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EX-32.2 - EX-32.2 - WINMARK CORPc315-20180929ex3220a4f9b.htm
EX-32.1 - EX-32.1 - WINMARK CORPc315-20180929ex321b1896e.htm
EX-31.2 - EX-31.2 - WINMARK CORPc315-20180929ex312b539af.htm
EX-31.1 - EX-31.1 - WINMARK CORPc315-20180929ex311c46cf6.htm

 

 

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 29, 2018

 

or

 

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

 

For the transition period from                   to                  

 

Commission File Number: 000-22012

 


WINMARK CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

 

Minnesota

 

41-1622691

(State or other jurisdiction of incorporation or organization)

 

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

 

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

(Address of principal executive offices)  (Zip Code)

 

(763) 520-8500

(Registrant’s telephone number, including area code)

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, 3,901,202 shares outstanding as of October 12, 2018.

 

 

 

 

 


 

WINMARK CORPORATION AND SUBSIDIARIES

 

INDEX

 

 

 

PAGE

 

 

 

PART I. 

FINANCIAL INFORMATION

 

 

 

 

Item 1. 

Financial Statements (Unaudited)

 

 

 

 

 

CONSOLIDATED CONDENSED BALANCE SHEETS

 

 

September 29, 2018 and December 30, 2017

3

 

 

 

 

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

 

 

Three Months Ended September 29, 2018 and September 30, 2017

 

 

Nine Months Ended September 29, 2018 and September 30, 2017

4

 

 

 

 

CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME

 

 

Three Months Ended September 29, 2018 and September 30, 2017

 

 

Nine Months Ended September 29, 2018, 2018 and September 30, 2017

5

 

 

 

 

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

 

 

Nine Months Ended September 29, 2018 and September 30, 2017

6

 

 

 

 

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

7 - 15

 

 

 

Item 2. 

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

16 - 23

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

23

 

 

 

Item 4. 

Controls and Procedures

23

 

 

 

PART II. 

OTHER INFORMATION

 

 

 

 

Item 1. 

Legal Proceedings

24

 

 

 

Item 1A. 

Risk Factors

24

 

 

 

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

24

 

 

 

Item 3. 

Defaults Upon Senior Securities

24

 

 

 

Item 4. 

Mine Safety Disclosures

24

 

 

 

Item 5. 

Other Information

24

 

 

 

Item 6. 

Exhibits

25

 

 

 

 

SIGNATURES

26

 

 

 

2


 

PART I.          FINANCIAL INFORMATION

 

ITEM 1:   Financial Statements

 

WINMARK CORPORATION AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS

(Unaudited)

 

 

 

 

 

 

 

 

 

 

September 29, 2018

 

December 30, 2017

ASSETS

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

1,187,200

 

$

1,073,200

Restricted cash

 

 

55,000

 

 

90,000

Receivables, less allowance for doubtful accounts of $900 and $400

 

 

1,756,900

 

 

1,796,000

Net investment in leases - current

 

 

17,568,700

 

 

15,332,300

Income tax receivable

 

 

 —

 

 

2,161,800

Inventories

 

 

128,200

 

 

97,100

Prepaid expenses

 

 

1,075,400

 

 

901,600

Total current assets

 

 

21,771,400

 

 

21,452,000

Net investment in leases - long-term

 

 

26,949,600

 

 

25,945,300

Property and equipment, net

 

 

725,500

 

 

486,800

Goodwill

 

 

607,500

 

 

607,500

Other assets

 

 

440,500

 

 

350,400

 

 

$

50,494,500

 

$

48,842,000

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

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

 

$

3,236,100

 

$

3,236,100

Accounts payable

 

 

1,445,000

 

 

2,073,000

Income tax payable

 

 

902,800

 

 

 —

Accrued liabilities

 

 

3,273,000

 

 

1,837,300

Discounted lease rentals

 

 

2,555,600

 

 

570,800

Deferred revenue

 

 

1,713,100

 

 

