wina_10Q_June 29, 2019

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 29, 2019

☐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 ☒

As of July 12, 2019, there were 3,781,339 shares of the registrant’s common stock, no par value, outstanding.

PART I. FINANCIAL INFORMATION

ITEM 1: Financial Statements

WINMARK CORPORATION AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS

(Unaudited)


	June 29, 2019		December 29, 2018
ASSETS
Current Assets:
Cash and cash equivalents	$	1,101,200	$	2,496,000
Restricted cash		65,000		80,000
Receivables, less allowance for doubtful accounts of $600 and $400		1,510,300		1,553,100
Net investment in leases - current		15,923,700		18,547,500
Income tax receivable		1,608,300		565,500
Inventories		114,400		107,600
Prepaid expenses		853,000		901,600
Total current assets		21,175,900		24,251,300
Net investment in leases - long-term		17,059,200		20,455,500
Property and equipment, net		1,936,400		866,200
Operating lease right of use assets		4,867,900		—
Goodwill		607,500		607,500
Other assets		509,200		482,600
	$	46,156,100	$	46,663,100
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		1,167,400		1,351,800
Accrued liabilities		2,783,300		3,128,600
Discounted lease rentals		3,172,700		3,021,900
Deferred revenue		1,725,500		1,744,900
Total current liabilities		12,085,000		12,483,300
Long-Term Liabilities:
Line of credit		6,000,000		—
Notes payable, net of unamortized debt issuance costs of $75,600 and $82,600		23,986,800		25,604,900
Discounted lease rentals		1,752,900		2,723,500
Deferred revenue		8,093,900		8,432,400
Operating lease liabilities		6,061,000		—
Other liabilities		818,900		1,079,200
Deferred income taxes		1,188,000		1,148,300
Total long-term liabilities		47,901,500		38,988,300
Shareholders’ Equity (Deficit):
Common stock, no par value, 10,000,000 shares authorized, 3,781,339 and 3,907,686 shares issued and outstanding		1,305,600		4,425,600
Retained earnings (accumulated deficit)		(15,136,000)		(9,234,100)
Total shareholders’ equity (deficit)		(13,830,400)		(4,808,500)
	$	46,156,100	$	46,663,100

The accompanying notes are an integral part of these financial statements

WINMARK CORPORATION AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

(Unaudited)


	Three Months Ended				Six Months Ended
	June 29, 2019		June 30, 2018		June 29, 2019		June 30, 2018
Revenue:
Royalties	$	12,653,200	$	11,821,000	$	24,414,600	$	22,870,000
Leasing income		3,203,000		4,857,100		8,358,300		10,385,900
Merchandise sales		721,800		704,900		1,332,800		1,481,800
Franchise fees		413,900		378,100		805,700		779,000
Other		412,300		398,700		824,000		804,100
Total revenue		17,404,200		18,159,800		35,735,400		36,320,800
Cost of merchandise sold		681,200		681,000		1,252,700		1,423,500
Leasing expense		370,900		495,800		1,069,600		1,050,700
Provision for credit losses		69,300		109,000		79,400		204,000
Selling, general and administrative expenses		6,435,900		6,799,300		13,420,300		13,493,700
Income from operations		9,846,900		10,074,700		19,913,400		20,148,900
Interest expense		(500,300)		(657,900)		(942,500)		(1,401,700)
Interest and other income (expense)		(6,100)		(11,300)		(6,400)		(12,300)
Income before income taxes		9,340,500		9,405,500		18,964,500		18,734,900
Provision for income taxes		(2,038,600)		(2,262,500)		(4,390,400)		(4,631,500)
Net income	$	7,301,900	$	7,143,000	$	14,574,100	$	14,103,400
Earnings per share - basic	$	1.94	$	1.85	$	3.80	$	3.66
Earnings per share - diluted	$	1.79	$	1.73	$	3.52	$	3.42
Weighted average shares outstanding - basic		3,771,439		3,858,446		3,839,563		3,852,880
Weighted average shares outstanding - diluted		4,072,408		4,133,535		4,135,827		4,129,055

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

WINMARK CORPORATION AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT)

(Unaudited)


					Retained
					Earnings
	Common Stock			(Accumulated
	Shares	Amount		Deficit)		Total
BALANCE, December 29, 2018	3,907,686	$	4,425,600	$	(9,234,100)	$	(4,808,500)
Repurchase of common stock	(150,000)		(5,081,000)		(18,947,100)		(24,028,100)
Stock options exercised	1,500		156,600		—		156,600
Compensation expense relating to stock options	—		498,800		—		498,800
Cash dividends ($0.15 per share)	—		—		(586,100)		(586,100)
Comprehensive income (Net income)	—		—		7,272,200		7,272,200
BALANCE, March 30, 2019	3,759,186		—		(21,495,100)		(21,495,100)
Stock options exercised	22,153		788,800		—		788,800
Compensation expense relating to stock options	—		516,800		—		516,800
Cash dividends ($0.25 per share)	—		—		(942,800)		(942,800)
Comprehensive income (Net income)	—		—		7,301,900		7,301,900
BALANCE, June 29, 2019	3,781,339	$	1,305,600	$	(15,136,000)	$	(13,830,400)


