Company Quick10K Filing
Winmark
Price171.64 EPS8
Shares4 P/E23
MCap706 P/FCF19
Net Debt15 EBIT43
TEV721 TEV/EBIT17
TTM 2019-09-30, in MM, except price, ratios
10-Q 2021-03-27 Filed 2021-04-20
10-K 2020-12-26 Filed 2021-03-09
10-Q 2020-09-26 Filed 2020-10-20
10-Q 2020-06-27 Filed 2020-07-21
10-Q 2020-03-28 Filed 2020-04-22
10-K 2019-12-28 Filed 2020-03-10
10-Q 2019-09-28 Filed 2019-10-22
10-Q 2019-06-29 Filed 2019-07-23
10-Q 2019-03-30 Filed 2019-04-26
10-K 2018-12-29 Filed 2019-03-08
10-Q 2018-09-29 Filed 2018-10-23
10-Q 2018-06-30 Filed 2018-07-24
10-Q 2018-03-31 Filed 2018-05-01
10-K 2017-12-30 Filed 2018-03-09
10-Q 2017-09-30 Filed 2017-10-24
10-Q 2017-07-01 Filed 2017-07-25
10-Q 2017-04-01 Filed 2017-04-25
10-K 2016-12-31 Filed 2017-03-10
10-Q 2016-09-24 Filed 2016-10-18
10-Q 2016-06-25 Filed 2016-07-20
10-Q 2016-03-26 Filed 2016-04-21
10-K 2015-12-26 Filed 2016-03-08
10-Q 2015-09-26 Filed 2015-10-21
10-Q 2015-06-27 Filed 2015-07-23
10-Q 2015-03-28 Filed 2015-04-23
10-K 2014-12-27 Filed 2015-03-11
10-Q 2014-09-27 Filed 2014-10-22
10-Q 2014-06-28 Filed 2014-07-23
10-Q 2014-03-29 Filed 2014-04-23
10-K 2013-12-28 Filed 2014-03-12
10-Q 2013-09-28 Filed 2013-10-23
10-Q 2013-06-29 Filed 2013-07-24
10-Q 2013-03-30 Filed 2013-04-24
10-K 2012-12-29 Filed 2013-03-14
10-Q 2012-09-29 Filed 2012-10-25
10-Q 2012-06-30 Filed 2012-07-27
10-Q 2012-03-31 Filed 2012-04-25
10-K 2011-12-31 Filed 2012-03-15
10-Q 2011-09-24 Filed 2011-10-21
10-Q 2011-06-25 Filed 2011-07-25
10-Q 2011-03-26 Filed 2011-04-20
10-K 2010-12-25 Filed 2011-03-10
10-Q 2010-09-25 Filed 2010-10-21
10-Q 2010-06-26 Filed 2010-07-23
10-Q 2010-03-27 Filed 2010-04-21
10-K 2009-12-26 Filed 2010-03-11
8-K 2020-10-14
8-K 2020-09-02
8-K 2020-08-05
8-K 2020-07-15
8-K 2020-07-15
8-K 2020-04-29
8-K 2020-04-14
8-K 2020-03-26
8-K 2020-02-26
8-K 2020-02-26
8-K 2020-01-29
8-K 2019-12-16
8-K 2019-10-23
8-K 2019-10-16
8-K 2019-07-24
8-K 2019-06-29
8-K 2019-06-26
8-K 2019-04-24
8-K 2019-04-17
8-K 2019-02-28
8-K 2019-01-23
8-K 2018-10-24
8-K 2018-10-17
8-K 2018-07-25
8-K 2018-07-18
8-K 2018-05-17
8-K 2018-04-25
8-K 2018-04-18
8-K 2018-02-26
8-K 2018-01-24

WINA 10Q Quarterly Report

Part I. Financial Information
Item 1: Financial Statements
Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3: Quantitative and Qualitative Disclosures About Market Risk
Item 4: Controls and Procedures
Part II. Other Information
Item 1: Legal Proceedings
Item 1A: Risk Factors
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds
Item 3: Defaults Upon Senior Securities
Item 4: Mine Safety Disclosures
Item 5: Other Information
Item 6: Exhibits
EX-31.1 c315-20210327ex3114f3219.htm
EX-31.2 c315-20210327ex31238d0b0.htm
EX-32.1 c315-20210327ex321304700.htm
EX-32.2 c315-20210327ex3220704e8.htm

