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 January 28, 2023 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 January 28, 2023, which were included in the Company’s Annual Report on Form 10-K filed with the SEC on April 13, 2023.
Certain prior period amounts in the notes to the condensed consolidated financial statements have been reclassified to conform to the current period presentation. These reclassifications did not affect net earnings attributable to Build-A-Bear Workshop, Inc.
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 January 28, 2023. An update and supplement to these policies is needed for the Company's accounting for credit impairment as a result of a recently adopted accounting standard during the first quarter of fiscal 2023.
Cash, Cash Equivalents, and Restricted Cash
Cash and cash equivalents include cash, money market funds, and short-term highly liquid investments with an original maturity of three months or less held in both domestic and foreign financial institutions. In addition, the Company has a long-term deposit to satisfy contractual terms with the UK Customs Authority (unrelated to the matter discussed in Note 10 - Commitments and Contingencies). The Company also has deposits from franchisees under contractual agreements which are refundable. The long-term and franchisee deposits are considered restricted cash and disclosed within the supplemental disclosure within the consolidated statement of cash flows. Cash equivalents also include amounts due from third-party financial institutions for credit and debit card transactions. The carrying amount of cash and cash equivalents approximates fair value, given the short maturity of those instruments
The majority of the Company’s cash and cash equivalents exceed federal deposit insurance limits. The Company has not experienced any losses in such accounts and management believes that the Company is not exposed to any significant credit risk on cash, cash equivalents, and restricted cash.
Receivables
Receivables consist primarily of amounts due to the Company in relation to wholesale and corporate product sales, franchisee royalties and product sales, tenant allowances, certain amounts due from taxing authorities, receivables due from insurance providers, and licensing revenue. The Company assesses the collectability of all receivables on an ongoing basis by considering its historical credit loss experience, current economic conditions, and other relevant factors. At the beginning of fiscal 2023, the Company adopted ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” This ASU requires entities to report “expected” credit losses on financial instruments and other commitments to extend credit rather than the current “incurred loss” model. These expected credit losses for financial assets held at the reporting date are to be based on historical experience, current conditions, and reasonable and supportable forecasts. Upon adoption, the Company recognized a charge of $0.8 million to the opening balance of retained earnings which represents a reduction in its account receivable balance associated with expected credit losses.
2. Revenue
Currently, most of 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 93% of consolidated revenue for the first quarter of fiscal 2023. The majority of these sales transactions were single performance obligations that were recorded when control of merchandise was 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-operated stores, other retail-delivered operations and e-commerce demand (orders generated online to be fulfilled from either the Company's warehouse or its stores). 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 its products, 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, three-quarters of gift cards are redeemed within three years of issuance and over the last three years, approximately 60% of gift cards issued 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.
In regard to the consolidated balance sheet, contract liabilities for gift cards are classified as gift cards and customer deposits.
Subsequent to stores reopening following shutdowns caused by the COVID pandemic, the Company has experienced lower redemptions of its gift cards for all periods of outstanding activated cards compared to pre-pandemic redemption patterns (fiscal year 2019 and earlier), which impacts the gift card breakage rate. The Company utilizes historical redemption data to develop a model to analyze the amount of breakage expected for gift cards sold to consumers and business partners. The Company continues to evaluate expected breakage annually and adjusts the breakage rates in the fourth quarter of each year, or other times, if significant changes in customer behavior are detected. Changes to breakage estimates impact revenue recognition prospectively. Further, given the magnitude of the Company's gift card liability, the changes in breakage rates could have a significant impact on the amount of breakage revenue recognized in future periods.
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. The Company issues certificates daily to loyalty program members who have earned 100 or more points in North America and 50 points or more in the U.K. with certificates historically expiring in six months if not redeemed. The Company assesses the redemption rates of its certifications on a quarterly basis to update the rate at which loyalty program points turn into certifications and the rate that certifications are redeemed. In regard to the consolidated balance sheet, contract liabilities related to the loyalty program are classified as deferred revenue and other.
The Company’s commercial segment includes transactions with other businesses and is 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 initial 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. The Company classifies these initial, one-time nonrefundable franchise fee contract liabilities as deferred revenue on its consolidated balance sheet. Revenue from merchandise and fixture sales is recognized when control is transferred to the franchisee which generally occurs upon delivery.
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 franchises and employee compensation. Accordingly, the Company’s policy is to capitalize any finder’s fee, as 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. These capitalized costs for the thirteen weeks ended April 29, 2023 are not material to the financial statements.
