BUILD-A-BEAR WORKSHOP INC - Quarter Report: 2019 May (Form 10-Q)

 

 

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

 

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FORM 10-Q

 

 

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(Mark One)

☒	Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
	For the quarterly period ended May 4, 2019

 

OR

 

☐	Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
	For the transition period from              to

 

Commission file number: 001-32320

 

 

 

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BUILD-A-BEAR WORKSHOP, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

 

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Delaware	43-1883836
(State or Other Jurisdiction of Incorporation or Organization)	(IRS Employer Identification No.)

 

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)

 

 

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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 ☒
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, there were 15,130,418 issued and outstanding shares of the registrant’s common stock.

 

 

 

BUILD-A-BEAR WORKSHOP, INC.

INDEX TO FORM 10-Q

 

		Page
Part I Financial Information
Item 1.	Financial Statements (Unaudited)	3
	Condensed Consolidated Balance Sheets	3
	Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)	4
	Condensed Consolidated Statements of Cash Flows	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	25
Item 4.	Controls and Procedures	25
Part II Other Information
Item 1A.	Risk Factors	25
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	26
Item 6.	Exhibits	27
Signatures		28

 

 

 

		May 4,				February 2,				May 5,
		2019				2019				2018
		(Unaudited)								(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	20,238			$	17,894			$	18,881
Inventories, net			56,004				58,356				49,423
Receivables, net			8,836				10,588				8,968
Prepaid expenses and other current assets			8,541				12,960				11,493
Total current assets			93,619				99,798				88,765
Operating lease right-of-use asset			144,483				-				-
Property and equipment, net			65,357				66,368				76,410
Deferred tax assets			3,241				3,099				4,102
Other intangible assets, net			607				731				950
Other assets, net			2,224				2,050				2,427
Total Assets		$	309,531			$	172,046			$	172,654
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable		$	20,887			$	22,551			$	12,965
Accrued expenses			7,785				10,047				8,739
Operating lease liability short term			30,558				-				-
Gift cards and customer deposits			19,026				21,643				17,007
Deferred revenue and other			2,006				1,936				1,893
Total current liabilities			80,262				56,177				40,604
Operating lease liability long term			137,666				-				-
Deferred rent			-				18,440				17,697
Deferred franchise revenue			1,580				1,625				1,142
Other liabilities			1,586				1,490				1,794
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
Additional paid-in capital			69,550				69,088				66,908
Accumulated other comprehensive loss			(12,123	)			(12,018	)			(11,546	)
Retained earnings			30,861				37,094				55,904
Total stockholders' equity			88,437				94,314				111,417
Total Liabilities and Stockholders' Equity		$	309,531			$	172,046			$	172,654

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		Thirteen weeks ended
		May 4,				May 5,
		2019				2018
Revenues:
Net retail sales		$	81,048			$	81,425
Commercial revenue			2,754				1,019
International franchising			560				740
Total revenues			84,362				83,184
Costs and expenses:
Cost of merchandise sold - retail			44,420				45,385
Cost of merchandise sold - commercial			1,264				479
Cost of merchandise sold - international franchising			440				332
Total cost of merchandise sold			46,124				46,196
Consolidated gross profit			38,238				36,988
Selling, general and administrative expense			35,808				36,337
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
Foreign currency translation adjustment			(105	)			(747	)
Comprehensive income (loss)		$	1,092			$	(393	)
Income (loss) per common share:
Basic		$	0.08			$	0.02
Diluted		$	0.08			$	0.02
Shares used in computing common per share amounts:
Basic			14,612,575				14,582,573
Diluted			14,738,240				14,722,989