Winmark Earnings 2021-03-27

Balance SheetIncome StatementCash Flow
553515-5-25-452012201420172020
Assets, Equity
25201510502012201420172020
Rev, G Profit, Net Income
1593-3-9-152012201420172020
Ops, Inv, Fin

2017 1st Qtr Form 10-Q (00014803).DOCX
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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 27, 2021

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                   to                  

Commission File Number: 000-22012

WINMARK CORPORATION

(Exact name of registrant as specified in its charter)

Minnesota

41-1622691

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

605 Highway 169 North, Suite 400, Minneapolis, MN 55441

(Address of principal executive offices) (Zip Code)

(763) 520-8500

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class:

Trading Symbol

Name of each exchange on which registered:

Common Stock, no par value per share

WINA

Nasdaq Global Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes               No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes               No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer 

Non-accelerated filer   

Accelerated filer  

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes               No

Common stock, no par value, 3,701,807 shares outstanding as of April 16, 2021.

Table of Contents

WINMARK CORPORATION AND SUBSIDIARIES

INDEX

PAGE

PART I.

FINANCIAL INFORMATION

Item 1.

Financial Statements (Unaudited)

CONSOLIDATED CONDENSED BALANCE SHEETS:

March 27, 2021 and December 26, 2020

3

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS:

Three Months Ended March 27, 2021 and March 28, 2020

4

CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT):

Three Months Ended March 27, 2021 and March 28, 2020

5

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS:

Three Months Ended March 27, 2021 and March 28, 2020

6

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

7 - 13

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

14 - 19

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

19

Item 4.

Controls and Procedures

20

PART II.

OTHER INFORMATION

Item 1.

Legal Proceedings

20

Item 1A.

Risk Factors

20

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

20

Item 3.

Defaults Upon Senior Securities

21

Item 4.

Mine Safety Disclosures

21

Item 5.

Other Information

21

Item 6.

Exhibits

21

SIGNATURES

22

2

Table of Contents

PART I.          FINANCIAL INFORMATION

ITEM 1: Financial Statements

WINMARK CORPORATION AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS

(Unaudited)

March 27, 2021

December 26, 2020

ASSETS

Current Assets:

Cash and cash equivalents

 

$

7,959,900

 

$

6,659,000

Restricted cash

25,000

25,000

Receivables, less allowance for doubtful accounts of $1,400 and $800

 

2,096,900

 

1,581,900

Net investment in leases - current

 

8,156,900

 

8,687,500

Income tax receivable

 

 

221,200

Inventories

 

110,200

 

106,600

Prepaid expenses

 

839,900

 

995,200

Total current assets

 

19,188,800

 

18,276,400

Net investment in leases - long-term

 

2,706,900

 

4,573,600

Property and equipment, net

2,253,300

2,332,800

Operating lease right of use assets

3,172,100

3,226,300

Goodwill

 

607,500

 

607,500

Other assets

438,500

435,900

Deferred income taxes

2,330,600

1,890,700

 

$

30,697,700

 

$

31,343,200

LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)

Current Liabilities:

Notes payable, net of unamortized debt issuance costs of $13,900 and $13,900

 

$

4,236,100

 

$

4,236,100

Accounts payable

 

1,399,300

 

1,769,600

Income tax payable

 

3,159,200

 

Accrued liabilities

 

2,223,500

 

2,624,000

Discounted lease rentals

959,200

1,096,600

Deferred revenue

 

1,647,700

 

1,657,400

Total current liabilities

 

13,625,000

 

11,383,700

Long-Term Liabilities:

Notes payable, net of unamortized debt issuance costs of $51,400 and $54,800

 

16,573,600

 

17,632,700

Discounted lease rentals

 

382,200

 

574,000

Deferred revenue

6,975,700

7,050,900

Operating lease liabilities

5,176,900

5,307,400

Other liabilities

 

768,500

 

773,200

Total long-term liabilities

 

29,876,900

 

31,338,200

Shareholders’ Equity (Deficit):

Common stock, no par value, 10,000,000 shares authorized, 3,700,723 and 3,756,028 shares issued and outstanding

 

 

9,281,800

Retained earnings (accumulated deficit)

 

(12,804,200)

 

(20,660,500)

Total shareholders’ equity (deficit)

 

(12,804,200)

 

(11,378,700)

 

$

30,697,700

 

$

31,343,200

The accompanying notes are an integral part of these financial statements

3

Table of Contents

WINMARK CORPORATION AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

(Unaudited)

Three Months Ended

    

March 27, 2021

    

March 28, 2020

    

Revenue:

Royalties

$

14,048,800

$

11,172,500

Leasing income

 

