BUILD-A-BEAR WORKSHOP INC

Build-A-Bear Workshop, Inc. and subsidiaries (collectively, the “Company”) is a multi-channel retailer of plush animals and related products. The Company began operations in* October 1997.The Company sells its products through its 368 corporately-managed locations operated primarily in leased mall locations in the U.S., Canada, the Republic of Ireland, and the U.K. along with its e-commerce sites. As of the balance sheet date, operations in foreign countries where the Company doesnot* have corporately-managed locations are through franchise agreements. The Company also sold product through its partner-operated "third-party retail" model at 138 stores in which it sells its products on a wholesale basis to other companies that then in turn execute the Company's retail experience.

The Company’s consolidated financial statements have been prepared in accordance U.S. GAAP. Certain amounts in prior fiscal periods have been reclassified to conform to current year presentation withno impact to the consolidated statement of operations and comprehensive income.

For each accounting topic that is addressed in its own note, the description of the accounting policy* may*be found in the related note. The Company’s other significant accounting policies applied in the preparation of the accompanying consolidated financial statements are as follows:

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of Build-A-Bear Workshop, Inc. and its wholly-owned subsidiaries. All intercompany accounts are eliminated in consolidation.

Fiscal Year

The Company operates on a52- or53-week fiscal year ending on the Saturday closest to* January**31.* The periods presented in these financial statements are fiscal2024 (52 weeks ended* February 1, 2025*), fiscal2023 (53 weeks ended* February 3, 2024*) and fiscal2022 (52 weeks ended* January 28, 2023*). References to years in these financial statements relate to fiscal years or year-ends rather than calendar years.

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 ofthree 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 fromthird-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 hasnot experienced any losses in such accounts and management believes that the Company isnot exposed to any significant credit risk on cash, cash equivalents, and restricted cash.

Inventories

Inventories are stated at the lower of cost or net realizable value, with cost determined on an average-cost basis. Inventory includes supplies of $3.5 million and $4.1 million as of* February 1, 2025* and* February 3, 2024*, respectively. A reserve for estimated shortage is accrued throughout the year based on detailed historical averages. The inventory reserve was $1.2 million as of* February 1, 2025* and $1.1 million as of* February 3, 2024*.

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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 fiscal2023, the Company adopted ASUNo. 2016-13, “Financial Instruments - Credit Losses (Topic326): 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.

Property and Equipment

Property and equipment consist of leasehold improvements, furniture and fixtures, computer equipment and software, building and land and are stated at cost. Leasehold improvements are depreciated using the straight-line method over the shorter of the useful life of the assets or the life of the lease ranging fromone toten years. Furniture and fixtures and computer equipment are depreciated using the straight-line method over the estimated service lives ranging from three toseven years. Computer software includes certain costs, including internal payroll costs incurred in connection with the development or acquisition of software for internal use and is amortized using the straight-line method over a period ofthree tofive years. New store construction deposits are recorded at the time the deposit is made as construction-in-progress and reclassified to the appropriate property and equipment category at the time of completion of construction, when operations of the store commence. Maintenance and repairs are expensed as incurred and improvements are capitalized. Gains or losses on the disposition of fixed assets are recorded upon disposal.

Leases

The majority of the Company's leases relate to retail stores, corporate offices, and storage locations. For leases with terms greater than12 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 offive toten-year base period and the term can be extended on a lease-by-lease basis with additional terms that are typically much shorter than the original lease term giving the Company lease optionality. The renewal options arenot 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* mayoperate stores for a period of time on a month-to-month basis after the expiration of the lease term. The Company's lease agreements donot* contain any material residual value guarantees or material restrictive covenants. 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 the 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.

The Company's leases typically contain rent escalations over the lease term and the Company recognizes expense for these leases on a straight-line basis over the lease term. The Company recognizes the related rental expense on a straight-line basis and records the difference between the recognized rental expense and amounts payable under the lease as part of the lease right-of-use asset. Some of the Company's leases include rent escalations based on inflation indexes and fair market value adjustments. 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. 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 and certain leases* may*contain rental provisions that only include a provision for a percentage of a store's total sales, instead of a fixed base rent amount. Such rents based on a percentage of store's total sales are recorded as variable lease expenses.

