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 ~~September~~June 25, ~~2021~~2022

☐

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, ~~3,626,338~~3,437,702 shares outstanding as of ~~October~~July 12, ~~2021.~~2022.

Table of Contents

WINMARK CORPORATION AND SUBSIDIARIES

INDEX


		PAGE

PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)

	CONSOLIDATED CONDENSED BALANCE SHEETS ~~September~~June 25, ~~2021~~2022 and December ~~26, 2020~~25, 2021	3

	CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS Three Months Ended ~~September~~June 25, ~~2021~~2022 and ~~September~~June 26, ~~2020~~2021 ~~Nine~~Six Months Ended ~~September~~June 25, ~~2021~~2022 and ~~September~~June 26, ~~2020~~2021	4

	CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT): Three Months Ended ~~September~~June 25, ~~2021~~2022 and ~~September~~June 26, ~~2020~~2021 ~~Nine~~Six Months Ended ~~September~~June 25, ~~2021~~2022 and ~~September~~June 26, ~~2020~~2021	5

	CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS ~~Nine~~Six Months Ended ~~September~~June 25, ~~2021~~2022 and ~~September~~June 26, ~~2020~~2021	6

	NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	2220

Item 4.	Controls and Procedures	2220

PART II.	OTHER INFORMATION	2221

Item 1.	Legal Proceedings	2221

Item 1A.	Risk Factors	2321

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	2321

Item 3.	Defaults Upon Senior Securities	2422

Item 4.	Mine Safety Disclosures	2422

Item 5.	Other Information	2422

Item 6.	Exhibits	2422

	SIGNATURES	2523

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1: Financial Statements

WINMARK CORPORATION AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS

(Unaudited)

September 25, 2021

December 26, 2020
ASSETS

Current Assets:

Cash and cash equivalents

$
37,569,100

$
6,659,000
Restricted cash

15,000

25,000
Receivables, less allowance for doubtful accounts of $1,200 and $800

1,394,900

1,581,900
Net investment in leases - current

3,884,600

8,687,500
Income tax receivable

188,200

221,200
Inventories

408,600

106,600
Prepaid expenses

958,700

995,200
Total current assets

44,419,100

18,276,400
Net investment in leases - long-term

1,157,000

4,573,600
Property and equipment, net

2,055,800

2,332,800
Operating lease right of use assets

3,059,300

3,226,300
Goodwill

607,500

607,500
Other assets

416,900

435,900
Deferred income taxes

3,256,200

1,890,700

$
54,971,800

$
31,343,200
LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)

Current Liabilities:

Notes payable, net of unamortized debt issuance costs of $17,400 and $13,900

$
4,232,600

$
4,236,100
Accounts payable

1,988,600

1,769,600
Accrued liabilities

2,918,800

2,624,000
Discounted lease rentals

—

1,096,600
Deferred revenue

1,643,900

1,657,400
Total current liabilities

10,783,900

11,383,700
Long-Term Liabilities:

Notes payable, net of unamortized debt issuance costs of $65,500 and $54,800

44,434,500

17,632,700
Discounted lease rentals

—

574,000
Deferred revenue

6,849,600

7,050,900
Operating lease liabilities

4,946,900

5,307,400
Other liabilities

759,000

773,200
Total long-term liabilities

56,990,000

31,338,200
Shareholders’ Equity (Deficit):

Common stock, 0 par value, 10,000,000 shares authorized, 3,623,538 and 3,756,028 shares issued and outstanding

—

9,281,800
Retained earnings (accumulated deficit)

(12,802,100)

(20,660,500)
Total shareholders’ equity (deficit)

(12,802,100)

(11,378,700)

$
54,971,800

$
31,343,200


	June 25, 2022		December 25, 2021
ASSETS
Current Assets:
Cash and cash equivalents	$	8,696,600	$	11,407,000
Restricted cash		55,000		30,000
Receivables, less allowance for doubtful accounts of $500 and $600		1,321,800		1,103,400
Net investment in leases - current		1,870,100		2,890,600
Income tax receivable		869,000		667,500
Inventories		603,400		325,200
Prepaid expenses		861,000		1,008,600
Total current assets		14,276,900		17,432,300
Net investment in leases - long-term		111,000		229,300
Property and equipment, net		1,815,300		1,976,900
Operating lease right of use assets		2,859,800		2,982,000
Intangible assets, net		3,525,200		—
Goodwill		607,500		607,500
Other assets		420,500		418,300
Deferred income taxes		3,438,100		3,252,700
	$	27,054,300	$	26,899,000
LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)
Current Liabilities:
Notes payable, net of unamortized debt issuance costs of $32,100 and $17,400	$	4,217,900	$	4,232,600
Accounts payable		1,889,300		2,099,000
Accrued liabilities		4,563,100		2,001,000
Deferred revenue		1,631,100		1,645,000
Total current liabilities		12,301,400		9,977,600
Long-Term Liabilities:
Line of credit/Term loan		30,000,000		—
Notes payable, net of unamortized debt issuance costs of $136,900 and $61,100		41,175,700		43,376,400
Deferred revenue		6,849,200		6,863,500
Operating lease liabilities		4,561,500		4,810,100
Other liabilities		945,200		954,800
Total long-term liabilities		83,531,600		56,004,800
Shareholders’ Equity (Deficit):
Common stock, 0 par value, 10,000,000 shares authorized, 3,437,806 and 3,635,806 shares issued and outstanding		—		—
Retained earnings (accumulated deficit)		(68,778,700)		(39,083,400)
Total shareholders’ equity (deficit)		(68,778,700)		(39,083,400)
	$	27,054,300	$	26,899,000

The accompanying notes are an integral part of these financial statements

Table of Contents

WINMARK CORPORATION AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

(Unaudited)


	Three Months Ended				Nine Months Ended				Three Months Ended				Six Months Ended
	September 25, 2021		September 26, 2020		September 25, 2021		September 26, 2020		June 25, 2022		June 26, 2021		June 25, 2022		June 26, 2021
Revenue:
Royalties	$	16,375,900	$	14,210,000	$	45,141,200	$	33,188,300	$	15,981,300	$	14,716,500	$	31,371,400	$	28,765,300
Leasing income		2,266,200		2,695,800		8,351,800		12,040,800		1,212,000		2,848,600		4,083,700		6,085,600
Merchandise sales		704,800		631,200		1,980,300		1,746,800		1,027,200		683,100		1,941,500		1,275,500
Franchise fees		383,400		335,400		1,101,300		1,064,900		391,500		358,900		812,100		717,900
Other		423,100		404,600		1,267,300		1,225,700		458,800		422,500		911,900		844,200
Total revenue		20,153,400		18,277,000		57,841,900		49,266,500		19,070,800		19,029,600		39,120,600		37,688,500
Cost of merchandise sold		681,100		598,200		1,887,700		1,662,000		970,200		647,800		1,834,700		1,206,600
Leasing expense		358,900		510,900		1,410,800		2,443,700		299,600		662,400		515,600		1,051,900
Provision for credit losses		(55,900)		(339,600)		(167,300)		164,300		(15,700)		(62,700)		(24,600)		(111,400)
Selling, general and administrative expenses		5,380,100		5,009,700		16,287,600		15,719,100		5,461,600		5,805,200		11,001,600		10,907,500
Income from operations		13,789,200		12,497,800		38,423,100		29,277,400		12,355,100		11,976,900		25,793,300		24,633,900
Interest expense		(323,200)		(345,700)		(945,600)		(1,409,600)		(712,000)		(304,300)		(1,225,100)		(622,400)
Interest and other income (expense)		(18,800)		9,200		(7,100)		27,700		(13,800)		4,900		(14,700)		11,700
Income before income taxes		13,447,200		12,161,300		37,470,400		27,895,500		11,629,300		11,677,500		24,553,500		24,023,200
Provision for income taxes		(3,364,700)		(2,802,500)		(9,139,500)		(6,164,500)		(2,602,100)		(2,740,200)		(5,673,800)		(5,774,800)
Net income	$	10,082,500	$	9,358,800	$	28,330,900	$	21,731,000	$	9,027,200	$	8,937,300	$	18,879,700	$	18,248,400
Earnings per share - basic	$	2.77	$	2.51	$	7.68	$	5.86	$	2.61	$	2.42	$	5.35	$	4.91
Earnings per share - diluted	$	2.67	$	2.43	$	7.40	$	5.63	$	2.54	$	2.33	$	5.19	$	4.74
Weighted average shares outstanding - basic		3,635,055		3,730,490		3,688,419		3,710,112		3,463,886		3,693,503		3,530,902		3,715,088
Weighted average shares outstanding - diluted		3,782,873		3,857,702		3,829,322		3,857,754		3,559,231		3,830,844		3,637,772		3,852,534

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

Table of Contents

WINMARK CORPORATION AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT)

(Unaudited)