1,714,900

Total current liabilities

 

 

13,125,600

 

 

9,432,100

Long-Term Liabilities:

 

 

 

 

 

 

Line of credit

 

 

10,100,000

 

 

35,400,000

Notes payable, net of unamortized debt issuance costs of $86,000 and $96,500

 

 

26,413,900

 

 

28,841,000

Discounted lease rentals

 

 

2,364,600

 

 

1,121,600

Deferred revenue

 

 

8,561,400

 

 

8,595,300

Other liabilities

 

 

1,211,900

 

 

845,000

Deferred income taxes

 

 

425,800

 

 

320,500

Total long-term liabilities

 

 

49,077,600

 

 

75,123,400

Shareholders’ Equity (Deficit):

 

 

 

 

 

 

Common stock, no par value, 10,000,000 shares authorized, 3,901,202 and 3,843,078 shares issued and outstanding

 

 

4,597,400

 

 

1,476,200

Retained earnings (accumulated deficit)

 

 

(16,306,100)

 

 

(37,189,700)

Total shareholders’ equity (deficit)

 

 

(11,708,700)

 

 

(35,713,500)

 

 

$

50,494,500

 

$

48,842,000

 

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

3


 

WINMARK CORPORATION AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

    

September 29, 2018

    

September 30, 2017

    

September 29, 2018

    

September 30, 2017

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

Royalties

 

$

12,865,900

 

$

12,316,700

 

$

35,735,900

 

$

33,865,100

Leasing income

 

 

4,608,600

 

 

3,915,800

 

 

14,994,500

 

 

13,722,000

Merchandise sales

 

 

858,400

 

 

773,100

 

 

2,340,200

 

 

2,058,500

Franchise fees

 

 

383,300

 

 

342,900

 

 

1,162,300

 

 

1,180,300

Other

 

 

402,300

 

 

382,400

 

 

1,206,400

 

 

1,145,600

Total revenue

 

 

19,118,500

 

 

17,730,900

 

 

55,439,300

 

 

51,971,500

Cost of merchandise sold

 

 

811,500

 

 

728,300

 

 

2,235,000

 

 

1,942,400

Leasing expense

 

 

718,500

 

 

792,000

 

 

1,769,200

 

 

2,724,000

Provision for credit losses

 

 

(55,600)

 

 

(13,300)

 

 

148,400

 

 

(26,200)

Selling, general and administrative expenses

 

 

6,208,800

 

 

6,184,400

 

 

19,702,500

 

 

19,165,300

Income from operations

 

 

11,435,300

 

 

10,039,500

 

 

31,584,200

 

 

28,166,000

Interest expense

 

 

(576,900)

 

 

(613,900)

 

 

(1,978,600)

 

 

(1,559,300)

Interest and other income (expense)

 

 

(1,000)

 

 

28,000

 

 

(13,300)

 

 

29,900

Income before income taxes

 

 

10,857,400

 

 

9,453,600

 

 

29,592,300

 

 

26,636,600

Provision for income taxes

 

 

(2,493,100)

 

 

(3,593,000)

 

 

(7,124,600)

 

 

(9,694,500)

Net income

 

$

8,364,300

 

$

5,860,600

 

$

22,467,700

 

$

16,942,100

Earnings per share - basic

 

$

2.15

 

$

1.46

 

$

5.81

 

$

4.10

Earnings per share - diluted

 

$

2.01

 

$

1.36

 

$

5.43

 

$

3.84

Weighted average shares outstanding - basic

 

 

3,886,473

 

 

4,024,692

 

 

3,864,077

 

 

4,131,269

Weighted average shares outstanding - diluted

 

 

4,164,339

 

 

4,314,412

 

 

4,140,816

 

 

4,416,185

 

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

 

4


 

WINMARK CORPORATION AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

    

September 29, 2018

    

September 30, 2017

    

September 29, 2018

    

September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

8,364,300

 

$

5,860,600

 

$

22,467,700

 