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 donot provide a readily available implicit interest rate. Therefore, the Company estimates the incremental borrowing discount rate based on information available at lease commencement. The discount rates used are indicative of a synthetic credit rating based on quantitative and qualitative analysis and adjusted to estimate a secured credit rating. For non-U.S. locations, a risk-free rate yield based on the currency of the lease is used to adjust the estimate of the incremental borrowing rate.

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Long-lived Assets

Whenever facts and circumstances indicate that the carrying value of a long-lived asset (asset group) and right-of-use operating lease assets* may**not* be recoverable, the carrying value of those assets is reviewed for potential impairment. If this review indicates that the carrying value of the asset (asset group) willnot be recovered, as determined based on projected undiscounted cash flows related to the asset (asset group) over its remaining life, the carrying value of the asset (asset group) is reduced to its estimated fair value. The Company typically performs an annual assessment of its store assets in the DTC segment, based on operating performance and forecasts of future performance. For the purposes of evaluating store assets for impairment, the Company has determined that each store location is an asset group, inclusive of the right-of-use asset attributable to each store. In periods where the Company identifies indicators of impairment for its store fleet, the Company performs a recoverability test for these assets by comparing the estimated undiscounted future cash flows over the remaining useful life of the asset (asset group) to the carry value of the asset (asset group). The estimated undiscounted future cash flows involve expectations for future operations and projected cash flows, including estimates of revenue, operating expenses and market conditions. Based on this, the Company determines if certain stores had long-lived and right-of-use assets with carrying values that exceed their estimated undiscounted future cash flows for the remaining useful life of the respective assets.

An impairment charge is recognized to the extent the carrying value exceeded the fair value of the asset (asset group). The Company estimates fair values of these long-lived assets based on its discounted future cash flow analysis for the remaining useful life of the asset or its market rent assessment. An individual asset within an asset group isnot impaired below its estimated fair value. Asset impairment charges are recorded within the cost of merchandise sold - retail expense within the Consolidated Statement of Operations and Comprehensive Income. The Company's analysis identified indicators of impairment attwo retail locations and the Company incurred immaterial impairment charges during fiscal2024 for long-lived assets in the Company's DTC segment.

The estimates, all of which are considered Level3 inputs, used to calculate the fair value of the asset (asset group) include: the Company’s expectations for future operations and projected cash flows, including revenues, operating expenses including market rents, and market conditions. Changes in these estimates could have an impact on whether long-lived store assets should be further evaluated for impairment and could have a significant impact on the resulting impairment charge.

Other Assets, net

Other assets consist primarily of the non-current portion of prepaid income taxes and deferred costs related to franchise agreements, financing agreements, and capitalized film production costs. Deferred franchise costs are initial costs related to the Company’s franchise agreements that are deferred and amortized over the life of the respective franchise agreement. Deferred financing costs are the initial issuance costs and fees incurred in obtaining the Company's new credit agreement. The Company hadno outstanding borrowings at the beginning of the facility or at of the date of thesecond amendment, therefore these costs and fees incurred for the original agreement and amendment were recorded as a deferred asset and the unamortized costs will be amortized over the length of the amended agreement. Film production costs include capitalizable direct costs, production overhead, interest and development costs and are stated at the lower of cost, less accumulated amortization, or fair value.

Entertainment Production Costs

Costs of producing entertainment assets, which include direct costs, production overhead and development costs, are capitalized when incurred and are stated at the lower of cost, less accumulated amortization, or fair value. For film related costs, the Company expects assets to be monetized individually and are amortized using the individual film-forecast-computation method which amortizes such costs in the same ratio that current period actual revenue bears to the estimated remaining unrecognized total revenues (ultimate revenue). Ultimate revenue includes estimates over a periodnot to exceedten years from the date of initial release of the film. Participation costs and residuals are accrued and expensed over the applicable product life cycle based upon the ratio of the current period's revenues to the estimated remaining total revenues for each production.