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 new 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. The extension periods are typically much shorter than the original lease term given the Company's strategic decision to maintain a high level of 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 weeks ended April 29, 2023 and April 30, 2022 (in thousands).
| | Thirteen weeks ended | |
| | April 29, 2023 | | | April 30, 2022 | |
| | | | | | | | |
Operating lease costs | | | 8,982 | | | | 8,344 | |
Variable lease costs (1) | | | 2,126 | | | | 2,130 | |
Short term lease costs | | | 15 | | | | 18 | |
Total Operating Lease costs | | $ | 11,123 | | | $ | 10,492 | |
| (1) | Variable lease costs consist of leases with variable rent structures, which are intended to increase flexibility in an environment with expected high sales volatility and provide a natural hedge against potential sales declines. |
Other information
The table below presents supplemental cash flow information related to leases for the thirteen weeks ended April 29, 2023 and April 30, 2022 (in thousands).
| | Thirteen weeks ended | |
| | April 29, 2023 | | | April 30, 2022 | |
Operating cash flows for operating leases | | | 9,684 | | | | 8,741 | |
As of April 29, 2023 and April 30, 2022, the weighted-average remaining operating lease term was 4.0 years and 4.5 years, respectively, and the weighted-average discount rate was 6.3% and 6.0%, respectively, for operating leases recognized on the Company's Condensed Consolidated Balance Sheets.
For the thirteen weeks ended April 29, 2023 and April 30, 2022 the Company did not incur impairment charges against its 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 operating lease liabilities recorded on the balance sheet (in thousands).
Operating Leases | | | |
2023 | | | 24,580 | |
2024 | | | 27,976 | |
2025 | | | 18,437 | |
2026 | | | 11,291 | |
2027 | | | 6,650 | |
Thereafter | | | 9,817 | |
Total minimum lease payments | | | 98,751 | |
Less: amount of lease payments representing interest | | | 11,878 | |
Present value of future minimum lease payments | | | 86,873 | |
Less: current obligations under leases | | | (27,843 | ) |
Long-term lease obligations | | $ | 59,030 | |
As of April 29, 2023, the Company had additional executed leases that had not yet commenced with operating lease liabilities of $0.4 million. These leases are expected to commence in the second quarter of fiscal 2023 with lease terms of two to five years.
4. Other Assets
Prepaid expenses and other current assets consist of the following (in thousands):
| | April 29, | | | January 28, | | | April 30, | |
| | 2023 | | | 2023 | | | 2022 | |
Prepaid occupancy (1) | | $ | 3,352 | | | $ | 2,196 | | | $ | 3,594 | |
Prepaid merchandise (2) | | | - | | | | 6,047 | | | | 44 | |
Prepaid insurance | | | 526 | | | | 1,221 | | | | 589 | |
Prepaid gift card fees | | | 768 | | | | 835 | | | | 1,305 | |
Prepaid royalties | | | 449 | | | | 301 | | | | 732 | |
Prepaid taxes (3) | | | 28 | | | | 73 | | | | 94 | |
Other (4) | | | 8,380 | | | | 8,701 | | | | 6,078 | |
Total | | $ | 13,503 | | | $ | 19,374 | | | $ | 12,436 | |
| (1) | Prepaid occupancy consists of prepaid expenses related to variable non-lease components. |
| (2) | Prepaid merchandise consists of prepaid purchase orders of inventory that are not in transit. |
| (3) | Prepaid taxes consist of prepaid federal and state income tax. |
| (4) | Other consists primarily of prepaid expense related to information technology maintenance contracts and software as a service. |
Other non-current assets consist of the following (in thousands):
| | April 29, | | | January 28, | | | April 30, | |
| | 2023 | | | 2023 | | | 2022 | |
Entertainment production asset | | $ | 3,500 | | | $ | 2,939 | | | $ | 1,122 | |
Deferred compensation | | | 885 | | | | 853 | | | | 622 | |
Other (1) | | | 400 | | | | 429 | | | | 522 | |
Total | | $ | 4,785 | | | $ | 4,221 | | | $ | 2,266 | |
| (1) | Other consists primarily of deferred financing costs related to the Company's credit facility. |
5. Accrued Expenses
Accrued expenses consist of the following (in thousands):
| | April 29, | | | January 28, | | | April 30, | |
| | 2023 | | | 2023 | | | 2022 | |
Accrued wages, bonuses and related expenses | | $ | 12,602 | | | $ | 23,767 | | | $ | 15,045 | |
Sales and value added taxes payable | | | 2,148 | | | | 4,561 | | | | 2,629 | |
Accrued rent and related expenses (1) | | | 898 | | | | 1,512 | | | | 1,383 | |
Current income taxes payable | | | 7,524 | | | | 3,418 | | | | 4,387 | |
Accrued Expense - Other (2) | | | 4,100 | | | | 4,100 | | | | - | |
Total | | $ | 27,272 | | | $ | 37,358 | | | $ | 23,444 | |
| (1) | Accrued rent and related expenses consist of accrued costs associated with non-lease components. |
| (2) | Accrued expense - Other consists of accrued costs associated with a legal reserve accrual. |
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 (the "Compensation Committee"), permits the granting 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 terminated earlier 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 April 29, 2023 and April 30, 2022, selling, general and administrative expense included stock-based compensation expense of $1.1 million and $0.7 million, respectively. As of April 29, 2023, there was $4.8 million of total unrecognized compensation expense related to unvested restricted stock awards which is expected to be recognized over a weighted-average period of 2.1 years.