					Retained
					Earnings
	Common Stock			(Accumulated
	Shares	Amount		Deficit)		Total
BALANCE, December 30, 2017	3,843,078	$	1,476,200	$	(37,189,700)	$	(35,713,500)
Stock options exercised	6,428		48,400		—		48,400
Compensation expense relating to stock options	—		490,800		—		490,800
Cash dividends ($0.11 per share)	—		—		(423,200)		(423,200)
Comprehensive income (Net income)	—		—		6,960,400		6,960,400
BALANCE, March 31, 2018	3,849,506		2,015,400		(30,652,500)		(28,637,100)
Stock options exercised	19,020		798,100		—		798,100
Compensation expense relating to stock options	—		516,100		—		516,100
Cash dividends ($0.15 per share)	—		—		(577,900)		(577,900)
Comprehensive income (Net income)	—		—		7,143,000		7,143,000
BALANCE, June 30, 2018	3,868,526	$	3,329,600	$	(24,087,400)	$	(20,757,800)

The accompanying notes are an integral part of these financial statements

WINMARK CORPORATION AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)


	Six Months Ended
	June 29, 2019		June 30, 2018
OPERATING ACTIVITIES:
Net income	$	14,574,100	$	14,103,400
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		166,000		155,100
Provision for credit losses		79,400		204,000
Compensation expense related to stock options		1,015,600		1,006,900
Deferred income taxes		39,700		39,700
Deferred initial direct costs		(48,000)		(1,083,100)
Amortization of deferred initial direct costs		369,000		562,200
Operating lease right of use asset amortization		207,300		—
Tax benefits on exercised stock options		305,800		125,700
Change in operating assets and liabilities:
Receivables		42,800		294,000
Principal collections on lease receivables		9,543,600		—
Income tax receivable/payable		(1,348,600)		2,273,300
Inventories		(6,800)		(53,000)
Prepaid expenses		48,600		135,800
Other assets		(26,600)		(46,400)
Accounts payable		(184,400)		(570,100)
Accrued and other liabilities		(761,700)		1,674,200
Rents received in advance and security deposits		56,100		(460,100)
Deferred revenue		(357,900)		31,500
Net cash provided by operating activities		23,714,000		18,393,100
INVESTING ACTIVITIES:
Purchase of property and equipment		(153,000)		(298,700)
Purchase of equipment for lease contracts		(5,678,600)		(12,895,200)
Principal collections on lease receivables		—		10,838,200
Net cash used for investing activities		(5,831,600)		(2,355,700)
FINANCING ACTIVITIES:
Proceeds from borrowings on line of credit		18,800,000		4,000,000
Payments on line of credit		(12,800,000)		(21,000,000)
Payments on notes payable		(1,625,000)		(1,625,000)
Repurchases of common stock		(24,028,100)		—
Proceeds from exercises of stock options		945,400		846,500
Dividends paid		(1,528,900)		(1,001,100)
Proceeds from discounted lease rentals		944,400		2,916,900
Net cash used for financing activities		(19,292,200)		(15,862,700)
NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH		(1,409,800)		174,700
Cash, cash equivalents and restricted cash, beginning of period		2,576,000		1,163,200
Cash, cash equivalents and restricted cash, end of period	$	1,166,200	$	1,337,900
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest	$	875,700	$	1,404,800
Cash paid for income taxes	$	5,393,600	$	2,192,700
Non-cash landlord leasehold improvements	$	1,083,200	$	—

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

	Six Months Ended
	June 29, 2019		June 30, 2018
Cash and cash equivalents	$	1,101,200	$	1,232,900
Restricted cash		65,000		105,000
Total cash, cash equivalents and restricted cash	$	1,166,200	$	1,337,900

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

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 29, 2019 are not necessarily indicative of the results to be expected for the full year.

Reclassifications

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

2. Organization and Business:

The Company offers licenses to operate franchises using the service marks Plato’s Closet®, Once Upon A Child®, Play It Again Sports®, Style Encore® and Music Go Round®. The Company uses its Winmark Franchise Partners® mark in connection with its strategic consulting and corporate development activities. The Company also operates both middle market and small-ticket equipment leasing businesses under the Winmark Capital® and Wirth Business Credit® marks.