$

16,942,100

Other comprehensive income (loss), before tax:

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized holding net gains (losses) arising during period

 

 

 —

 

 

(700)

 

 

 —

 

 

15,900

Other comprehensive income (loss), before tax

 

 

 —

 

 

(700)

 

 

 —

 

 

15,900

Income tax (expense) benefit related to items of other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized net gains/losses on marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized holding net gains/losses arising during period

 

 

 —

 

 

300

 

 

 —

 

 

(6,000)

Income tax (expense) benefit related to items of other comprehensive income

 

 

 —

 

 

300

 

 

 —

 

 

(6,000)

Other comprehensive income (loss), net of tax

 

 

 —

 

 

(400)

 

 

 —

 

 

9,900

Comprehensive income

 

$

8,364,300

 

$

5,860,200

 

$

22,467,700

 

$

16,952,000

 

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

 

 

5


 

WINMARK CORPORATION AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

    

September 29, 2018

    

September 30, 2017

    

OPERATING ACTIVITIES:

 

 

 

 

 

 

 

Net income

 

$

22,467,700

 

$

16,942,100

 

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

 

 

 

 

 

 

 

Depreciation and amortization

 

 

233,700

 

 

275,700

 

Provision for credit losses

 

 

148,400

 

 

(26,200)

 

Compensation expense related to stock options

 

 

1,507,800

 

 

1,462,500

 

Deferred income taxes

 

 

105,300

 

 

153,400

 

Gain on sale of marketable securities

 

 

 —

 

 

(1,400)

 

Deferred initial direct costs

 

 

(1,198,600)

 

 

(369,200)

 

Amortization of deferred initial direct costs

 

 

809,500

 

 

345,300

 

Tax benefits on exercised stock options

 

 

297,900

 

 

592,800

 

Change in operating assets and liabilities:

 

 

 

 

 

 

 

Receivables

 

 

39,100

 

 

(228,900)

 

Income tax receivable/payable

 

 

2,766,700

 

 

(630,600)

 

Inventories

 

 

(31,100)

 

 

20,500

 

Prepaid expenses

 

 

(173,800)

 

 

189,900

 

Other assets

 

 

(90,100)

 

 

(18,700)

 

Accounts payable

 

 

(628,000)

 

 

(217,400)

 

Accrued and other liabilities

 

 

1,775,800

 

 

754,400

 

Rents received in advance and security deposits

 

 

(376,000)

 

 

92,800

 

Deferred revenue

 

 

(35,700)

 

 

(98,700)

 

Net cash provided by operating activities

 

 

27,618,600

 

 

19,238,300

 

INVESTING ACTIVITIES:

 

 

 

 

 

 

 

Proceeds from sale of marketable securities

 

 

 —

 

 

217,200

 

Purchase of property and equipment

 

 

(472,400)

 

 

(53,800)

 

Purchase of equipment for lease contracts

 

 

(20,219,800)

 

 

(19,253,300)

 

Principal collections on lease receivables

 

 

16,303,500

 

 

20,078,100

 

Net cash provided by (used for) investing activities

 

 

(4,388,700)

 

 

988,200

 

FINANCING ACTIVITIES:

 

 

 

 

 

 

 

Proceeds from borrowings on line of credit

 

 

7,300,000

 

 

46,900,000

 

Payments on line of credit

 

 

(32,600,000)

 

 

(28,400,000)

 

Proceeds from borrowings on notes payable

 

 

 —

 

 

12,500,000

 

Payments on notes payable

 

 

(2,437,500)

 

 

(1,500,000)

 

Repurchases of common stock

 

 

(558,200)

 

 

(49,904,100)

 

Proceeds from exercises of stock options

 

 

2,171,600

 

 

1,329,200

 

Dividends paid

 

 

(1,584,100)

 

 

(1,343,800)

 

Proceeds from discounted lease rentals

 

 

4,557,300

 

 

 —

 

Net cash used for financing activities

 

 

(23,150,900)

 

 

