BUILD-A-BEAR WORKSHOP INC - Quarter Report: 2020 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 2, 2020

 

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 8, 2020, there were 15,439,538 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)	4
	Condensed Consolidated Balance Sheets	4
	Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)	5
	Condensed Consolidated Statements of Cash Flows	6
	Notes to Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	28
Item 4.	Controls and Procedures	28
Part II Other Information
Item 1A.	Risk Factors	28
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	29
Item 6.	Exhibits	30
Signatures		32

 

 

 

		May 2,				February 1,				May 4,
		2020				2020				2019
		(Unaudited)								(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	21,851			$	26,726			$	20,238
Inventories, net			53,238				53,381				56,004
Receivables, net			7,099				11,526				8,836
Prepaid expenses and other current assets			5,896				7,117				8,541
Total current assets			88,084				98,750				93,619
Operating lease right-of-use asset			124,112				126,144				144,483
Property and equipment, net			61,626				65,855				65,357
Deferred tax assets			-				3,411				3,241
Other intangible assets, net			-				-				607
Other assets, net			3,005				3,102				2,224
Total Assets		$	276,827			$	297,262			$	309,531
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable		$	22,905			$	15,680			$	20,887
Accrued expenses			10,395				16,536				7,785
Operating lease liability short term			32,963				30,912				30,558
Gift cards and customer deposits			18,530				20,231				19,026
Deferred revenue and other			2,603				2,605				2,006
Total current liabilities			87,396				85,964				80,262
Operating lease liability long term			118,416				119,625				137,666
Deferred franchise revenue			915				1,325				1,580
Other liabilities			1,643				1,717				1,586
Stockholders' equity:
Preferred stock, par value $0.01, Shares authorized: 15,000,000; No shares issued or outstanding at May 2, 2020, February 1, 2020 and May 4, 2019			-				-				-
Common stock, par value $0.01, Shares authorized: 50,000,000; Issued and outstanding: 15,439,538, 15,205,981 and 15,130,418 shares, respectively			155				152				149
Additional paid-in capital			71,491				70,633				69,550
Accumulated other comprehensive loss			(11,909	)			(12,079	)			(12,123	)
Retained earnings			8,720				29,925				30,861
Total stockholders' equity			68,457				88,631				88,437
Total Liabilities and Stockholders' Equity		$	276,827			$	297,262			$	309,531

 

		Thirteen weeks ended
		May 2,				May 4,
		2020				2019
Revenues:
Net retail sales		$	45,647			$	81,048
Commercial revenue			333				2,754
International franchising			644				560
Total revenues			46,624				84,362
Costs and expenses:
Cost of merchandise sold - retail			33,352				44,420
Store asset impairment			4,819				-
Cost of merchandise sold - commercial			140				1,264
Cost of merchandise sold - international franchising			255				440
Total cost of merchandise sold			38,566				46,124
Consolidated gross profit			8,058				38,238
Selling, general and administrative expense			26,725				35,808
Interest (income) expense, net			(3	)			20
(Loss) income before income taxes			(18,664	)			2,410
Income tax expense			2,540				1,213
Net (loss) income		$	(21,204	)		$	1,197
Foreign currency translation adjustment			170				(105	)
Comprehensive (loss) income		$	(21,034	)		$	1,092
(Loss) income per common share:
Basic		$	(1.42	)		$	0.08
Diluted		$	(1.42	)		$	0.08
Shares used in computing common per share amounts:
Basic			14,926,097				14,612,575
Diluted			14,926,097				14,738,240

 