3. Recent Accounting Pronouncements:

Recently Issued Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses of Financial Instruments, which changes the methodology for measuring credit losses on financial instruments and the timing of when such losses are recorded. This guidance 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 February 2016, the FASB issued 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, as well as adding new disclosures for leasing activities. In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842 (Leases), which provides narrow amendments to clarify how to apply certain aspects of the new lease standard. In July 2018, the FASB also issued ASU 2018-11, Leases (Topic 842): Targeted Improvements, which provides an optional transition method that allows entities to elect to apply the standard prospectively at its effective date, versus recasting the prior periods presented. The Company used the prospective approach of adoption when the new guidance was adopted on December 30, 2018, the second day of fiscal 2019. In addition, the Company elected the package of practical expedients permitted under the transition guidance within the new standard which allowed it to carry forward historical lease classification. Upon adoption, as a lessee, the Company recognized operating lease right-of-use assets of $6.0 million and operating lease liabilities of $6.3 million on its Consolidated Condensed Balance Sheets. The adoption of the standard did not have

a material impact on its Consolidated Condensed Statements of Operations or Shareholders’ Equity (Deficit). As a lessor, the adoption of the new standard required the Company to present cash receipts from leases within operating activities in the Consolidated Condensed Statements of Cash Flows, where in prior periods such cash receipts are presented within investing activities. For the six months ended June 29, 2019, principal collections on lease receivables were $9.5 million.

As a lessor, leasing income for direct financing leases is recognized under the effective interest method. The effective interest method of income recognition applies a constant rate of interest equal to the internal rate of return on the lease. For sales-type leases in which the equipment has a fair value greater or less than its carrying amount, selling profit/loss is recognized at commencement. For subsequent periods or for leases in which the equipment’s fair value is equal to its carrying amount, the recording of income is consistent with the accounting for a direct financing lease. For leases that are accounted for as operating leases, income is recognized on a straight-line basis when payments under the lease contract are due.

Additional information and disclosures required by this new standard for the Company as a lessee are contained in Note 11 – “Operating Leases”, and as a lessor in Note 6 – “Investment in Leasing Operations”.

4. Contract Liabilities:

The Company’s contract liabilities for its franchise revenues consist of deferred revenue associated with franchise fees and software license fees. The table below presents the activity of the current and noncurrent deferred franchise revenue during the second six months of 2019 and 2018, respectively:


	June 29, 2019		June 30, 2018
Balance at beginning of period	$	10,177,300	$	10,310,200
Franchise and software license fees collected from franchisees, excluding amount earned as revenue during the period		598,400		964,700
Fees earned that were included in the balance at the beginning of the period		(956,300)		(933,200)
Balance at end of period	$	9,819,400	$	10,341,700

The following table illustrates future estimated revenue to be recognized for the remainder of 2019 and full fiscal years thereafter related to performance obligations that are unsatisfied (or partially unsatisfied) as of June 29, 2019.


Contract Liabilities expected to be recognized in	Amount
2019	$	849,700
2020		1,657,800
2021		1,519,000
2022		1,374,100
2023		1,202,800
Thereafter		3,216,000
	$	9,819,400

5. Fair Value Measurements:

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

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

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

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

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

6. Investment in Leasing Operations:

Investment in leasing operations consists of the following:


	June 29, 2019		December 29, 2018
Direct financing and sales-type leases:
Minimum lease payments receivable	$	32,130,800	$	40,822,400
Estimated unguaranteed residual value of equipment		4,473,600		4,741,200
Unearned lease income, net of initial direct costs deferred		(5,040,200)		(6,739,900)
Security deposits		(4,108,800)		(4,118,300)
Equipment installed on leases not yet commenced		6,149,200		5,094,800
Total investment in direct financing and sales-type leases		33,604,600		39,800,200
Allowance for credit losses		(727,100)		(861,200)
Net investment in direct financing and sales-type leases		32,877,500		38,939,000
Operating leases:
Operating lease assets		685,800		777,000
Less accumulated depreciation and amortization		(580,400)		(713,000)
Net investment in operating leases		105,400		64,000
Total net investment in leasing operations	$	32,982,900	$	39,003,000

As of June 29, 2019, the $33.0 million total net investment in leases consists of $15.9 million classified as current and $17.1 million classified as long-term. As of December 29, 2018, the $39.0 million total net investment in leases consists of $18.5 million classified as current and $20.5 million classified as long-term.

