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EX-32.2 - EX-32.2 - WINMARK CORPc315-20180630ex322dd0c5a.htm
EX-32.1 - EX-32.1 - WINMARK CORPc315-20180630ex32195f6a4.htm
EX-31.2 - EX-31.2 - WINMARK CORPc315-20180630ex312936ffc.htm
EX-31.1 - EX-31.1 - WINMARK CORPc315-20180630ex31198b73a.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 June 30, 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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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   

 

(Do not check if a smaller reporting company)

 

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, 3,868,526 shares outstanding as of July 13, 2018.

 

 

 

 

 


 

WINMARK CORPORATION AND SUBSIDIARIES

 

INDEX

 

 

 

PAGE

 

 

 

PART I. 

FINANCIAL INFORMATION

 

 

 

 

Item 1. 

Financial Statements (Unaudited)

 

 

 

 

 

CONSOLIDATED CONDENSED BALANCE SHEETS

 

 

June 30, 2018 and December 30, 2017

3

 

 

 

 

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

 

 

Three Months Ended June 30, 2018 and July 1, 2017

 

 

Six Months Ended June 30, 2018 and July 1, 2017

4

 

 

 

 

CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME

 

 

Three Months Ended June 30, 2018 and July 1, 2017

 

 

Six Months Ended June 30, 2018 and July 1, 2017

5

 

 

 

 

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

 

 

Six Months Ended June 30, 2018 and July 1, 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)

 

 

 

 

 

 

 

 

 

 

June 30, 2018

 

December 30, 2017

ASSETS

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

1,232,900

 

$

1,073,200

Restricted cash

 

 

105,000

 

 

90,000

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

 

 

1,502,000

 

 

1,796,000

Net investment in leases - current

 

 

17,046,100

 

 

15,332,300

Income tax receivable

 

 

 —

 

 

2,161,800

Inventories

 

 

150,100

 

 

97,100

Prepaid expenses

 

 

765,800

 

 

901,600

Total current assets

 

 

20,801,900

 

 

21,452,000

Net investment in leases - long-term

 

 

26,380,400

 

 

25,945,300

Property and equipment, net

 

 

630,400

 

 

486,800

Goodwill

 

 

607,500

 

 

607,500

Other assets

 

 

396,800

 

 

350,400

 

 

$

48,817,000

 

$

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

 

 

1,502,900

 

 

2,073,000

Income tax payable

 

 

237,200

 

 

 —

Accrued liabilities

 

 

3,214,400

 

 

1,837,300

Discounted lease rentals

 

 

1,637,100

 

 

570,800

Deferred revenue

 

 

3,047,200

 

 

3,012,700

Total current liabilities

 

 

12,874,900

 

 

10,729,900

Long-Term Liabilities:

 

 

 

 

 

 

Line of credit

 

 

18,400,000

 

 

35,400,000

Notes payable, net of unamortized debt issuance costs of $89,500 and $96,500

 

 

27,223,000

 

 

28,841,000

Discounted lease rentals

 

 

2,260,900

 

 

1,121,600

Deferred revenue

 

 

7,294,500

 

 

7,297,500

Other liabilities

 

 

1,161,300

 

 

845,000

Deferred income taxes

 

 

360,200

 

 

320,500

Total long-term liabilities

 

 

56,699,900

 

 

73,825,600

Shareholders’ Equity (Deficit):

 

 

 

 

 

 

Common stock, no par value, 10,000,000 shares authorized, 3,868,526 and 3,843,078 shares issued and outstanding

 

 

3,329,600

 

 

1,476,200

Retained earnings (accumulated deficit)

 

 

(24,087,400)

 

 

(37,189,700)

Total shareholders’ equity (deficit)

 

 

(20,757,800)

 

 

(35,713,500)

 

 

$

48,817,000

 

$

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

 

Six Months Ended

 

    

June 30, 2018

    

July 1, 2017

    

June 30, 2018

    

July 1, 2017

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

Royalties

 

$

11,821,000

 

$

11,094,400

 

$

22,870,000

 

$

21,548,400

Leasing income

 

 

4,857,100

 

 

3,946,600

 

 

10,385,900

 

 

9,806,200

Merchandise sales

 

 

704,900

 

 

537,100

 

 

1,481,800

 

 

1,285,400

Franchise fees

 

 

378,100

 

 

468,800

 

 

779,000

 

 

837,400

Other

 

 

398,700

 

 

382,800

 

 

804,100

 

 

763,200

Total revenue

 

 

18,159,800

 

 

16,429,700

 

 

36,320,800

 

 

34,240,600

Cost of merchandise sold

 

 

681,000

 

 

499,100

 

 

1,423,500

 

 

1,214,100

Leasing expense

 

 

495,800

 

 

660,600

 

 

1,050,700

 

 

1,932,000

Provision for credit losses

 