		Thirteen weeks ended
		May 2,				May 4,
		2020				2019
Cash flows (used in) from operating activities:
Net (loss) income		$	(21,204	)		$	1,197
Adjustments to reconcile net less to net cash provided by operating activities:
Depreciation and amortization			3,457				3,512
Share-based and performance-based stock compensation			271				720
Impairment of right-of-use assets and fixed assets			4,819				-
Deferred taxes			3,388				(142	)
Provision for doubtful accounts			589				5
Gain on disposal of property and equipment			(5	)			(2	)
Change in assets and liabilities:
Inventories, net			(376	)			2,424
Receivables, net			3,732				1,762
Prepaid expenses and other assets			1,177				4,423
Accounts payable and accrued expenses			2,716				(1,910	)
Operating leases			865				(2,988	)
Gift cards and customer deposits			(1,635	)			(2,621	)
Deferred revenue			(300	)			(1,239	)
Net cash (used in) provided by operating activities			(2,506	)			5,141
Cash flows used in investing activities:
Purchases of property and equipment			(2,849	)			(2,440	)
Net cash (used in) investing activities			(2,849	)			(2,440	)
Cash flows used in financing activities:
Proceeds from the exercise of employee stock options, net of withholding tax payments			(114	)			(258	)
Net cash (used in) financing activities			(114	)			(258	)
Effect of exchange rates on cash			551				(99	)
Net (decrease) increase in cash and cash equivalents			(4,918	)			2,344
Cash and cash equivalents, beginning of period			28,395				19,561
Cash and cash equivalents, end of period		$	23,477			$	21,905
Supplemental disclosure of cash flow information:
Total cash, cash equivalents and restricted cash		$	23,477			$	21,905
Less: Restricted cash from long-term deposits		$	(1,626	)		$	(1,667	)
Total cash and cash equivalents		$	21,851			$	20,238
Net cash received during the period for income taxes		$	(8	)		$	(1,000	)

 

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 owned and operated stores in the United States, Canada, the United Kingdom, Denmark and Ireland as a result of the pandemic. In addition, on March 26, 2020, the Company announced the temporary closure of its warehouse and e-commerce fulfillment center in Ohio as it reviewed its process related to workplace safety, including social distancing and sanitation practices recommended by the Centers for Disease Control and Prevention. The Ohio warehouse was reopened on April 1, 2020 following the review and reconfiguration of workflow and workspaces to further promote social distancing and minimize interaction as orders are fulfilled. While some stores in the United States and the e-commerce businesses in the United States and the United Kingdom continue to serve customers during this crisis, the Company has experienced a loss of sales and earnings as a result of the store closures. In addition, many of the Company's wholesale customers have also closed their retail stores affecting their inventory purchases. Although the store closures are expected to be temporary and the Company has begun to open stores where allowable by local law, the Company cannot estimate the duration of the store closures for the remainder of stores, the impact on our interactive retail experience once stores are reopened, or the full financial effect as a result of COVID-19.

 

In response to COVID-19, the Company has taken the following actions:

 

	●	Reducing and deferring expenses
		•  Furlough of over 90% of its employees effective March 29, 2020;
		•  A 20% reduction in compensation for all employees not on temporary leave including each of its executive officers effective March 29, 2020;
		•  Elimination of the cash retainer for all non-employee directors serving on its Board of Directors for the fiscal 2020 first quarter;
		•  The delayed payment of 100% of the bonus earned by the company’s executive officers for fiscal 2019 performance and 80% of such bonuses earned by its other associates;
		•  The delayed payment of the Company’s contribution to its 401(k) plan; and
		•  Reduction in expenses and deferral of payments through extension of payment terms in many areas including its marketing programs. At quarter end, the Company had not paid April store rent and was in discussions with landlords regarding more favorable terms;
	●	Reducing its planned capital expenditures to maintenance levels
	●	Leveraging operating lease optionality with over 70% of its leases having a natural lease event over the next three years with approximately 120 locations having events before the end of fiscal 2020

 

 

Operational and Distribution Network Update due to COVID-19:

 

	●	Starting on March 18, 2020, the Company temporarily closed its corporately-managed retail locations in North America and Europe. Since that time, the Company has modified several key operational processes including:
		•  Modifying its popular in-store experience to accommodate various governmental social distancing recommendations, crowd limitation requirements and recommendations and employee and guest safety considerations; and
		•  Adding a “Workshop Wednesday” program that offers digital entertainment and activities for families staying at home, generating nearly 100 million media impressions when it was announced in April. The Company expects Workshop Wednesdays to expand in the future to include in-store events;

	●	The Company’s e-commerce site was fully operational throughout the quarter. Order processing times were extended as procedures were updated to enhance social distancing and sanitation practices at its distribution center. The Company has seen its digital demand continue to gain momentum with growth rates increasing to triple-digit levels following the store closures and has improved fulfillment times with expanded features including:
		•  Adding capabilities for select stores to supplement its e-commerce fulfillment with a “buy online, ship from store” omni-channel program; and
		•  Adding new queue technology and enabling a chat bot to better serve customers in-line for high-demand product launches;
	●	The Company’s supply chain had minimal disruption in the quarter with the Company able to receive deliveries in a timely manner;
	●	The Company’s franchisees ended the quarter with 80 locations across Africa, Asia, Australia, Mexico, the Middle East and South America. The majority of the locations were closed due to COVID-19 at quarter-end and have begun opening as permitted by law; and
	●	The Company’s third-party retail partners such as Great Wolf Resorts and Carnival Cruise Lines were closed due to COVID-19 at quarter-end and remain temporarily closed.