As of June 29, 2019, leased assets with one customer approximated 16% of the Company’s total assets. A portion of the lease payments receivable from this customer were 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 2019 and the full fiscal years thereafter as of June 29, 2019:


	Direct Financing and Sales-Type Leases				Operating Leases
	Minimum Lease		Income		Minimum Lease
Fiscal Year	Payments Receivable		Amortization		Payments Receivable
2019	$	12,972,900	$	2,752,200	$	11,000
2020		14,003,900		1,963,200		—
2021		4,843,500		316,200		—
2022		298,000		8,000		—
2023		8,100		500		—
Thereafter		4,400		100		—
	$	32,130,800	$	5,040,200	$	11,000

The activity in the allowance for credit losses for leasing operations during the first six months of 2019 and 2018, respectively, is as follows:


	June 29, 2019		June 30, 2018
Balance at beginning of period	$	861,200	$	711,200
Provisions charged to expense		79,400		204,000
Recoveries		10,600		(60,900)
Deductions for amounts written-off		(224,100)		(98,400)
Balance at end of period	$	727,100	$	755,900

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:


	June 29, 2019				December 29, 2018
	Investment		Allowance for		Investment		Allowance for
	In Leases		Credit Losses		In Leases		Credit Losses
Collectively evaluated for loss potential	$	33,604,600		727,100	$	39,800,200	$	861,200
Individually evaluated for loss potential		—		—		—		—
Total	$	33,604,600	$	727,100	$	39,800,200	$	861,200

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 29, 2019
	0-60 Days		61-90 Days		Over 90 Days
	Delinquent		Delinquent		Delinquent and
	and Accruing		and Accruing		Accruing		Non-Accrual		Total
Middle-Market	$	32,285,500	$	—	$	—	$	—	$	32,285,500
Small-Ticket		1,319,100		—		—		—		1,319,100
Total Investment in Leases	$	33,604,600	$	—	$	—	$	—	$	33,604,600


	December 29, 2018
	0-60 Days		61-90 Days		Over 90 Days
	Delinquent		Delinquent		Delinquent and
	and Accruing		and Accruing		Accruing		Non-Accrual		Total
Middle-Market	$	38,395,000	$	—	$	—	$	70,000	$	38,465,000
Small-Ticket		1,335,200		—		—		—		1,335,200
Total Investment in Leases	$	39,730,200	$	—	$	—	$	70,000	$	39,800,200

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

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


	Three Months Ended		Six Months Ended
	June 29, 2019		June 29, 2019
Interest income on direct financing and sales-type leases	$	2,028,300	$	4,210,800
Selling profit (loss) at commencement of sales-type leases		—		873,500
Operating lease income		567,800		1,206,100
Income on sales of equipment under lease		546,300		1,771,900
Other		60,600		296,000
Leasing income	$	3,203,000	$	8,358,300

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 29, 2019	June 30, 2018	June 29, 2019	June 30, 2018
Denominator for basic EPS — weighted average common shares	3,771,439	3,858,446	3,839,563	3,852,880
Dilutive shares associated with option plans	300,969	275,089	296,264	276,175
Denominator for diluted EPS — weighted average common shares and dilutive potential common shares	4,072,408	4,133,535	4,135,827	4,129,055
Options excluded from EPS calculation — anti-dilutive	3,689	19,504	6,710	22,976

8. Shareholders’ Equity (Deficit):

Dividends

On January 23, 2019, 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 February 6, 2019, which was paid on March 1, 2019.

On April 24, 2019, the Company’s Board of Directors approved the payment of a $0.25 per share quarterly cash dividend to shareholders of record at the close of business on May 8, 2019, which was paid on June 3, 2019.

Repurchase of Common Stock

In February 2019, the Company’s Board of Directors authorized the repurchase of up to 150,000 shares of our common stock for a price of $159.63 per share through a tender offer (the “Tender Offer”). The Tender Offer began on the date of the announcement, February 28, 2019 and expired on March 28, 2019. Upon expiration, the Company accepted for payment 150,000 shares for a total purchase price of approximately $24.0 million, including fees and expenses related to the Tender Offer. The Tender Offer was financed in part by net borrowings under the Line of Credit. (See Note 9 – “Debt”).

Under a previous Board of Directors’ authorization, as of June 29, 2019, the Company has the ability to repurchase an additional 130,604 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 29, 2019, 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 29, 2019 was as follows:


				Weighted Average
				Remaining
	Number of	Weighted Average		Contractual Life
	Shares	Exercise Price		(years)		Intrinsic Value
Outstanding, December 29, 2018	639,380	$	84.12	5.61	$	47,808,100
Granted	29,250		164.84
Exercised	(23,653)		39.97
Outstanding, June 29, 2019	644,977	$	89.40	5.44	$	54,018,600
Exercisable, June 29, 2019	482,452	$	72.55	4.38	$	48,533,600

The fair value of options granted under the Option Plans during the first six months of 2019 and 2018 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
	June 29, 2019			June 30, 2018
Risk free interest rate		1.98	%		2.73	%
Expected life (years)		6			6
Expected volatility		20.30	%		20.40	%
Dividend yield		1.26	%		1.17	%
Option fair value	$	32.65		$	31.44

All unexercised options at June 29, 2019 have an exercise price equal to the fair market value on the date of the grant.

