WINMARK CORP - Quarter Report: 2022 September (Form 10-Q)

Nine Months Ended

September 24, 2022

September 25, 2021

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

Operating cash flow outflow from operating leases

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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 24, 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, 3,437,786 shares outstanding as of October 11, 2022.

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WINMARK CORPORATION AND SUBSIDIARIES

INDEX


		PAGE

PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)

	CONSOLIDATED CONDENSED BALANCE SHEETS September 24, 2022 and December 25, 2021	3

	CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS Three Months Ended September 24, 2022 and September 25, 2021 Nine Months Ended September 24, 2022 and September 25, 2021	4

	CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT) Three Months Ended September 24, 2022 and September 25, 2021 Nine Months Ended September 24, 2022 and September 25, 2021	5

	CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS Nine Months Ended September 24, 2022 and September 25, 2021	6

	NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	20

Item 4.	Controls and Procedures	21

PART II.	OTHER INFORMATION	21

Item 1.	Legal Proceedings	21

Item 1A.	Risk Factors	21

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	21

Item 3.	Defaults Upon Senior Securities	22

Item 4.	Mine Safety Disclosures	22

Item 5.	Other Information	22

Item 6.	Exhibits	22

	SIGNATURES	23

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PART I. FINANCIAL INFORMATION

ITEM 1: Financial Statements

WINMARK CORPORATION AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS

(Unaudited)


	September 24, 2022		December 25, 2021
ASSETS
Current Assets:
Cash and cash equivalents	$	16,986,000	$	11,407,000
Restricted cash		55,000		30,000
Receivables, less allowance for doubtful accounts of $700 and $600		1,633,600		1,103,400
Net investment in leases - current		839,900		2,890,600
Income tax receivable		43,400		667,500
Inventories		637,900		325,200
Prepaid expenses		1,006,100		1,008,600
Total current assets		21,201,900		17,432,300
Net investment in leases - long-term		63,600		229,300
Property and equipment, net		1,740,700		1,976,900
Operating lease right of use assets		2,796,300		2,982,000
Intangible assets, net		3,436,700		—
Goodwill		607,500		607,500
Other assets		416,300		418,300
Deferred income taxes		3,467,400		3,252,700
	$	33,730,400	$	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		1,909,900		2,099,000
Accrued liabilities		3,870,000		2,001,000
Deferred revenue		1,647,000		1,645,000
Total current liabilities		11,644,800		9,977,600
Long-Term Liabilities:
Line of credit/Term loan		30,000,000		—
Notes payable, net of unamortized debt issuance costs of $128,800 and $61,100		40,121,200		43,376,400
Deferred revenue		7,026,200		6,863,500
Operating lease liabilities		4,432,800		4,810,100
Other liabilities		940,500		954,800
Total long-term liabilities		82,520,700		56,004,800
Shareholders’ Equity (Deficit):
Common stock, no par value, 10,000,000 shares authorized, 3,439,832 and 3,635,806 shares issued and outstanding		382,100		—
Retained earnings (accumulated deficit)		(60,817,200)		(39,083,400)
Total shareholders’ equity (deficit)		(60,435,100)		(39,083,400)
	$	33,730,400	$	26,899,000

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

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WINMARK CORPORATION AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

(Unaudited)