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		Thirteen weeks ended
		May 4,				May 5,
		2019				2018
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:
Depreciation and amortization			3,512				4,115
Stock-based compensation			720				841
Deferred taxes			(142	)			(433	)
Provision for doubtful accounts			5				-
(Gain) loss on disposal of property and equipment			(2	)			(29	)
Change in assets and liabilities:
Inventories, net			2,424				8,233
Receivables, net			1,762				(723	)
Prepaid expenses and other assets			4,423				1,671
Accounts payable and accrued expenses			(1,910	)			(10,662	)
Operating leases			(2,988	)			127
Gift cards and customer deposits			(2,621	)			(2,235	)
Deferred revenue			(1,239	)			105
Net cash provided by (used in) operating activities			5,141				1,364
Cash flows used in investing activities:
Purchases of property and equipment			(2,440	)			(3,030	)
Proceeds from property insurance			-				85
Net cash used in investing activities			(2,440	)			(2,945	)
Cash flows used in financing activities:
Proceeds from the exercise of employee stock options, net of withholding tax payments			(258	)			(406	)
Purchases of Company’s common stock			-				(732	)
Net cash used in financing activities			(258	)			(1,138	)
Effect of exchange rates on cash			(99	)			101
Net increase (decrease) in cash and cash equivalents			2,344				(2,618	)
Cash and cash equivalents, beginning of period			17,894				21,499
Cash and cash equivalents, end of period		$	20,238			$	18,881
Supplemental disclosure of cash flow information:
Net cash paid (received) during the period for income taxes		$	(1,000	)		$	(168	)

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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, 2019 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, which were included in the Company’s Annual Report on Form 10-K filed with the SEC on April 18, 2019. 

 

Recent Accounting Pronouncements – Adopted in the Current Year

 

Effective February 3, 2019, the Company adopted the Financial Accounting Standards Board ("FASB") new guidance on leases (“Topic 842”), which replaced most existing lease accounting guidance in U.S. GAAP. The Company 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 did not adjust its comparative period financial information or make the new required lease disclosures for periods before the effective date.

 

See Note 3 — Leases for additional information.

 

 

 

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% of consolidated revenue. 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-tenth 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. 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 a five to ten-year base period and include renewal options to extend the lease term beyond the initial base period. The renewal options are not included in the measurement of the right of use assets and right of use liabilities unless the Company is reasonably certain to exercise the optional renewal periods 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.

 

 

 

The table below presents certain information related to the lease costs for operating leases for the thirteen weeks ended May 4, 2019.

 

 

Other information

The table below presents supplemental cash flow information related to leases for the thirteen weeks ended May 4, 2019.

 

 

As of May 4, 2019, the weighted-average remaining operating lease term was 6.4 years and the weighted-average discount rate was 5.9 % for operating leases recognized on our Condensed Consolidated Statement of Operations.

 

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.

 

 

 

As of May 4, 2019, the Company has additional executed leases that have not yet commenced of $6.1 million. These leases will commence in 2019 with lease terms of approximately ten 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:

 

 

 

 

 

4. Prepaid Expenses and Other Current Assets

 

Prepaid expenses and other current assets consist of the following (in thousands):

 

 

(1)

Prepaid occupancy consists of prepaid expenses related to non-lease components.

 

 

  

 

5. Accrued Expenses

 

Accrued expenses consist of the following (in thousands):

 

 

(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 Incentive Plans that on or after March 21, 2017 may be forfeited, expire or be settled for cash.

 

For the thirteen weeks ended May 4, 2019 and May 5, 2018, selling, general and administrative expense included $0.7 million and $0.8 million, respectively, of stock-based compensation expense. As of May 4, 2019, there was $4.1 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 1.7 years.

 

The following table is a summary of the balances and activity for stock options for the thirteen weeks ended May 4, 2019:

 

 

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:

 

 

The total fair value of shares vested during the thirteen weeks ended May 4, 2019 and May 5, 2018 was $1.6 million and $1.7 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, 2019 consist of the following:

 

 

 

 

7. Income Taxes

 

The effective tax rate was 50.3% 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 2019, the effective tax rate differed from the statutory rate of 21% primarily due to the valuation allowance being recorded in certain foreign jurisdictions 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 periods ended May 4, 2019 and May 5, 2018:

 

 

 

(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, 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.

 

 

 

9. Income per Share

 

The following table sets forth the computation of basic and diluted net income 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:

 

 

 

In calculating diluted income per share for the thirteen week periods ended May 4, 2019 and May 5, 2018, options to purchase 938,622 and 478,996; respectively, 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 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 4, 2019 and May 5, 2018 was comprised entirely of foreign currency translation. For the thirteen weeks ended May 4, 2019 and May 5, 2018, there were no reclassifications out of accumulated other comprehensive 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. 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):

 

 

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):

 

 

For purposes of this table only:

(1)  North America includes corporately managed locations in the United States, Canada, Puerto Rico and franchise business in Mexico

(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 been 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 contesting the Company's appeal. 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, the Company had a gross receivable balance of $4.0 million and a reserve of $3.1 million, leaving a net receivable of $0.9 million. However, the 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.

 

 

 

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