The following table is a summary of the balances and activity for stock options for the thirteen weeks ended April 29, 2023:
| | Options | |
| | Shares | | | Weighted Average Exercise Price | |
Outstanding, January 28, 2023 | | | 177,519 | | | $ | 14.20 | |
Granted | | | - | | | | - | |
Exercised | | | (7,308 | ) | | | 12.84 | |
Forfeited | | | - | | | | - | |
Canceled or expired | | | - | | | | - | |
Outstanding, April 29, 2023 | | | 170,211 | | | $ | 14.26 | |
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 April 29, 2023:
| | Time-Based Restricted Stock | | | Performance-Based Restricted Stock | |
| | Shares | | | Weighted Average Grant Date Fair Value | | | Shares | | | Weighted Average Grant Date Fair Value | |
Outstanding, January 28, 2023 | | | 287,983 | | | $ | 8.78 | | | | 295,048 | | | $ | 8.13 | |
Granted | | | 43,437 | | | | 24.75 | | | | 65,254 | | | | 24.75 | |
Vested | | | - | | | | - | | | | - | | | | - | |
Earned | | | 215,130 | | | | 2.78 | | | | (157,373 | ) | | | 2.78 | |
Forfeited | | | - | | | | - | | | | - | | | | - | |
Canceled or expired | | | - | | | | - | | | | - | | | | - | |
Outstanding, April 29, 2023 | | | 546,550 | | | $ | 7.69 | | | | 202,929 | | | $ | 8.13 | |
During the thirteen weeks ended April 29, 2023, there were no shares that vested within the period. Performance shares totaling a fair value of $0.6 million were earned during the first quarter of fiscal 2023 and will vest in the second quarter of fiscal 2023. For the thirteen weeks ended April 30, 2022, the total fair value of shares vested was $1.6 million.
The outstanding performance shares as of April 29, 2023 consist of the following:
| | Performance Shares | |
Earned Shares subject to time-based restrictions at actual | | | 215,130 | |
| | | | |
Unearned shares subject to performance-based restrictions at target: | | | | |
2021 - 2023 consolidated, cumulative earnings before interest, taxes, depreciation and amortization (EBITDA) objectives | | | 39,821 | |
2021 - 2023 consolidated revenue growth objectives | | | 13,274 | |
2022 - 2024 consolidated, earnings before interest, taxes, depreciation and amortization (EBITDA) growth objectives | | | 63,435 | |
2022 - 2024 consolidated revenue growth objectives | | | 21,145 | |
2023 - 2025 consolidated pre-tax income growth objectives | | | 42,415 | |
2023 - 2025 consolidated revenue growth objectives | | | 22,839 | |
Performance shares outstanding, April 29, 2023 | | | 202,929 | |
7. Income Taxes
The Company's effective tax rate was 24.5% for the thirteen weeks ended April 29, 2023 compared to 22.0% for the thirteen weeks ended April 30, 2022. In the first quarter of fiscal 2023, the effective tax rate differed from the statutory rate of 21% primarily due to state income tax expense. In the first quarter of fiscal 2022, the effective tax rate differed from the statutory rate of 21% primarily due to state income tax expense partially offset by the tax impact of equity awards vesting. In addition, in the first quarter of fiscal 2023 and 2022, the Company maintains a full valuation allowance for its deferred tax assets in certain foreign jurisdictions.