					Retained							Retained
					Earnings							Earnings
	Common Stock			(Accumulated				Common Stock			(Accumulated
	Shares	Amount		Deficit)		Total		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)
BALANCE, December 25, 2021								3,635,806	$	—	$	(39,083,400)	$	(39,083,400)
Repurchase of common stock	(43,833)		(1,254,400)		(7,208,600)		(8,463,000)	(164,586)		(1,679,900)		(34,911,500)		(36,591,400)
Stock options exercised	11,129		941,500		—		941,500	9,156		1,258,300		—		1,258,300
Compensation expense relating to stock options	—		312,900		—		312,900	—		421,600		—		421,600
Cash dividends ($0.45 per share)	—		—		(1,665,000)		(1,665,000)	—		—		(1,625,300)		(1,625,300)
Comprehensive income (Net income)	—		—		8,937,300		8,937,300	—		—		9,852,500		9,852,500
BALANCE, June 26, 2021	3,668,019	$	—	$	(12,740,500)	$	(12,740,500)
BALANCE, March 26, 2022								3,480,376		—		(65,767,700)		(65,767,700)
Repurchase of common stock	(45,731)		(465,100)		(8,509,600)		(8,974,700)	(55,694)		(1,645,200)		(9,610,900)		(11,256,100)
Stock options exercised	1,250		89,000		—		89,000	13,124		1,295,400		—		1,295,400
Compensation expense relating to stock options	—		376,100		—		376,100	—		349,800		—		349,800
Cash dividends ($0.45 per share)	—		—		(1,634,500)		(1,634,500)
Cash dividends ($0.70 per share)								—		—		(2,427,300)		(2,427,300)
Comprehensive income (Net income)	—		—		10,082,500		10,082,500	—		—		9,027,200		9,027,200
BALANCE, September 25, 2021	3,623,538	$	—	$	(12,802,100)	$	(12,802,100)
BALANCE, June 25, 2022								3,437,806	$	—	$	(68,778,700)	$	(68,778,700)


					Retained							Retained
					Earnings							Earnings
	Common Stock			(Accumulated				Common Stock			(Accumulated
	Shares	Amount		Deficit)		Total		Shares	Amount		Deficit)		Total
BALANCE, December 28, 2019	3,947,858	$	11,929,300	$	519,000	$	12,448,300
BALANCE, December 26, 2020								3,756,028	$	9,281,800	$	(20,660,500)	$	(11,378,700)
Repurchase of common stock	(300,000)		(12,215,500)		(36,772,000)		(48,987,500)	(58,255)		(9,935,800)		(519,400)		(10,455,200)
Stock options exercised	2,895		145,900		—		145,900	2,950		268,800		—		268,800
Compensation expense relating to stock options	—		140,300		—		140,300	—		385,200		—		385,200
Cash dividends ($0.25 per share)	—		—		(912,200)		(912,200)	—		—		(935,400)		(935,400)
Comprehensive income (Net income)	—		—		7,317,000		7,317,000	—		—		9,311,100		9,311,100
BALANCE, March 28, 2020	3,650,753		—		(29,848,200)		(29,848,200)
BALANCE, March 27, 2021								3,700,723		—		(12,804,200)		(12,804,200)
Repurchase of common stock								(43,833)		(1,254,400)		(7,208,600)		(8,463,000)
Stock options exercised	72,434		6,013,600		—		6,013,600	11,129		941,500		—		941,500
Compensation expense relating to stock options	—		397,700		—		397,700			312,900		—		312,900
Cash dividends ($0.05 per share)	—		—		(184,500)		(184,500)
Cash dividends ($0.45 per share)								—				(1,665,000)		(1,665,000)
Comprehensive income (Net income)	—		—		5,055,200		5,055,200	—		—		8,937,300		8,937,300
BALANCE, June 27, 2020	3,723,187	$	6,411,300	$	(24,977,500)	$	(18,566,200)
Repurchase of common stock	12,250		914,600		—		914,600
Compensation expense relating to stock options	—		391,900		—		391,900
Cash dividends ($0.25 per share)	—		—		(932,800)		(932,800)
Comprehensive income (Net income)	—		—		9,358,800		9,358,800
BALANCE, September 26, 2020	3,735,437	$	7,717,800	$	(16,551,500)	$	(8,833,700)
BALANCE, June 26, 2021								3,668,019	$	—	$	(12,740,500)	$	(12,740,500)

The accompanying notes are an integral part of these financial statements

Table of Contents

WINMARK CORPORATION AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)


		Nine Months Ended					Six Months Ended
		September 25, 2021		September 26, 2020			June 25, 2022		June 26, 2021
OPERATING ACTIVITIES:
Net income		$	28,330,900	$	21,731,000		$	18,879,700	$	18,248,400
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			328,800		366,700			219,400		223,200
Provision for credit losses			(167,300)		164,300			(24,600)		(111,400)
Compensation expense related to stock options			1,074,200		929,900			771,400		698,100
Deferred income taxes			(1,365,500)		(1,251,000)			(185,400)		(907,400)
Loss from disposal of property and equipment			—		200
Deferred initial direct costs			(2,100)		(18,300)			—		(2,100)
Amortization of deferred initial direct costs			18,800		89,400			—		16,400
Operating lease right of use asset amortization			167,000		293,400			122,200		109,900
Tax benefits on exercised stock options			249,200		602,400			348,000		248,900
Change in operating assets and liabilities:
Receivables			187,000		(278,100)			(218,400)		405,600
Principal collections on lease receivables			7,452,200		11,418,500			1,636,100		5,332,200
Income tax receivable/payable			(216,200)		368,000			(549,500)		(722,900)
Inventories			(302,000)		900			(278,200)		(222,800)
Prepaid expenses			36,500		(190,700)			147,600		308,000
Other assets			19,000		34,200			(2,200)		17,800
Accounts payable			219,000		257,700			(209,700)		(311,600)
Accrued and other liabilities			(94,100)		(864,100)			2,213,500		232,100
Rents received in advance and security deposits			(674,500)		(1,252,000)			(472,700)		(317,700)
Deferred revenue			(214,800)		(630,300)			(28,200)		(120,300)
Net cash provided by operating activities			35,046,100		31,772,100			22,369,000		23,124,400
INVESTING ACTIVITIES:
Purchase of property and equipment			(51,800)		(33,400)			(43,000)		(48,600)
Reacquired franchise rights								(3,540,000)		—
Purchase of equipment for lease contracts			(78,200)		(3,128,200)			—		(78,200)
Net cash used for investing activities			(130,000)		(3,161,600)			(3,583,000)		(126,800)
FINANCING ACTIVITIES:
Proceeds from borrowings on line of credit			—		46,600,000			33,700,000		—
Payments on line of credit			—		(46,600,000)			(3,700,000)		—
Proceeds from borrowings on notes payable			30,000,000		—
Payments on notes payable			(3,187,500)		(2,687,500)			(2,125,000)		(2,125,000)
Repurchases of common stock			(27,892,900)		(48,987,500)			(47,847,500)		(18,918,200)
Proceeds from exercises of stock options			1,299,300		7,074,100			2,553,700		1,210,300
Dividends paid			(4,234,900)		(2,029,500)			(4,052,600)		(2,600,400)
Proceeds from discounted lease rentals			—		1,157,000
Net cash used for financing activities			(4,016,000)		(45,473,400)			(21,471,400)		(22,433,300)
NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH			30,900,100		(16,862,900)			(2,685,400)		564,300
Cash, cash equivalents and restricted cash, beginning of period			6,684,000		25,180,300			11,437,000		6,684,000
Cash, cash equivalents and restricted cash, end of period		$	37,584,100	$	8,317,400		$	8,751,600	$	7,248,300
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest		$	884,100	$	1,426,100		$	1,108,100	$	603,700
Cash paid for income taxes		$	10,472,000	$	6,445,200		$	6,060,800	$	7,156,200

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:	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:					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:
		Nine Months Ended					Six Months Ended
		September 25, 2021		September 26, 2020			June 25, 2022		June 26, 2021
Cash and cash equivalents		$	37,569,100	$	8,267,400		$	8,696,600	$	7,223,300
Restricted cash			15,000		50,000			55,000		25,000
Total cash, cash equivalents and restricted cash		$	37,584,100	$	8,317,400		$	8,751,600	$	7,248,300

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

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 ~~nine~~six months ended ~~September~~June 25, ~~2021~~2022 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. 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 ~~nine~~six months of ~~2021~~2022 and ~~2020,~~2021, respectively:


	September 25, 2021		September 26, 2020		June 25, 2022		June 26, 2021
Balance at beginning of period	$	8,708,300	$	9,575,500	$	8,508,500	$	8,708,300
Franchise and software license fees collected from franchisees, excluding amount earned as revenue during the period		1,110,600		656,700		937,900		755,400
Fees earned that were included in the balance at the beginning of the period		(1,325,400)		(1,287,000)		(966,100)		(875,700)
Balance at end of period	$	8,493,500	$	8,945,200	$	8,480,300	$	8,588,000

The following table illustrates future estimated revenue to be recognized for the remainder of ~~2021~~2022 and full fiscal years thereafter related to performance obligations that are unsatisfied (or partially unsatisfied) as of ~~September~~June 25, ~~2021.~~2022.


Contract Liabilities expected to be recognized in	Amount		Amount
2021	$	418,400
2022		1,605,500	$	804,700
2023		1,434,200		1,546,500
2024		1,236,500		1,348,800
2025		1,020,100		1,132,400
2026				928,000
Thereafter		2,778,800		2,719,900
	$	8,493,500	$	8,480,300

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4. 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.

5. Investment in Leasing Operations:

In May 2021, the Company made the decision to no longer solicit new leasing customers and will pursue an orderly run-off for its leasing portfolio.