 

The Company has not borrowed on its credit facility as of June 8, 2020. Due to the impacts of COVID-19 and the continued closure of a majority of our corporately managed stores, our financial performance in the second quarter of fiscal 2020 will be negatively impacted. The Company's liquidity may be negatively impacted if stores do not resume normal operations and the Company may be required to pursue additional sources of financing to meet its financial obligations. Obtaining such financing is not guaranteed and is largely dependent on market conditions and other factors. The Company believes that its current cash balance, along with the actions taken as outlined above, provide it with sufficient current liquidity. Future impact of COVID-19 may require further actions by the Company to improve its cash position, including but not limited to, monetizing Company assets including the Company owned warehouse in Ohio, inventory, implementing further employee furloughs, and foregoing capital expenditures and other discretionary expenses.

 

Significant Accounting Policies

 

The Company's significant accounting policies are summarized in Note 2 to the consolidated financial statements included in our Form 10-K for the year ended February 1, 2020. An update and supplement to these policies is needed for the Company's accounting for government assistance, long-live asset impairment, and lease modifications as a result of activity during the first quarter of fiscal 2020.

 

Government Grants

 

The Company applied for reimbursement of payroll expenses in certain jurisdictions through COVID-19 related government programs for payroll paid to employees who were paid while not providing services to the Company prior to the end of the first quarter of fiscal 2020. These programs require the Company to apply to the government for reimbursement of wages based on the applicable laws and programs within each jurisdiction. Through review of and application to these programs, the Company believes it qualifies for such reimbursement, and it is probable that the expenses will be reimbursed. As a result, the Company recorded a reduction to expenses of approximately $1.5 million related to these wages within the Selling, general and administrative line within the Condensed Consolidated Statement of Operations and Comprehensive Income (Loss) for the period ending May 2, 2020. In addition, a portion of these amounts was received subsequent to the end of the quarter.

 

 

Long-live Assets, including right-of-use operating lease assets

 

Whenever facts and circumstances indicate that the carrying value of long-lived assets and right-of-use operating lease assets may not be recoverable, the carrying value is reviewed. If this review indicates that the carrying value of the asset will not be recovered, as determined based on projected undiscounted cash flows related to the asset over its remaining life, the carrying value of the asset is reduced to its estimated fair value. The Company typically performs an annual assessment of the store assets in the direct-to-consumer (“DTC”) segment, based on operating performance and forecasts of future performance. As a result of the COVID-19 pandemic, we experienced lower than projected revenues and identified indicators of impairment for our store fleet. We performed undiscounted cash flow analyses over the long-lived assets and right-of-use assets and determined that certain stores had long-lived and right-of-use assets with carrying values that exceeded their estimated undiscounted cash flows. We estimated fair values of these long-lived assets based on our discounted cash flows or market rent assessments. Our analysis indicated that the carrying values of certain of our long-lived assets exceeded their respective fair values. As a result, we recognized an impairment charge of $4.8 million for the thirteen weeks ended May 2, 2020. with approximately $2.4 million for right-of-use operating lease assets and $2.4 million for fixed assets including leasehold improvements and fixtures, furniture and fixtures, and machinery and equipment. The charge is recorded in Store asset impairment within the Condensed Consolidated Statement of Operations and Comprehensive Income (Loss). These impairment charges were primarily driven by lower than projected revenues and the effect of store closures as a result of the COVID-19 pandemic. The majority of the impairment was recorded for assets associated with stores in North America. For the thirteen weeks ended May 4, 2019, the Company recorded impairment charges of $5.9 million on right-of-use assets into retained earnings as a result of the adoption of ASC 842 Leases.

