Build-A-Bear Workshop Inc: Form 10-Q for the period ended Oct 30, 2021

Cautionary Notice Regarding Forward-Looking Statements

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties, and we undertake no obligation to update these statements except as required by the federal securities laws. Our actual results may differ materially from the results discussed in the forward-looking statements. These risks and uncertainties include, without limitation, those detailed under the caption “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended January 30, 2021, as filed with the SEC, and include the following:

• our business, operations and financial results have been and will continue to be negatively affected by the pandemic including the temporary closure of retail store locations or occupancy restrictions, which may be reinstated, all of which continue to fluctuate on a localized basis, presenting ongoing uncertainty relating to the anticipated duration and scope of the pandemic in areas in which we operate, as well as the restrictions imposed by federal, state, and local governments in response to the pandemic;
• any sustained decline in general global economic conditions, caused by the COVID pandemic or otherwise, could lead to disproportionately reduced consumer demand for our products, including those sold by third-party retailers, and which represent relatively discretionary spending, would cause an adverse effect on our liquidity and profitability;
• we rely on a few global supply chain vendors to supply substantially all of our merchandise, and significant price increases or disruption in their ability to deliver merchandise, such as was experienced due to periodic COVID-related factory closures, have impaired, and may in the future more significantly impair, our ability to source products and supply inventory to our stores and have previously caused us and in the future may cause us to carry higher levels of inventory than we have on a historical basis;
• we depend upon the shopping malls and tourist locations in which our corporately-managed stores and third-party retail locations are situated to attract guests and a decline in consumer traffic, or if such consumer traffic does not return to levels that we saw prior to the pandemic, or if such return is not sustained due to the spikes in the COVID infection rates or the emergence of new variants, such as Delta or Omicron, could adversely affect our financial performance and profitability. In addition, some of our third-party retailers may be subject to different market conditions as a result of the pandemic;
• in connection with the reopening of our stores, we have modified our interactive shopping experience in order to comply with recommended social distancing and sanitation practices. These modifications could have a negative impact on the appeal of our interactive shopping experience, reduce guest traffic to our stores, and decrease the volume of guests that may be able to enjoy our interactive shopping experience which could adversely impact our ability to operate our stores profitably;
• we may experience store closures in shopping malls and tourist locations and other impacts to our business resulting from civil disturbances;
• we believe the hands-on and interactive nature of our store and high touch service model result in guests forming an emotional connection with our brand, which in turn contributes to the success of our e-commerce platform and drives repeat customer transactions; if the revised experiences we are offering do not create or re-affirm the same guest affinity for our brand, it may adversely affect the value of our brand;
• birthdays and other special occasions have historically been a key driver for store traffic, and our inability to host such events due to pandemic restrictions or if our guests are not willing to hold such events at our stores may adversely affect store performance and our overall profitability;
• if we are unable to generate interest in and demand for our interactive retail experience and products, including being able to adjust that experience consistent with our guests' expectations as the general retail economy emerges from the restrictions imposed by the pandemic, and to otherwise identify and respond to consumer preferences in a timely manner, our sales, financial condition and profitability could be adversely affected;
• some of our licensed products are based on feature films with planned theatrical launches; given that the pandemic has negatively impacted theaters and delayed movie releases, the portion of our business associated with these films has been and could continue to be negatively affected;
• we may be unable to leverage the flexibility within our existing real estate portfolio to capitalize on future real estate opportunities over the near and intermediate term as our leases come up for renewal, and there may be other costs and risks related to a brick-and-mortar retail store model such as a lack of available retail store sites on terms acceptable to us as a result;
• consumer interests change rapidly and our success depends on the ongoing effectiveness of our marketing and online initiatives to build consumer affinity for our brand and drive consumer demand for key products and services;