3,237,000

 

5,871,200

Merchandise sales

 

592,400

 

754,100

Franchise fees

 

359,000

 

387,400

Other

 

421,700

 

414,800

Total revenue

 

18,658,900

 

18,600,000

Cost of merchandise sold

 

558,800

 

717,700

Leasing expense

 

389,500

 

1,416,200

Provision for credit losses

 

(48,700)

 

615,400

Selling, general and administrative expenses

 

5,102,300

 

5,748,900

Income from operations

 

12,657,000

 

10,101,800

Interest expense

 

(318,100)

 

(525,200)

Interest and other income

 

6,800

 

5,900

Income before income taxes

 

12,345,700

 

9,582,500

Provision for income taxes

 

(3,034,600)

 

(2,265,500)

Net income

$

9,311,100

$

7,317,000

Earnings per share - basic

$

2.49

$

1.97

Earnings per share - diluted

$

2.40

$

1.87

Weighted average shares outstanding - basic

 

3,736,676

 

3,711,597

Weighted average shares outstanding - diluted

 

3,874,227

 

3,911,751

The accompanying notes are an integral part of these financial statements.

4

Table of Contents

WINMARK CORPORATION AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT)

Retained

Earnings

Common Stock

(Accumulated

    

Shares

    

Amount

    

Deficit)

    

Total

BALANCE, December 26, 2020

3,756,028

9,281,800

$

(20,660,500)

$

(11,378,700)

Repurchase of common stock

 

(58,255)

(9,935,800)

(519,400)

(10,455,200)

Stock options exercised

 

2,950

268,800

268,800

Compensation expense relating to stock options

 

385,200

385,200

Cash dividends ($0.25 per share)

 

(935,400)

(935,400)

Comprehensive income (Net income)

 

9,311,100

9,311,100

BALANCE, March 27, 2021

 

3,700,723

(12,804,200)

(12,804,200)

Retained

Earnings

Common Stock

(Accumulated

    

Shares

    

Amount

    

Deficit)

    

Total

BALANCE, December 28, 2019

3,947,858

$

11,929,300

$

519,000

$

12,448,300

Repurchase of common stock

 

(300,000)

(12,215,500)

(36,772,000)

(48,987,500)

Stock options exercised

 

2,895

145,900

145,900

Compensation expense relating to stock options

 

140,300

140,300

Cash dividends ($0.25 per share)

 

(912,200)

(912,200)

Comprehensive income (Net income)

 

7,317,000

7,317,000

BALANCE, March 28, 2020

 

3,650,753

(29,848,200)

(29,848,200)

The accompanying notes are an integral part of these financial statements.

5

Table of Contents

WINMARK CORPORATION AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

Three Months Ended

    

March 27, 2021

    

March 28, 2020

    

OPERATING ACTIVITIES:

Net income

$

9,311,100

$

7,317,000

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization

 

113,800

 

123,100

Provision for credit losses

 

(48,700)

 

615,400

Compensation expense related to stock options

 

385,200

 

140,300

Deferred income taxes

 

(439,900)

 

11,100

Deferred initial direct costs

 

(1,500)

 

(8,500)

Amortization of deferred initial direct costs

 

10,500

 

37,200

Operating lease right of use asset amortization

54,200

192,100

Tax benefits on exercised stock options

 

47,100

 

87,000

Change in operating assets and liabilities:

Receivables

 

(515,000)

 

689,000

Principal collections on lease receivables

2,268,700

4,988,400

Income tax receivable/payable

 

3,333,300

 

2,046,500

Inventories

 

(3,600)

 

(19,200)

Prepaid expenses

 

155,300

 

(253,800)

Other assets

(2,600)

(3,600)

Accounts payable

 

(370,300)

 

56,200

Accrued and other liabilities

 

(532,300)

 

(674,200)

Rents received in advance and security deposits

 

(95,400)

 

(885,300)

Deferred revenue

 

(84,900)

 

(95,500)

Net cash provided by operating activities

 

13,585,000

 

14,363,200

INVESTING ACTIVITIES:

Purchase of property and equipment

 

(34,300)

 

(31,200)

Purchase of equipment for lease contracts

 

(65,500)

 

(1,706,000)

Net cash used for investing activities

 

(99,800)

 

(1,737,200)

FINANCING ACTIVITIES:

Proceeds from borrowings on line of credit

 

 

45,700,000

Payments on line of credit

 

 

(5,700,000)

Payments on notes payable

(1,062,500)

(812,500)

Repurchases of common stock

 