	Three Months Ended				Nine Months Ended
	September 24, 2022		September 25, 2021		September 24, 2022		September 25, 2021
Revenue:
Royalties	$	17,859,000	$	16,375,900	$	49,230,400	$	45,141,200
Leasing income		1,762,100		2,266,200		5,845,800		8,351,800
Merchandise sales		746,000		704,800		2,687,500		1,980,300
Franchise fees		348,100		383,400		1,160,200		1,101,300
Other		449,300		423,100		1,361,200		1,267,300
Total revenue		21,164,500		20,153,400		60,285,100		57,841,900
Cost of merchandise sold		717,600		681,100		2,552,300		1,887,700
Leasing expense		376,300		358,900		891,900		1,410,800
Provision for credit losses		(22,000)		(55,900)		(46,600)		(167,300)
Selling, general and administrative expenses		5,671,500		5,380,100		16,673,100		16,287,600
Income from operations		14,421,100		13,789,200		40,214,400		38,423,100
Interest expense		(820,500)		(323,200)		(2,045,600)		(945,600)
Interest and other income (expense)		21,700		(18,800)		7,000		(7,100)
Income before income taxes		13,622,300		13,447,200		38,175,800		37,470,400
Provision for income taxes		(3,253,700)		(3,364,700)		(8,927,500)		(9,139,500)
Net income	$	10,368,600	$	10,082,500	$	29,248,300	$	28,330,900
Earnings per share - basic	$	3.01	$	2.77	$	8.36	$	7.68
Earnings per share - diluted	$	2.93	$	2.67	$	8.11	$	7.40
Weighted average shares outstanding - basic		3,439,417		3,635,055		3,500,411		3,688,419
Weighted average shares outstanding - diluted		3,540,779		3,782,873		3,605,445		3,829,322

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

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WINMARK CORPORATION AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT)

(Unaudited)


					Retained
					Earnings
	Common Stock			(Accumulated
	Shares	Amount		Deficit)		Total
BALANCE, December 25, 2021	3,635,806	$	—	$	(39,083,400)	$	(39,083,400)
Repurchase of common stock	(164,586)		(1,679,900)		(34,911,500)		(36,591,400)
Stock options exercised	9,156		1,258,300		—		1,258,300
Compensation expense relating to stock options	—		421,600		—		421,600
Cash dividends ($0.45 per share)	—		—		(1,625,300)		(1,625,300)
Comprehensive income (Net income)	—		—		9,852,500		9,852,500
BALANCE, March 26, 2022	3,480,376		—		(65,767,700)		(65,767,700)
Repurchase of common stock	(55,694)		(1,645,200)		(9,610,900)		(11,256,100)
Stock options exercised	13,124		1,295,400		—		1,295,400
Compensation expense relating to stock options	—		349,800		—		349,800
Cash dividends ($0.70 per share)	—		—		(2,427,300)		(2,427,300)
Comprehensive income (Net income)	—		—		9,027,200		9,027,200
BALANCE, June 25, 2022	3,437,806		—		(68,778,700)		(68,778,700)
Repurchase of common stock	(2,027)		(433,700)		—		(433,700)
Stock options exercised	4,053		383,400		—		383,400
Compensation expense relating to stock options	—		432,400		—		432,400
Cash dividends ($0.70 per share)	—		—		(2,407,100)		(2,407,100)
Comprehensive income (Net income)	—		—		10,368,600		10,368,600
BALANCE, September 24, 2022	3,439,832	$	382,100	$	(60,817,200)	$	(60,435,100)


					Retained
					Earnings
	Common Stock			(Accumulated
	Shares	Amount		Deficit)		Total
BALANCE, December 26, 2020	3,756,028	$	9,281,800	$	(20,660,500)	$	(11,378,700)
Repurchase of common stock	(58,255)		(9,935,800)		(519,400)		(10,455,200)
Stock options exercised	2,950		268,800		—		268,800
Compensation expense relating to stock options	—		385,200		—		385,200
Cash dividends ($0.25 per share)	—		—		(935,400)		(935,400)
Comprehensive income (Net income)	—		—		9,311,100		9,311,100
BALANCE, March 27, 2021	3,700,723		—		(12,804,200)		(12,804,200)
Repurchase of common stock	(43,833)		(1,254,400)		(7,208,600)		(8,463,000)
Stock options exercised	11,129		941,500		—		941,500
Compensation expense relating to stock options			312,900		—		312,900
Cash dividends ($0.45 per share)	—		—		(1,665,000)		(1,665,000)
Comprehensive income (Net income)	—		—		8,937,300		8,937,300
BALANCE, June 26, 2021	3,668,019		—		(12,740,500)		(12,740,500)
Repurchase of common stock	(45,731)		(465,100)		(8,509,600)		(8,974,700)
Stock options exercised	1,250		89,000		—		89,000
Compensation expense relating to stock options	—		376,100		—		376,100
Cash dividends ($0.45 per share)	—		—		(1,634,500)		(1,634,500)
Comprehensive income (Net income)	—		—		10,082,500		10,082,500
BALANCE, September 25, 2021	3,623,538	$	—	$	(12,802,100)	$	(12,802,100)