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• we are subject to a number of risks related to disruptions, failures or security breaches of our information technology infrastructure. If we improperly obtain or are unable to protect our data or violate privacy or security laws such as the GDPR or the General Data Protection Regulation, the CCPA or the California Privacy Rights Act (as adopted), or expectations, we could be subject to liability as well as damage to our reputation;
• we may not be able to operate successfully if we lose key personnel, are unable to hire qualified additional personnel, or experience turnover of our management team;
• we are subject to risks associated with technology and digital operations;
• we may not be able to evolve our store locations over time to align with market trends, successfully diversify our store models and formats in accordance with our strategic goals or otherwise effectively manage our overall portfolio of stores which could adversely affect our ability to grow and could significantly harm our profitability;
• our company-owned distribution center which services the majority of our stores in North America and our third-party distribution center providers used in the western United States and Europe may experience disruptions in their ability to support our stores or may operate inefficiently;
• our merchandise is manufactured by foreign manufacturers and we transact business in various foreign countries, and the availability and costs of our products, as well as our product pricing, may be negatively affected by risks associated with international manufacturing and trade, tariffs and foreign currency fluctuations;
• if we are unable to effectively manage our international franchises, attract new franchises or if the laws relating to our international franchises change, our growth and profitability could be adversely affected and we could be exposed to additional liability;
• we may not be able to operate our international corporately-managed locations profitably;
• we may fail to renew, register or otherwise protect our trademarks or other intellectual property and may be sued by third parties for infringement or, misappropriation of their proprietary rights, which could be costly, distract our management and personnel and which could result in the diminution in value of our trademarks and other important intellectual property;
• we may suffer negative publicity or be sued if the manufacturers of our merchandise or of Build-A-Bear branded merchandise sold by our licensees ship any products that do not meet current safety standards or production requirements or if such products are recalled or cause injuries;
• we may suffer negative publicity or be sued if the manufacturers of our merchandise violate labor laws or engage in practices that consumers believe are unethical;
• our profitability could be adversely affected by fluctuations in petroleum products prices;
• our business may be adversely impacted at any time by a significant variety of competitive threats;
• we may suffer negative publicity or a decrease in sales or profitability if the products from other companies that we sell in our stores do not meet our quality standards or fail to achieve our sales expectations;
• we may be unsuccessful in engaging in various strategic transactions, which may negatively affect our financial condition and profitability;
• fluctuations in our quarterly results of operations could cause the price of our common stock to substantially decline;
• the market price of our common stock is subject to volatility, which could in turn attract the interest of activist shareholders; and
• our certificate of incorporation and bylaws and Delaware law contain provisions that may prevent or frustrate attempts to replace or remove our current management by our stockholders, even if such replacement or removal may be in our stockholders’ best interests.

Overview

We are the only global company that offers an interactive “make your own stuffed animal” retail entertainment experience under the Build-A-Bear Workshop brand, in which guests participate in the stuffing, dressing, accessorizing and naming of their own teddy bears and other stuffed animals. As of October 30, 2021, we had 349 corporately-managed stores globally and had 73 internationally franchised stores under the Build-A-Bear Workshop brand. In addition to these stores, we sell products on our company-owned e-commerce sites and third-party marketplace sites, our franchisees sell products through sites that they manage as well as other third party marketplace sites and other parties sell products on their sites under wholesale agreements.

We operate in three segments that share the same infrastructure, including management, systems, merchandising and marketing, and generate revenues as follows:

• Direct-to-Consumer (“DTC”) – Corporately-managed retail stores located in the U.S., Canada, the U.K., and Ireland and two e-commerce sites;
• Commercial – Transactions with other businesses, mainly comprised of wholesale product sales to third-party retailers and licensing our intellectual property, including entertainment properties, for third-party use; and
• International franchising – Royalties as well as development fees and the sales from products and fixtures from other international operations under franchise agreements.

Selected financial data attributable to each segment for the thirteen and thirty-nine weeks ended October 30, 2021 and October 31, 2020 are set forth in the notes to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

COVID and Business Update

Currently, we primarily operate specialty retail stores that provide a “make your own stuffed animal” interactive entertainment experience in which guests visit a variety of stations to make and customize a stuffed animal. Our retail concept is a unique combination of experience and product and we are focused on enhancing our brand equity while meeting the needs of a broad range of consumers including families with children, teens and adults by offering a relevant selection of premium products that meet high quality standards and are on trend. In addition, products are sold through our e-commerce sites that offer curated experiences with targeted offerings to consumers looking for affinity and gifting products. We believe the hands-on and interactive nature of our store, our high touch service model and engaging digital shopping experiences result in guests forming an emotional connection with our brand. We believe there are opportunities to leverage this emotional connection and the strength of the Build-A-Bear brand and generate incremental revenue and profits given the high consumer recognition and strong positioning as a trusted, high-quality brand through licensing our intellectual properties as well as through content and entertainment development.