(10,455,200)

 

(48,987,500)

Proceeds from exercises of stock options

 

268,800

 

145,900

Dividends paid

 

(935,400)

 

(912,200)

Proceeds from discounted lease rentals

1,157,000

Net cash used for financing activities

 

(12,184,300)

 

(9,409,300)

NET INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH

 

1,300,900

 

3,216,700

Cash, cash equivalents and restricted cash, beginning of period

 

6,684,000

 

25,180,300

Cash, cash equivalents and restricted cash, end of period

$

7,984,900

$

28,397,000

SUPPLEMENTAL DISCLOSURES:

Cash paid for interest

$

309,200

$

460,600

Cash paid for income taxes

$

94,100

$

120,900

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the Consolidated Condensed Balance Sheets to the total of the same amounts shown above:

Three Months Ended

    

March 27, 2021

    

March 28, 2020

    

Cash and cash equivalents

$

7,959,900

$

28,347,000

Restricted cash

 

25,000

 

50,000

Total cash, cash equivalents and restricted cash

$

7,984,900

$

28,397,000

The accompanying notes are an integral part of these financial statements.

6

Table of Contents

WINMARK CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

1. Management’s Interim Financial Statement Representation:

The accompanying consolidated condensed financial statements have been prepared by Winmark Corporation and subsidiaries (the Company), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. The Company has a 52/53 week year which ends on the last Saturday in December. The information in the consolidated condensed financial statements includes normal recurring adjustments and reflects all adjustments which are, in the opinion of management, necessary for a fair presentation of such financial statements. The consolidated condensed financial statements and notes are presented in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions for Form 10-Q, and therefore do not contain certain information included in the Company’s annual consolidated financial statements and notes. This report should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company’s latest Annual Report on Form 10-K.

Revenues and operating results for the three months ended March 27, 2021 are not necessarily indicative of the results to be expected for the full year.

Reclassifications

Certain reclassifications of previously reported amounts have been made to conform to the current year presentation. Such reclassifications did not impact net income or shareholders’ equity (deficit) as previously reported.

2. Organization and Business:

The Company offers licenses to operate franchises using the service marks Plato’s Closet®, Once Upon A Child®, Play It Again Sports®, Style Encore® and Music Go Round®. The Company also operates a middle market equipment leasing business under the Winmark Capital® mark.

3. Recent Accounting Pronouncements:

Recently Issued Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses of Financial Instruments, which changes the methodology for measuring credit losses on financial instruments and the timing of when such losses are recorded. This guidance was to be effective for reporting periods beginning after December 15, 2019, with early adoption permitted. In November 2019, the FASB issued ASU 2019-10, Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842) Effective Dates, which deferred the effective dates for the Company, as a smaller reporting company, until fiscal year 2023. The Company currently plans to adopt the guidance at the beginning of fiscal 2023. The Company is continuing to assess the impact of the standard on its consolidated financial statements.

4. Contract Liabilities:

The Company’s contract liabilities for its franchise revenues consist of deferred revenue associated with franchise fees and software license fees. The table below presents the activity of the current and noncurrent deferred franchise revenue during the first three months of 2021 and 2020, respectively:

    

March 27, 2021

    

March 28, 2020

Balance at beginning of period

$

8,708,300

$

9,575,500

Franchise and software license fees collected from franchisees, excluding amount earned as revenue during the period

 

355,700

 

372,500

Fees earned that were included in the balance at the beginning of the period

 

(440,600)

 

(468,000)

Balance at end of period

$

8,623,400

$

9,480,000

7

Table of Contents

The following table illustrates future estimated revenue to be recognized for the remainder of 2021 and full fiscal years thereafter related to performance obligations that are unsatisfied (or partially unsatisfied) as of March 27, 2021.

Contract Liabilities expected to be recognized in

Amount

2021

$

1,220,200

2022

 

1,537,400

2023

 

1,366,200

2024

 

1,168,400

2025

 

952,100

Thereafter

 

2,379,100

$

8,623,400

5. Fair Value Measurements:

The Company defines fair value as the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.  The Company uses three levels of inputs to measure fair value:

Level 1 – quoted prices in active markets for identical assets and liabilities.
Level 2 – observable inputs other than quoted prices in active markets for identical assets and liabilities.
Level 3 – unobservable inputs in which there is little or no market data available, which require the reporting entity to develop its own assumptions.

Due to their nature, the carrying value of cash equivalents, receivables, payables and debt obligations approximates fair value.