Investment in leasing operations consists of the following:


	September 25, 2021		December 26, 2020		June 25, 2022		December 25, 2021
Direct financing and sales-type leases:
Minimum lease payments receivable	$	5,111,300	$	12,536,300	$	2,020,200	$	3,387,500
Estimated unguaranteed residual value of equipment		1,643,300		2,950,100		658,900		1,316,100
Unearned lease income, net of initial direct costs deferred		(611,100)		(1,439,500)		(206,400)		(418,100)
Security deposits		(1,494,500)		(2,169,000)		(649,800)		(1,122,500)
Equipment installed on leases not yet commenced		431,800		1,634,400
Total investment in direct financing and sales-type leases		5,080,800		13,512,300		1,822,900		3,163,000
Allowance for credit losses		(102,900)		(270,200)		(40,400)		(63,600)
Net investment in direct financing and sales-type leases		4,977,900		13,242,100		1,782,500		3,099,400
Operating leases:
Operating lease assets		469,800		599,100		753,800		626,200
Less accumulated depreciation and amortization		(406,100)		(580,100)		(555,200)		(605,700)
Net investment in operating leases		63,700		19,000		198,600		20,500
Total net investment in leasing operations	$	5,041,600	$	13,261,100	$	1,981,100	$	3,119,900

As of ~~September~~June 25, ~~2021,~~2022, the ~~$5.0~~$2.0 million total net investment in leases consists of ~~$3.9~~$1.9 million classified as current and ~~$1.1~~$0.1 million classified as long-term. As of December ~~26, 2020,~~25, 2021, the ~~$13.3~~$3.1 million total net investment in leases consists of ~~$8.7~~$2.9 million classified as current and ~~$4.6~~$0.2 million classified as long-term.

As of ~~September~~June 25, ~~2021,~~2022, there were no customers with leased assets greater than 10% of the Company’s total assets.

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~~2022 and the full fiscal years thereafter as of ~~September~~June 25, ~~2021:~~2022:


	Direct Financing and Sales-Type Leases				Direct Financing and Sales-Type Leases
	Minimum Lease		Income		Minimum Lease		Income
Fiscal Year	Payments Receivable		Amortization		Payments Receivable		Amortization
2021	$	1,442,000	$	278,200
2022		3,538,900		321,600		1,506,400		175,300
2023		126,900		11,200		510,300		31,000
2024		3,500		100		3,500		100
	$	5,111,300	$	611,100	$	2,020,200	$	206,400

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The activity in the allowance for credit losses for leasing operations during the first ~~nine~~six months of ~~2021~~2022 and ~~2020,~~2021, respectively, is as follows:


	September 25, 2021		September 26, 2020		June 25, 2022		June 26, 2021
Balance at beginning of period	$	270,200	$	580,600	$	63,600	$	270,200
Provisions charged to expense		(167,300)		164,300		(24,600)		(111,400)
Recoveries		—		(12,400)		1,400		—
Deductions for amounts written-off		—		(148,900)
Balance at end of period	$	102,900	$	583,600	$	40,400	$	158,800

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:


	September 25, 2021				December 26, 2020				June 25, 2022				December 25, 2021
	Investment		Allowance for		Investment		Allowance for		Investment		Allowance for		Investment		Allowance for
	In Leases		Credit Losses		In Leases		Credit Losses		In Leases		Credit Losses		In Leases		Credit Losses
Collectively evaluated for loss potential	$	5,080,800	$	102,900	$	13,512,300	$	270,200	$	1,822,900	$	40,400	$	3,163,000	$	63,600
Individually evaluated for loss potential		—		—		—		—		—		—		—		—
Total	$	5,080,800	$	102,900	$	13,512,300	$	270,200	$	1,822,900	$	40,400	$	3,163,000	$	63,600

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.


	September 25, 2021										June 25, 2022
	0-60 Days		61-90 Days		Over 90 Days						0-60 Days		61-90 Days		Over 90 Days
	Delinquent		Delinquent		Delinquent and						Delinquent		Delinquent		Delinquent and
	and Accruing		and Accruing		Accruing		Non-Accrual		Total		and Accruing		and Accruing		Accruing		Non-Accrual		Total

Total investment in leases	$	5,080,800	$	—	$	—	$	—	$	5,080,800	$	1,822,900	$	—	$	—	$	—	$	1,822,900


	December 26, 2020										December 25, 2021
	0-60 Days		61-90 Days		Over 90 Days						0-60 Days		61-90 Days		Over 90 Days
	Delinquent		Delinquent		Delinquent and						Delinquent		Delinquent		Delinquent and
	and Accruing		and Accruing		Accruing		Non-Accrual		Total		and Accruing		and Accruing		Accruing		Non-Accrual		Total

Total investment in leases	$	13,512,300	$	—	$	—	$	—	$	13,512,300	$	3,163,000	$	—	$	—	$	—	$	3,163,000

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 ~~customer~~its 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.

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


	Three Months Ended		Three Months Ended		Nine Months Ended		Nine Months Ended		Three Months Ended		Three Months Ended		Six Months Ended		Six Months Ended
	September 25, 2021		September 26, 2020		September 25, 2021		September 26, 2020		June 25, 2022		June 26, 2021		June 25, 2022		June 26, 2021
Interest income on direct financing and sales-type leases	$	362,200	$	839,600	$	1,464,700	$	2,947,900	$	205,300	$	482,800	$	483,800	$	1,102,500
Selling profit (loss) at commencement of sales-type leases		164,300		267,700		1,594,300		1,453,600		34,800		356,300		1,298,000		1,430,000
Operating lease income		436,700		668,600		1,397,500		1,758,500		528,300		476,500		910,100		960,800
Income on sales of equipment under lease		988,500		913,400		3,214,000		5,078,300		328,700		1,479,900		932,100		2,225,500
Other		314,500		6,500		681,300		802,500		114,900		53,100		459,700		366,800
Leasing income	$	2,266,200	$	2,695,800	$	8,351,800	$	12,040,800	$	1,212,000	$	2,848,600	$	4,083,700	$	6,085,600

6. Intangible Assets

In June 2022, Winmark terminated an agreement that contained the rights for 11 Play It Again Sports stores to operate separately from Winmark’s franchise system. In terminating the agreement, which included $3.54 million of consideration paid by Winmark, Winmark reacquired the franchise rights to these 11 stores. Upon termination of the agreement, these 11 stores signed franchise agreements, each with an initial term of ten years.

Intangible assets consist of these reacquired franchise rights. The Company amortizes the fair value of the reacquired franchise rights over the contract term of the franchise. The Company recognized $14,800 of amortization expense for the three and six months ended June 25, 2022.

The following table illustrates future amortization to be expensed for the remainder of 2022 and full fiscal years thereafter related to reacquired franchise rights as of June 25, 2022.


Amortization expected to be expensed in	Amount
2022	$	177,000
2023		354,000
2024		354,000
2025		354,000
2026		354,000
Thereafter		1,932,200
	$	3,525,200

6.7. 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		Nine Months Ended		Three Months Ended		Six Months Ended
	September 25, 2021	September 26, 2020	September 25, 2021	September 26, 2020	June 25, 2022	June 26, 2021	June 25, 2022	June 26, 2021
Denominator for basic EPS — weighted average common shares	3,635,055	3,730,490	3,688,419	3,710,112	3,463,886	3,693,503	3,530,902	3,715,088
Dilutive shares associated with option plans	147,818	127,212	140,903	147,642	95,345	137,341	106,870	137,446
Denominator for diluted EPS — weighted average common shares and dilutive potential common shares	3,782,873	3,857,702	3,829,322	3,857,754	3,559,231	3,830,844	3,637,772	3,852,534
Options excluded from EPS calculation — anti-dilutive	3,038	11,979	6,833	11,057	21,488	6,670	16,379	9,654

~~7. 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.

On April 14, 2021, the Company’s Board of Directors approved the payment of a $0.45 per share quarterly cash dividend to shareholders of record at the close of business on May 12, 2021, which was paid on June 1, 2021.

On July 14, 2021, the Company’s Board of Directors approved the payment of a $0.45 per share quarterly cash dividend to shareholders of record at the close of business on August 11, 2021, which was paid on September 1, 2021

~~Repurchase of Common Stock~~

In the first nine months of 2021, the Company repurchased 147,819 shares of its common stock. Under the Board of Directors’ authorization, as of September 25, 2021, the Company has the ability to repurchase an additional 382,785 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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8. Shareholders’ Equity (Deficit):

Dividends

On January 26, 2022, the Company’s Board of Directors approved the payment of a $0.45 per share quarterly cash dividend to shareholders of record at the close of business on February 9, 2022, which was paid on March 1, 2022.

On April 13, 2022, the Company’s Board of Directors approved the payment of a $0.70 per share quarterly cash dividend to shareholders of record at the close of business on May 11, 2022, which was paid on June 1, 2022.

Repurchase of Common Stock

In the first six months of 2022, the Company repurchased 220,280 shares of its common stock. Under the Board of Directors’ authorization, as of June 25, 2022, the Company has the ability to repurchase an additional 84,485 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.