At the beginning of fiscal 2021, our United States store portfolio was open and operating while our stores in the United Kingdom, Ireland and Canada remained temporarily closed. In April 2021, stores in the United Kingdom reopened as the government lifted lockdown restrictions resulting in almost all of our stores operating at the end of the 2021 first fiscal quarter with the remaining stores in the United Kingdom and Ireland opening in the second fiscal quarter thereby ending the second fiscal quarter with all stores open in those geographies. The majority of our Canadian stores remained temporarily closed to begin the second quarter with the majority reopening in June 2021 and with all stores ending the second fiscal quarter open. Our year-over-year results discussed below are, and we expect for the remainder of 2021 will be, impacted by prior year store closures and operating hour reductions as a result of the pandemic. During the third quarter, temporary, unplanned store closures occurred due to COVID exposures on a limited basis, with no stores temporarily closed as of the end of the third fiscal quarter.

We believe we have built the infrastructure to respond with greater agility to deal with ongoing and future potential uncertainty and we expect to deliver growth in total revenues and profit in fiscal 2021 compared to fiscal 2020 and fiscal 2019. While we believe that we have seen benefits from pandemic-driven factors such as pent-up demand and stimulus packages, we believe that the initiatives and investments that were put in place prior to the pandemic, and in many cases accelerated during the pandemic, are driving improved results, which we expect to continue. We remain focused on our strategic priorities which are centered primarily on three key areas:

• Further acceleration of our digital transformation including content and entertainment initiatives. We are intent on building our business with more effective use of technology and improved and enhanced fulfillment capabilities while leveraging our expanded digital platforms to inform and drive marketing and content efforts. We believe that our multi-year sustained strong trend in e-commerce demand trajectory that we have achieved, demonstrates the progress we continue to make in this area. We have also been working to drive continued incremental e-commerce growth with innovative new products and experiences for a variety of consumer segments. Some examples include the large and expanding gifting category leveraging our efforts to broaden our consumer base; our adult fan-based affinity products continue to be an online growth driver, enabled by a new dedicated space on our website called "The Bear Cave"; the roll out of our consumer-facing marketing launch of a new interactive e-commerce experience called the Bear-Builder 3d or BB3D, where guests can complete an online transaction via a reimagined animated Build-A-Bear Workshop; the addition of the Klarna

Retail Stores:

The table below sets forth the number of Build-A-Bear Workshop corporately-managed stores in North America, Europe and Asia for the periods presented:

As of October 30, 2021, 40% of our corporately-managed stores were in an updated Discovery format. We also expect to close certain stores in accordance with natural lease events as an ongoing part of our real estate management and day-to-day operational plans. The future of our retail store fleet may include expansion into more non-traditional locations, including concourse format shops and by expansion in other locations outside traditional malls.

International Franchise Stores:

Our first franchisee location was opened in November 2003. All franchised stores have similar signage, store layout, merchandise characteristics and guest experience as our corporately-managed stores. As of October 30, 2021, we had six master franchise agreements, which typically grant franchise rights for a particular country or group of countries, covering an aggregate of 11 countries.

The number of franchised stores opened and closed for the periods presented below are summarized as follows:

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In the ordinary course of business, we anticipate signing additional master franchise agreements in the future and terminating other such agreements. We source fixtures and other supplies for our franchisees from China which significantly reduces the capital and lowers the expenses required to open franchises. We are leveraging new formats that have been developed for our corporately-managed locations such as concourses and shop-in-shops with our franchisees.