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

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WINMARK CORPORATION AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)


	Nine Months Ended
	September 24, 2022		September 25, 2021
OPERATING ACTIVITIES:
Net income	$	29,248,300	$	28,330,900
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		409,500		328,800
Provision for credit losses		(46,600)		(167,300)
Compensation expense related to stock options		1,203,800		1,074,200
Deferred income taxes		(214,700)		(1,365,500)
Deferred initial direct costs		—		(2,100)
Amortization of deferred initial direct costs		—		18,800
Operating lease right of use asset amortization		185,700		167,000
Tax benefits on exercised stock options		429,500		249,200
Change in operating assets and liabilities:
Receivables		(530,200)		187,000
Principal collections on lease receivables		2,819,200		7,452,200
Income tax receivable/payable		194,600		(216,200)
Inventories		(312,700)		(302,000)
Prepaid expenses		2,500		36,500
Other assets		2,000		19,000
Accounts payable		(189,100)		219,000
Accrued and other liabilities		1,395,000		(94,100)
Rents received in advance and security deposits		(556,200)		(674,500)
Deferred revenue		164,700		(214,800)
Net cash provided by operating activities		34,205,300		35,046,100
INVESTING ACTIVITIES:
Purchase of property and equipment		(70,000)		(51,800)
Reacquired franchise rights		(3,540,000)		—
Purchase of equipment for lease contracts		—		(78,200)
Net cash used for investing activities		(3,610,000)		(130,000)
FINANCING ACTIVITIES:
Proceeds from borrowings on line of credit/term loan		33,700,000		—
Payments on line of credit/term loan		(3,700,000)		—
Proceeds from borrowings on notes payable		—		30,000,000
Payments on notes payable		(3,187,500)		(3,187,500)
Repurchases of common stock		(48,281,200)		(27,892,900)
Proceeds from exercises of stock options		2,937,100		1,299,300
Dividends paid		(6,459,700)		(4,234,900)
Net cash used for financing activities		(24,991,300)		(4,016,000)
NET INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH		5,604,000		30,900,100
Cash, cash equivalents and restricted cash, beginning of period		11,437,000		6,684,000
Cash, cash equivalents and restricted cash, end of period	$	17,041,000	$	37,584,100
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest	$	1,925,400	$	884,100
Cash paid for income taxes	$	8,518,100	$	10,472,000

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 24, 2022		September 25, 2021
Cash and cash equivalents	$	16,986,000	$	37,569,100
Restricted cash		55,000		15,000
Total cash, cash equivalents and restricted cash	$	17,041,000	$	37,584,100

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

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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 24, 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 months of 2022 and 2021, respectively:


	September 24, 2022		September 25, 2021
Balance at beginning of period	$	8,508,500	$	8,708,300
Franchise and software license fees collected from franchisees, excluding amount earned as revenue during the period		1,538,100		1,110,600
Fees earned that were included in the balance at the beginning of the period		(1,373,400)		(1,325,400)
Balance at end of period	$	8,673,200	$	8,493,500

The following table illustrates future estimated revenue to be recognized for the remainder of 2022 and full fiscal years thereafter related to performance obligations that are unsatisfied (or partially unsatisfied) as of September 24, 2022.