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Costs of entertainment productions are subject to recoverability assessments, whenever events or changes in circumstances indicate that the fair value of the film* maybe less than the unamortized cost, which for content predominantly monetized individually, involves comparing the estimated fair values with the unamortized cost. The fair value is determined based on a discounted cash flow analysis of the cash flows directly attributable to the entertainment assets. The discounted cash flow analysis includes cash flow estimates of ultimate revenue as well as a discount rate (a Level3* fair value measurement). The discount rate used in the Company’s discounted cash flow model reflects the time value of money, expectations about variation in the amount or timing of the most likely cash flows, and the price market participants would seek for bearing the uncertainty inherent with the film asset. The amount by which the unamortized costs of entertainment assets exceed their estimated fair values are written off. As of* February 1, 2025* and* February 3, 2024*, the Company had net capitalized entertainment production costs of $4.2 million and $4.7 million, respectively. The* February 1, 2025* balance for entertainment production costs is comprised of unamortized, released assets and several in-development entertainment projects.

The main purpose of the Company's production assets is to drive consumer engagement with its own intellectual property, similar to a marketing campaign. As such, the amortization of production assets and any related impairment charges are recorded as advertising expenses with the Selling, general, and administrative line within the Consolidated Statement of Operations and Comprehensive Income and includes this expense in the financial information of the Commercial reportable segment presented in Note15 - Segment Information. In* November 2023,the Company released the film Glisten and the Merry Mission and recorded $1.0 million in film cost amortization during fiscal2023* based on the individual film's production asset carrying value and its current period actual revenue as a percentage of the ultimate revenue estimate. Additionally, as of* February 1, 2025*, the Company performed a recoverability assessment of the Glisten and the Merry Mission assets and determined there were indicators of impairment. A discounted cash flow analysis was used to estimate the fair value of the asset and determined the carry value of the production asset was greater than its fair value. As a result, the Company recorded $0.3 million in film asset amortization. The Company recorded a total of $1.1 million in film costs amortization in fiscal2024 and a total of $2.4 million in fiscal2023.

Revenue

See Note3 — Revenue for additional accounting information.

Cost of Merchandise Sold

Cost of merchandise sold - retail includes the cost of the merchandise, including royalties paid to licensors ofthird-party branded merchandise; store occupancy cost, including store depreciation; cost of warehousing and distribution; packaging; stuffing; damages and shortages; and shipping and handling costs incurred in shipment to consumers. Cost of merchandise sold - commercial includes the cost of the merchandise, including royalties paid to licensors ofthird-party branded merchandise; cost of warehousing and distribution; packaging; stuffing; damages and shortages; and shipping and handling costs incurred in shipment to consumers.

Selling, General, and Administrative Expenses

Selling, general, and administrative expenses include store payroll and related benefits, advertising, credit card fees, store supplies and store closing costs, as well as central office management payroll and related benefits, travel, information systems, accounting, insurance, legal, and public relations costs. It also includes depreciation and amortization of central office leasehold improvements, furniture, fixtures, and equipment. In addition, bad debt expenses and accounts receivable related charges are included. Further, it includes store preopening expenses which represent costs incurred prior to store openings, remodels and relocations including certain store set-up, labor and hiring costs, rental charges, payroll, government grants, marketing, travel and relocation costs and recoveries.

Advertising

The costs of advertising and marketing programs are charged to operations in thefirst period the program takes place. Advertising expense was $21.0 million, $24.3 million and $19.6 million for fiscal years2024,2023 and2022, respectively.

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Income Taxes

Income taxes are accounted for using a balance sheet approach known as the liability method. The liability method accounts for deferred income taxes by applying the rate, based on enacted tax law, that will be in effect in the period in which the temporary differences between the book basis and the tax basis of assets and liabilities reverse or are settled. Deferred taxes are reported on a jurisdictional basis.

Tax positions are reviewed at least quarterly and adjusted as new information becomes available. The recoverability of deferred tax assets is evaluated by assessing the adequacy of future expected taxable income from all sources, including reversal of taxable temporary differences, forecasted operating earnings and available tax planning strategies. These estimates of future taxable income inherently require significant judgment. To the extent it is considered more likely thannot that a deferred tax asset will benot recovered, a valuation allowance is established.

The Company assesses its total liability for uncertain tax positions on a quarterly basis. The Company recognizes estimated interest and penalties related to unrecognized tax benefits in income tax expense. See Note8—Income Taxes for further discussion.