6. Investment in Leasing Operations:

Investment in leasing operations consists of the following:

    

March 27, 2021

    

December 26, 2020

Direct financing and sales-type leases:

Minimum lease payments receivable

$

11,257,700

$

12,536,300

Estimated unguaranteed residual value of equipment

 

2,505,200

 

2,950,100

Unearned lease income, net of initial direct costs deferred

 

(1,152,500)

 

(1,439,500)

Security deposits

 

(2,073,600)

 

(2,169,000)

Equipment installed on leases not yet commenced

 

457,200

 

1,634,400

Total investment in direct financing and sales-type leases

 

10,994,000

 

13,512,300

Allowance for credit losses

 

(221,500)

 

(270,200)

Net investment in direct financing and sales-type leases

 

10,772,500

 

13,242,100

Operating leases:

Operating lease assets

 

593,800

 

599,100

Less accumulated depreciation and amortization

 

(502,500)

 

(580,100)

Net investment in operating leases

 

91,300

 

19,000

Total net investment in leasing operations

$

10,863,800

$

13,261,100

As of March 27, 2021, the $10.9 million total net investment in leases consists of $8.2 million classified as current and $2.7 million classified as long-term. As of December 26, 2020, the $13.3 million total net investment in leases consists of $8.7 million classified as current and $4.6 million classified as long-term.

As of March 27, 2021, there were no customers with leased assets greater than 10% of the Company’s total assets.

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Future minimum lease payments receivable under lease contracts and the amortization of unearned lease income, net of initial direct costs deferred, is as follows for the remainder of fiscal 2021 and the full fiscal years thereafter as of March 27, 2021:

Direct Financing and Sales-Type Leases

 

    

Minimum Lease

    

Income

 

Fiscal Year

Payments Receivable

 Amortization

 

2021

$

7,899,800

$

918,900

2022

 

3,228,700

 

226,400

2023

 

129,200

 

7,200

$

11,257,700

$

1,152,500

The activity in the allowance for credit losses for leasing operations during the first three months of 2021 and 2020, respectively, is as follows:

    

March 27, 2021

    

March 28, 2020

    

Balance at beginning of period

$

270,200

$

580,600

Provisions charged to expense

 

(48,700)

 

615,400

Recoveries

 

 

1,500

Deductions for amounts written-off

 

 

Balance at end of period

$

221,500

$

1,197,500

The Company’s investment in direct financing and sales-type leases (“Investment In Leases”) and allowance for credit losses by loss evaluation methodology are as follows:

March 27, 2021

December 26, 2020

    

Investment

    

Allowance for

    

Investment

    

Allowance for

In Leases

Credit Losses

In Leases

Credit Losses

Collectively evaluated for loss potential

$

10,994,000

$

221,500

$

13,512,300

$

270,200

Individually evaluated for loss potential

 

 

 

 

Total

$

10,994,000

$

221,500

$

13,512,300

$

270,200

The Company’s key credit quality indicator for its investment in direct financing and sales-type leases is the status of the lease, defined as accruing or non-accrual. Leases that are accruing income are considered to have a lower risk of loss. Non-accrual leases are those that the Company believes have a higher risk of loss. The following table sets forth information regarding the Company’s accruing and non-accrual leases. Delinquent balances are determined based on the contractual terms of the lease.

March 27, 2021

    

0-60 Days

    

61-90 Days

    

Over 90 Days

    

    

Delinquent

Delinquent

Delinquent and

and Accruing

and Accruing

Accruing

Non-Accrual

Total

Total investment in leases

$

10,994,000

$

$

$

$

10,994,000

December 26, 2020

    

0-60 Days

    

61-90 Days

    

Over 90 Days

    

    

Delinquent

Delinquent

Delinquent and

and Accruing

and Accruing

Accruing

Non-Accrual

Total

Total investment in leases

$

13,512,300

$

$

$

$

13,512,300

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The Company leases high-technology and other business-essential equipment to its leasing customers. Upon expiration of the initial term or extended lease term, depending on the structure of the lease, the customer may return the equipment, renew the lease for an additional term, or purchase the equipment. Due to the uncertainty of such outcome at the end of the lease term, the lease as recorded at commencement represents only the current terms of the agreement. As a lessor, the Company’s leases do not contain non-lease components. The residual values reflect the estimated amounts to be received at lease termination from sales or other dispositions of leased equipment to unrelated parties. The leased equipment residual values are based on the Company’s best estimate. The Company’s risk management strategy for its residual value includes the contractual obligations of customers to maintain, service, and insure the leased equipment, the use of third party remarketers as well as the analytical review of historical asset dispositions.