Compensation expense of $1,015,600 and $1,006,900 relating to the vested portion of the fair value of stock options granted was expensed to “Selling, General and Administrative Expenses” in the first six months of 2019 and 2018, respectively. As of June 29, 2019, the Company had $4.3 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.

9. Debt:

Line of Credit

As of June 29, 2019, there was $6.0 million in borrowings outstanding under the Company’s revolving credit facility with CIBC Bank USA and BMO Harris Bank N.A. (the “Line of Credit”) bearing interest ranging from 4.60% to 5.50% leaving $44.0 million available for additional borrowings.

The Line of Credit has been and will continue to be used for general corporate purposes. During the first quarter of 2019, the Line of Credit was used to finance in part the Tender Offer (as indicated above). The Line of Credit, which terminates in July 2021, is secured by a lien against substantially all of the Company’s assets, contains customary financial conditions and covenants, and requires maintenance of minimum levels of debt service coverage and tangible net worth and maximum levels of leverage (all as defined within the Line of Credit). As of June 29, 2019, the Company was in compliance with all of its financial covenants.

Notes Payable

As of June 29, 2019, the Company had $17.0 million in principal outstanding from the $25.0 million Series A notes issued in May 2015 and $10.3 million in principal outstanding from the $12.5 million Series B notes issued in August 2017 under its Note Agreement with Prudential Investment Management, Inc., its affiliates and managed accounts (“Prudential”).

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

The Company’s obligations under the Note Agreement are secured by a lien against substantially all of the Company’s assets (as the notes rank pari passu with the Line of Credit), and the Note Agreement contains customary financial conditions and covenants, and requires maintenance of minimum levels of fixed charge coverage and tangible net worth and maximum levels of leverage (all as defined within the Note Agreement). As of June 29, 2019, the Company was in compliance with all of its financial covenants.

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

10. Discounted Lease Rentals:

The Company utilized certain lease receivables and underlying equipment as collateral to borrow from financial institutions at a weighted average rate of 6.30% at June 29, 2019 on a non-recourse basis. As of June 29, 2019, $3.2 million of the $4.9 million liability balance is current.

11. Operating Leases:

As of June 29, 2019, the Company leases its Minnesota corporate headquarters in a facility with an operating lease that expires in December 2029 as well as satellite office space in California with an operating lease that expires in August 2022. Our leases include both lease (fixed payments including rent) and non-lease components (common area or other maintenance costs and taxes) which are accounted for as a single lease component as we have elected the practical expedient to group lease and non-lease components for all leases. The corporate headquarters lease provides us the option to extend the lease for two additional five year periods. The California lease provides us an option to extend the lease for an additional three year period. The lease renewal options are at our sole discretion; therefore, the renewals to extend the lease term are not included in our right of use assets and lease liabilities as they are not reasonably certain of exercise. The weighted average remaining lease term for these leases is 10.3 years and the weighted average discount rate is 5.5%. As our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the lease commencement date in determining the present value of the lease payments. The Company recognized $720,600 and $574,300 of rent expense for the periods ended June 29, 2019 and June 30, 2018, respectively.

Maturities of operating lease liabilities is as follows for the remainder of fiscal 2019 and full fiscal years thereafter as of June 29, 2019:


Operating Lease Liabilities expected to be recognized in	Amount
2019	$	140,200
2020		762,500
2021		783,600
2022		784,400
2023		763,300
Thereafter		5,042,900
Total lease payments		8,276,900
Less imputed interest		(2,013,200)
Present value of lease liabilities	$	6,263,700

Of the $6.3 million operating lease liability outstanding at June 29, 2019, $0.2 million is included in Accrued liabilities in the Current liabilities section of the Consolidated Condensed Balance Sheets.

Supplemental cash flow information related to our operating leases is as follows for the period ended June 29, 2019:


	Six Months Ended
	June 29, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flow outflow from operating leases	$	353,700

12. Segment Reporting:

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


	Three Months Ended				Six Months Ended
	June 29, 2019		June 30, 2018		June 29, 2019		June 30, 2018
Revenue:
Franchising	$	14,201,200	$	13,302,700	$	27,377,100	$	25,934,900
Leasing		3,203,000		4,857,100		8,358,300		10,385,900
Total revenue	$	17,404,200	$	18,159,800	$	35,735,400	$	36,320,800

Reconciliation to operating income:
Franchising segment contribution	$	8,450,800	$	7,407,500	$	15,948,800	$	14,200,000
Leasing segment contribution		1,396,100		2,667,200		3,964,600		5,948,900
Total operating income	$	9,846,900	$	10,074,700	$	19,913,400	$	20,148,900