 

109,000

 

 

(11,500)

 

 

204,000

 

 

(12,900)

Selling, general and administrative expenses

 

 

6,799,300

 

 

6,468,400

 

 

13,493,700

 

 

12,980,900

Income from operations

 

 

10,074,700

 

 

8,813,100

 

 

20,148,900

 

 

18,126,500

Interest expense

 

 

(657,900)

 

 

(446,300)

 

 

(1,401,700)

 

 

(945,400)

Interest and other income (expense)

 

 

(11,300)

 

 

100

 

 

(12,300)

 

 

1,900

Income before income taxes

 

 

9,405,500

 

 

8,366,900

 

 

18,734,900

 

 

17,183,000

Provision for income taxes

 

 

(2,262,500)

 

 

(2,836,200)

 

 

(4,631,500)

 

 

(6,101,500)

Net income

 

$

7,143,000

 

$

5,530,700

 

$

14,103,400

 

$

11,081,500

Earnings per share - basic

 

$

1.85

 

$

1.32

 

$

3.66

 

$

2.65

Earnings per share - diluted

 

$

1.73

 

$

1.23

 

$

3.42

 

$

2.48

Weighted average shares outstanding - basic

 

 

3,858,446

 

 

4,201,982

 

 

3,852,880

 

 

4,184,558

Weighted average shares outstanding - diluted

 

 

4,133,535

 

 

4,483,647

 

 

4,129,055

 

 

4,467,072

 

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

 

Six Months Ended

 

    

June 30, 2018

    

July 1, 2017

    

June 30, 2018

    

July 1, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

7,143,000

 

$

5,530,700

 

$

14,103,400

 

$

11,081,500

Other comprehensive income (loss), before tax:

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized holding net gains (losses) arising during period

 

 

 —

 

 

9,000

 

 

 —

 

 

16,600

Other comprehensive income (loss), before tax

 

 

 —

 

 

9,000

 

 

 —

 

 

16,600

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

 

 

 —

 

 

(3,500)

 

 

 —

 

 

(6,300)

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

 

 

 —

 

 

(3,500)

 

 

 —

 

 

(6,300)

Other comprehensive income (loss), net of tax

 

 

 —

 

 

5,500

 

 

 —

 

 

10,300

Comprehensive income

 

$

7,143,000

 

$

5,536,200

 

$

14,103,400

 

$

11,091,800

 

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

 

 

5


 

WINMARK CORPORATION AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

    

June 30, 2018

    

July 1, 2017

    

OPERATING ACTIVITIES:

 

 

 

 

 

 

 

Net income

 

$

14,103,400

 

$

11,081,500

 

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

 

 

 

 

 

 

 

Depreciation and amortization

 

 

155,100

 

 

188,700

 

Provision for credit losses

 

 

204,000

 

 

(12,900)

 

Compensation expense related to stock options

 

 

1,006,900

 

 

966,600

 

Deferred income taxes

 

 

39,700

 

 

140,300

 

Deferred initial direct costs

 

 

(1,083,100)

 

 

(250,000)

 

Amortization of deferred initial direct costs

 

 

562,200

 

 

238,300

 

Tax benefits on exercised stock options

 

 

125,700

 

 

518,000

 

Change in operating assets and liabilities:

 

 

 

 

 

 

 

Receivables

 

 

294,000

 

 

(153,100)

 

Income tax receivable/payable

 

 

2,273,300

 

 

(175,700)

 

Inventories

 

 

(53,000)

 

 

(11,900)

 

Prepaid expenses

 

 

135,800

 

 

587,000

 

Other assets

 

 

(46,400)

 

 

5,300

 

Accounts payable

 

 

(570,100)

 

 

(282,500)

 

Accrued and other liabilities

 

 

1,674,200

 

 

686,900

 

Rents received in advance and security deposits

 

 

(460,100)

 

 

6,600

 

Deferred revenue

 

 

31,500

 

 

(147,000)

 

Net cash provided by operating activities

 

 

18,393,100

 

 

13,386,100

 

INVESTING ACTIVITIES:

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(298,700)

 

 

(44,200)

 

Purchase of equipment for lease contracts

 

 

(12,895,200)

 

 

(13,532,300)

 

Principal collections on lease receivables

 

 

10,838,200

 

 

13,982,500

 

Net cash provided by (used for) investing activities

 

 

(2,355,700)

 

 

406,000

 

FINANCING ACTIVITIES:

 

 

 

 

 

 

 

Proceeds from borrowings on line of credit

 

 

4,000,000

 

 

6,800,000

 

Payments on line of credit

 

 

(21,000,000)

 

 

(20,100,000)

 

Payments on notes payable

 

 

(1,625,000)

 

 

(1,000,000)

 

Proceeds from exercises of stock options

 

 

846,500

 

 

1,197,000

 