Stock Option Plans and Stock-Based Compensation

Stock option activity under the Company’s option plans as of ~~September~~June 25, ~~2021~~2022 was as follows:


				Weighted Average						Weighted Average
				Remaining						Remaining
	Number of	Weighted Average		Contractual Life			Number of	Weighted Average		Contractual Life
	Shares	Exercise Price		(years)		Intrinsic Value	Shares	Exercise Price		(years)		Intrinsic Value
Outstanding, December 26, 2020	393,488	$	113.19	5.61	$	27,864,900
Outstanding, December 25, 2021							355,621	$	146.03	6.32	$	39,320,600
Granted	34,000		191.82				34,940		198.42
Exercised	(15,329)		84.76				(22,280)		114.62
Forfeited	(2,700)		151.06				(6,501)		183.28
Outstanding, September 25, 2021	409,459	$	120.54	5.29	$	39,222,800
Exercisable, September 25, 2021	287,729	$	99.03	3.93	$	33,749,500
Outstanding, June 25, 2022							361,780	$	152.35	6.26	$	20,285,200
Exercisable, June 25, 2022							220,496	$	119.50	4.59	$	18,323,800

The fair value of options granted under the Option Plans during the first ~~nine~~six months of ~~2021~~2022 and ~~2020~~2021 were estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions and results:


	Nine Months Ended						Six Months Ended
	September 25, 2021			September 26, 2020			June 25, 2022			June 26, 2021
Risk free interest rate		0.90	%		0.40	%		2.70	%		0.90	%
Expected life (years)		6			6			6			6
Expected volatility		25.07	%		25.03	%		27.47	%		25.07	%
Dividend yield		2.74	%		1.92	%		4.61	%		2.74	%
Option fair value	$	32.70		$	26.55		$	33.38		$	32.70

All unexercised options at ~~September~~June 25, ~~2021~~2022 have an exercise price equal to the fair market value on the date of the grant.

Compensation expense of ~~$1,074,200~~$771,400 and ~~$929,900~~$698,100 relating to the vested portion of the fair value of stock options granted was expensed to “Selling, General and Administrative Expenses” in the first ~~nine~~six months of ~~2021~~2022 and ~~2020,~~2021, respectively. As of ~~September~~June 25, ~~2021,~~2022, the Company had ~~$2.8~~$4.2 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~~2.9 years.

8.9. Debt:

Line of Credit

In ~~September 2021,~~April 2022, the Company’s ~~Line of Credit~~credit facility with CIBC Bank USA (the Line of Credit) was amended to, among other things:

●

~~Permit the~~Provide for a new $30.0 million delayed draw term facility, with available draws summarized as follows:

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The Company ~~to issue~~may draw up to 5 (5) loans over a period of 18 months, each draw having a principal amount not less than $3.0 million (or higher integral multiples of $1.0 million), with aggregate draws outstanding not to exceed $30.0 million;

The final maturity of all drawn loans of April 12, 2029, with all payments of principal due on such date;

Interest at a rate to be determined at the time of each draw, payable monthly in arrears on the outstanding aggregate principal balance.

●

Decrease the aggregate commitments for revolving loans from $25.0 million ~~in additional term notes~~ to ~~one or more affiliates or managed accounts of PGIM, Inc. (formerly Prudential Investment Management, Inc.) (collectively, “Prudential”);~~$20.0 million;

●

Extend the termination date for revolving loans from August 31, 2024 to April 12, 2027;

●

Remove the ~~tangible net worth~~borrowing base covenant ~~minimum requirement, amend~~restriction for revolving loans;

●

Replace LIBOR with SOFR as an interest rate option in connection with borrowings on revolving loans and adjust the definition of and reduce the applicable margin to reflect such replacement;

●

Amend the fixed charge coverage ratio definition ~~and amend the restricted~~to exclude principal payments ~~covenant to allow the Company more flexibility~~on non-amortizing term loans that are refinanced with ~~respect to shareholder distributions and/or common stock repurchases as long as certain conditions are met~~proceeds from permitted debt (as defined within the amendment);

●

~~Amend~~Permit the ~~provisions that allow for the replacement of LIBOR~~Company to issue additional term notes under a new Private Shelf Agreement with PGIM, Inc. (formerly Prudential Investment Management, Inc.) its affiliates and managed accounts (collectively, “Prudential”) as ~~an interest rate option in connection with borrowings under the Line of Credit.~~described below.

As of ~~September~~June 25, ~~2021,~~2022, there were 0 ~~borrowings~~revolving loans outstanding under the ~~Company’s~~ Line of Credit, leaving ~~$25.0~~$20.0 million available for additional revolving borrowings. During the three months ended June 25, 2022, the Company had delayed draw term loan borrowings totaling $30.0 million under the Line of Credit bearing interest ranging from 4.60% to 4.75%.

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 (as the Line of Credit ranks pari passu with the Prudential facilities described below), contains customary financial conditions and covenants, and requires maintenance of minimum levels of debt service coverage and maximum levels of leverage (all as defined within the Line of Credit). As of ~~September~~June 25, ~~2021,~~2022, the Company was in compliance with all of its financial covenants.

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Notes Payable

In ~~September 2021,~~April 2022, the Note Agreement with Prudential was amended to, among other things:

●

~~Provide for~~Permit the ~~issuance~~Company to incur the obligations described in and conform to the changes made by the Company’s entry into the amendments to the Line of ~~$30.0 million in new senior secured notes;~~Credit described above;

●

~~Remove the tangible net worth covenant minimum requirement, amend the fixed charge coverage ratio definition, and amend the restricted payments covenant to allow~~Permit the Company ~~more flexibility with respect~~ to ~~shareholder distributions and/or common stock repurchase as long as certain conditions are met (as defined within~~incur the ~~amendment).~~obligations described in and conform to the changes made by the Company’s entry into the Shelf Agreement described below.

~~In September 2021,~~As of June 25, 2022, the Company ~~issued $30.0~~had aggregate principal outstanding of $45.6 million under the Note Agreement; consisting of ~~Series C notes, with the proceeds to be used for general corporate purposes, including share repurchases and dividends. As of September 25, 2021, with the $11.25~~$9.0 million in principal outstanding from the $25.0 million Series A notes issued in May 2015, ~~and $7.5~~$6.6 million in principal outstanding from the $12.5 million Series B notes issued in August 2017 ~~the aggregate~~and $30.0 million in principal outstanding ~~under~~from the ~~Note Agreement was $48.75 million.~~$30.0 million Series C notes issued in September 2021.

The final maturity of the ~~Series A and~~ Series BA and Series B notes is 10 years from the issuance date. The final maturity of the Series C notes is 7 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 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. For the Series C notes, interest at a rate of 3.18% per annum on the outstanding principal balance is payable quarterly until the principal is paid in full. The Series A, Series B and Series C 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 maximum levels of leverage (all as defined within the Note Agreement). As of ~~September~~June 25, ~~2021,~~2022, the Company was in compliance with all of its financial covenants.

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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.

In April 2022, the Company entered into a Private Shelf Agreement (the “Shelf Agreement”) with Prudential, summarized as follows:

●

For a period three years from entry into the Shelf Agreement, subject to certain customary conditions, the Company may offer and Prudential may purchase from the Company privately negotiated senior notes (“Shelf Notes”) in the aggregate principal amount up to (i) $100.0 million, less (ii) the aggregate principal amount of notes outstanding at such point (including notes outstanding under the existing Prudential Note Agreement);

●

Each Shelf Note issued will have an average life and maturity of no more than 12.5 years from the date of original issuance, with interest payable at a rate per annum determined at the time of each issuance;

●

The Shelf Notes will be secured by all of the Company’s assets and the Shelf Notes will rank pari passu with the Company’s obligations to the lenders under the amended Line of Credit and the amended Note Agreement;

●

The Shelf Notes may be prepaid, at the option of the Company, in whole or in part (in a minimum amount of $1 million), but prepayments will require payment of a Yield Maintenance Amount (as defined within the Shelf Agreement);

●

The Shelf Agreement contains customary affirmative covenants and negative covenants that are substantially the same as those contained in the amended Line of Credit and amended Note Agreement.

As of June 25, 2022, the Company had 0t issued any notes under the Shelf Agreement and was in compliance with all of its financial covenants.

9.10. Operating Leases:

As of ~~September~~June 25, ~~2021,~~2022, 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 ~~8.25~~7.50 years and the discount rate is ~~5.5~~5.5%%. The Company recognized ~~$879,200~~$604,900 and ~~$896,400~~$580,000 of rent expense for the periods ended ~~September~~June 25, 2022 and June 26, 2021, ~~and September 26, 2020,~~ respectively.

Maturities of operating lease liabilities is as follows for the remainder of fiscal ~~2021~~2022 and full fiscal years thereafter as of ~~September~~June 25, ~~2021:~~2022:


Operating Lease Liabilities expected to be recognized in	Amount		Amount
2021	$	184,000
2022		742,900	$	374,800
2023		763,300		763,300
2024		784,400		784,400
2025		806,000		806,000
2026				828,200
Thereafter		3,452,600		2,624,300
Total lease payments		6,733,200		6,181,000
Less imputed interest		(1,315,700)		(1,117,500)
Present value of lease liabilities	$	5,417,500	$	5,063,500

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Of the ~~$5.4~~$5.1 million operating lease liability outstanding at ~~September~~June 25, ~~2021,~~2022, $0.5 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 ~~September~~June 25, ~~2021:~~2022:


	Nine Months Ended				Six Months Ended
	September 25, 2021		September 26, 2020		June 25, 2022		June 26, 2021
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flow outflow from operating leases	$	539,100	$	524,600	$	368,100	$	358,300

11. Segment Reporting:

The Company currently has 2 reportable business segments, franchising and leasing. The franchising segment franchises value-oriented retail store concepts that buy, sell and trade merchandise. The leasing segment includes the