Depreciation and amortization:
Franchising	$	67,400	$	60,700	$	129,900	$	117,900
Leasing		18,500		18,600		36,100		37,200
Total depreciation and amortization	$	85,900	$	79,300	$	166,000	$	155,100


	As of
	June 29, 2019		December 29, 2018
Identifiable assets:
Franchising	$	4,183,300	$	5,208,400
Leasing		34,248,100		40,490,000
Unallocated		7,724,700		964,700
Total	$	46,156,100	$	46,663,100

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

Overview

As of June 29, 2019, we had 1,249 franchises operating under the Plato’s Closet, Once Upon A Child, Play It Again Sports, Style Encore and Music Go Round brands and had a leasing portfolio of $33.0 million. Management closely tracks the following financial criteria to evaluate current business operations and future prospects: royalties, leasing activity, and selling, general and administrative expenses.

Our most significant source of franchising revenue is royalties received from our franchisees. During the first six months of 2019, our royalties increased $1.5 million or 6.7% compared to the first six months of 2018.

Leasing income net of leasing expense during the first six months of 2019 was $7.3 million compared to $9.3 million in the same period last year. Fluctuations in period-to-period leasing income and leasing expense can result from the manner and timing in which leasing income and leasing expense is recognized over the term of each particular lease in accordance with accounting guidance applicable to leasing. For this reason, we believe that more meaningful levels of leasing activity are the medium- to long-term trend in the purchases of equipment for lease customers and the size of the leasing portfolio. During the first six months of 2019, we purchased $5.7 million in equipment for lease customers compared to $12.9 million in the first six months of 2018. Our leasing portfolio (net investment in leases — current and long-term) decreased to $33.0 million at June 29, 2019 from $39.0 million at December 29, 2018. The lower equipment purchases and the decrease in the size of the leasing portfolio were a direct result of lower equipment purchases by one customer during the first six months compared to last year.

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 six months of 2019, selling, general and administrative expenses decreased $0.1 million, or 0.5% compared to the first six months of 2018.

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 six months ended June 29, 2019:


					AVAILABLE
	TOTAL			TOTAL	FOR	COMPLETED
	12/29/2018	OPENED	CLOSED	6/29/2019	RENEWAL	RENEWALS
Plato’s Closet
Franchises - US and Canada	480	1	(2)	479	21	19
Once Upon A Child
Franchises - US and Canada	379	6	(1)	384	17	17
Play It Again Sports
Franchises - US and Canada	281	2	—	283	5	5
Style Encore
Franchises - US and Canada	67	4	(2)	69	—	—
Music Go Round
Franchises - US	34	—	—	34	3	3
Total Franchised Stores	1,241	13	(5)	1,249	46	44

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 six months of 2019, we renewed 44 of the 46 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, (iii) increase lease originations and minimize write-offs in our leasing portfolio, and (iv) control our selling, general and administrative expenses.

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				Six Months Ended
	June 29, 2019		June 30, 2018		June 29, 2019		June 30, 2018

Revenue:
Royalties	72.7	%	65.1	%	68.3	%	63.0	%
Leasing income	18.4		26.7		23.4		28.6
Merchandise sales	4.1		3.9		3.7		4.1
Franchise fees	2.4		2.1		2.3		2.1
Other	2.4		2.2		2.3		2.2
Total revenue	100.0		100.0		100.0		100.0

Cost of merchandise sold	(3.9)		(3.8)		(3.5)		(3.9)
Leasing expense	(2.1)		(2.7)		(3.0)		(2.9)
Provision for credit losses	(0.4)		(0.6)		(0.2)		(0.6)
Selling, general and administrative expenses	(37.0)		(37.4)		(37.6)		(37.1)
Income from operations	56.6		55.5		55.7		55.5
Interest expense	(2.9)		(3.6)		(2.6)		(3.9)
Interest and other income (expense)	—		(0.1)		—		—
Income before income taxes	53.7		51.8		53.1		51.6
Provision for income taxes	(11.7)		(12.5)		(12.3)		(12.8)
Net income	42.0	%	39.3	%	40.8	%	38.8	%

Comparison of Three Months Ended June 29, 2019 to Three Months Ended June 29, 2019

Revenue

Revenues for the quarter ended June 29, 2019 totaled $17.4 million compared to $18.2 million for the comparable period in 2018.

Royalties and Franchise Fees

Royalties increased to $12.7 million for the second quarter of 2019 from $11.8 million for the second quarter of 2018, a 7.0% increase. The increase is primarily from higher franchisee retail sales and from having additional franchise stores in the second quarter of 2019 compared to the same period last year.

Franchise fees of $0.4 million for the second quarter of 2019 were comparable to $0.4 million for the second quarter of 2018.

Leasing Income

Leasing income decreased to $3.2 million for the second quarter of 2019 compared to $4.9 million for the same period in 2018. The decrease is due to a smaller lease portfolio and a lower level of equipment sales to customers when compared to the same period last year.