Dividends paid

 

 

(1,001,100)

 

 

(880,100)

 

Proceeds from discounted lease rentals

 

 

2,916,900

 

 

 —

 

Net cash used for financing activities

 

 

(15,862,700)

 

 

(13,983,100)

 

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

 

 

174,700

 

 

(191,000)

 

Cash, cash equivalents and restricted cash, beginning of period

 

 

1,163,200

 

 

1,292,900

 

Cash, cash equivalents and restricted cash, end of period

 

$

1,337,900

 

$

1,101,900

 

SUPPLEMENTAL DISCLOSURES:

 

 

 

 

 

 

 

Cash paid for interest

 

$

1,404,800

 

$

980,300

 

Cash paid for income taxes

 

$

2,192,700

 

$

5,654,000

 

 

 

 

 

 

 

 

 

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:

 

 

 

Six Months Ended

 

 

 

June 30, 2018

    

July 1, 2017

 

Cash and cash equivalents

 

$

1,232,900

 

$

1,071,900

 

Restricted cash

 

 

105,000

 

 

30,000

 

Total cash, cash equivalents and restricted cash

 

$

1,337,900

 

$

1,101,900

 

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 six months ended June 30, 2018 are not necessarily indicative of the results to be expected for the full year.

 

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.  This guidance is effective for reporting periods beginning after December 15, 2018, with early adoption permitted.  The provisions of this guidance are to be applied using a modified retrospective approach, with elective reliefs.  The Company is currently in the process of evaluating the 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 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. As a result of this adoption, for the six months ended July 1, 2017, $10,000 that was previously reported as a cash inflow from operating activities related to a corresponding decrease in restricted cash is no longer presented within the net change in cash, cash equivalents and restricted cash.

7


 

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 July 1, 2017

 

Six Months Ended July 1, 2017

 

    

As Previously Reported

    

Adjustments

    

As Restated

    

As Previously Reported

    

Adjustments

    

As Restated

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Franchise fees

 

$

675,400

 

$

(206,600)

 

$

468,800

 

$

944,700

 

$

(107,300)

 

$

837,400

Other

 

 

496,000

 

 

(113,200)

 

 

382,800

 

 

788,600

 

 

(25,400)

 

 

763,200

Selling, general and administrative expenses

 

 

6,467,100

 

 

1,300

 

 

6,468,400

 

 

12,970,500

 

 

10,400

 

 

12,980,900

Provision for income taxes

 

 

(2,914,800)

 

 

78,600

 

 

(2,836,200)

 

 

(6,136,500)

 

 

35,000

 

 

(6,101,500)

Net income

 

 

5,773,200

 

 

(242,500)

 

 

5,530,700

 

 

11,189,600

 

 

(108,100)

 

 

11,081,500

Earnings per share - basic

 

$

1.37

 

$

(0.05)

 

$

1.32

 

$

2.67

 

$

(0.02)

 

$

2.65

Earnings per share - diluted

 

$

1.29

 

$

(0.06)

 

$

1.23

 

$

2.50

 

$

(0.02)

 

$

2.48

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

1,276,500

 

$

3,012,700

Deferred revenue-Long term

 

 

1,465,500

 

 

5,832,000

 

 

7,297,500

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 June 30, 2018 and July 1, 2017, and $0.6 million for each of the six months ended June 30, 2018 and July 1, 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 June 30, 2018 and July 1, 2017, and $0.2 million for each of the six months ended June 30, 2018 and July 1, 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 six months of 2018 and 2017, respectively:

 

 

 

 

 

 

 

 

 

    

June 30, 2018

    

July 1, 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

 

 

964,700

 

 

836,300

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

 

 

(933,200)

 

 

(983,300)

Balance at end of period

 

$

10,341,700

 

$

10,261,500

 

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 June 30, 2018.

 

 

 

 

 

 

 

Contract Liabilities expected to be recognized in

 

 

Amount

2018

 

 

 

$

838,800

2019

 

 

 

 

1,679,800

2020

 

 

 

 

1,543,200

2021

 

 

 

 

1,404,400

2022

 

 

 

 

1,259,500

Thereafter

 

 

 

 

3,616,000

 

 

 

 

$

10,341,700

 

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 June 30, 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 June 30, 2018 and July 1, 2017, the Company recognized $24,500 and $24,800 of commission fee expense, respectively. During the six months ended June 30, 2018 and July 1, 2017, the Company recognized $48,400 and $49,900 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:

 

 

 

 

 

 

 

 

 

    

June 30, 2018

    

December 30, 2017

Direct financing and sales-type leases:

 

 

 

 

 

 

Minimum lease payments receivable

 

$

42,666,700

 

$

36,119,700

Estimated residual value of equipment

 

 

3,830,400

 

 

4,762,700

Unearned lease income net of initial direct costs deferred

 

 