Leasing income as presented on the Consolidated Condensed Statements of Operations consists of the following:

Three Months Ended

Three Months Ended

March 27, 2021

    

March 28, 2020

Interest income on direct financing and sales-type leases

$

619,700

$

1,128,600

Selling profit (loss) at commencement of sales-type leases

 

1,073,700

 

313,200

Operating lease income

484,300

435,400

Income on sales of equipment under lease

745,600

3,261,300

Other

313,700

732,700

Leasing income

$

3,237,000

$

5,871,200

7. Earnings Per Share:

The following table sets forth the presentation of shares outstanding used in the calculation of basic and diluted earnings per share (“EPS”):

Three Months Ended

    

March 27, 2021

    

March 28, 2020

    

Denominator for basic EPS — weighted average common shares

 

3,736,676

 

3,711,597

 

Dilutive shares associated with option plans

 

137,551

 

200,154

 

Denominator for diluted EPS — weighted average common shares and dilutive potential common shares

 

3,874,227

 

3,911,751

 

Options excluded from EPS calculation — anti-dilutive

 

6,987

 

2,192

 

8. Shareholders’ Equity (Deficit):

Dividends

On January 27, 2021, the Company’s Board of Directors approved the payment of a $0.25 per share quarterly cash dividend to shareholders of record at the close of business on February 10, 2021, which was paid on March 1, 2021.

Repurchase of Common Stock

In the first three months of 2021, the Company repurchased 58,255 shares of its common stock. Under the Board of Directors’ authorization, as of March 27, 2021, the Company has the ability to repurchase an additional 72,349 shares of its common stock. Repurchases may be made from time to time at prevailing prices, subject to certain restrictions on volume, pricing and timing.

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Table of Contents

Stock Option Plans and Stock-Based Compensation

Stock option activity under the Company’s option plans as of March 27, 2021 was as follows:

    

    

    

Weighted Average

    

Remaining

Number of

Weighted Average

Contractual Life

 

Shares

 

Exercise Price

 

(years)

 

 

Intrinsic Value

Outstanding, December 26, 2020

 

393,488

$

113.19

5.61

$

27,864,900

Granted

 

10,000

182.21

Exercised

 

(2,950)

91.10

Outstanding, March 27, 2021

 

400,538

$

115.08

5.47

$

28,425,900

Exercisable, March 27, 2021

 

278,583

$

94.89

4.14

$

25,395,100

No options were granted during the three months ended March 28, 2020. The fair value of options granted under the Option Plans during the first three months of 2021 were estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions and results:

Three Months Ended

    

March 27, 2021

    

Risk free interest rate

 

0.64

%

 

Expected life (years)

 

6

 

Expected volatility

 

25.05

%

 

Dividend yield

 

2.77

%

 

Option fair value

$

30.02

All unexercised options at March 27, 2021 have an exercise price equal to the fair market value on the date of the grant.

Compensation expense of $385,200 and $140,300 relating to the vested portion of the fair value of stock options granted was expensed to “Selling, General and Administrative Expenses” in the first three months of 2021 and 2020, respectively. As of March 27, 2021, the Company had $2.8 million of total unrecognized compensation expense related to stock options that is expected to be recognized over the remaining weighted average vesting period of approximately 2.5 years.

9. Debt:

Line of Credit

As of March 27, 2021, there were no borrowings outstanding under the Company’s revolving credit facility with CIBC Bank USA (the “Line of Credit”), leaving $25.0 million available for additional borrowings.

The Line of Credit has been and will continue to be used for general corporate purposes. The Line of Credit, which terminates in August 2024, is secured by a lien against substantially all of the Company’s assets, contains customary financial conditions and covenants, and requires maintenance of minimum levels of debt service coverage and tangible net worth and maximum levels of leverage (all as defined within the Line of Credit). As of March 27, 2021, the Company was in compliance with all of its financial covenants.

Notes Payable

As of March 27, 2021, the Company had $12.8 million in principal outstanding from the $25.0 million Series A notes issued in May 2015 and $8.1 million in principal outstanding from the $12.5 million Series B notes issued in August 2017 under its Note Agreement with Prudential Investment Management, Inc., its affiliates and managed accounts (“Prudential”).