IncomePer Share

Basic income per share is dete rmined by dividing net income allocated to common stockholders by the weighted average number of common shares outstanding during the period. Diluted income per share reflects the potential dilution that could occur if options to issue common stock were exercised. In periods in which the inclusion of such instruments is anti-dilutive, the effect of such securities isnot given consideration.

Stock-Based Compensation

The Company has share-based compensation plans covering certain management groups and its Board of Directors. The Company accounts for share-based payments utilizing the fair value recognition provisions of ASC718 Compensation - Stock Compensation. The Company recognizes compensation cost for graded-vested equity awards on a straight-line basis over the requisite service period for the entire award and forfeitures as they occur. See Note12 — "Stock Incentive Plans" for additional information.

ComprehensiveIncome

Comprehensive income is comprised of net income and foreign currency translation adjustments.

Deferred Compensation Plan

The Company maintains a Deferred Compensation Plan for the benefit of certain management employees. The investment funds offered to participants generally correspond to the funds offered in the Company’s401(k) plan, and the account balance fluctuates with the investment returns on those funds. The fair value of the assets, classified as trading securities, and corresponding liabilities are based on unadjusted quoted market prices for the funds in active markets with sufficient volume and frequency (Level1). As of* February 1, 2025*, the current portions of the assets and related liabilities of less than $0.1 million are presented in prepaid expenses and other current assets and accrued expenses in the accompanying Consolidated Balance Sheets, and the non-current portions of the assets and the related liabilities of $0.9 million are presented in other assets, net and other liabilities in the accompanying Consolidated Balance Sheets. As of* February 3, 2024*, the current portions of the assets and related liabilities of less than $0.1 million are presented in prepaid expenses and other current assets and accrued expenses in the accompanying Consolidated Balance Sheets, and the non-current portions of the assets and the related liabilities of $0.7 million are presented in other assets, net and other liabilities in the accompanying Consolidated Balance Sheets.

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Fair Value of Financial Instruments

For purposes of financial reporting, management has determined that the fair value of financial instruments, including cash, cash equivalents and restricted cash, receivables, short term investments, accounts payable and accrued expenses, approximates book value at* February 1, 2025* and* February 3, 2024*.

Use of Estimates

The preparation of the consolidated financial statements requires management of the Company to make a number of estimates and assumptions relating to the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The assumptions used by management in future estimates could change significantly due to changes in circumstances, including, butnot limited to, challenging economic conditions. Accordingly, future estimates* may*change significantly. Significant items subject to such estimates and assumptions include the calculation of revenue from gift card breakage, valuation of long-lived asset for asset impairments, income tax valuation allowances on deferred income tax assets, and the determination of deferred revenue under the Company’s customer loyalty program.

Sales Tax Policy

The Company’s revenues in the consolidated statement of operations are net of sales taxes.

Foreign Currency

Assets and liabilities of the Company’s foreign operations with functional currencies other than the U.S. dollar are translated at the exchange rate in effect at the balance sheet date, while revenues and expenses are translated at average rates prevailing during the year. Translation adjustments are reported in accumulated other comprehensive income, a separate component of stockholders’ equity. Gains and losses resulting from foreign exchange transactions, including the impact of the re-measurement of the Company’s balance sheet, are recorded as a component of selling, general and administrative expenses. The Company recorded a loss of $0.2 million, $0.1 million and $0.6 million related to foreign currency in fiscal2024,2023 and2022, respectively.

Recent Accounting Pronouncements*** – Adopted in the current year***

At the end of fiscal2024, the Company adopted ASU**No.* 2023-07, "Segment Reporting (Topic280*): Improvements to Reportable Segment Disclosures." This ASU updates reportable segment disclosure requirements primarily through enhanced disclosures about significant segment expenses.

Recent Accounting Pronouncements*** – Pending adoption***

In* December 2023,the FASB issued ASU**No. 2023-09*, "Income Taxes (Topic740): Improvements to Income Tax Disclosures." This ASU expands the requirements for income tax disclosures in order to provide greater transparency. The amendments are effective for fiscal years beginning after* December 15, 2024*and the amendments should be applied prospectively. Management is currently evaluating this ASU to determine its impact on the Company's disclosures.