8. Stockholders’ Equity
The following table sets forth the changes in stockholders’ equity (in thousands) for the thirteen weeks ended April 29, 2023 and April 30, 2022 (in thousands):
| | For the thirteen weeks ended April 29, 2023 | | | For the thirteen weeks ended April 30, 2022 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common | | | | | | | | | | | Retained | | | | | | | Common | | | | | | | | | | | Retained | | | | | |
| | stock | | | APIC (1) | | | AOCI (2) | | | earnings | | | Total | | | stock | | | APIC (1) | | | AOCI (2) | | | earnings | | | Total | |
Balance, beginning | | $ | 148 | | | $ | 69,868 | | | $ | (12,274 | ) | | $ | 61,375 | | | $ | 119,117 | | | $ | 162 | | | $ | 75,490 | | | $ | (12,470 | ) | | $ | 30,501 | | | $ | 93,683 | |
Adoption of new accounting standard | | | | | | | | | | | | | | $ | (785 | ) | | | | | | | | | | | | | | | | | | | | | | | | |
Subtotal | | $ | 148 | | | $ | 69,868 | | | $ | (12,274 | ) | | $ | 60,590 | | | $ | 118,332 | | | $ | 162 | | | $ | 75,490 | | | $ | (12,470 | ) | | $ | 30,501 | | | $ | 93,683 | |
Shares issued under employee stock plans | | | 2 | | | | 691 | | | | - | | | | - | | | | 693 | | | | 2 | | | | 538 | | | | - | | | | - | | | | 540 | |
Stock-based compensation | | | - | | | | 389 | | | | - | | | | - | | | | 389 | | | | - | | | | 429 | | | | - | | | | - | | | | 429 | |
Shares withheld in lieu of tax withholdings | | | - | | | | - | | | | - | | | | - | | | | - | | | | (1 | ) | | | (2,178 | ) | | | - | | | | - | | | | (2,179 | ) |
Share Repurchase | | | (1 | ) | | | (624 | ) | | | - | | | | (2,474 | ) | | | (3,099 | ) | | | (6 | ) | | | (2,313 | ) | | | - | | | | (5,819 | ) | | | (8,138 | ) |
Cash Dividends | | | - | | | | - | | | | - | | | | (22,048 | ) | | | (22,048 | ) | | | - | | | | - | | | | - | | | | - | | | | - | |
Other | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (4 | ) | | | - | | | | - | | | | (4 | ) |
Other comprehensive income | | | - | | | | - | | | | 97 | | | | - | | | | 97 | | | | - | | | | - | | | | 18 | | | | - | | | | 18 | |
Net income | | | - | | | | - | | | | - | | | | 14,608 | | | | 14,608 | | | | - | | | | - | | | | - | | | | 14,190 | | | | 14,190 | |
Balance, ending | | $ | 149 | | | $ | 70,324 | | | $ | (12,177 | ) | | $ | 50,676 | | | $ | 108,972 | | | $ | 157 | | | $ | 71,962 | | | $ | (12,452 | ) | | $ | 38,872 | | | $ | 98,539 | |
(1) - Additional paid-in capital (“APIC”)
(2) - Accumulated other comprehensive income (loss) (“AOCI”)
For the thirteen weeks ended April 29, 2023, the Company recorded credit impairment charges of $0.8 million on trade receivables into retained earnings as a result of the adoption of ASC 326 - Credit Impairment.
During the first quarter of fiscal 2023, the Company utilized $3.1 million in cash to repurchase 132,385 shares under its $50.0 million program that was authorized by its Board of Directors on August 31, 2022. The Company's Board of Directors also authorized a special cash dividend of $1.50 per share that was paid on April 6, 2023, to all stockholders of record as of March 23, 2023, following a $1.25 per share special cash dividend declared on November 30, 2021.