The final maturity of the Series A and Series B notes is 10 years from the issuance date. For the Series A notes, interest at a rate of 5.50% per annum on the outstanding principal balance is payable quarterly, along with required prepayments of the principal of $500,000 quarterly for the first five years, and $750,000 quarterly thereafter until the principal is paid

11

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in full. For the Series B notes, interest at a rate of 5.10% per annum on the outstanding principal balance is payable quarterly, along with required prepayments of the principal of $312,500 quarterly until the principal is paid in full. The Series A and Series B notes may be prepaid, at the option of the Company, in whole or in part (in a minimum amount of $1.0 million), but prepayments require payment of a Yield Maintenance Amount, as defined in the Note Agreement.

The Company’s obligations under the Note Agreement are secured by a lien against substantially all of the Company’s assets (as the notes rank pari passu with the Line of Credit), and the Note Agreement contains customary financial conditions and covenants, and requires maintenance of minimum levels of fixed charge coverage and tangible net worth and maximum levels of leverage (all as defined within the Note Agreement). As of March 27, 2021, the Company was in compliance with all of its financial covenants.

In connection with the Note Agreement, the Company incurred debt issuance costs, of which unamortized amounts are presented as a direct deduction from the carrying amount of the related liability.

10. Discounted Lease Rentals:

The Company utilized certain lease receivables and underlying equipment as collateral to borrow from financial institutions at a weighted average rate of 5.41% at March 27, 2021 on a non-recourse basis. As of March 27, 2021, $1.0 million of the $1.3 million liability balance is current.

11. Operating Leases:

As of March 27, 2021, the Company leases its Minnesota corporate headquarters in a facility with an operating lease that expires in December 2029. The remaining lease term for this lease is 8.75 years and the discount rate is 5.5%. The Company recognized $300,900 and $300,400 of rent expense for the periods ended March 27, 2021 and March 28, 2020, respectively.

Maturities of operating lease liabilities is as follows for the remainder of fiscal 2021 and full fiscal years thereafter as of March 27, 2021:

Operating Lease Liabilities expected to be recognized in

    

Amount

2021

$

544,000

2022

 

742,900

2023

 

763,300

2024

 

784,400

2025

 

806,000

Thereafter

 

3,452,600

Total lease payments

7,093,200

Less imputed interest

(1,468,100)

Present value of lease liabilities

$

5,625,100

Of the $5.6 million operating lease liability outstanding at March 27, 2021, $0.4 million is included in Accrued liabilities in the Current liabilities section of the Consolidated Condensed Balance Sheets.

Supplemental cash flow information related to our operating leases is as follows for the period ended March 27, 2021:

Three Months Ended

    

March 27, 2021

    

March 28, 2020

Cash paid for amounts included in the measurement of lease liabilities:

Operating cash flow outflow from operating leases

$

179,100

$

174,300

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12. Segment Reporting:

The Company currently has two reportable business segments, franchising and leasing. The franchising segment franchises value-oriented retail store concepts that buy, sell, trade and consign merchandise. The leasing segment includes the Company’s equipment leasing and financing business. Segment reporting is intended to give financial statement users a better view of how the Company manages and evaluates its businesses. The Company’s internal management reporting is the basis for the information disclosed for its business segments and includes allocation of shared-service costs. Segment assets are those that are directly used in or identified with segment operations, including cash, restricted cash, accounts receivable, prepaid expenses, inventory, property and equipment, investment in leasing operations and goodwill. Unallocated assets include corporate cash and cash equivalents, current and deferred tax amounts, operating lease right of use assets and other corporate assets. Inter-segment balances and transactions have been eliminated. The following tables summarize financial information by segment and provide a reconciliation of segment contribution to operating income:

Three Months Ended

    

March 27, 2021

    

March 28, 2020

    

Revenue:

Franchising

$

15,421,900

$

12,728,800

Leasing

 

3,237,000

 

5,871,200

Total revenue

$

18,658,900

$

18,600,000

Reconciliation to operating income:

Franchising segment contribution

$

10,724,500

$

7,211,400

Leasing segment contribution

 

1,932,500

 

2,890,400

Total operating income

$

12,657,000

$

10,101,800

Depreciation and amortization:

Franchising

$

65,900

$

72,600

Leasing

 

47,900

 

50,500

Total depreciation and amortization

$

113,800

$

123,100

As of

    

March 27, 2021

    

December 26, 2020

Identifiable assets:

Franchising

$

4,728,700

$

4,848,300

Leasing

 

11,814,700

 

14,462,600

Unallocated

 

14,154,300

 

12,032,300

Total

$

30,697,700

$

31,343,200

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ITEM 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations

COVID-19 Pandemic

The emergence of the coronavirus (COVID-19) and new variants of the virus around the world, and particularly in the United States and Canada, continues to present significant risks to the Company, not all of which the Company is able to fully evaluate or even to foresee at the current time. The pandemic affected the Company’s financial results and business operations in the Company’s first fiscal quarters ended March 27, 2021 and March 28, 2020, and economic and health conditions in the United States and across most of the globe have continued to change since the beginning of the pandemic. Notably, a number of the Company’s franchised store locations were temporarily closed to in-store consumer activities from time to time due to various restrictions. Such temporary store closings may reoccur and customer traffic may continue to be impacted depending on the duration and severity of the pandemic, the length of time it takes for normal economic and operating conditions to resume, additional governmental actions that may be taken and/or re-imposition of restrictions that have been imposed to date, and numerous other uncertainties.

Even as governmental restrictions are relaxed and markets reopen, the ongoing economic impacts and health concerns associated with the pandemic may continue to affect consumer behavior, spending levels and shopping preferences. Changes in consumer purchasing patterns may increase demand at our franchised stores in one quarter, resulting in decreased demand in subsequent quarters. We continue to see shifts in product and channel preferences as markets move through varying stages of restrictions and re-opening at different times. In addition, we continue to see an increase in demand in the e-commerce channel and any failure to capitalize on this demand could adversely affect our franchised stores ability to maintain and grow sales and erode our competitive position.

Due to the above circumstances and as described generally in this Form 10-Q, the Company’s results of operations for the three-month period ended March 27, 2021 are not necessarily indicative of the results to be expected for the full fiscal year. Management cannot predict the full impact of the pandemic on the Company’s management and employees, its franchisees or leasing customers nor to economic conditions generally, including the effects on consumer spending. The ultimate extent of the effects of the pandemic on the Company is highly uncertain and will depend on future developments, and such effects could exist for an extended period of time even after the pandemic might end.

Overview

As of March 27, 2021, we had 1,264 franchises operating under the Plato’s Closet, Once Upon A Child, Play It Again Sports, Style Encore and Music Go Round brands and had a leasing portfolio of $10.9 million. Management closely tracks the following financial criteria to evaluate current business operations and future prospects: royalties, leasing activity, and selling, general and administrative expenses.

Our most significant source of franchising revenue is royalties received from our franchisees. During the first three months of 2021, our royalties increased $2.9 million or 25.7% compared to the first three months of 2020.

Leasing income net of leasing expense during the first three months of 2021 was $2.8 million compared to $4.5 million in the same period last year. Fluctuations in period-to-period leasing income and leasing expense can result from the manner and timing in which leasing income and leasing expense is recognized over the term of each particular lease in accordance with accounting guidance applicable to leasing. For this reason, we believe that more meaningful levels of leasing activity are the medium- to long-term trend in the purchases of equipment for lease customers and the size of the leasing portfolio. During the first three months of 2021, we purchased $0.1 million in equipment for lease customers compared to $1.7 million in the first three months of each of 2020 and 2019. Our leasing portfolio (net investment in leases — current and long-term) was $10.9 million at March 27, 2021 compared to $13.3 million at December 26, 2020 and $21.3 million at March 28, 2020. The lower equipment purchases and the decrease in the size of the portfolio across these periods were a direct result of a decrease in the number of our customers installing leased equipment. We continue to explore ways to grow leased assets and add new customers to our leasing portfolio; however, continued low levels of equipment purchases for lease customers and decreases in the size of our portfolio will impact the long-term operating income of our leasing segment.

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Management continually monitors the level and timing of selling, general and administrative expenses. The major components of selling, general and administrative expenses include salaries, wages and benefits, advertising, travel, occupancy, legal and professional fees. During the first three months of 2021, selling, general and administrative expenses decreased $0.6 million, or 11.2% compared to the first three months of 2020.

Management also monitors several nonfinancial factors in evaluating the current business operations and future prospects including franchise openings and closings and franchise renewals. The following is a summary of our franchising activity for the first three months ended March 27, 2021:

AVAILABLE

TOTAL

TOTAL

FOR

COMPLETED

    

12/26/2020

    

OPENED

    

CLOSED

    

3/27/2021

    

RENEWAL

    

RENEWALS

    

Plato’s Closet

Franchises - US and Canada

 

485

 

 

(1)

 

484

 

13

13

Once Upon A Child

Franchises - US and Canada

 

399

 

 

(1)

 

398

 

3

3

Play It Again Sports

Franchises - US and Canada

 

274

 

 

 

274

13

13

Style Encore

Franchises - US and Canada

 

69

 

2