 

The determination of estimated market rent used in the fair value estimate of the Company’s operating lease assets included within the respective store asset group requires significant management judgment. Changes in these estimates could have a significant impact on whether long-lived store assets should be further evaluated for impairment and could have a significant impact on the resulting impairment charge. The significant estimates, all of which are considered Level 3 inputs, used in the fair value methodology include: the Company’s expectations for future operations and projected cash flows, including revenues, operating expenses, and market conditions.

 

Lease modifications

 

In April 2020, the FASB issued guidance indicating that entities may elect not to evaluate whether a concession provided by lessors is a lease modification.  Under existing lease guidance, an entity would have to determine if a lease concession was the result of a new arrangement reached with the landlord, which would be accounted for under the lease modification framework, or if the concession was under the enforceable rights and obligations that existed in the original lease, which would be accounted for outside the lease modification framework. The FASB guidance provides entities with the option to elect to account for lease concessions as though the enforceable rights and obligations existed in the original lease. During the first quarter of 2020, the Company did not modify any leases as a result of the COVID-19 pandemic and as a result, the Company has not yet made a policy election with respect to lease modifications. Refer to Note 3 to the consolidated financial statements for further discussion regarding the Company's leases.

 

2. Revenue

 

Nearly all the Company’s revenue is derived from retail sales (including e-commerce sites) and is recognized when control of the merchandise is transferred to the customer. The Company's disaggregated revenue is fully disclosed as net sales to external customers by reporting segment and by geographic area (See Note 11 — Segment Information for additional information). The Company's direct-to-consumer reporting segment represents 98% of consolidated revenue for the first quarter fiscal 2020. The majority of these sales transactions are single performance obligations that are recorded when control is transferred to the customer.

 

The following is a description of principal activities from which the Company generates its revenue, by reportable segment.

 

The Company’s direct-to-consumer segment includes the operating activities of corporately-managed stores, other retail-delivered operations and online sales. Direct-to-consumer revenue is recognized when control of the merchandise is transferred to the customer and for the Company's online sales, generally upon delivery to the customer. Revenue is measured as the amount of consideration, including any discounts or incentives, the Company expects to receive in exchange for transferring the merchandise. Product returns have historically averaged less than one-half of one percent due to the interactive nature of sales, where consumers customize their own stuffed animal. The Company has elected to exclude from revenue all collected sales, value added and other taxes paid by its customers.

 

 

For the Company’s gift cards, revenue is deferred for single transactions until redemption including any related gift card discounts. Historically, most gift card redemptions have occurred within three years of acquisition and approximately 75% of gift cards have been redeemed within the first twelve months. In addition, unredeemed gift cards or breakage revenue is recorded in proportion to the customer’s redemption period using an estimated breakage rate based on historical experience. For certain qualifying transactions, a portion of revenue transactions are deferred for the obligation related to the Company’s loyalty program or when a material right in the form of a future discount is granted. In these transactions, the transaction price is allocated to the separate performance obligations based on the relative standalone selling price. The standalone selling price for the points earned for the Company's loyalty program is estimated using the net retail value of the merchandise purchased, adjusted for estimated breakage based on historical redemption patterns. The revenue associated with the initial merchandise purchased is recognized immediately and the value assigned to the points is deferred until the points are redeemed, forfeited or expired. In regard to the consolidated balance sheet, contract liabilities for gift cards are classified as gift cards and customer deposits.

 

 

The Company’s commercial segment includes transactions with other businesses and are mainly comprised of licensing the Company’s intellectual properties for third-party use and wholesale sales of merchandise, including supplies and fixtures. Revenue for wholesale sales is recognized when control of the merchandise or fixtures is transferred to the customer, which generally occurs upon delivery to the customer. The license agreements provide the customer with highly interrelated rights that are not distinct in the context of the contract and therefore, have been accounted for as a single performance obligation and recognized as licensee sales occur. If the contract includes a guaranteed minimum, the minimum guarantee is recognized on a straight-line basis over the guarantee term until such time as royalties earned through licensee sales exceed the minimum guarantee. The Company classifies these guaranteed minimum contract liabilities as deferred revenue on the consolidated balance sheet.