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~~10. Segment Reporting:~~

The Company currently has 2 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 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, intangible assets 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				Nine Months Ended				Three Months Ended				Six Months Ended
	September 25, 2021		September 26, 2020		September 25, 2021		September 26, 2020		June 25, 2022		June 26, 2021		June 25, 2022		June 26, 2021
Revenue:
Franchising	$	17,887,200	$	15,581,200	$	49,490,100	$	37,225,700	$	17,858,800	$	16,181,000	$	35,036,900	$	31,602,900
Leasing		2,266,200		2,695,800		8,351,800		12,040,800		1,212,000		2,848,600		4,083,700		6,085,600
Total revenue	$	20,153,400	$	18,277,000	$	57,841,900	$	49,266,500	$	19,070,800	$	19,029,600	$	39,120,600	$	37,688,500

Reconciliation to operating income:
Franchising segment contribution	$	12,330,200	$	10,789,900	$	33,601,600	$	22,601,000	$	11,742,400	$	10,546,900	$	22,943,100	$	21,271,400
Leasing segment contribution		1,459,000		1,707,900		4,821,500		6,676,400		612,700		1,430,000		2,850,200		3,362,500
Total operating income	$	13,789,200	$	12,497,800	$	38,423,100	$	29,277,400	$	12,355,100	$	11,976,900	$	25,793,300	$	24,633,900

Depreciation and amortization:
Franchising	$	59,400	$	70,800	$	187,600	$	216,100	$	81,900	$	62,300	$	149,400	$	128,200
Leasing		46,200		49,900		141,200		150,600		35,000		47,100		70,000		95,000
Total depreciation and amortization	$	105,600	$	120,700	$	328,800	$	366,700	$	116,900	$	109,400	$	219,400	$	223,200


	As of				As of
	September 25, 2021		December 26, 2020		June 25, 2022		December 25, 2021
Identifiable assets:
Franchising	$	3,953,200	$	4,848,300	$	8,401,500	$	4,907,800
Leasing		5,691,100		14,462,600		2,399,700		3,600,500
Unallocated		45,327,500		12,032,300		16,253,100		18,390,700
Total	$	54,971,800	$	31,343,200	$	27,054,300	$	26,899,000

~~11. Subsequent Events:~~

On October 13, 2021, the Company’s Board of Directors approved the payment of a $7.50 per share special cash dividend (the “2021 Special Dividend”) to shareholders of record at the close of business November 10, 2021, which will be paid on December 1, 2021. The 2021 Special Dividend will be approximately $27.2 million based on the current number of shares outstanding and is expected to be financed by cash on hand.

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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 nine months ended September 25, 2021 and September 26, 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 effects 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 nine-month period ended September 25, 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

We are a franchising business focused on sustainability and small business formation. As of ~~September~~June 25, ~~2021,~~2022, we had ~~1,269~~1,293 resale franchises operating under the Plato’s Closet, Once Upon A Child, Play It Again Sports, Style Encore and Music Go Round brands. Our franchise business is not capital intensive and is designed to generate consistent, recurring revenue and strong operating margins.

The financial criteria that management closely tracks to evaluate current business operations and future prospects include royalties and selling, general and administrative expenses.

Our most significant source of franchising revenue is royalties received from our franchisees. During the first ~~nine~~six months of ~~2021,~~2022, our royalties increased ~~$12.0~~$2.6 million or ~~36.0%~~9.1% compared to the first ~~nine~~six months of ~~2020.~~2021.

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 ~~nine~~six months of ~~2021,~~2022, selling, general and administrative expenses increased ~~$0.6~~$0.1 million, or ~~3.6%~~0.9% compared to the first ~~nine~~six months of ~~2020.~~2021.

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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 ~~nine~~six months ended ~~September~~June 25, ~~2021:~~2022:


					AVAILABLE						AVAILABLE
	TOTAL			TOTAL	FOR	COMPLETED	TOTAL			TOTAL	FOR	COMPLETED
	12/26/2020	OPENED	CLOSED	9/25/2021	RENEWAL	RENEWALS	12/25/2021	OPENED	CLOSED	6/25/2022	RENEWAL	RENEWALS
Plato’s Closet
Franchises - US and Canada	485	4	(1)	488	41	41	489	8	(1)	496	30	30
Once Upon A Child
Franchises - US and Canada	399	3	(2)	400	11	11	401	5	(1)	405	19	19
Play It Again Sports
Franchises - US and Canada	274	3	(4)	273	38	37	273	13⁽¹⁾	(1)	285	38	38
Style Encore												.
Franchises - US and Canada	69	2	—	71	—	—	71	3	(4)	70	—	—
Music Go Round
Franchises - US	37	—	—	37	1	1	37	—	—	37	—	—
Total Franchised Stores	1,264	12	(7)	1,269	91	90	1,271	29	(7)	1,293	87	87

(1)

Includes 11 stores formerly operated outside the Winmark franchise system. (See Note 6 – “Intangible Assets”).

Renewal activity is a key focus area for management. Our franchisees sign 10-year agreements with us. The renewal of existing franchise agreements as they approach their expiration is an indicator that management monitors to determine the health of our business and the preservation of future royalties. During the first ~~nine~~six months of ~~2021,~~2022, we renewed 9087 of the 9187 franchise agreements available for renewal.

Our ability to grow our operating income is dependent on our ability to: (i) effectively support our franchise partners so that they produce higher revenues, (ii) open new franchises, and (iii) control our selling, general and administrative expenses.

In May 2021, we made the decision to no longer solicit new leasing customers and will pursue an orderly run-off of our middle-market leasing portfolio, the operations of which constitute our leasing segment. Leasing income net of leasing expense for the first ~~nine~~six months of ~~2021~~2022 was ~~$6.9~~$3.6 million compared to ~~$9.6~~$5.0 million in the first ~~nine~~six months of ~~2020. During the first nine months of 2021, we purchased $0.1 million in equipment for lease customers compared to $3.1 million in the first nine months of 2020.~~2021. Our leasing portfolio (net investment in leases – current and long-term), was ~~$5.0~~$2.0 million at ~~September~~June 25, ~~2021~~2022 compared to ~~$13.3~~$3.1 million at December ~~26, 2020.~~25, 2021. Given the decision to run-off the portfolio, we anticipate that leasing income net of leasing expense ~~purchases of equipment for lease customers~~ and the size of the leasing portfolio will continue to decrease through the run-off period. See Note 5 – “Investment in Leasing Operations” for information regarding the lease portfolio, including future minimum lease payments receivable under lease contracts and the amortization of unearned lease income.

COVID-19

As discussed in our 2021 Form 10-K, the COVID-19 pandemic has had a significant impact on our business. We are closely monitoring the effects of the ongoing COVID-19 pandemic and its continued impact on our business. We cannot estimate with certainty the length or severity of this pandemic, or the extent to which the disruption may materially impact our Consolidated Condensed Financial Statements.

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Results of Operations

The following table sets forth selected information from our Consolidated Condensed Statements of Operations expressed as a percentage of total revenue:


	Three Months Ended				Nine Months Ended				Three Months Ended				Six Months Ended
	September 25, 2021		September 26, 2020		September 25, 2021		September 26, 2020		June 25, 2022		June 26, 2021		June 25, 2022		June 26, 2021

Revenue:
Royalties	81.3	%	77.7	%	78.1	%	67.4	%	83.8	%	77.3	%	80.2	%	76.3	%
Leasing income	11.2		14.8		14.4		24.4		6.4		15.0		10.4		16.2
Merchandise sales	3.5		3.5		3.4		3.5		5.4		3.6		5.0		3.4
Franchise fees	1.9		1.8		1.9		2.2		2.0		1.9		2.1		1.9
Other	2.1		2.2		2.2		2.5		2.4		2.2		2.3		2.2
Total revenue	100.0		100.0		100.0		100.0		100.0		100.0		100.0		100.0

Cost of merchandise sold	(3.4)		(3.3)		(3.3)		(3.4)		(5.1)		(3.4)		(4.7)		(3.2)
Leasing expense	(1.8)		(2.8)		(2.4)		(5.0)		(1.6)		(3.5)		(1.3)		(2.8)
Provision for credit losses	0.3		1.9		0.3		(0.3)		0.1		0.3		—		0.3
Selling, general and administrative expenses	(26.7)		(27.4)		(28.2)		(31.9)		(28.6)		(30.5)		(28.1)		(28.9)
Income from operations	68.4		68.4		66.4		59.4		64.8		62.9		65.9		65.4
Interest expense	(1.6)		(1.9)		(1.6)		(2.9)		(3.7)		(1.6)		(3.1)		(1.7)
Interest and other income	(0.1)		—		—		0.1
Interest and other income (expense)									(0.1)		—		—		—
Income before income taxes	66.7		66.5		64.8		56.6		61.0		61.3		62.8		63.7
Provision for income taxes	(16.7)		(15.3)		(15.8)		(12.5)		(13.7)		(14.4)		(14.5)		(15.3)
Net income	50.0	%	51.2	%	49.0	%	44.1	%	47.3	%	46.9	%	48.3	%	48.4	%

Comparison of Three Months Ended ~~September~~June 25, ~~2021~~2022 to Three Months Ended ~~September~~June 26, ~~2020~~2021

Revenue

Revenues for the quarter ended ~~September~~June 25, ~~2021~~2022 totaled ~~$20.2~~$19.1 million compared to ~~$18.3~~$19.0 million for the comparable period in ~~2020.~~2021.

Royalties and Franchise Fees

Royalties increased to ~~$16.4~~$16.0 million for the ~~third~~second quarter of 2022 from $14.7 million for the second quarter of 2021, ~~from $14.2 million for the third quarter of 2020,~~ an ~~15.2%~~8.6% increase. The increase is primarily from higher franchisee retail sales and from having additional franchise stores in the ~~third~~second quarter of ~~2021~~2022 compared to the same period in ~~2020.~~2021.