Contract Liabilities expected to be recognized in	Amount
2022	$	416,400
2023		1,604,400
2024		1,406,700
2025		1,190,300
2026		985,900
Thereafter		3,069,500
	$	8,673,200

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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 24, 2022		December 25, 2021
Direct financing and sales-type leases:
Minimum lease payments receivable	$	1,059,600	$	3,387,500
Estimated unguaranteed residual value of equipment		528,300		1,316,100
Unearned lease income, net of initial direct costs deferred		(140,400)		(418,100)
Security deposits		(566,200)		(1,122,500)
Total investment in direct financing and sales-type leases		881,300		3,163,000
Allowance for credit losses		(18,400)		(63,600)
Net investment in direct financing and sales-type leases		862,900		3,099,400
Operating leases:
Operating lease assets		687,700		626,200
Less accumulated depreciation and amortization		(647,100)		(605,700)
Net investment in operating leases		40,600		20,500
Total net investment in leasing operations	$	903,500	$	3,119,900

As of September 24, 2022, the $0.9 million total net investment in leases consists of $0.8 million classified as current and $0.1 million classified as long-term. As of December 25, 2021, the $3.1 million total net investment in leases consists of $2.9 million classified as current and $0.2 million classified as long-term.

As of September 24, 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 2022 and the full fiscal years thereafter as of September 24, 2022:


	Direct Financing and Sales-Type Leases
	Minimum Lease		Income
Fiscal Year	Payments Receivable		Amortization
2022	$	519,300	$	85,000
2023		536,800		55,300
2024		3,500		100
	$	1,059,600	$	140,400

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


	September 24, 2022		September 25, 2021
Balance at beginning of period	$	63,600	$	270,200
Provisions charged to expense		(46,600)		(167,300)
Recoveries		1,400		—
Balance at end of period	$	18,400	$	102,900

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 24, 2022				December 25, 2021
	Investment		Allowance for		Investment		Allowance for
	In Leases		Credit Losses		In Leases		Credit Losses
Collectively evaluated for loss potential	$	881,300	$	18,400	$	3,163,000	$	63,600
Individually evaluated for loss potential		—		—		—		—
Total	$	881,300	$	18,400	$	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 24, 2022
	0-60 Days		61-90 Days		Over 90 Days
	Delinquent		Delinquent		Delinquent and
	and Accruing		and Accruing		Accruing		Non-Accrual		Total

Total investment in leases	$	881,300	$	—	$	—	$	—	$	881,300


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

Total investment in leases	$	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 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
	September 24, 2022		September 25, 2021		September 24, 2022		September 25, 2021
Interest income on direct financing and sales-type leases	$	153,500	$	362,200	$	637,300	$	1,464,700
Selling profit (loss) at commencement of sales-type leases		—		164,300		1,298,000		1,594,300
Operating lease income		651,900		436,700		1,562,000		1,397,500
Income on sales of equipment under lease		865,900		988,500		1,798,000		3,214,000
Other		90,800		314,500		550,500		681,300
Leasing income	$	1,762,100	$	2,266,200	$	5,845,800	$	8,351,800

6. Intangible Assets

In June 2022, Winmark terminated an agreement that contained the rights for eleven 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 eleven stores. Upon termination of the agreement, individual franchise agreements were signed for these eleven stores, 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 $88,500 and $103,300 of amortization expense for the three and nine months ended September 24, 2022, respectively.

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 September 24, 2022.


Amortization expected to be expensed in	Amount
2022	$	88,500
2023		354,000
2024		354,000
2025		354,000
2026		354,000
Thereafter		1,932,200
	$	3,436,700

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 24, 2022	September 25, 2021	September 24, 2022	September 25, 2021
Denominator for basic EPS — weighted average common shares	3,439,417	3,635,055	3,500,411	3,688,419
Dilutive shares associated with option plans	101,362	147,818	105,034	140,903
Denominator for diluted EPS — weighted average common shares and dilutive potential common shares	3,540,779	3,782,873	3,605,445	3,829,322
Options excluded from EPS calculation — anti-dilutive	15,724	3,038	16,103	6,833

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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.

On July 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 August 10, 2022, which was paid on September 1, 2022.