Results of Operations

The following table sets forth, for the periods indicated, selected income statement data expressed as a percentage of total revenues, except where otherwise indicated. Percentages will not total due to cost of merchandise sold being expressed as a percentage of net retail sales, commercial revenue, international franchising, respectively, as well as immaterial rounding:

BUILD-A-BEAR WORKSHOP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(1) Cost of merchandise sold – retail is expressed as a percentage of net retail sales. Cost of merchandise sold – commercial is expressed as a percentage of commercial revenue. Cost of merchandise sold – international franchising is expressed as a percentage of international franchising revenue.

(2) Retail gross margin represents net retail sales less cost of merchandise sold - retail; retail gross margin percentage represents retail gross margin divided by net retail sales.

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Thirteen weeks ended October 30, 2021 compared to thirteen weeks ended October 31, 2020

Total revenues. Consolidated revenues increased 27.4%, driven by a 26.8% increase in North America and a 30.3% increase in Europe. The increase in North America and Europe was primarily driven by increased retail store operating days compared to the same period in the prior year which saw temporary store closures due to the pandemic and increased e-commerce sales.

Net retail sales for the thirteen weeks ended October 30, 2021 were $91.6 million, compared to $72.4 million for the thirteen weeks ended October 31, 2020, an increase of $19.2 million, or 26.5%, compared to the prior year period. The components of this increase are as follows (dollars in millions):

The retail revenue increase was primarily the result of the increase in store operating days of corporately-managed stores and consolidated e-commerce sales.

Commercial revenue was $2.7 million for the thirteen weeks ended October 30, 2021 compared to $1.9 million for the thirteen weeks ended October 31, 2020. The $0.8 million increase is the result of increased sales volume from our commercial customers as some stability returned to our third-party retail model.

International franchising revenue was $0.8 million for the thirteen weeks ended October 30, 2021 compared to $0.4 million for the thirteen weeks ended October 31, 2020. The $0.4 million increase is primarily due to having more stores in operation in 2021 compared to the same period in 2020 when significantly more locations were temporarily closed due to pandemic-related mandated government restrictions.

Retail gross margin. Retail gross margin dollars increased $14.0 million to $47.6 million compared to the thirteen weeks ended October 31, 2020. The retail gross margin rate increased 550 basis points primarily driven by an increase in corporately-managed retail sales, increased leverage of fixed occupancy costs as a result of rent negotiations that began during the prior fiscal year, and expansion of merchandise margin.

Selling, general and administrative. Selling, general and administrative (SG&A) expenses were $41.7 million, or 43.8% of consolidated revenue, for the thirteen weeks ended October 30, 2021, compared to $33.1 million, or 44.3% of consolidated revenue, for the thirteen weeks ended October 31, 2020. The increase in overall expense was driven by higher store labor costs given the lifting of capacity restrictions and expanded operating hours in 2021 compared to 2020. In addition, the Company recorded full corporate salaries in 2021 while the prior year included temporary wage reductions as part of its pandemic-related cost containment initiatives. In addition, the change in SG&A reflects an increase in variable costs driven by sales growth initiatives inclusive of higher marketing spend and performance incentive programs.

Interest expense (income), net. Interest income was $2,000 for the thirteen weeks ended October 30, 2021 compared to interest expense of $2,000 for the thirteen weeks ended October 31, 2020.

Benefit/Provision for income taxes. Income tax expense was $2.0 million with a tax rate of 25.1% for the thirteen weeks ended October 30, 2021 compared to an expense of less than $0.1 million with a tax rate of 0.6% for the thirteen weeks ended October 31, 2020. In the third quarter of fiscal 2021 the effective tax rate differed from the statutory rate of 21% primarily due to state income tax expense. While the Company is still in a full valuation allowance globally, it recorded tax expense on the pretax income earned in the third quarter of fiscal 2021 based on its projected current tax expense. In the third quarter of fiscal 2020, the effective tax rate differed from the statutory rate of 21% primarily due to no tax benefit being recorded on the current period pretax loss as a full valuation allowance has now been recorded globally.

Thirty-nine weeks ended October 30, 2021 compared to thirty-nine weeks ended October 31, 2020

Total revenues. Consolidated revenues increased 74.2%, including an 80.1% increase in North America and a 39.5% increase in Europe. The increase in North America and Europe was primarily driven by increased retail store operating days compared to the same period in the prior year which saw temporary store closures due to the pandemic and increased e-commerce sales.