In* November 2024,the FASB issued ASU**No. 2024-03*, "Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures (Subtopic220-40): Disaggregation of Income Statement Expenses." The amendment requires a public business entity (PBE) to disclose, on an annual and interim basis, disaggregated information about certain income statement line items in a tabular format in the notes to the financial statements. The amendments are effective for fiscal years beginning after* December 15, 2026,and interim periods within fiscal years beginning after December 15, 2027.*Management is currently evaluating this ASU to determine its impact on the Company's disclosures.

 

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Nearly all of 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 accounts for revenue in accordance with Topic606, Revenue from Contracts with Customers. The Company's disaggregated revenue is fully disclosed as net sales to external customers by reporting segment and by geographic area (See Note15 — "Segment Information" for additional information). The Company's direct-to-consumer reporting segment represents nearly 93% 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, control generally transfers 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 thanone-half ofone 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-add 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. Approximately 80% of gift cards issued have been redeemed within three years of issuance and over the lastthree years, approximately 65% of gift cards issued have been redeemed within thefirst twelve months. In addition, unredeemed gift cards or breakage revenue is recorded in proportion to the customer’s redemption pattern using an estimated breakage rate based on historical experience.

Subsequent to stores reopening following shutdowns caused by COVID, the Company has experienced lower redemptions of its gift cards for all periods of outstanding activated cards compared to pre-pandemic redemption patterns (fiscal year2019 and earlier), which impacts the gift card breakage rate. The Company doesnot believe that the redemption pattern experienced during the pandemic reflects the pattern in the future and has adjusted the historical redemption data used to calculate the breakage rate. The Company continues to evaluate expected breakage annually and adjusts the breakage rates in thefourth 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 the fiscal years ended* February 1, 2025*,* February 3, 2024*, and* January 28, 2023*, net retail sales included gift card breakage revenue of $6.5 million, $6.3 million and $5.1 million, respectively. In regard to the consolidated balance sheet, contract liabilities for gift cards are classified as gift cards and customer deposits.

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 certifications daily for those loyalty program members who have earned100 or more points in the previous day in North America and50 points or more in the U.K. with certifications historically expiring infour months ifnot 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 are mainly comprised of wholesale sales of merchandise, supplies and fixtures, licensing the Company’s intellectual properties forthird-party use, and revenues generated from entertainment activities. 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 arenot 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 as licensee sales occur 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 and other on the consolidated balance sheet. Entertainment revenue is generated through the sale of entertainment assets directly to customers or through licensing agreements.

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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, merchandise, 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 arenot 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 and other on the consolidated balance sheet. Revenue from merchandise and fixture sales is recognized when control is transferred to the franchisee which generally occurs upon delivery to the customer.

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

Allowance for Expected Credit Losses

(1) Other receivables allowance for doubtful accounts represent uncollectible accounts written off, recoveries and the impact of currency translation

The table below presents information related to the lease costs for operating leases for the periods presented (in thousands).

(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.

The table below presents supplemental cash flow information related to leases for the periods presented (in thousands).

Operating cash flows for operating leases for fiscal2024 increased from the operating cash flows for operating leases for the same periods infiscal2023 and fiscal2022, primarily due to increased corporately-managed store count and overall increases in market rent.

As of* February 1, 2025*, the weighted-average remaining operating lease term was 6.0 years and the weighted-average discount rate was 7.2% for operating leases recognized on the consolidated balance sheet.

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The Company recorded immaterial impairment charges during fiscal2024, fiscal 2023 and fiscal2022 against its right-of-use operating lease assets in the Company's DTC segment.

Undiscounted cash flows

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

As of* February 1, 2025*, the Company had additional executed leases that hadnot yet commenced with operating lease liabilities totaling $29.3 million. These leases are expected to commence in thefirst quarter of fiscal2025 with lease terms offive totwenty years.

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) Prepaid taxes consist primarily of prepaid federal and state income tax.

(3) Other consists primarily of prepaid expenses related to IT maintenance contracts and software as a service.

Other non-current assets consist of the following (in thousands):

(1) Other consists primarily of deferred financing costs related to the Company's credit facility.