Franchise fees of $0.4 million for the ~~third~~second quarter of ~~2021~~2022 were comparable to ~~$0.3~~$0.4 million for the ~~third~~second quarter of ~~2020.~~2021.

Leasing Income

Leasing income decreased to ~~$2.3~~$1.2 million for the ~~third~~second quarter of ~~2021~~2022 compared to ~~$2.7~~$2.8 million for the same period in ~~2020.~~2021. The decrease is primarily due to lower levels of equipment sales to customers and lower levels of interest income from the smaller lease portfolio.

Merchandise Sales

Merchandise sales include the sale of product to franchisees either through our Computer Support Center or through the Play It Again Sports buying group (together, “Direct Franchisee Sales”). Direct Franchisee Sales ~~of $0.7~~increased to $1.0 million for the ~~third~~second quarter of ~~2021 were comparable~~2022 compared to ~~$0.6~~$0.7 million in the same period of ~~2020.~~2021. The increase is due to an increase in technology and buying group purchases by our franchisees.

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Cost of Merchandise Sold

Cost of merchandise sold includes in-bound freight and the cost of merchandise associated with Direct Franchisee Sales. Cost of merchandise sold ~~of $0.7~~increased to $1.0 million for the ~~third~~second quarter of ~~2021 was comparable~~2022 compared to ~~$0.6~~$0.7 million in the same period of ~~2020.~~2021. The increase is due to an increase in Direct Franchisee Sales discussed above. Cost of merchandise sold as a percentage of Direct Franchisee Sales for the ~~third~~second quarter of 2022 and 2021 ~~and 2020~~ was ~~96.6%~~94.5% and 94.8%, respectively.

Leasing Expense

Leasing expense ~~of $0.4~~decreased to $0.3 million for the ~~third~~second quarter of ~~2021 was comparable~~2022 compared to ~~$0.5~~$0.7 million for the ~~third~~second quarter of ~~2020.~~

~~Provision for Credit Losses~~

~~Provision for credit losses~~2021. The decrease is primarily due to a decrease in the associated cost of ~~$(0.1) million for the third quarter of 2021 was comparable~~equipment sales to ~~$(0.3) million for the third quarter of 2020.~~customers discussed above.

Selling, General and Administrative

Selling, general and administrative expenses ~~increased 7.4%~~decreased 5.9% to ~~$5.4~~$5.5 million in the ~~third~~second quarter of ~~2021~~2022 compared to ~~$5.0~~$5.8 million in the same period of ~~2020.~~2021. The ~~increase~~decrease was primarily due to ~~an increase~~a decrease in advertising production expenses.

Interest Expense

Interest expense ~~of $0.3~~increased to $0.7 million for the ~~third~~second quarter of ~~2021 was comparable~~2022 compared to $0.3 million for the ~~third~~second quarter of ~~2020.~~2021. The increase is primarily due to higher average corporate borrowings when compared to the same period last year.

Income Taxes

The provision for income taxes was calculated at an effective rate of ~~25.0%~~22.4% and ~~23.0%~~23.5% for the ~~third~~second quarter of ~~2021~~2022 and ~~2020,~~2021, respectively. The ~~increase~~decrease is primarily due to ~~lower~~higher benefits on the exercise of non-qualified stock options and ~~an increase~~a decrease in state taxes.

Comparison of ~~Nine~~Six Months Ended ~~September~~June 25, ~~2021~~2022 to ~~Nine~~Six Months Ended ~~September~~June 26, ~~2020~~2021

Revenue

Revenues for the first ~~nine~~six months of ~~2021~~2022 totaled ~~$57.8~~$39.1 million compared to ~~$49.3~~$37.7 million for the comparable period in ~~2020.~~2021.

Royalties and Franchise Fees

Royalties increased to ~~$45.1~~$31.4 million for the first ~~nine~~six months of ~~2021~~2022 from ~~$33.2~~$28.8 million for the first ~~nine~~six months of ~~2020,~~2021, a ~~36.0%~~9.1% increase. The increase in royalties is primarily from higher franchisee retail sales and from having additional franchised stores in the first ~~nine~~six months of ~~2021~~2022 compared to the same period last year. Lower franchisee retail sales in the first nine months of 2020 were directly attributable to the temporary store closing and reduced customer traffic resulting from the COVID-19 pandemic. For illustrative purposes, royalties for the first nine months of 2019 were $38.2 million.

Franchise fees of ~~$1.1~~$0.8 million for the first ~~nine~~six months of ~~2021~~2022 were comparable to ~~$1.1~~$0.7 million for the first ~~nine~~six months of ~~2020.~~2021.

Leasing Income

Leasing income decreased to ~~$8.4~~$4.1 million for the first ~~nine~~six months of ~~2021~~2022 compared to ~~$12.0~~$6.1 million for the same period in ~~2020.~~2021. The decrease is primarily due to lower levels of equipment sales to customers and lower levels of interest income from the smaller lease portfolio when compared to the same period last year.

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Merchandise Sales

Merchandise sales include the sale of product to franchisees either through our Computer Support Center or through the Play It Again Sports buying group (together, “Direct Franchisee Sales”). Direct Franchisee Sales ~~of $2.0~~increased to $1.9 million for the first ~~nine~~six months of ~~2021~~2022 compared to ~~$1.7~~$1.3 million in the same period of ~~2020.~~2021. The increase is primarily due to an increase in buying group and technology purchases by our franchisees.

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Cost of Merchandise Sold

Cost of merchandise sold includes in-bound freight and the cost of merchandise associated with Direct Franchisee Sales. Cost of merchandise sold ~~of $1.9~~increased to $1.8 million for the first ~~nine~~six months of ~~2021~~2022 compared to ~~$1.7~~$1.2 million in the same period of ~~2020.~~2021. The increase is due to an increase in Direct Franchise Sales discussed above. Cost of merchandise sold as a percentage of Direct Franchisee Sales for the first ~~nine~~six months of 2022 and 2021 was 94.5% and ~~2020 was 95.3% and 95.1%~~94.6%, respectively.

Leasing Expense

Leasing expense decreased to ~~$1.4~~$0.5 million for the first ~~nine~~six months of ~~2021~~2022 compared to ~~$2.4~~$1.1 million for the first ~~nine~~six months of ~~2020.~~2021. The decrease was due to a decrease in the associated cost of equipment sales to customers discussed above.

~~Provision for Credit Losses~~

Provision for credit losses was $(0.2) million for the first nine months of 2021 compared to $0.2 for the first nine months of 2020. Provision levels for the first nine months of 2020 reflected the then estimated impact of the COVID-19 pandemic on the credit quality of customers in our lease portfolio at that time.

Selling, General and Administrative

Selling, general and administrative expenses increased ~~3.6%~~0.1% to ~~$16.3~~$11.0 million in the first ~~nine~~six months of ~~2021 compared~~2022 and were comparable to ~~$15.7~~$10.9 million in the same period of ~~2020. The increase was primarily due to an increase in advertising production expenses.~~2021.

Interest Expense

Interest expense was ~~$0.9~~$1.2 million for the first ~~nine~~six months of ~~2021~~2022 compared to ~~$1.4~~$0.6 million for the first ~~nine~~six months of ~~2020.~~2021. The ~~decrease~~increase is primarily due to ~~lower~~higher average corporate borrowings when compared to the same period last year.

Income Taxes

The provision for income taxes was calculated at an effective rate of ~~24.4%~~23.1% and ~~22.1%~~24.0% for the first ~~nine~~six months of ~~2021~~2022 and ~~2020,~~2021, respectively. The ~~increase~~decrease is primarily due to ~~lower~~higher tax benefits on the exercise of non-qualified stock options and ~~an increase~~a decrease in state taxes.

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Segment Comparison of Three Months Ended ~~September~~June 25, ~~2021~~2022 to Three Months Ended ~~September~~June 26, ~~2020~~2021

Franchising Segment Operating Income

The franchising segment’s operating income for the ~~third~~second quarter of ~~2021~~2022 increased to ~~$12.3~~$11.7 million from ~~$10.8~~$10.5 million for the ~~third~~second quarter of ~~2020.~~2021. The increase in segment contribution was due to increased royalty ~~revenues, partially offset by an increase in selling, general and administrative expenses.~~revenues.

Leasing Segment Operating Income

The leasing segment’s operating income for the ~~third~~second quarter of ~~2021 of $1.5~~2022 decreased to $0.6 million ~~was comparable to $1.7~~from $1.4 million for the ~~third~~second quarter of ~~2020.~~2021. The decrease in segment contribution was due to a decrease in leasing income net of leasing expenses, partially offset by a decrease in selling, general and administrative expenses.

Segment Comparison of ~~Nine~~Six Months Ended ~~September~~June 25, ~~2021~~2022 to ~~Nine~~Six Months Ended ~~September~~June 26, ~~2020~~2021

Franchising Segment Operating Income

The franchising segment’s operating income for the first ~~nine~~six months of ~~2021~~2022 increased to ~~$33.6~~$22.9 million from ~~$22.6~~$21.3 million for the first ~~nine~~six months of ~~2020.~~2021. The increase in segment contribution was due to increased royalty revenues, partially offset by an increase in selling, general and administrative expenses.

Leasing Segment Operating Income

The leasing segment’s operating income for the first ~~nine~~six months of ~~2021~~2022 decreased to ~~$4.8~~$2.9 million from ~~$6.7~~$3.4 million for the first ~~nine~~six months of ~~2020.~~2021. The decrease in segment contribution was due to a decrease in leasing income net of leasing expenses, partially offset by a decrease in ~~provision for credit losses and a decrease in~~ selling, general and administrative expenses.