Net retail sales for the thirty-nine weeks ended October 30, 2021 were $272.1 million, compared to $157.4 million for the thirty-nine weeks ended October 31, 2020, an increase of $114.7 million, or 72.9%, compared to the prior year period. The components of this increase are as follows (dollars in millions):

The retail revenue increase was primarily the result of the increase in store operating days of corporately-managed stores and consolidated e-commerce sales.

Commercial revenue was $7.8 million for the thirty-nine weeks ended October 30, 2021 compared to $3.1 million for the thirty-nine weeks ended October 31, 2020. The $4.7 million increase is the result of increased sales volume from our commercial customers versus the prior year which was impacted by pandemic drive closures of third-party retail locations serviced by these customers.

International franchising revenue was $1.7 million for the thirty-nine weeks ended October 30, 2021 compared to $1.2 million for the thirty-nine weeks ended October 31, 2020. The $0.5 million increase is primarily due to having more stores in operation in 2021 compared to the same period in 2020 when significantly more locations were temporarily closed due to pandemic-related mandated government restrictions.

Retail gross margin. Retail gross margin dollars increased $88.3 million to $143.4 million compared to the thirty-nine weeks ended October 31, 2020. The retail gross margin rate increased 1,770 basis points primarily driven by an increase in corporately-managed retail sales, a decrease in fixed occupancy costs recorded as a result of rent negotiations that began during the prior fiscal year, and expansion of merchandise margin.

Selling, general and administrative. SG&A expenses were $117.9 million, or 41.9% of consolidated revenue, for the thirty-nine weeks ended October 30, 2021, compared to $81.3 million, or 50.3% of consolidated revenue, for the thirty-nine weeks ended October 31, 2020. The increase in overall expense was primarily due to higher labor costs given the re-opening of our store base and the Company recording full corporate salaries for the thirty-nine weeks ended October 30, 2021 as opposed to the prior year when pandemic-related cost containment initiatives included temporary wage reductions. Additionally, the change reflects an increase in variable costs driven by sales growth initiatives inclusive of higher marketing spend and funding of performance incentive programs.

Interest expense (income), net. Interest expense was $11,000 for the thirty-nine weeks ended October 30, 2021 compared to interest expense of $6,000 for the thirty-nine weeks ended October 31, 2020.

Benefit/Provision for income taxes. Income tax expense was $7.4 million with a tax rate of 24.3% for the thirty-nine weeks ended October 30, 2021 compared to $2.5 million with a tax rate (8)% of for the thirty-nine weeks ended October 31, 2020. In the first thirty-nine weeks of fiscal 2021, the effective tax rate differed from the statutory rate of 21% primarily due to state income tax expense partially offset by the tax impact of equity awards vesting. In the first thirty-nine weeks of fiscal 2020, the effective tax rate differed from the statutory rate of 21% primarily due to no tax benefit being recorded on the current period pretax loss as a full valuation allowance has now been recorded globally. In addition, the first thirty-nine weeks of fiscal 2020 was impacted by 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.

Seasonality and Quarterly Results

Our operating results for one period may not be indicative of results for other periods, and may fluctuate significantly because of a variety of factors, including, but not limited to: (1) changes in general economic conditions (including as a result of the pandemic) and consumer spending patterns; (2) changes in store operations in response to the pandemic apart from its effect on the general economy, including temporary store closures required by local governments; (3) increases or decreases in our existing store and e-commerce sales; (4) fluctuations in the profitability of our stores; (5) the timing and frequency of the sales of licensed products tied to major theatrical releases (including the cancellation or delay of such releases due to the pandemic) and our marketing initiatives, including national media and other public relations events; (6) changes in foreign currency exchange rates; (7) the timing of new store openings, closings, relocations and remodeling and related expenses; (8) changes in consumer preferences; (9) the effectiveness of our inventory management; (10) the actions of our competitors or mall anchors and co-tenants; (11) seasonal shopping patterns and holiday and vacation schedules; (12) disruptions in store operations due to civil unrest; and (13) weather conditions.