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Property and equipment, net consist of the following (in thousands):

For fiscal2024 and2023, depreciation expense was $14.8 million and $13.7 million, respectively.

The Company recorded immaterial impairment charges during fiscal2024 and2023 for long-lived assets in the Company's DTC segment.

Accrued expenses consist of the following (in thousands):

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

For fiscal2024 and2023, defined contribution expense was $1.4 million and $1.5 million, respectively, included within Accrued wages, bonuses and related expenses.

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The Company’s income before income taxes from domestic and foreign operations (which include the U.K., Canada, China, and Ireland), is as follows (in thousands):

The components of the income tax expense are as follows (in thousands):

The provision for income taxes was $15.4 million in fiscal2024 compared to $13.5 million in fiscal2023. The2024 effective rate of 22.9% differed from the statutory rate of 21% primarily due to state income tax expense partially offset by the tax benefit of the foreign-derived intangible income (FDII) deduction. The2023 effective rate of 20.4% differed from the statutory rate of 21% primarily due to the reversal of the valuation allowance in the U.K. partially offset by state income tax expense.

The Company periodically assesses whether it is more likely thannot that it will generate sufficient taxable income to realize its deferred income tax assets based on all available positive and negative evidence. Changes in the valuation allowance in fiscal2024 are primarily related to functional currency fluctuations.

Differences between the provision for income taxes at the U.S. federal statutory income tax rate and the provision in the consolidated statements of operations are as follows:

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Temporary differences that gave rise to deferred tax assets and liabilities are as follows (in thousands):

As of* February 1, 2025,the Company had gross net operating loss (NOL) carryforwards of approximately $3.2 million, $1.8 million of which relate to the U.K. where NOLs haveno* expiration date, and $1.4 million of which relate to China where NOLs are carried forward forfive years subsequent to the year in which the loss was incurred.

The Company continues to assert its investments in foreign subsidiaries are permanent in duration and it isnot practical to estimate the income tax liability on the outside basis differences.

As of* February 1, 2025,the Company hadno unrecognized tax benefits. As of February 3, 2024,the Company had total unrecognized tax benefits of $0.1 million, of which $0.1 million would favorably impact the Company’s provision for income taxes if recognized. In thefourth* quarter of fiscal year2024, the Company recorded additional unrecognized tax benefits of $0.1 million and settled all unrecognized tax benefits of $0.1 million. The Company reviews its uncertain tax positions periodically and accrues interest and penalties accordingly. Accrued interest and penalties included within other liabilities in the consolidated balance sheets was $0.0 million and less than $0.1 million for the years ended* February 1, 2025,and February 3, 2024,respectively. The Company recognizes accrued interest and penalties related to unrecognized tax benefits as a component of the provision for income taxes within the consolidated statement of operations. For the years ended February 1, 2025,and February 3, 2024,*the Company recognized an (expense) benefit of less than ($0.1) million and ($0.1) million, respectively, for interest and penalties.

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A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):

Management doesnot expect the amount of unrecognized tax benefits to change by a material amount in the nexttwelve months.

The following tax years remain open in the Company’s major taxing jurisdictions as of* February 1, 2025*:

The Company has a revolving credit and security agreement with PNC Bank, as agent, which expires on* December 17, 2026,and provides for a secured revolving loan in aggregate principal of up to $25.0 million, subject to a borrowing base formula. As of February 1, 2025*, borrowings under the agreement would bear interest at (a) a base rate determined under the agreement, or (b) the borrower's option, at a rate based on SOFR, plus in either case a margin based on average undrawn availability as determined in accordance with the agreement.

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The Credit Agreement requires the Company to comply withone financial covenant, specifically, that the Company maintain availability (as determined in accordance with the Credit Agreement) at all times equal to or greater than the greater of (a)10.0% of the Loan Cap and (b) $1,875,000 (subject to increase upon exercise of the Increase Option). The “Loan Cap” is the lesser of (1)$25,000,000 less the outstanding amount of loans and letters of credit under the Credit Agreement and (2) the borrowing base from time to time under the Credit Agreement.