(20,418,700)

 

NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH

 

 

79,000

 

 

(192,200)

 

Cash, cash equivalents and restricted cash, beginning of period

 

 

1,163,200

 

 

1,292,900

 

Cash, cash equivalents and restricted cash, end of period

 

$

1,242,200

 

$

1,100,700

 

SUPPLEMENTAL DISCLOSURES:

 

 

 

 

 

 

 

Cash paid for interest

 

$

2,015,000

 

$

1,349,500

 

Cash paid for income taxes

 

$

3,954,700

 

$

9,514,800

 

 

 

 

 

 

 

 

 

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

 

 

 

September 29, 2018

    

September 30, 2017

 

Cash and cash equivalents

 

$

1,187,200

 

$

1,060,700

 

Restricted cash

 

 

55,000

 

 

40,000

 

Total cash, cash equivalents and restricted cash

 

$

1,242,200

 

$

1,100,700

 

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

 

 

6


 

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 months ended September 29, 2018 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 uses its Winmark Franchise Partners® mark in connection with its strategic consulting and corporate development activities. The Company also operates both middle market and small-ticket equipment leasing businesses under the Winmark Capital® and Wirth Business Credit® marks. 

 

3.  Recent Accounting Pronouncements:

 

Recently Issued Accounting Pronouncements

 

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842), which provides guidance on accounting for leases that supersedes existing lease accounting guidance.  The ASU’s core principle is that a lessee should recognize lease assets and lease liabilities for those leases classified as operating leases under existing lease accounting guidance.  The new standard also makes targeted changes to lessor accounting.  In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842 (Leases), which provides narrow amendments to clarify how to apply certain aspects of the new lease standard.  In July 2018, the FASB also issued ASU 2018-11, Leases (Topic 842): Targeted Improvements, which provides an optional transition method that allows entities to elect to apply the standard prospectively at its effective date, versus recasting the prior periods presented. This guidance is effective for reporting periods beginning after December 15, 2018, with early adoption permitted.  The Company is currently in the process of evaluating the transition method and impact of the adoption of this ASU on the Company’s consolidated financial statements.

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses of Financial Instruments, which changes the methodology for measuring credit losses on financial instruments and the timing of when such losses are recorded.  This guidance will be effective for reporting periods beginning after December 15, 2019, with early adoption permitted.  The Company is currently in the process of evaluating the impact of the adoption of this ASU on the Company’s consolidated financial statements.

 

Recently Adopted Accounting Pronouncements

 

In November 2016, the FASB issued ASU 2016-18 Statement of Cash Flows,  Restricted Cash which provides guidance on the presentation of restricted cash within an entity’s cash flow statement. The Company adopted ASU 2016-18 in the

7


 

first quarter of 2018 on a retrospective basis. Restricted cash is now presented with cash and cash equivalents when reconciling the beginning of period and end of period total amounts shown on the statement of cash flows.

 

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which provides guidance for revenue recognition that supersedes existing revenue recognition guidance (but does not apply to nor supersede accounting guidance for lease contracts).  The ASU’s core principle is that an entity will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.  The ASU also requires more detailed disclosures to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.  The Company adopted ASU 2014-09 in the first quarter of 2018, using the full retrospective method.

 

The adoption of this guidance did not impact the Company’s recognition of leasing revenues or revenue from royalties that are based on a percentage of franchisee sales. Upon adoption, initial franchise fees, which were previously recognized upon the opening of a franchise, are deferred and recognized over the term of the estimated life of the franchise. The effect of the required deferral of initial franchise fees received in a given year was mitigated by the recognition of revenue from fees retrospectively deferred from prior years. The Company bills and collects marketing fees from its franchisees at various times throughout the year. This amount is included in the Revenue: Other line of the Consolidated Condensed Statements of Operations. Previously, marketing fees were recognized at the time of billing. In accordance with the new guidance, the Company recognizes marketing fee revenue on a straight line basis over the franchise duration. The Company previously recognized commission fees related to franchise agreement contracts as selling expenses when they were incurred. In accordance with the new guidance, the Company capitalizes the commission fees as costs of obtaining a contract and amortizes them over the franchise duration. (See Note 4 – Revenue Recognition: Franchising)