Repurchase of Common Stock

In the first nine months of 2022, the Company repurchased 222,307 shares of its common stock. Under the Board of Directors’ authorization, as of September 24, 2022, the Company has the ability to repurchase an additional 82,458 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 24, 2022 was as follows:


				Weighted Average
				Remaining
	Number of	Weighted Average		Contractual Life
	Shares	Exercise Price		(years)		Intrinsic Value
Outstanding, December 25, 2021	355,621	$	146.03	6.32	$	39,320,600
Granted	34,940		198.42
Exercised	(26,333)		111.54
Forfeited	(6,501)		183.28
Outstanding, September 24, 2022	357,727	$	153.00	6.06	$	24,816,800
Exercisable, September 24, 2022	216,443	$	119.96	4.37	$	21,258,300

The fair value of options granted under the Option Plans during the first nine months of 2022 and 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
	September 24, 2022			September 25, 2021
Risk free interest rate		2.70	%		0.90	%
Expected life (years)		6			6
Expected volatility		27.47	%		25.07	%
Dividend yield		4.61	%		2.74	%
Option fair value	$	33.38		$	32.70

All unexercised options at September 24, 2022 have an exercise price equal to the fair market value on the date of the grant.

Compensation expense of $1,203,800 and $1,074,200 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 months of 2022 and 2021, respectively. As of September 24, 2022, the Company had $3.8 million of total unrecognized compensation expense related to stock options that is expected to be recognized over the remaining weighted average vesting period of approximately 2.6 years.

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9. Debt:

Line of Credit/Term Loan

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

●

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

The Company may draw up to five (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 to $20.0 million;

●

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

●

Remove the borrowing base covenant 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 to exclude principal payments on non-amortizing term loans that are refinanced with proceeds from permitted debt (as defined within the amendment);

●

Permit the 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 described below.

As of September 24, 2022, there were no revolving loans outstanding under the Line of Credit, leaving $20.0 million available for additional revolving borrowings. During the nine months ended September 24, 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 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 24, 2022, the Company was in compliance with all of its financial covenants.

Notes Payable

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

●

Permit the 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 Credit described above;

●

Permit the Company to incur the obligations described in and conform to the changes made by the Company’s entry into the Shelf Agreement described below.

As of September 24, 2022, the Company had aggregate principal outstanding of $44.5 million under the Note Agreement; consisting of $8.25 million in principal outstanding from the $25.0 million Series A notes issued in May 2015, $6.25 million in principal outstanding from the $12.5 million Series B notes issued in August 2017 and $30.0 million in principal outstanding from the $30.0 million Series C notes issued in September 2021.

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 the option of the Company, in whole or in part (in a

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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 24, 2022, the Company was in compliance with all of its financial covenants.

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

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 September 24, 2022, the Company had not issued any notes under the Shelf Agreement and was in compliance with all of its financial covenants.

10. Operating Leases:

As of September 24, 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 7.25 years and the discount rate is 5.5%. The Company recognized $910,500 and $879,200 of rent expense for the periods ended September 24, 2022 and September 25, 2021, respectively.

Maturities of operating lease liabilities is as follows for the remainder of fiscal 2022 and full fiscal years thereafter as of September 24, 2022:


Operating Lease Liabilities expected to be recognized in	Amount
2022	$	189,100
2023		763,300
2024		784,400
2025		806,000
2026		828,200
Thereafter		2,624,300
Total lease payments		5,995,300
Less imputed interest		(1,048,400)
Present value of lease liabilities	$	4,946,900

Of the $4.9 million operating lease liability outstanding at September 24, 2022, $0.5 million is included in Accrued liabilities in the Current liabilities section of the Consolidated Condensed Balance Sheets.