The Credit Agreement contains customary events of default, including without limitation events of default based on payment obligations, material inaccuracies of representations and warranties, covenant defaults, final judgments and orders, unenforceability of the Credit Agreement, material ERISA events, change in control, insolvency proceedings, and defaults under certain other obligations. An event of default* may*cause the applicable interest rate and fees to increase by 2% until such event of default has been cured, waived, or amended.

The Credit Agreement contains typical negative covenants, including, among other things, that the Borrower willnot incur indebtedness except for permitted indebtedness or make any investments except for permitted investments, declare dividends or repurchase its stock except as permitted, acquire any subsidiaries except in connection with a permitted acquisition, or merge or consolidate with any other entity or acquire all or substantially all of the assets of any other company outside the ordinary course of business.

The Company is currently in compliance with the Credit Agreement covenants. As of* February 1, 2025*, the Company had a borrowing base of$25.0 million. The Company hadno outstanding borrowings as of* February 1, 2025*.

Litigation

In the normal course of business, the Company is subject to legal proceedings, government inquiries and claims, and other commercial disputes. Ifone 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 in2012 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 2019and Upper Tribunal in March 2021held that duty was due on some, butnot* 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, butnot* all, of the grounds of appeal that the Company had put forward. An appeal was heard by the Court of Appeal during thefirst quarter of fiscal2022, and the Court of Appeal dismissed the appeal in thethird quarter of fiscal2022. During thefourth quarter of fiscal2022, 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* February 1, 2025*, the Company had a gross receivable balance of $4.7 million and a reserve of $3.3 million, leaving a net receivable of $1.4 million. The Company believes that the outcome of this dispute willnot have a material adverse impact on the results of operations, liquidity, or financial position of the Company.

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The Company computes both basic and diluted income per common share. The following table sets forth the computation of basic and diluted income per share (in thousands, except share and per share data):

In calculating diluted earnings per share for fiscal2024,2023 and2022, there were 21,828,23,324, and 46,543 shares of common stock, respectively, that were outstanding at the end of the period that werenot included in the computation of diluted income per share due to their anti-dilutive effect under provisions of ASC260-10.

In2017, the Company adopted the Build-A-Bear Workshop, Inc.2017 Omnibus Incentive Plan (the*"2017* Plan").

On* April14,* 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’s2020* Annual Meeting of Stockholders (the “Annual Meeting”), the Company’s stockholders approved the2020 Incentive Plan. On* April11,* 2023, the Board adopted, subject to stockholder approval, the Build-A-Bear Workshop, Inc. Amended and Restated2020 Omnibus Incentive Plan (the “Restated2020 Incentive Plan”). On* June 8, 2023,at the Company’s2023* Annual Meeting of Stockholders (the “Annual Meeting”), the Company’s stockholders approved the Restated2020 Incentive Plan. The Restated2020 Incentive Plan, which is administered by the Compensation and Development Committee of the Board, permits the grant of stock options (including both incentive and non-qualified stock options), stock appreciation rights, other stock-based awards, including restricted stock and restricted stock units, cash-based awards, and performance awards pursuant to the terms of the Restated2020 Incentive Plan. The Restated2020 Incentive Plan will terminate on* April 11, 2033,unless earlier terminated by the Board. The total number of shares of the Company’s common stock authorized for issuance under the Restated2020* Incentive Plan increased by 800,000 to a maximum of 1,800,000 since its inception as the2020 Incentive Plan, subject to customary capitalization adjustments, substitutions of acquired company awards and certain additions of acquired company plan shares, plus shares that are subject to outstanding awards made under the2017 Plan that on or after* April 14, 2020** may*be forfeited, expire or be settled for cash.

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For the years ended* February 1, 2025*,* February 3, 2024* and* January 28, 2023*, Selling, general and administrative expense included stock-based compensation expense of $2.2 million, $2.1 million and $2.6 million, respe ctively. As of* February 1, 2025*, there was $2.7 million of total unrecognized compensation expense related to unvested stock awards which is expected to be recognized over a weighted-average period of 1.6 years. Future total shares available for options, non-vested stock and restricted stock grants were 857,838,1,010,666 and 186,624 at the end of2024,2023 and2022, respectively.