 

The Company’s international franchising segment includes the activities with franchisees who operate store locations in certain countries and includes development fees, sales-based royalties and merchandise, including supplies and fixture sales. The Company's obligations under the franchise agreement are ongoing and include operations and product development support and training, generally concentrated around new store openings. These obligations are highly interrelated rights that are not distinct in the context of the contract and, therefore, have been accounted for as a single performance obligation and recognized as franchisee sales occur. If the contract includes an initial, one-time nonrefundable development fee, this fee is recognized on a straight-line basis over the term of the franchise agreement, which may extend for periods up to 25 years, or if the agreement is terminated prior to the end of the term. The Company classifies these initial, one-time nonrefundable franchise fee contract liabilities as deferred revenue on the consolidated balance sheet. Revenue from merchandise and fixture sales is recognized when control is transferred to the franchisee which generally occurs upon delivery to the customer.

 

The Company also incurs expenses directly related to the startup of new franchises, including finder’s fees, legal and travel costs as well as expenses related to its ongoing support of the franchisees, predominantly travel and employee compensation. Accordingly, the Company’s policy is to capitalize the finder’s fee, an incremental cost, and expense all other costs as incurred. Additionally, the Company amortizes these capitalized costs into expense in the same pattern as the development fee's recording of revenue as described previously.

 

 

 

 3. Leases

 

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 five to ten-year base period and 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 weeks ended May 2, 2020 and May 4, 2019 (in thousands).

 

 

Other information

The table below presents supplemental cash flow information related to leases for the thirteen weeks ended May 2, 2020 and May 4, 2019 (in thousands).

 

 

As of May 2, 2020 and May 4, 2019, the weighted-average remaining operating lease term was 5.6 years and 6.4 years, respectively, and the weighted-average discount rate was 6.1% and 5.9%, respectively, for operating leases recognized on our Condensed Consolidated Balance Sheets.

 

As discussed above, the Company incurred impairment charges during the thirteen week period ending May 2, 2020, of $2.4 million against right-of-use operating lease assets.

 

Undiscounted cash flows

The table below reconciles the undiscounted cash flows for each of the first five years and total of the remaining years to the operating lease liabilities recorded on the balance sheet (in thousands).

 

 

 

As of May 2, 2020, the Company has additional executed leases that have not yet commenced with operating lease liabilities of $1.4 million. These leases will commence in 2020 with lease terms ranging from two to five years.

 

 

 

 

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.
	(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):

 

 

(1)

Accrued rent and related expenses consist of accrued costs associated with non-lease components.

 

 

6. Stock-based Compensation

 

On March 14, 2017, the Company’s Board of Directors (the “Board”) adopted, subject to stockholder approval, the Build-A-Bear Workshop, Inc. 2017 Omnibus Incentive Plan (the “2017 Plan”). On May 11, 2017, at the Company’s 2017 Annual Meeting of Stockholders, the Company’s stockholders approved the 2017 Plan. The 2017 Plan, which is administered by the Compensation and Development Committee of the Board, permits the grant of stock options (including both incentive and non-qualified stock options), stock appreciation rights, restricted stock, cash and other stock-based awards, some of which may be performance-based pursuant to the terms of the 2017 Plan. The Board may amend, modify or terminate the 2017 Plan at any time, except as otherwise provided in the 2017 Plan. The 2017 Plan will terminate on March 14, 2027, unless earlier terminated by the Board. The number of shares of the Company’s common stock authorized for issuance under the 2017 Plan is 1,000,000, plus shares of stock subject to outstanding awards made under the Company's Third Amended and Restated 2004 Stock Incentive Plan that on or after March 21, 2017 may be forfeited, expire or be settled for cash.

 

For the thirteen weeks ended May 2, 2020 and May 4, 2019, Selling, general and administrative expense included $0.3 million and $0.7 million, respectively, of stock-based compensation expense. As of May 2, 2020, there was $2.4 million of total unrecognized compensation expense related to unvested restricted stock and option awards which is expected to be recognized over a weighted-average period of 1.2 years.

 

 

The following table is a summary of the balances and activity for stock options for the thirteen weeks ended May 2, 2020:

 

 

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 2, 2020:

 

 

The total fair value of shares vested during the thirteen weeks ended May 2, 2020 and May 4, 2019 was $1.9 million and $1.6 million, respectively.