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Supplemental cash flow information related to our operating leases is as follows for the period ended September 24, 2022:

11. Segment Reporting:

The Company currently has two reportable business segments, franchising and leasing. The franchising segment franchises value-oriented retail store concepts that buy, sell and trade 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
	September 24, 2022		September 25, 2021		September 24, 2022		September 25, 2021
Revenue:
Franchising	$	19,402,400	$	17,887,200	$	54,439,300	$	49,490,100
Leasing		1,762,100		2,266,200		5,845,800		8,351,800
Total revenue	$	21,164,500	$	20,153,400	$	60,285,100	$	57,841,900

Reconciliation to operating income:
Franchising segment contribution	$	13,346,800	$	12,330,200	$	36,289,900	$	33,601,600
Leasing segment contribution		1,074,300		1,459,000		3,924,500		4,821,500
Total operating income	$	14,421,100	$	13,789,200	$	40,214,400	$	38,423,100

Depreciation and amortization:
Franchising	$	155,200	$	59,400	$	304,600	$	187,600
Leasing		34,900		46,200		104,900		141,200
Total depreciation and amortization	$	190,100	$	105,600	$	409,500	$	328,800


	As of
	September 24, 2022		December 25, 2021
Identifiable assets:
Franchising	$	7,917,400	$	4,907,800
Leasing		1,253,500		3,600,500
Unallocated		24,559,500		18,390,700
Total	$	33,730,400	$	26,899,000

12. Subsequent Events:

On October 12, 2022, the Company’s Board of Directors approved the payment of a $3.00 per share special cash dividend (the “2022 Special Dividend”) to shareholders of record at the close of business November 9, 2022, which will be paid on December 1, 2022. The 2022 Special Dividend will be approximately $10.3 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

Overview

We are a franchising business focused on sustainability and small business formation. As of September 24, 2022, we had 1,291 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 months of 2022, our royalties increased $4.1 million or 9.1% compared to the first nine months of 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 months of 2022, selling, general and administrative expenses increased $0.4 million, or 2.4% compared to the first nine months of 2021.

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 months ended September 24, 2022:


					AVAILABLE
	TOTAL			TOTAL	FOR	COMPLETED
	12/25/2021	OPENED	CLOSED	9/24/2022	RENEWAL	RENEWALS
Plato’s Closet
Franchises - US and Canada	489	12	(2)	499	42	42
Once Upon A Child
Franchises - US and Canada	401	6	(3)	404	25	25
Play It Again Sports
Franchises - US and Canada	273	13⁽¹⁾	(6)	280	47	47
Style Encore						.
Franchises - US and Canada	71	4	(4)	71	—	—
Music Go Round
Franchises - US	37	—	—	37	—	—
Total Franchised Stores	1,271	35	(15)	1,291	114	114

(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 months of 2022, we renewed 114 of the 114 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 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 months of 2022 was $5.0 million compared to $6.9 million in the first nine months of 2021. Our leasing portfolio (net investment in leases – current and long-term), was $0.9 million at September 24, 2022 compared to $3.1 million at December 25, 2021. Given the decision to run-off the portfolio, we anticipate that leasing income net of leasing expense 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.

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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.

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
	September 24, 2022		September 25, 2021		September 24, 2022		September 25, 2021

Revenue:
Royalties	84.4	%	81.3	%	81.7	%	78.1	%
Leasing income	8.3		11.2		9.7		14.4
Merchandise sales	3.5		3.5		4.5		3.4
Franchise fees	1.7		1.9		1.9		1.9
Other	2.1		2.1		2.2		2.2
Total revenue	100.0		100.0		100.0		100.0

Cost of merchandise sold	(3.4)		(3.4)		(4.2)		(3.3)
Leasing expense	(1.8)		(1.8)		(1.5)		(2.4)
Provision for credit losses	0.1		0.3		0.1		0.3
Selling, general and administrative expenses	(26.8)		(26.7)		(27.7)		(28.2)
Income from operations	68.1		68.4		66.7		66.4
Interest expense	(3.9)		(1.6)		(3.4)		(1.6)
Interest and other income (expense)	0.1		(0.1)		—		—
Income before income taxes	64.3		66.7		63.3		64.8
Provision for income taxes	(15.3)		(16.7)		(14.8)		(15.8)
Net income	49.0	%	50.0	%	48.5	%	49.0	%

Comparison of Three Months Ended September 24, 2022 to Three Months Ended September 25, 2021

Revenue

Revenues for the quarter ended September 24, 2022 totaled $21.2 million compared to $20.2 million for the comparable period in 2021.