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 | |
| | April 29, | | | April 30, | |
| | 2023 | | | 2022 | |
NUMERATOR: | | | | | | | | |
Net income | | $ | 14,608 | | | $ | 14,191 | |
| | | | | | | | |
DENOMINATOR: | | | | | | | | |
Weighted average number of common shares outstanding - basic | | | 14,457,858 | | | | 15,475,731 | |
Dilutive effect of share-based awards: | | | 517,072 | | | | 488,702 | |
Weighted average number of common shares outstanding - dilutive | | | 14,974,930 | | | | 15,964,433 | |
| | | | | | | | |
Basic net income per common share attributable to Build-A-Bear Workshop, Inc. stockholders | | $ | 1.01 | | | $ | 0.92 | |
Diluted net income per common share attributable to Build-A-Bear Workshop, Inc. stockholders | | $ | 0.98 | | | $ | 0.89 | |
In calculating the diluted income per share for the thirteen weeks ended April 29, 2023, there were 9,069 shares of common stock 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 weeks ended April 30, 2022, there were 63,529 shares of common stock 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 on April 29, 2023 and April 30, 2022 was comprised entirely of foreign currency translation. For the thirteen weeks ended April 29, 2023 and April 30, 2022, 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-operated locations and other retail delivery operations in the U.S., Canada, Ireland and the 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 select countries in Asia, Australia, 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 April 29, 2023 | | | | | | | | | | | | | | | | |
Net sales to external customers | | $ | 112,096 | | | $ | 6,688 | | | $ | 1,266 | | | $ | 120,050 | |
Income before income taxes | | | 15,955 | | | | 2,890 | | | | 508 | | | | 19,353 | |
Capital expenditures | | | 3,065 | | | | - | | | | - | | | | 3,065 | |
Depreciation and amortization | | | 2,973 | | | | 107 | | | | - | | | | 3,080 | |
Thirteen weeks ended April 30, 2022 | | | | | | | | | | | | | | | | |
Net sales to external customers | | $ | 112,890 | | | $ | 4,286 | | | $ | 486 | | | $ | 117,662 | |
Income before income taxes | | | 15,993 | | | | 1,989 | | | | 208 | | | | 18,190 | |
Capital expenditures | | | 1,070 | | | | - | | | | - | | | | 1,070 | |
Depreciation and amortization | | | 3,032 | | | | 218 | | | | - | | | | 3,250 | |
Total Assets as of: | | | | | | | | | | | | | | | | |
April 29, 2023 | | $ | 253,338 | | | $ | 6,902 | | | $ | 1,470 | | | $ | 261,710 | |
January 28, 2023 | | | 272,221 | | | | 7,466 | | | | 1,107 | | | | 280,794 | |
April 30, 2022 | | | 249,587 | | | | 5,580 | | | | 1,258 | | | | 256,425 | |
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 April 29, 2023 | | | | | | | | | | | | | | | | |
Net sales to external customers | | $ | 106,864 | | | $ | 12,658 | | | $ | 528 | | | $ | 120,050 | |
Property and equipment, net | | $ | 47,780 | | | $ | 2,605 | | | $ | - | | | $ | 50,385 | |
Thirteen weeks ended April 30, 2022 | | | | | | | | | | | | | | | | |
Net sales to external customers | | $ | 103,174 | | | $ | 13,995 | | | $ | 493 | | | $ | 117,662 | |
Property and equipment, net | | $ | 43,899 | | | $ | 2,792 | | | $ | - | | | $ | 46,691 | |
For purposes of this table only: |
(1) North America includes corporately-operated locations in the United States and Canada. |
(2) Europe includes corporately-operated locations in the U.K. and Ireland. |
(3) Other includes franchise businesses outside of North America and Europe |
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. Rulings by the First Tier Tribunal in November 2019 and Upper Tribunal in March 2021 held that duty was due on some, but not all, of the products at issue. The Company petitioned the Court of Appeal for permission to appeal certain elements of the Upper Tribunal decision and, in early November 2021, a judge granted the Company's petition for permission to appeal those elements of the Upper Tribunal decision on some, but not all, of the grounds of appeal that the Company had put forward. An appeal was heard by the Court of Appeal during the first quarter of fiscal 2022, and the Court of Appeal dismissed the appeal in the third quarter of fiscal 2022. During the fourth quarter of fiscal 2022, the UK Supreme Court declined to hear the appeal. The Company is engaging with the customs authority to attempt to resolve all outstanding issues following the application of the determined principles. The case will return to the lower tribunal for a final ruling if outstanding issues cannot be resolved. 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 April 29, 2023, the Company had a gross receivable balance of $4.6 million and a reserve of $3.5 million, leaving a net receivable of $1.1 million. The Company 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.
In August 2021, a putative class action lawsuit was filed against Build-A-Bear Workshop, Inc., asserting claims under the Telephone Consumer Protection Act (the "TCPA") alleging that the Company continued to send marketing text messages to mobile phone numbers registered on the National Do Not Call Registry after allegedly opting-out of receiving them. Statutory damages under the TCPA are assessed at $500 per violation (i.e. per text message), and up to $1,500 per violation if the violation was knowing or willful. The Company has reached a settlement with the Plaintiff and an insurance carrier which, if the settlement receives final approval by the Court, is not expected to result in a significant expense for the Company.