The following table is a summary of the balance and activity for the Plans related to stock options for the periods presented:

There wereno stock options granted during fiscal2024,2023 or2022. The expense recorded related to options granted was determined using the Black-Scholes option pricing model and the provisions of SAB107 and110, which allow the use of a simplified method to estimate the expected term of “plain vanilla” options.

The total grant date fair value of options exercised in fiscal2024 was $0.1 million and the total intrinsic value was $0.1 million. The total grant date fair value of options exercised in fiscal2023 was $1.2 million and the total intrinsic value was $1.2 million. The Company generally issues new shares to satisfy option exercises.

The Company granted restricted stock awards that typically vest over aone tothree-year period. Recipients of time-based restricted stock awards have the right to vote and receive dividends as to all unvested shares, however, the receipt of such dividends is contingent on such time-based awards vesting. Recipients of performance-based restricted stock awards have the right to vote and receive dividends upon satisfaction of the performance criteria and certain of these awards’ dividend rights are also subject to time-based vesting. The following table is a summary of the balance and activity for the Plans related to unvested time-based and performance-based restricted stock granted as compensation to employees and directors for the periods presented:

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In fiscal2024**, the Committee awarded three-year performance-based restricted stock, established specific profitability and revenue objectives for fiscal2024, 2025, and2026, and assigned a weighting to each objective. Profitability is measured by the Company’s achievement of established cumulative consolidated EBITDA. Revenue will be measured by the Company's achievement of cumulative total revenue. The target number of shares awarded was 64,619 with a weighted average grant date fair value of $27.61 per share. If profitability and revenue exceed the threshold objectives, the performance-based restricted stock award has a payout opportunity ranging from 25% to 200% of the target number of shares.

In fiscal2023**, the Committee awarded three-year performance-based restricted stock, established specific profitability and revenue objectives for fiscal2023, 2024, and2025, and assigned a weighting to each objective. Profitability is measured by the Company’s achievement of established compound annual growth for consolidated EBITDA. Revenue will be measured by the Company's achievement of revenue growth, by meeting established compound annual growth rate targets for cumulative total revenue. The target number of shares awarded was 65,254 with a weighted average grant date fair value of $24.75 per share. If profitability and revenue exceed the threshold objectives, the performance-based restricted stock award has a payout opportunity ranging from 25% to 200% of the target number of shares.

In fiscal2022**, the Committee awarded three-year performance-based restricted stock, established specific profitability and revenue objectives for fiscal2022, 2023, and2024, and assigned a weighting to each objective. Profitability is measured by the Company’s achievement of established compound annual growth for consolidated EBITDA. Revenue will be measured by the Company's achievement of revenue growth, by meeting established compound annual growth rate targets for cumulative total revenue. The target number of shares awarded was 84,579 with a weighted average grant date fair value of $18.03 per share. If profitability and revenue exceed the threshold objectives, the performance-based restricted stock award has a payout opportunity ranging from 25% to 200% of the target number of shares.

As of* February 1, 2025*, the Company had recorded aggregate expense for the fiscal2022, 2023, and2024 three-year performance-based restricted stock awards of $0.8 million.

The vesting date fair value of shares that vested in fiscal2024,2023 and2022 was $2.2 million, $2.1 million and $2.0 million, respectively.

The following table summarizes the changes in outstanding shares of common stock for fiscal2024 and fiscal2023:

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Five vendors, each of whose primary manufacturing facilities are located in Asia, accounted for approximately 69% of inventory purchases in2024 and 73% in2023.

The Company’s operations are conducted through three operating segments consisting of 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, the Republic of 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 wholesale activities, licensing the Company’s intellectual properties forthird party use, and entertainment 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 Executive Officer, who is also the Chief Operating Decision Maker ("CODM"), regularly evaluates the business in assessing performance, determining the allocation of resources and the pursuit of future growth opportunities. The CODM uses contribution margin to allocate resources across the reportable segments as part of the Company's long-range and annual planning processes, and to evaluate planned versus actual results when assessing segment operating performance. Accordingly, the Company has determined that each of its operating segments represent a reportable segment. Thethree 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 reporting segments (in thousands):

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Total assets, depreciation and amortization, and capital expenditures for the Company's segments, as well as for Corporate and support, are as follows:

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 (in thousands):

For purposes of this table only:

(a)(2)* Financial Statement Schedules*