The timing of store closures, relocations, remodels and openings (and re-openings) may result in fluctuations in quarterly results based on the revenues and expenses associated with each store location. Expenses related to store closings are typically incurred in stages: when the decision is made to close the store typically associated with a lease event such as an expiration or lease triggered clause; when the closure is communicated to store associates; and at the time of closure. We typically incur most preopening costs for a new store in the three months immediately preceding the store’s opening.

Because our retail operations include toy products which have sales that historically peak in relation to the holiday season as part of our revenue model, our sales have historically been highest in our fourth quarter. The timing of holidays and school vacations can impact our quarterly results. We cannot provide assurance that this will continue to be the case. In addition, for accounting purposes, the quarters of each fiscal year consist of 13 weeks, although we will have a 14-week quarter approximately once every six years. For example, the 2014 fiscal fourth quarter had 14 weeks.

Liquidity and Capital Resources

As of October 30, 2021, we had a consolidated cash balance of $48.5 million, approximately 79% of which was domiciled within the United States. Historically, our cash requirements have been primarily for the relocation and remodeling of existing stores in our new design, opening of new stores, investments in information technology infrastructure and working capital. Over the past several years, we have met these requirements through capital generated from cash flow provided by operations.

A summary of our operating, investing and financing activities is shown in the following table (dollars in thousands):

Operating Activities. Cash provided by operating activities increased $14.2 million for the thirty-nine weeks ended October 30, 2021, as compared to the thirty-nine weeks ended October 31, 2020. This increase in cash from operating activities was primarily driven by increased retail store operating days at corporately-managed stores and sales volume to commercial customers resulting in higher net income offset by an increase in cash spend on inventory purchases in advance of the holiday season in the fiscal fourth quarter, increased spend on operating leases with rent deferral paybacks, and an increase in receivables stemming from the release of an entertainment product.

Investing Activities. Cash used in investing activities increased $0.6 million for the thirty-nine weeks ended October 30, 2021 as compared to the thirty-nine weeks ended October 31, 2020. This increase in cash from investing activities was primarily driven by spend on information technology projects and build out of new stores in the United States.

Financing Activities. Cash provided by financing activities increased $1.0 million for the thirty-nine weeks ended October 30, 2021, as compared to the thirty-nine weeks ended October 31, 2020. This increase in cash from financing activities was driven by proceeds from stock option exercises offset by stock compensation vesting resulting in shares withheld for taxes.

Capital Resources: We have a revolving credit and security agreement with PNC Bank, as agent, that provides for a secured revolving loan in aggregate principal of up to $25.0 million, subject to a borrowing base formula. Borrowings under the agreement bear interest at (a) a base rate determined under the agreement, or (b) the borrower's option, at a rate based on LIBOR, plus in either case a margin based on average undrawn availability as determined in accordance with the agreement. As of October 30, 2021, our borrowing base was slightly more than $16.7 million. As a result of a $750,000 letter of credit against the line of credit at the end of the fiscal 2021 second quarter, approximately $16.0 million was available for borrowing. We had no outstanding borrowings as of the end of October 30, 2021.

Most of our corporately-managed retail stores are located within shopping malls and all are operated under leases classified as operating leases. Our leases in North America have shifted to shorter term leases, many of which include variable rent structures, to provide flexibility in aligning stores with market trends. Our leases typically require us to pay personal property taxes, our pro rata share of real property taxes of the shopping mall, our own utilities, repairs and maintenance in our store, a pro rata share of the malls’ common area maintenance and, in some instances, merchant association fees and media fund contributions. Many new leases contain incentives to help defray the cost of construction of a new store. Typically, a portion of the incentive must be repaid to the landlord if we choose to terminate the lease before the end of its initial term. In addition, some of these leases contain various restrictions relating to change in control of our company. Our leases also subject us to risks relating to compliance with changing mall rules and the exercise of discretion by our landlords on various matters, including rights of termination in some cases. Rents are invoiced monthly and paid in advance.