(7,727,200)

 

 

(5,371,900)

Security deposits

 

 

(4,039,700)

 

 

(4,526,000)

Equipment installed on leases not yet commenced

 

 

9,363,000

 

 

10,989,700

  Total investment in direct financing and sales-type leases

 

 

44,093,200

 

 

41,974,200

Allowance for credit losses

 

 

(755,900)

 

 

(711,200)

  Net investment in direct financing and sales-type leases

 

 

43,337,300

 

 

41,263,000

Operating leases:

 

 

 

 

 

 

Operating lease assets

 

 

1,370,900

 

 

1,045,400

Less accumulated depreciation and amortization

 

 

(1,281,700)

 

 

(1,030,800)

  Net investment in operating leases

 

 

89,200

 

 

14,600

Total net investment in leasing operations

 

$

43,426,500

 

$

41,277,600

 

As of June 30, 2018, the $43.4 million total net investment in leases consists of $17.0 million classified as current and $26.4 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 June 30, 2018, leased assets with one customer approximated 28% of the Company’s total assets. A portion of the lease payments receivable from this customer 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 June 30, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct Financing and Sales-Type Leases

 

Operating Leases

 

 

    

Minimum Lease

    

Income

    

Minimum Lease

 

Fiscal Year

 

Payments Receivable

 

 Amortization

 

Payments Receivable

 

2018

 

$

12,738,700

 

$

3,418,500

 

$

84,300

 

2019

 

 

21,656,500

 

 

3,855,000

 

 

76,900

 

2020

 

 

7,581,200

 

 

442,500

 

 

 —

 

2021

 

 

664,100

 

 

9,300

 

 

 —

 

2022

 

 

13,700

 

 

1,300

 

 

 —

 

Thereafter

 

 

12,500

 

 

600

 

 

 —

 

 

 

$

42,666,700

 

$

7,727,200

 

$

161,200

 

 

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

 

 

 

 

 

 

 

 

 

 

 

    

June 30, 2018

    

July 1, 2017

    

Balance at beginning of period

 

$

711,200

 

$

896,000

 

Provisions charged to expense

 

 

204,000

 

 

(12,900)

 

Recoveries

 

 

(60,900)

 

 

10,200

 

Deductions for amounts written-off

 

 

(98,400)

 

 

 —

 

Balance at end of period

 

$

755,900

 

$

893,300

 

 

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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2018

 

December 30, 2017

 

    

Investment

    

Allowance for

    

Investment

    

Allowance for

 

 

In Leases

 

Credit Losses

 

In Leases

 

Credit Losses

Collectively evaluated for loss potential

 

$

44,093,200

 

$

755,900

 

$

41,974,200

 

$

711,200

Individually evaluated for loss potential

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Total

 

$

44,093,200

 

$

755,900

 

$

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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2018

 

    

0-60 Days

    

61-90 Days

    

Over 90 Days

    

 

 

    

 

 

 

 

Delinquent

 

Delinquent

 

Delinquent and

 

 

 

 

 

 

 

 

and Accruing

 

and Accruing

 

Accruing

 

Non-Accrual

 

Total

Middle-Market

 

$

42,843,000

 

$

 —

 

$

 —

 

$

 —

 

$

42,843,000

Small-Ticket

 

 

1,247,500

 

 

 —

 

 

 —

 

 

2,700

 

 

1,250,200

Total Investment in Leases

 

$

44,090,500

 

$

 —

 

$

 —

 

$

2,700

 

$

44,093,200

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

Six Months Ended

 

 

    

June 30, 2018

    

July 1, 2017

    

June 30, 2018

    

July 1, 2017

    

Denominator for basic EPS — weighted average common shares

 

3,858,446

 

4,201,982

 

3,852,880

 

4,184,558

 

Dilutive shares associated with option plans

 

275,089

 

281,665

 

276,175

 

282,514

 

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

 

4,133,535

 

4,483,647

 

4,129,055

 

4,467,072

 

Options excluded from EPS calculation — anti-dilutive

 

19,504

 

14,620

 

22,976

 

19,133

 

 

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.

 

Repurchase of Common Stock

 

In the first six months of 2018 the Company repurchased no shares of its common stock.  Under the Board of Directors’ authorization, as of June 30, 2018, the Company has the ability to repurchase an additional 142,988 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 June 30, 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 June 30, 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

 

(27,697)

 

 

41.39

 

 

 

 

 

Forfeited

 

(4,063)

 

 

113.95

 

 

 

 

 

Outstanding, June 30, 2018

 

661,424

 

$

77.12

 

5.69

 

$

47,178,100

Exercisable, June 30, 2018

 

487,335

 

$

62.07

 

4.66

 

$

42,095,400

 

 

The fair value of options granted under the Option Plans during the first six months of 2018 and 2017 were estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions and results:

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended