BUILD A BEAR WORKSHOP INC

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.

Beginning in late May 2020, we began reopening selected store locations in the United States where permitted by federal, state and local directives. Separately, in the United Kingdom, the government has announced June 15, 2020 as the date for retailers to begin to reopen and we are planning accordingly. As of June 5, 2020, approximately 35 of our stores were open to the public, or approximately 11% of our total corporately managed store locations in the North America, and we expect to continue to reopen our temporarily closed stores through the remainder of the second quarter and into the third quarter, and expect that a majority of our store locations will be open by the end of the second quarter. Concurrent with the reopening of our stores, we have begun to bring employees back from furlough, and have implemented safety and cleaning protocols in the stores, as well as requiring the wearing of bear-themed masks by our store associates and implementing social distancing measures in our stores and guiding our guests in those measures in a fun, friendly and kid-centric way. Thus far the modifications have been well-received based on the positive feedback from both our associates and guests. We have seen varying levels of business recovery compared to the prior year at the stores that have reopened with tourist locations generally faring better than traditional mall sites.

The ultimate health and economic impact of the COVID-19 pandemic is highly uncertain, including the duration and severity of the COVID-19 outbreak, actions taken to contain its spread as well as its impact to consumer discretionary spending and the pace of economic recovery when the pandemic subsides. Therefore, we currently are not able to estimate the full impact of COVID-19 on our financial condition and future results of operations. In the near term, we expect that this situation will have an adverse effect on our reported results for second fiscal quarter of 2020 and possibly beyond, as we continue to reopen our stores. We will continue to actively monitor the effects that COVID-19 has on our business. A prolonged period of store closures, changes in customer behaviors and reductions of consumer discretionary spending would require us to continue to evaluate our business assumptions and estimates. Such conditions would likely result in lower future net sales and cash flow, which could lead to impairment of our store and other assets, as well as increase the risks associated with excess inventory. 

Impairment of long-live assets, including right-of-use assets. As a result of the COVID-19 pandemic, we experienced lower than projected revenues and identified indicators of impairment for our store fleet. We performed undiscounted cash flow analyses over the long-lived assets and right-of-use assets and determined that certain stores had long-lived and right-of-use assets with carrying values that exceeded their estimated undiscounted cash flows. We estimated fair values of these long-lived assets based on our discounted cash flows or market rent assessments. Our analysis indicated that the carrying values of our long-lived assets exceeded their respective fair values. As a result, we recognized an impairment charge of $4.8 million for the thirteen weeks ended May 2, 2020, with approximately $2.4 million for right-of-use operating lease assets and $2.4 million for fixed assets including leasehold improvements and fixtures, furniture and fixtures, and machinery and equipment. These impairment charges were primarily driven by lower than projected revenues and the effect of store closures as a result of the COVID-19 pandemic. The majority of the impairment was recorded for assets associated with stores in North America. For the thirteen weeks ended May 4, 2019, the Company did not record any impairment charges.

Capital Resources: As noted above, as of May 2, 2020, we had a consolidated cash balance of $21.9 million compared to $26.7 million as of February 1, 2020, and approximately 84% of this balance was domiciled within the United States. 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. 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.