Our leases in the U.K. and Ireland typically have terms of ten years and generally contain a provision whereby every fifth year the rental rate can be adjusted to reflect the current market rates. The leases typically provide the lessee with the first right for renewal at the end of the lease. Real estate taxes also change according to government time schedules to reflect current market rental rates for the locations we lease. Rents are invoiced monthly or quarterly and paid in advance.

Capital spending through the thirty-nine weeks ended October 30, 2021 totaled $4.6 million and we expect to spend approximately $8 to $10 million on capital expenditures for fiscal 2021.

On November 30, 2021 we announced that our Board of Directors authorized a share repurchase program of up to $25 million. The primary source of funding for the share repurchase program is expected to be cash on hand. The timing and amount of share repurchases, if any, will depend on price, market conditions, applicable regulatory requirements, and other factors. The program authorizes us to repurchase shares through November 30, 2023, does not require us to repurchase any specific number of shares, and may be modified, suspended or terminated at any time without prior notice. Shares repurchased under the program will be subsequently retired. We believe that the multi-year, multi-million dollar share buy-back program is reflective of the strong confidence that the Board of Directors has in the future of Build-A-Bear.

On November 30, 2021 we announced that our Board of Directors authorized a special cash dividend of $1.25 per share to be paid on December 27, 2021 to all shareholders of record as of December 10, 2021. We believe that given our strong financial results year-to-date, the special dividend is intended to immediately return value to our shareholders.

Off-Balance Sheet Arrangements

None.

Inflation

We do not believe that inflation has had a material adverse impact on our business or operating results during the periods presented, however, we do expect inflation pressures to impact the remainder of fiscal 2021. We cannot provide an estimate or range of impact such cost inflations may have on our results of operations.

Critical Accounting Estimates

The preparation of financial statements in conformity with U.S. GAAP requires the appropriate application of certain accounting policies, which require us to make estimates and assumptions about future events and their impact on amounts reported in our financial statements and related notes. Since future events and their impact cannot be determined with certainty, the actual results will inevitably differ from our estimates. Such differences could be material to the financial statements.

We believe our application of accounting policies, and the estimates inherently required therein, are reasonable. These accounting policies and estimates, including those related to long-lived assets, leases, revenue recognition and income taxes, are reevaluated on an ongoing basis, and adjustments are made when facts and circumstances dictate a change.

Historically, we have found our application of accounting policies to be appropriate, and actual results have not differed materially from those determined using necessary estimates. Our critical accounting policies and estimates are discussed in and should be read in conjunction with our Annual Report on Form 10-K, as filed with the Securities and Exchange Commission (SEC) on April 15, 2021, which includes audited consolidated financial statements for our 2020 and 2019 fiscal years. There have been no material changes to the critical accounting estimates disclosed in the 2020 Form 10-K.

Recent Accounting Pronouncements

See Note 1 to the Condensed Consolidated Financial Statements — Basis of Presentation — Recent Accounting Pronouncements – Adopted in the Current Year as disclosed in our Annual Report on Form 10-K for the year ended January 30, 2021 as filed with the SEC on April 15, 2021.

There have been no material changes to our Quantitative and Qualitative Disclosures About Market Risk as disclosed in our Annual Report on Form 10-K for the year ended January 30, 2021 as filed with the SEC on April 15, 2021.

Our management, with the participation of our President and Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures, as of the end of the period covered by this report. Our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and is accumulated and communicated to management, including our certifying officers, as appropriate to allow timely decisions regarding required disclosure. Based on the foregoing evaluation, our management, including the President and Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective as of October 30, 2021, the end of the period covered by this Quarterly Report.

It should be noted that our management, including the President and Chief Executive Officer and the Chief Financial Officer, does not expect that our disclosure controls and procedures or internal controls will prevent all error and all fraud. A control system, no matter how well conceived or operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

Changes in Internal Control Over Financial Reporting. The Company’s management, with the participation of the Company’s President and Chief Executive Officer and Chief Financial Officer, also conducted an evaluation of the Company’s internal control over financial reporting to determine whether any changes occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. There have been no changes in our internal control over financial reporting during the quarter covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

There have been no material changes to our risk factors as disclosed in our Annual Report on Form 10-K for the year ended January 30, 2021 as filed with the SEC on April 15, 2021.