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Liquidity and Capital Resources

Our primary sources of liquidity have historically been cash flows from operations and borrowings. The components of the consolidated condensed statements of operations that reduce our net income but do not affect our liquidity include non-cash items for depreciation and amortization and compensation expense related to stock options.

We ended the ~~third~~second quarter of ~~2021~~2022 with ~~$37.6~~$8.8 million in cash, cash equivalents and restricted cash compared to ~~$8.3~~$7.2 million in cash, cash equivalents and restricted cash at the end of the ~~third~~second quarter of ~~2020.~~2021.

Operating activities provided ~~$35.0~~$22.4 million of cash during the first ~~nine~~six months of ~~2021,~~2022, compared to ~~$31.8~~$23.1 million provided during the same period last year. The ~~increase~~decrease in cash provided by operating activities in the first ~~nine~~six months of ~~2021~~2022 compared to ~~2020~~2021 was primarily due to ~~net income, partially offset by~~ a decrease in principal collections on lease ~~receivables.~~receivables, partially offset by an increase in accrued and other liabilities.

Investing activities used ~~$0.1~~$3.6 million of cash during the first ~~nine~~six months of ~~2021.~~2022. The ~~2021~~2022 activities consisted primarily of ~~the purchase of equipment for lease customers of $0.1 million.~~reacquired franchise rights (See Note 6 – “Intangible Assets”).

Financing activities used ~~$4.0~~$21.5 million of cash during the first ~~nine~~six months of ~~2021.~~2022. Our most significant financing activities during the first ~~nine~~six months of ~~2021~~2022 consisted of ~~$27.9~~$47.8 million to repurchase ~~147,819~~220,280 shares of our common stock, ~~$4.2~~$4.1 million for the payment of dividends, and payments on notes payable of ~~$3.2~~$2.1 million; partially offset by $30.0 million of ~~proceeds from~~net borrowing on ~~notes payable~~our line of credit and ~~$1.3~~$2.6 million of proceeds from exercise of stock ~~options~~options. (See Note 78 — “Shareholders’ Equity (Deficit),” and Note 89 — “Debt”).

~~As of September 25, 2021, we had no off balance sheet arrangements.~~

~~In September 2021, our~~Our debt facilities include a Line of Credit with CIBC Bank USA ~~was amended to, among other things:~~

●

Permit us to issue up to $30.0 million in additional term notes to one or more affiliates or managed accounts of PGIM, Inc. (formerly Prudential Investment Management, Inc.) (collectively, “Prudential”);

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●

Remove the tangible net worth covenant minimum requirement, amend the fixed charge coverage ratio definition, and amend the restricted payments covenant to allow us more flexibility with respect to shareholder distributions and/or common stock repurchases as long as certain conditions are met (as defined within the amendment);

●

~~Amend the provisions that allow for the replacement of LIBOR as an interest rate option in connection with borrowings under the Line of Credit.~~

As of September 25, 2021, our borrowing availability under our Line of Credit was $25.0 million (the lesser of the borrowing base or the aggregate line of credit). There were no borrowings outstanding at September 25, 2021 under the Line of Credit leaving $25.0 million available for additional borrowings.

~~The Line of Credit has~~and a Note Agreement and Shelf Agreement with Prudential. These facilities have been and will continue to be used for general corporate ~~purposes. The Line of Credit is~~purposes, are secured by a lien against substantially all of our assets, ~~contains~~contain customary financial conditions and covenants, and ~~requires~~require maintenance of minimum levels of debt service coverage and maximum levels of leverage (all as defined within the ~~Line of Credit).~~

~~In September 2021, our Note Agreement with Prudential was amended to, among other things:~~

●

~~Provide for the issuance of $30.0 million in new senior secured notes;~~

●

Remove the tangible net worth covenant minimum requirement, amend the fixed charge coverage ratio definition, and amend the restricted payments covenant to allow us more flexibility with respect to shareholder distributions and/or common stock repurchase as long as certain conditions are met (as defined within the amendment).

~~In September 2021, we issued $30.0 million of Series C notes, with~~agreements governing the ~~proceeds to be used for general corporate purposes, including share repurchases and dividends.~~facilities). As of ~~September~~June 25, 2021, with the $11.25 million in principal outstanding from the $25.0 million Series A notes issued in May 2015 and $7.5 million in principal outstanding from the $12.5 million Series B notes issued in August 2017, the aggregate principal outstanding under our Note Agreement was $48.75 million.

The final maturity of the Series A and Series B notes is 10 years from the issuance date. The final maturity of the Series C notes is 7 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 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. For the Series C notes, interest at a rate of 3.18% per annum on the outstanding principal balance is payable quarterly until the principal is paid in full The Series A, Series B and Series C notes may be prepaid, at our option, 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.

Our obligations under the Note Agreement are secured by a lien against substantially all of our assets, and the Note Agreement contains customary financial conditions and covenants, and requires maintenance of minimum levels of fixed charge coverage and maximum levels of leverage (all as defined within the Note Agreement).

~~As of September 25, 2021,~~2022, we were in compliance with all of the financial covenants under the Line of Credit, the Note Agreement and ~~Note~~the Shelf Agreement.

~~On October 13, 2021,~~The Line of Credit provides for up to $20.0 million in revolving loans and $30.0 million in delayed draw term loans. As of June 25, 2022, we approved the payment of a $7.50 per share special cash dividend (the “2021 Special Dividend”) to shareholders of record at the close of business November 10, 2021, which will be paid on December 1, 2021. The 2021 Special Dividend will be approximately $27.2 million based on the current number of shareshad no revolving loans outstanding, and ~~is expected to be financed by cash on hand.~~had delayed draw term loan borrowings totaling $30.0 million that mature in 2029.

The Shelf Agreement allows us to offer privately negotiated senior notes to Prudential in an aggregate principal amount up to (i) $100.0 million, less (ii) the aggregate principal amount of notes outstanding at such point (including notes outstanding under the Note Agreement, which at June 25, 2022 was $45.6 million). As of June 25, 2022, we had not issued any notes under the Shelf Agreement. Of the $45.6 million of principal outstanding under the Note Agreement, $15.6 million amortizes over the remainder of 2022 through 2027, and $30.0 million matures in 2028.

See Part I, Item 1, Note 9 – “Debt” for more information regarding the Line of Credit, Note Agreement and Shelf Agreement.

We expect to generate the cash necessary to pay our expenses and to pay the principal and interest on our outstanding debt from cash flows provided by operating activities and by opportunistically using other means to repay or refinance our obligations as we determine appropriate. Our ability to pay our expenses and meet our debt service obligations depends on our future performance, which may be affected by financial, business, economic, and other factors including

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the risk factors described under Item 1A of our Form 10-K for the fiscal year ended December ~~26, 2020~~25, 2021 and under Item 1A below. If we do not have enough money to pay our debt service obligations, we may be required to refinance all or part of our existing debt, sell assets, borrow more money or raise equity. In such an event, we may not be able to refinance our debt, sell assets, borrow more money or raise equity on terms acceptable to us or at all. Also, our ability to carry out any of these activities on favorable terms, if at all, may be further impacted by any financial or credit crisis which may limit access to the credit markets and increase our cost of capital.

~~While significant uncertainty exists as to the full impact of the COVID-19 pandemic on our liquidity and capital resources, as~~As of the date of this report we believe that the combination of our cash on hand, the cash generated from our franchising and leasing businesses, ~~and~~ our Line of Credit and our Shelf Agreement will be adequate to fund our planned operations through ~~2022.~~2023.

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Critical Accounting Policies

~~The Company prepares the consolidated condensed financial statements~~A discussion of Winmark Corporation and Subsidiaries in conformity with accounting principles generally accepted in the United States of America. As such, the Company is required to make certain estimates, judgments and assumptions that it believes are reasonable based on information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the periods presented. There can be no assurance that actual results will not differ from these estimates. Theour critical accounting policies ~~that~~is contained in our annual report on Form 10-K for the ~~Company believes are most important~~year ended December 25, 2021. There have been no changes to ~~aid in fully understanding and evaluating~~our critical accounting policies from those disclosed on our Form 10-K for the ~~reported financial results include the following:~~

~~Revenue Recognition — Royalty Revenue and Franchise Fees~~

The Company collects royalties from each retail franchise based on a percentage of retail store gross sales. The Company recognizes royalties as revenue when earned. At the end of each accounting period, estimates of royalty amounts due are made based on the most recent franchisee sales information available. If there are significant changes in the actual performance of franchisees versus the Company’s estimates, its royalty revenue would be impacted. During the first nine months of 2021, the Company collected $1,900 more than it estimated atyear ended December ~~26, 2020. As of September~~ 25, ~~2021, the Company’s royalty receivable was $1,310,200.~~2021.

The Company collects initial franchise fees when franchise agreements are signed and recognizes the initial franchise fees as revenue over the estimated life of the franchise, beginning when the franchise is opened. Franchise fees collected from franchisees but not yet recognized as income are recorded as deferred revenue in the liability section of the consolidated condensed balance sheet. As of September 25, 2021, deferred franchise fee revenue was $6,574,800.

~~Leasing Income Recognition~~

Leasing income for direct financing leases is recognized under the effective interest method. The effective interest method of income recognition applies a constant rate of interest equal to the internal rate of return on the lease.