Royalties and Franchise Fees

Royalties increased to $17.9 million for the third quarter of 2022 from $16.4 million for the third quarter of 2021, a 9.1% increase. The increase is primarily from higher franchisee retail sales and from having additional franchise stores in the third quarter of 2022 compared to the same period in 2021.

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

Leasing Income

Leasing income decreased to $1.8 million for the third quarter of 2022 compared to $2.3 million for the same period in 2021. The decrease is primarily due to lower levels of interest and other income from the smaller lease portfolio.

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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 $0.7 million for the third quarter of 2022 were comparable to $0.7 million in the same period of 2021.

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 million for the third quarter of 2022 were comparable to $0.7 million in the same period of 2021. Cost of merchandise sold as a percentage of Direct Franchisee Sales for the third quarter of 2022 and 2021 was 96.2% and 96.6%, respectively.

Leasing Expense

Leasing expense of $0.4 million for the third quarter of 2022 were comparable to $0.4 million for the third quarter of 2021.

Selling, General and Administrative

Selling, general and administrative expenses increased 5.4% to $5.7 million in the third quarter of 2022 compared to $5.4 million in the same period of 2021. The increase was primarily due to increases in compensation, benefits and advertising related expenses.

Interest Expense

Interest expense increased to $0.8 million for the third quarter of 2022 compared to $0.3 million for the third quarter of 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 23.9% and 25.0% for the third quarter of 2022 and 2021, respectively. The decrease is primarily due to higher benefits on the exercise of non-qualified stock options and a decrease in state taxes.

Comparison of Nine Months Ended September 24, 2022 to Nine Months Ended September 25, 2021

Revenue

Revenues for the first nine months of 2022 totaled $60.3 million compared to $57.8 million for the comparable period in 2021.

Royalties and Franchise Fees

Royalties increased to $49.2 million for the first nine months of 2022 from $45.1 million for the first nine months of 2021, a 9.1% increase. The increase in royalties is primarily from higher franchisee retail sales and from having additional franchised stores in the first nine months of 2022 compared to the same period last year.

Franchise fees of $1.2 million for the first nine months of 2022 were comparable to $1.1 million for the first nine months of 2021.

Leasing Income

Leasing income decreased to $5.8 million for the first nine months of 2022 compared to $8.4 million for the same period in 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 increased to $2.7 million for the first nine months of 2022 compared to $2.0 million in the same period of 2021. The increase is primarily due to an increase in buying group and technology purchases by our franchisees.

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 increased to $2.6 million for the first nine months of 2022 compared to $1.9 million in the same period of 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 months of 2022 and 2021 was 95.0% and 95.3%, respectively.

Leasing Expense

Leasing expense decreased to $0.9 million for the first nine months of 2022 compared to $1.4 million for the first nine months of 2021. The decrease was due to a decrease in the associated cost of equipment sales to customers discussed above.

Selling, General and Administrative

Selling, general and administrative expenses increased 2.4% to $16.7 million in the first nine months of 2022 compared to $16.3 million in the same period of 2021. The increase was primarily due to increases in travel and advertising related expenses.

Interest Expense

Interest expense was $2.1 million for the first nine months of 2022 compared to $0.9 million for the first nine months of 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 23.4% and 24.4% for the first nine months of 2022 and 2021, respectively. The decrease is primarily due to higher tax benefits on the exercise of non-qualified stock options and a decrease in state taxes.

Segment Comparison of Three Months Ended September 24, 2022 to Three Months Ended September 25, 2021

Franchising Segment Operating Income

The franchising segment’s operating income for the third quarter of 2022 increased to $13.3 million from $12.3 million for the third quarter of 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 third quarter of 2022 decreased to $1.1 million from $1.5 million for the third quarter of 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.