 

Adoption of the standard using the full retrospective method also required the Company to restate certain previously reported results, as shown in the tables below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Condensed Consolidated Statement of Operations:

 

Three Months Ended September 30, 2017

 

Nine Months Ended September 30, 2017

 

    

As Previously Reported

    

Adjustments

    

As Restated

    

As Previously Reported

    

Adjustments

    

As Restated

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Franchise fees

 

$

317,800

 

$

25,100

 

$

342,900

 

$

1,262,500

 

$

(82,200)

 

$

1,180,300

Other

 

 

244,500

 

 

137,900

 

 

382,400

 

 

1,033,100

 

 

112,500

 

 

1,145,600

Selling, general and administrative expenses

 

 

6,208,900

 

 

(24,500)

 

 

6,184,400

 

 

19,179,400

 

 

(14,100)

 

 

19,165,300

Provision for income taxes

 

 

(3,547,100)

 

 

(45,900)

 

 

(3,593,000)

 

 

(9,683,600)

 

 

(10,900)

 

 

(9,694,500)

Net income

 

 

5,719,000

 

 

141,600

 

 

5,860,600

 

 

16,908,600

 

 

33,500

 

 

16,942,100

Earnings per share - basic

 

$

1.42

 

$

0.04

 

$

1.46

 

$

4.09

 

$

0.01

 

$

4.10

Earnings per share - diluted

 

$

1.33

 

$

0.03

 

$

1.36

 

$

3.83

 

$

0.01

 

$

3.84

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated Balance Sheet:

 

 

December 30, 2017

 

 

 

As Previously Reported

 

 

Adjustments

 

 

As Restated

ASSETS

 

 

 

 

 

 

 

 

 

Prepaid expenses

 

$

814,800

 

$

86,800

 

$

901,600

Other assets

 

 

 —

 

 

350,400

 

 

350,400

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT):

 

 

 

 

 

 

 

 

 

Deferred revenue-Current

 

$

1,736,200

 

$

(21,300)

 

$

1,714,900

Deferred revenue-Long term

 

 

1,465,500

 

 

7,129,800

 

 

8,595,300

Deferred income taxes

 

 

1,956,500

 

 

(1,636,000)

 

 

320,500

Retained earnings (accumulated deficit)

 

 

(32,154,400)

 

 

(5,035,300)

 

 

(37,189,700)

8


 

 

 

 

 

4.  Revenue Recognition: Franchising

 

The following is a description of the principal sources of revenue for the company’s franchising segment. The Company’s performance obligations under franchise agreements consist of (a) a franchise license, including a license to use one of our brands, (b) a point-of-sale software license, (c) initial services, such as pre-opening training and marketing support, and (d) ongoing services, such as marketing services and operational support. These performance obligations are highly interrelated so we do not consider them to be individually distinct and therefore account for them under ASC 606 as a single performance obligation, which is satisfied by providing a right to use our intellectual property over the estimated life of the franchise. The disaggregation of the Company’s franchise revenue is presented within the Revenue lines of the Consolidated Condensed Statements of Operations with the amounts included in Revenue: Other delineated below. For more detailed information about reportable segments, see Note 13 – “Segment Reporting”.

 

Royalties

 

The Company collects royalties from each retail franchise based upon a percentage of retail store gross sales.  The Company recognizes royalties as revenue when earned.

 

Merchandise Sales

 

Merchandise sales include the sale of point-of-sale technology equipment to franchisees and the sale of a limited amount of sporting goods to certain Play It Again Sports franchisees.  Merchandise sales, which includes shipping and handling charges, are recognized at a point in time when the product has been shipped to the franchisee.  Sales taxes that are collected from customers and remitted to governmental authorities are accounted for on a net basis and therefore excluded from merchandise sales.  Shipping and handling costs associated with outbound freight are accounted for as a fulfillment cost and included in cost of merchandise sold.