For sales-type leases in which the equipment has a fair value greater or less than its carrying amount, selling profit/loss is recognized at commencement. For subsequent periods or for leases in which the equipment’s fair value is equal to its carrying amount, the recording of income is consistent with the accounting for a direct financing lease.

~~For leases that are accounted for as operating leases, income is recognized on a straight-line basis when payments under the lease contract are due.~~

Generally, when a lease is more than 90 days delinquent (where more than three monthly payments are owed), the lease is classified as being on non-accrual and the Company stops recognizing leasing income on that date. Payments received on leases in non-accrual status generally reduce the lease receivable. Leases on non-accrual status remain classified as such until there is sustained payment performance that, in the Company’s judgment, would indicate that all contractual amounts will be collected in full.

Forward Looking Statements

The statements contained in this Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” that are not strictly historical fact, including without limitation, specific and overall impacts of the COVID-19 pandemic on the Company’s financial condition or results of operations, the Company’s belief that it will have

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adequate capital and reserves to meet its current and contingent obligations and operating needs, as well as its disclosures regarding market rate risk are forward looking statements made under the safe harbor provision of the Private Securities Litigation Reform Act. Such statements are based on management’s current expectations as of the date of this Report, but involve risks, uncertainties and other factors that may cause actual results to differ materially from those contemplated by such forward looking statements. Additionally, many of these risks and uncertainties are currently elevated by and may or will continue to be elevated by the COVID-19 pandemic. Investors are cautioned to consider these forward looking statements in light of important factors which may result in material variations between results contemplated by such forward looking statements and actual results and conditions. See the section appearing in our Annual Report on Form 10-K for the fiscal year ended December ~~26, 2020~~25, 2021 entitled “Risk Factors” and Part II, Item 1A in this Report for a more complete discussion of certain factors that may cause the Company’s actual results to differ from those in its forward looking statements. You should not place undue reliance on these forward-looking statements, which speak only as of the date they were made. The Company undertakes no obligation to revise or update publicly any forward-looking statements for any reason.

ITEM 3: Quantitative and Qualitative Disclosures About Market Risk

The Company incurs financial market risk in the form of interest rate risk. Risk can be quantified by measuring the financial impact of a near-term adverse increase in short-term interest rates. At ~~September~~June 25, ~~2021,~~2022, the ~~Company had available a $25.0 million line~~Company’s Line of ~~credit~~Credit with CIBC Bank ~~USA.~~USA included a commitment for revolving loans of $20.0 million. The interest rates applicable to ~~this agreement~~revolving loans are based on either the bank’s base rate or ~~LIBOR~~SOFR for short-term borrowings (twelve months or less). The Company had no ~~debt~~revolving loans outstanding at ~~September~~June 25, ~~2021~~2022 under this ~~line~~Line of credit. The Company’s earnings would be affected by changes in these short-term interest rates only in the event that it were to borrow amounts under this facility. With the Company’s borrowings at September 25, 2021, a one percent increase in short-term rates would have no impact on annual pretax earnings.Credit. The Company had no interest rate derivatives in place at ~~September~~June 25, ~~2021.~~2022. The Company’s fixed rate debt exposes the company to changes in the market interest rate only to the extent that the Company may need to refinance maturing debt with new debt at a higher rate.

None of the Company’s cash and cash equivalents at ~~September~~June 25, ~~2021~~2022 was invested in money market mutual funds, which are subject to the effects of market fluctuations in interest rates.

Foreign currency transaction gains and losses were not material to the Company’s results of operations for the ~~nine~~six months ended ~~September~~June 25, ~~2021.~~2022. During fiscal ~~2020,~~2021, less than 7% of the Company’s total revenues and 1% of expenses were denominated in a foreign currency. Based upon these revenues and expenses, a 10% increase or decrease in the foreign currency exchange rates would impact annual pretax earnings by approximately ~~$388,000.~~$480,000. To date, the Company has not entered into any foreign currency forward exchange contracts or other derivative financial instruments to hedge the effects of adverse fluctuations in foreign currency exchange rates.

ITEM 4: Controls and Procedures

As of the end of the period covered by this report, the Company conducted an evaluation, under the supervision and with the participation of the principal executive officer and principal financial officer, of its disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”). Based upon, and as of the date of that evaluation, the principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. There was no

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change in the Company’s internal control over financial reporting during its most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, its internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1: Legal Proceedings

We are not a party to any material litigation and are not aware of any threatened litigation that would have a material adverse effect on our business.

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ITEM 1A: Risk Factors

In addition to the other information set forth in this report, including the important information in “Forward-Looking Statements,” you should carefully consider the “Risk Factors” discussed in our Annual Report on Form 10-K for the year ended December ~~26, 2020.~~25, 2021. If any of those factors were to occur, they could materially adversely affect our financial condition or future results, and could cause our actual results to differ materially from those expressed in its forward-looking statements in this report. We are aware of no material changes to the Risk Factors discussed in our Annual Report on Form 10-K for the year ended December ~~26, 2020.~~25, 2021.

ITEM 2: Unregistered Sales of Equity Securities and Use of Proceeds

Purchase of Equity Securities by the Issuer and Affiliated Purchasers

The following table summarizes the Company’s common stock repurchases during the ~~third~~second quarter of ~~2021.~~2022.


				Total Number of	Maximum Number				Total Number of	Maximum Number
				Shares Purchased as	of Shares that may				Shares Purchased as	of Shares that may
	Total Number of	Average Price		Part of a Publicly	yet be Purchased	Total Number of	Average Price		Part of a Publicly	yet be Purchased
Period	Shares Purchased	Paid Per Share		Announced Plan(1)	Under the Plan(2)	Shares Purchased	Paid Per Share		Announced Plan(1)	Under the Plan

June 27, 2021 to July 31, 2021	35,851	$	194.97	35,851	392,665
August 1, 2021 to August 28, 2021	2,860	$	201.80	2,860	389,805
August 29, 2021 to September 25, 2021	7,020	$	203.98	7,020	382,785
March 27, 2022 to April 30, 2022						13,345	$	207.17	13,345	126,834
May 1, 2022 to May 28, 2022						32,635	$	203.16	32,635	94,199
May 29, 2022 to June 25, 2022						9,714	$	191.61	9,714	84,485

(1)

The Board of Directors’ authorization for the repurchase of shares of the Company’s common stock was originally approved in 1995 with no expiration date. The total shares approved for repurchase has been increased by additional Board of Directors’ approvals and as of ~~September~~June 25, ~~2021~~2022 was limited to 5,400,000 shares, of which ~~382,785~~84,485 may still be repurchased.

~~(2)~~

~~On July 14, 2021, the Board of Directors authorized a 400,000 share increase to its existing share repurchase authorization.~~

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ITEM 3: Defaults Upon Senior Securities

None.

ITEM 4: Mine Safety Disclosures

Not applicable.

ITEM 5: Other Information

All information required to be reported in a report on Form 8-K during the period covered by this Form 10-Q has been reported.

ITEM 6: Exhibits

3.1		Articles of Incorporation, as amended (Exhibit 3.1)(1)

3.2		By-laws, as amended and restated to date (Exhibit 3.2)(2)

10.1		Amendment No. 10 to Credit Agreement dated April 12, 2022 (Exhibit 10.1) (3)

10.2		Private Shelf Agreement dated April 12, 2022, among Winmark Corporation and its subsidiaries and PGIM, Inc., its subsidiaries and managed accounts (Exhibit 10.3) (3)

10.3		Amendment No. 6 to Note Agreement dated April 12, 2022 (Exhibit 10.4) (3)

10.4		Amended and Restated Intercreditor and Collateral Agency Agreement dated April 12, 2022 (Exhibit 10.6) (3)

10.5		Omnibus Amendment to Collateral Documents dated April 12, 2022 (Exhibit 10.7) (3)

31.1		Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*

31.2		Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*

32.1		Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*

32.2		Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*

101		Interactive Data Files Pursuant to Rule 405 of Regulation S-T: Financial statements from the Quarterly Report on Form 10-Q of Winmark Corporation and Subsidiaries for the quarter ended ~~September~~June 25, ~~2021,~~2022, formatted in Inline XBRL: (i) Consolidated Condensed Balance Sheets, (ii) Consolidated Condensed Statements of Operations, (iii) Consolidated Condensed Statements of Shareholders’ Equity (Deficit), (iv) Consolidated Condensed Statements of Cash Flows, and (v) Notes to Consolidated Condensed Financial Statements.
104		The cover page from the Quarterly Report on Form 10-Q of Winmark Corporation and Subsidiaries for the quarter ended ~~September~~June 25, ~~2021,~~2022, formatted in Inline XBRL (contained in Exhibit 101).

*Filed Herewith

(1)	Incorporated by reference to the specified exhibit to the Registration Statement on Form S-1, effective August 24, 1993 (Reg. No. 333-65108).

(2)	Incorporated by reference to the specified exhibit to the Annual Report on Form 10-K for the fiscal year ended December 30, 2006.

(3)	Incorporated by reference to the specified exhibit to the Current Report on Form 8-K filed April 13, 2022.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		WINMARK CORPORATION


Date: ~~October~~July 13, ~~2021~~2022	By:	/s/ Brett D. Heffes
		Brett D. Heffes Chairman of the Board and Chief Executive Officer (principal executive officer)


Date: ~~October~~July 13, ~~2021~~2022	By:	/s/ Anthony D. Ishaug
		Anthony D. Ishaug Executive Vice President Chief Financial Officer and Treasurer (principal financial and accounting officer)

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