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 second quarter of 2019 were comparable to $0.7 million in the same period of 2018.

Segment Comparison of Six Months Ended June 29, 2019 to Six Months Ended June 30, 2018

Franchising Segment Operating Income

The franchising segment’s operating income for the first six months of 2019 increased by $1.7 million to $15.9 million from $14.2 million for the first six months of 2018. The increase in segment contribution was primarily due to increased royalty revenues.

Leasing Segment Operating Income

The leasing segment’s operating income for the first six months of 2019 decreased by $2.0 million to $3.9 million from $5.9 million for the first six months of 2018. The decrease in segment contribution was due to a decrease in leasing income net of leasing expense.

Liquidity and Capital Resources

Our primary sources of liquidity have historically been cash flow 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 compensation expense related to stock options.

We ended the second quarter of 2019 with $1.2 million in cash, cash equivalents and restricted cash compared to $1.3 million in cash, cash equivalents and restricted cash at the end of the second quarter of 2018.

Operating activities provided $23.7 million of cash during the first six months of 2019 compared to $18.4 million provided during the same period last year. The increase in cash provided by operating activities in the first six months of 2019 compared to 2018 was primarily due to the classification of principal collections on lease receivables of $9.5 million as operating activities in 2019, where such collections in 2018 were classified as investing activities. (See Note 3 – “Recent Accounting Pronouncements”).

Investing activities used $5.8 million of cash during the first six months of 2019. The 2019 activities consisted primarily of the purchase of equipment for lease customers of $5.7 million.

Financing activities used $19.3 million of cash during the first six months of 2019. Our most significant financing activities during the first six months of 2019 consisted of $24.0 million to repurchase 150,000 shares of our common stock in the Tender Offer (including fees and expenses), net borrowings on our Line of Credit of $6.0 million to fund in part the Tender Offer, payments on notes payable of $1.6 million and $1.5 million for the payment of dividends; partially offset by $0.9 million in proceeds received from discounted lease rentals and $0.9 million of proceeds from exercise of stock options. (See Note 8 — “Shareholders’ Equity (Deficit),” Note 9 — “Debt” and Note 10 — “Discounted Lease Rentals”).

As of June 29, 2019, we had no off balance sheet arrangements.

As of June 29, 2019, our borrowing availability under our Line of Credit was $50.0 million (the lesser of the borrowing base or the aggregate line of credit). There were $6.0 million in borrowings outstanding at June 29, 2019 under the Line of Credit bearing interest from 4.60% to 5.50% leaving $44.0 million available for additional borrowings.

During the first six months of 2019, the Line of Credit was used to finance in part the Tender Offer and has been and will continue to be used for general corporate purposes. In July 2019 and each subsequent July thereafter through the term of the facility, the aggregate commitments under the Line of Credit automatically reduce by $5.0 million. The Line of Credit is secured by a lien against substantially all of our assets, contains customary financial conditions and covenants, and requires maintenance of minimum levels of debt service coverage and tangible net worth and maximum levels of leverage (all as defined within the Line of Credit).

As of June 29, 2019, we had $17.0 million in principal outstanding from the $25.0 million Series A notes issued in May 2015 and $10.3 million in principal outstanding from the $12.5 million Series B notes issued in August 2017 under our Note Agreement with Prudential.

The final maturity of the Series A and Series B notes is 10 years from the issuance date. For the Series A notes, interest at a rate of 5.50% per annum on the outstanding principal balance is payable quarterly, along with required prepayments of the principal of $500,000 quarterly for the first five years, and $750,000 quarterly thereafter until the principal is paid in full. For the Series B notes, interest at a rate of 5.10% per annum on the outstanding principal balance is payable quarterly, along with required prepayments of the principal of $312,500 quarterly until the principal is paid in full. The Series A and Series B notes may be prepaid, at our option, in whole or in part (in a minimum amount of $1.0 million), but prepayments require payment of a Yield Maintenance Amount, as defined in the Note Agreement.

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

As of June 29, 2019, we were in compliance with all of the financial covenants under the Line of Credit and Note Agreement.

We expect to generate the cash necessary to pay our expenses, finance our leasing business and to pay the principal and interest on our outstanding debt from cash flows provided by operating activities and by opportunistically using other means to repay or refinance our obligations as we determine appropriate. Our ability to pay our expenses, finance our leasing business 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 29, 2018. 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.

We may utilize discounted lease financing to provide funds for a portion of our leasing activities. Rates for discounted lease financing reflect prevailing market interest rates and the credit standing of the lessees for which the payment stream of the leases are discounted. We believe that discounted lease financing will continue to be available to us at competitive rates of interest through the relationships we have established with financial institutions.