 

Franchise Fees

 

The Company collects initial franchise fees when franchise agreements are signed.  The Company recognizes franchise fee revenue over the estimated life of the franchise, beginning with the opening of the franchise, which is when the Company has performed substantially all initial services required by the franchise agreement and the franchisee benefits from the rights afforded by the franchise agreement.

 

Marketing Fees

 

Marketing fee revenue is included in the Revenue: Other line of the Consolidated Condensed Statements of Operations.  The Company bills and collects annual marketing fees from its franchisees at various times throughout the year.  The Company recognizes marketing fee revenue on a straight line basis over the franchise duration.  The Company recognized $0.3 million of marketing fee revenue for each of the three months ended September 29, 2018 and September 30, 2017, and $0.9 million for each of the nine months ended September 29, 2018 and September 30, 2017.

 

Software License Fees

 

Software license fee revenue is included in the Revenue: Other line of the Consolidated Condensed Statements of Operations.  The Company bills and collects software license fees from its franchisees when the point-of-sale system is provided to the franchisee.  The Company recognizes software license fee revenue on a straight line basis over the franchise duration.  The Company recognized $0.1 million of software license fee revenue for each of the three months ended September 29, 2018 and September 30, 2017, and $0.2 million for each of the nine months ended September 29, 2018 and September 30, 2017.

9


 

 

Contract Liabilities

 

The Company’s contract liabilities for its franchise revenues consist of deferred revenue associated with franchise fees and software license fees described above.  The table below presents the activity of the current and noncurrent deferred franchise revenue during the first nine months of 2018 and 2017, respectively:

 

 

 

 

 

 

 

 

 

    

September 29, 2018

    

September 30, 2017

Balance at beginning of period

 

$

10,310,200

 

$

10,408,500

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

 

 

1,354,500

 

 

1,295,600

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

 

 

(1,390,200)

 

 

(1,394,300)

Balance at end of period

 

$

10,274,500

 

$

10,309,800

 

The following table illustrates future estimated revenue to be recognized for the remainder of 2018 and full fiscal years thereafter related to performance obligations that are unsatisfied (or partially unsatisfied) as of September 29, 2018.

 

 

 

 

 

 

 

Contract Liabilities expected to be recognized in

 

 

Amount

2018

 

 

 

$

429,200

2019

 

 

 

 

1,711,800

2020

 

 

 

 

1,575,300

2021

 

 

 

 

1,436,500

2022

 

 

 

 

1,291,500

Thereafter

 

 

 

 

3,830,200

 

 

 

 

$

10,274,500

 

Commission Fees

 

The Company capitalizes incremental commission fees paid as a result of obtaining franchise agreement contracts. Capitalized commission fees of $0.5 million and $0.4 million are outstanding at September 29, 2018 and December 30, 2017, respectively and are included in Prepaid expenses and Other assets of the Consolidated Condensed Balance Sheets.

 

Capitalized commission fees are amortized over the life of the franchise and are included in selling, general and administrative expenses. During the three months ended September 29, 2018 and September 30, 2017, the Company recognized $24,800 and $24,800 of commission fee expense, respectively. During the nine months ended September 29, 2018 and September 30, 2017, the Company recognized $73,200 and $74,700 of commission fee expense, respectively.

 

5.  Fair Value Measurements:

 

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

 

·

Level 1 – quoted prices in active markets for identical assets and liabilities.

·

Level 2 – observable inputs other than quoted prices in active markets for identical assets and liabilities.

·

Level 3 – unobservable inputs in which there is little or no market data available, which require the reporting entity to develop its own assumptions.

 

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

 

10


 

6.  Investment in Leasing Operations:

 

Investment in leasing operations consists of the following:

 

 

 

 

 

 

 

 

 

    

September 29, 2018

    

December 30, 2017

Direct financing and sales-type leases:

 

 

 

 

 

 

Minimum lease payments receivable

 

$

41,669,100

 

$

36,119,700

Estimated residual value of equipment

 

 

4,254,200

 

 

4,762,700

Unearned lease income net of initial direct costs deferred

 

 

(7,222,200)

 

 

(5,371,900)

Security deposits

 

 

(4,112,700)

 

 

(4,526,000)

Equipment installed on leases not yet commenced

 

 

10,861,600

 

 

10,989,700

  Total investment in direct financing and sales-type leases

 

 

45,450,000

 

 

41,974,200

Allowance for credit losses

 

 

(969,200)

 

 

(711,200)

  Net investment in direct financing and sales-type leases

 

 

44,480,800

 

 

41,263,000

Operating leases:

 

 

 

 

 

 

Operating lease assets

 

 

736,800

 

 

1,045,400

Less accumulated depreciation and amortization

 

 

(699,300)

 

 

(1,030,800)

  Net investment in operating leases

 

 

37,500

 

 

14,600

Total net investment in leasing operations

 

$

44,518,300

 

$

41,277,600

 

As of September 29, 2018, the $44.5 million total net investment in leases consists of $17.6 million classified as current and $26.9 million classified as long-term.  As of December 30, 2017, the $41.3 million total net investment in leases consists of $15.3 million classified as current and $26.0 million classified as long-term.

 

As of September 29, 2018, leased assets with two customers approximated 24% and 11%, respectively, of the Company’s total assets. A portion of the lease payments receivable from these customers is assigned as collateral in non-recourse financing with financial institutions. See Note 10 – “Discounted Lease Rentals”.

 

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 2018 and the full fiscal years thereafter as of September 29, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct Financing and Sales-Type Leases

 

Operating Leases

 

 

    

Minimum Lease

    

Income

    

Minimum Lease

 

Fiscal Year

 

Payments Receivable

 

 Amortization

 

Payments Receivable

 

2018

 

$

6,522,300

 

$

1,832,900

 

$

42,100

 

2019

 

 

23,754,600

 

 

4,580,700

 

 

76,900

 

2020

 

 

9,623,900

 

 

752,700

 

 

 —

 

2021

 

 

1,742,200

 

 

54,000

 

 

 —

 

2022

 

 

13,700

 

 

1,300

 

 

 —

 

Thereafter

 

 

12,400

 

 

600

 

 

 —

 

 

 

$

41,669,100

 

$

7,222,200

 

$

119,000

 

 

The activity in the allowance for credit losses for leasing operations during the first nine months of 2018 and 2017, respectively, is as follows:

 

 

 

 

 

 

 

 

 

 

 

    

September 29, 2018

    

September 30, 2017

    

Balance at beginning of period

 

$

711,200

 

$

896,000

 

Provisions charged to expense

 

 

148,400

 

 

(26,200)

 

Recoveries

 

 

210,700

 

 

13,800

 

Deductions for amounts written-off

 

 

(101,100)

 

 

 —

 

Balance at end of period

 

$

969,200

 

$

883,600

 

 

11


 

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 29, 2018

 

December 30, 2017

 

    

Investment

    

Allowance for

    

Investment

    

Allowance for

 

 

In Leases

 

Credit Losses

 

In Leases

 

Credit Losses

Collectively evaluated for loss potential

 

$

45,450,000

 

$

969,200

 

$

41,974,200

 

$

711,200

Individually evaluated for loss potential

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Total

 

$

45,450,000

 

$

969,200

 

$

41,974,200

 

$

711,200

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 29, 2018

 

    

0-60 Days

    

61-90 Days

    

Over 90 Days

    

 

 

    

 

 

 

 

Delinquent

 

Delinquent

 

Delinquent and

 

 

 

 

 

 

 

 

and Accruing

 

and Accruing

 

Accruing

 

Non-Accrual

 

Total

Middle-Market

 

$

44,145,700

 

$

 —

 