 

 

The outstanding performance shares as of May 2, 2020 consist of the following:

 

 

 

 

 

7. Income Taxes

 

The effective tax rate was (13.6%) for the thirteen weeks ended May 2, 2020 compared to 50.5% for the thirteen weeks ended May 4, 2019. In the first quarter of fiscal 2020, the effective tax rate differed from the statutory rate of 21% primarily due to the $3.3 million valuation allowance recorded on the beginning balance of the net deferred tax assets in certain jurisdictions offset by $0.8 million of benefit as a result of the Coronavirus Aid, Relief, and Economic Security ("CARES") Act. In addition, no tax benefit was recorded on the current period pretax loss as a full valuation allowance has now been recorded globally.  In the first quarter of fiscal 2019, the effective tax rate differed from the statutory rate of 21% primarily due to the valuation allowance being recorded in certain foreign 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 May 2, 2020 and May 4, 2019 (in thousands):

 

 

(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 2, 2020, the Company has repurchased approximately 1.3 million shares at an average price of $8.75 per share for an aggregate amount of approximately $11.2 million, leaving approximately $8.8 million authorized under the program as of that date. We do not plan to utilize cash to resume share repurchases in fiscal 2020. In addition, our ability to repurchase shares is limited by conditions set forth by our lender in our credit agreement, as described below.

 

 

 

9. Income per Share

 

The following table sets forth the computation of basic and diluted net loss 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 the diluted income per share for the thirteen weeks ended May 2, 2020 and May 4, 2019 options to purchase 892,339 and 938,622 shares of common stock, respectively, that were outstanding at the end of the period were not included in the computation of diluted income per share due to their anti-dilutive effect.

 

 

10. Comprehensive Income (Loss)

 

The difference between comprehensive income or loss and net income or loss results from foreign currency translation adjustments on the balance sheets of subsidiaries whose functional currency is not the U.S. Dollar. The accumulated other comprehensive income (loss) balance at May 2, 2020 and May 4, 2019 was comprised entirely of foreign currency translation. For the thirteen weeks ended May 2, 2020 and May 4, 2019, there were 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, 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):

 

 

 

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.

(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 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. On November 27, 2019, the trial court issued a ruling that duty was due on some, but not all, of the products at issue. Both the Company and the U.K. customs authority have appealed that ruling, which was accepted by tribunal judge on June 1, 2020. The Company maintains a provision against the related receivable, based on a current evaluation of collectability, using the latest facts available in the dispute. As of May 2, 2020, the Company had a gross receivable balance of $4.2 million and a reserve of $3.4 million, leaving a net receivable of $0.8 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.

 

13. Subsequent Events

 

On May 28, 2020, we entered into the twenty-first amendment to our credit agreement, which, among other revisions, reduced the total facility to $10.0 million with U.S. Bank National Association, as lender. Borrowings under the credit agreement are secured by our assets and a pledge of 66% of our ownership interest in certain of our foreign subsidiaries. The credit agreement expires on September 30, 2020 and contains various restrictions on indebtedness, liens, guarantees, redemptions, mergers, acquisitions or sale of assets, loans, transactions with affiliates and investments. The agreement limits the conditions under which the Company may declare dividends and repurchase shares. For example, we may not use the proceeds of the line of credit to repurchase shares. The commitment fee is 0.25% per annum and borrowings bear interest at LIBOR plus 3.25%. The amendment eliminated the minimum EBITDA, funded debt ratio, and fixed charge coverage ratio covenants as of the end of each reporting period, but imposed other restrictions, including a requirement to maintain a minimum consolidated North American cash balance of $3 million at all times and, at the time of borrowing, have no more than $5 million of consolidated North American cash and meet a fixed charge coverage ratio as of the most recent quarter-end on a trailing 12-month basis of less than 1.25 to 1.00. In addition, the Company had a $1.0 million letter of credit against the line of credit at the end of the first quarter of fiscal 2020. As of the end of the first quarter of fiscal 2020 under the credit agreement as amended on May 28, 2020, we were in compliance with the restrictions stated in the agreement and there were no borrowings under the line of credit. Although there was $9.0 million available for borrowing under the line of credit as of the end of the first quarter, because of the amendments described above, we do not expect to access the credit agreement prior to its expiration on September 30, 2020 because we expect to have cash of more than $5 million and given our trailing twelve month financial results, we do not expect to meet the required fixed charge coverage ratio.