We believe that the combination of our cash on hand, the cash generated from our franchising business, cash generated from discounting sources and our Line of Credit will be adequate to fund our planned operations through 2020.

Critical Accounting Policies

The Company prepares the consolidated condensed financial statements of Winmark Corporation and Subsidiaries in conformity with accounting principles generally accepted in the United States of America. As such, the Company is required to make certain estimates, judgments and assumptions that it believes are reasonable based on information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the periods presented. There can be no assurance that actual results will not differ from these estimates. The critical accounting policies that the Company believes are most important to aid in fully understanding and evaluating the reported financial results include the following:

Revenue Recognition — Royalty Revenue and Franchise Fees

The Company collects royalties from each retail franchise based on a percentage of retail store gross sales. The Company recognizes royalties as revenue when earned. At the end of each accounting period, estimates of royalty amounts due are made based on applying historical weekly sales information to the number of weeks of unreported franchisee sales. If there are significant changes in the actual performance of franchisees versus the Company’s estimates, its royalty revenue would be impacted. During the first six months of 2019, the Company collected $27,100 less than it estimated at December 29, 2018. As of June 29, 2019, the Company’s royalty receivable was $1,433,500.

The Company collects initial franchise fees when franchise agreements are signed and recognizes the initial franchise fees as revenue over the estimated life of the franchise, beginning when the franchise is opened. Franchise fees collected

from franchisees but not yet recognized as income are recorded as deferred revenue in the liability section of the consolidated condensed balance sheet. As of June 29, 2019, deferred franchise fee revenue was $7,850,700.

Leasing Income Recognition

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

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

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

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

Allowance for Credit Losses

The Company maintains an allowance for credit losses at an amount that it believes to be sufficient to absorb losses inherent in its existing lease portfolio as of the reporting dates. Leases are collectively evaluated for potential loss. The Company’s methodology for determining the allowance for credit losses includes consideration of the level of delinquencies and non-accrual leases, historical net charge-off amounts and review of any significant concentrations.

A provision is charged against earnings to maintain the allowance for credit losses at the appropriate level. If the actual results are different from the Company’s estimates, results could be different. The Company’s policy is to charge-off against the allowance the estimated unrecoverable portion of accounts once they reach 121 days delinquent. (See Note 6 — “Investment in Leasing Operations”).

Stock-Based Compensation

The Company currently uses the Black-Scholes option pricing model to determine the fair value of stock options. The determination of the fair value of the awards on the date of grant using an option-pricing model is affected by stock price as well as assumptions regarding a number of complex and subjective variables. These variables include implied volatility over the term of the awards, actual and projected employee stock option exercise behaviors, risk-free interest rate and expected dividends.

The Company evaluates the assumptions used to value awards on an annual basis. If factors change and the Company employs different assumptions for estimating stock-based compensation expense in future periods or if the Company decides to use a different valuation model, the future periods may differ significantly from what it has recorded in the current period and could materially affect operating income, net income and earnings per share.

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, 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. 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

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 29, 2018. 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 29, 2018.

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

Purchase of Equity Securities by the Issuer and Affiliated Purchasers

The following table summarized the Company’s common stock repurchase during the second quarter of 2019. No shares were purchased during the quarter.


				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

March 31, 2019 to May 4, 2019	—	$	—	—	130,604
May 5, 2019 to June 1, 2019	—	$	—	—	130,604
June 2, 2019 to June 29, 2019	—	$	—	—	130,604

(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 is currently limited to 5,000,000 shares, of which 130,604 may still be repurchased.

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.

		PAGE

PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)

	CONSOLIDATED CONDENSED BALANCE SHEETS
	June 29, 2019 and December 29, 2018	3

	CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
	Three Months Ended June 29, 2019 and June 30, 2018
	Six Months Ended June 29, 2019 and June 30, 2018	4

	CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT):
	Three Months Ended June 29, 2019 and June 30, 2018
	Six Months Ended June 29, 2019 and June 30, 2018	5

	CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
	Six Months Ended June 29, 2019 and June 30, 2018	6

	NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS	7 - 14

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15 - 22

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	22

Item 4.	Controls and Procedures	22

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	23

Item 1A.	Risk Factors	23

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	23

Item 3.	Defaults Upon Senior Securities	23

Item 4.	Mine Safety Disclosures	23

Item 5.	Other Information	23

Item 6.	Exhibits	24

	SIGNATURES	25

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 June 29, 2019, formatted in 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.

		WINMARK CORPORATION


Date: July 23, 2019	By:	/s/ Brett D. Heffes
		Brett D. Heffes Chief Executive Officer and Director (principal executive officer)


Date: July 23, 2019	By:	/s/ Anthony D. Ishaug
		Anthony D. Ishaug Executive Vice President Chief Financial Officer and Treasurer (principal financial and accounting officer)