$

 —

 

$

 —

 

$

44,145,700

Small-Ticket

 

 

1,304,300

 

 

 —

 

 

 —

 

 

 —

 

 

1,304,300

Total Investment in Leases

 

$

45,450,000

 

$

 —

 

$

 —

 

$

 —

 

$

45,450,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 30, 2017

 

    

0-60 Days

    

61-90 Days

    

Over 90 Days

    

 

 

    

 

 

 

 

Delinquent

 

Delinquent

 

Delinquent and

 

 

 

 

 

 

 

 

and Accruing

 

and Accruing

 

Accruing

 

Non-Accrual

 

Total

Middle-Market

 

$

40,657,500

 

$

133,700

 

$

 —

 

$

 —

 

$

40,791,200

Small-Ticket

 

 

1,183,000

 

 

 —

 

 

 —

 

 

 —

 

 

1,183,000

Total Investment in Leases

 

$

41,840,500

 

$

133,700

 

$

 —

 

$

 —

 

$

41,974,200

 

 

7.  Earnings Per Share:

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

    

September 29, 2018

    

September 30, 2017

    

September 29, 2018

    

September 30, 2017

    

Denominator for basic EPS — weighted average common shares

 

3,886,473

 

4,024,692

 

3,864,077

 

4,131,269

 

Dilutive shares associated with option plans

 

277,866

 

289,720

 

276,739

 

284,916

 

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

 

4,164,339

 

4,314,412

 

4,140,816

 

4,416,185

 

Options excluded from EPS calculation — anti-dilutive

 

6,116

 

10,753

 

15,428

 

16,057

 

 

12


 

8.  Shareholders’ Equity (Deficit):

 

Dividends

 

On January 24, 2018, the Company’s Board of Directors approved the payment of a $0.11 per share quarterly cash dividend to shareholders of record at the close of business on February 7, 2018, which was paid on March 1, 2018.

 

On April 25, 2018, the Company’s Board of Directors approved the payment of a $0.15 per share quarterly cash dividend to shareholders of record at the close of business on May 9, 2018, which was paid on June 1, 2018.

 

On July 25, 2018, the Company’s Board of Directors approved the payment of a $0.15 per share quarterly cash dividend to shareholders of record at the close of business on August 8, 2018, which was paid on September 4, 2018.

 

Repurchase of Common Stock

 

In the first nine months of 2018 the Company repurchased 3,770 shares of its common stock.  Under the Board of Directors’ authorization, as of September 29, 2018, the Company has the ability to repurchase an additional 139,218 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

 

The Company had authorized up to 750,000 shares of common stock be reserved for granting either nonqualified or incentive stock options to officers and key employees under the Company’s 2001 Stock Option Plan (the “2001 Plan”).  The 2001 Plan expired on February 20, 2011. As of September 29, 2018, the Company has authorized up to 700,000 shares of common stock to be reserved for granting either nonqualified or incentive stock options to officers and key employees under the Company’s 2010 Stock Option Plan (the “2010 Plan”).

 

The Company also sponsors a Stock Option Plan for Nonemployee Directors (the “Nonemployee Directors Plan”) and has reserved a total of 350,000 shares for issuance to directors of the Company who are not employees.

 

Stock option activity under the 2001 Plan, 2010 Plan and Nonemployee Directors Plan (collectively, the “Option Plans”) as of September 29, 2018 was as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

 

    

Weighted Average

    

 

 

 

 

 

 

 

 

 

Remaining

 

 

 

 

 

Number of

 

Weighted Average

 

Contractual Life

 

 

 

 

 

Shares

 

Exercise Price

 

(years)

 

 

Intrinsic Value

Outstanding, December 30, 2017

 

658,184

 

$

72.33

 

5.87

 

$

37,723,800

Granted

 

35,000

 

 

143.20

 

 

 

 

 

Exercised

 

(64,143)

 

 

38.53

 

 

 

 

 

Forfeited

 

(4,063)

 

 

113.95