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Segment Comparison of Nine Months Ended September 24, 2022 to Nine Months Ended September 25, 2021

Franchising Segment Operating Income

The franchising segment’s operating income for the first nine months of 2022 increased to $36.3 million from $33.6 million for the first nine months of 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 months of 2022 decreased to $3.9 million from $4.8 million for the first nine months of 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.

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 quarter of 2022 with $17.0 million in cash, cash equivalents and restricted cash compared to $37.6 million in cash, cash equivalents and restricted cash at the end of the third quarter of 2021.

Operating activities provided $34.2 million of cash during the first nine months of 2022, compared to $35.0 million provided during the same period last year. The decrease in cash provided by operating activities in the first nine months of 2022 compared to 2021 was primarily due to a decrease in principal collections on lease receivables, partially offset by an increase in accrued and other liabilities.

Investing activities used $3.6 million of cash during the first nine months of 2022. The 2022 activities consisted primarily of reacquired franchise rights (See Note 6 – “Intangible Assets”).

Financing activities used $25.0 million of cash during the first nine months of 2022. Our most significant financing activities during the first nine months of 2022 consisted of $48.3 million to repurchase 222,307 shares of our common stock, $6.5 million for the payment of dividends, and payments on notes payable of $3.2 million; partially offset by $30.0 million of net borrowing on our line of credit and $2.9 million of proceeds from exercise of stock options. (See Note 8 — “Shareholders’ Equity (Deficit),” and Note 9 — “Debt”).

Our debt facilities include a Line of Credit with CIBC Bank USA and a Note Agreement and Shelf Agreement with Prudential. These facilities have been and will continue to be used for general corporate purposes, are secured by a lien against substantially all of our assets, contain customary financial conditions and covenants, and require maintenance of minimum levels of debt service coverage and maximum levels of leverage (all as defined within the agreements governing the facilities). As of September 24, 2022, we were in compliance with all of the financial covenants under the Line of Credit, the Note Agreement and the Shelf Agreement.

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 September 24, 2022, we had no revolving loans outstanding, and 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 September 24, 2022 was $44.5 million). As of September 24, 2022, we had not issued any notes under the Shelf Agreement. Of the $44.5 million of principal outstanding under the Note Agreement, $14.5 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

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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 the risk factors described under Item 1A of our Form 10-K for the fiscal year ended December 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.

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, our Line of Credit and our Shelf Agreement will be adequate to fund our planned operations through 2023.

Critical Accounting Policies

A discussion of our critical accounting policies is contained in our annual report on Form 10-K for the year ended December 25, 2021. There have been no changes to our critical accounting policies from those disclosed on our Form 10-K for the year ended December 25, 2021.

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 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 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 24, 2022, the Company’s Line of Credit with CIBC Bank USA included a commitment for revolving loans of $20.0 million. The interest rates applicable to revolving loans are based on either the bank’s base rate or SOFR for short-term borrowings (twelve months or less). The Company had no revolving loans outstanding at September 24, 2022 under this Line of Credit. The Company had no interest rate derivatives in place at September 24, 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 24, 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 months ended September 24, 2022. During fiscal 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 $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.

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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 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.

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 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 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 quarter of 2022.


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

June 26, 2022 to July 30, 2022	104	$	192.98	104	84,381
July 31, 2022 to August 27, 2022	—	$	—	—	84,381
August 28, 2022 to September 24, 2022	1,923	$	215.08	1,923	82,458

(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 24, 2022 was limited to 5,400,000 shares, of which 82,458 may still be repurchased.

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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)

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 24, 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 24, 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.

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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 12, 2022	By:	/s/ Brett D. Heffes
		Brett D. Heffes Chairman of the Board and Chief Executive Officer (principal executive officer)


Date: October 12, 2022	By:	/s/ Anthony D. Ishaug
		Anthony D. Ishaug Executive Vice President Chief Financial Officer and Treasurer (principal financial and accounting officer)