UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)



☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~September 28, 2019~~

June 27, 2020



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

For the transition period from _____ to _____

Commission File No. 001-37425

WINGSTOP INC.

(Exact name of registrant as specified in its charter)



~~Delaware~~

~~47-3494862~~

Delaware

47-3494862

(State or other jurisdiction of incorporation or organization)

(IRS Employer Identification No.)

5501 LBJ Freeway

5th Floor

Dallas

Texas

75240

(Address of principal executive offices)

(Zip Code)

(~~972~~) (972) 686-6500

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.01 per share

WING

NASDAQ Global Select 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. x 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). x 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

Accelerated filer

Non-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 x No

On ~~October 29, 2019~~July 28, 2020 there were ~~29,453,374~~29,598,958 shares of common stock outstanding.

~~TABLE OF CONTENTS~~

TABLE OF CONTENTS


		Page
PART I	Financial Information	4
Item 1.	Financial Statements	4
	Consolidated Balance Sheets - ~~September 28, 2019~~June 27, 2020 (Unaudited) and December ~~29, 2018~~28, 2019	4
	Consolidated Statements of Operations (Unaudited) - Thirteen and ~~Thirty-Nine~~Twenty-six Weeks Ended ~~September 28,~~June 27, 2020 and June 29, 2019 ~~and September 29, 2018~~	5
	Consolidated Statement of Stockholders’ Deficit (Unaudited) - ~~Thirty-Nine~~Twenty-six Weeks Ended ~~September 28,~~June 27, 2020 and June 29, 2019 ~~and September 29, 2018~~	6
	Consolidated Statements of Cash Flows (Unaudited) - ~~Thirty-Nine~~Twenty-six Weeks Ended ~~September 28,~~June 27, 2020 and June 29, 2019 ~~and September 29, 2018~~	87
	Notes to Consolidated Financial Statements (Unaudited)	98
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	1813
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	3225
Item 4.	Controls and Procedures	3326

PART II	Other Information	3427
Item 1.	Legal Proceedings	3427
Item 1A.	Risk Factors	3427
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	3428
Item 3.	Defaults Upon Senior Securities	3428
Item 4.	Mine Safety Disclosures	3428
Item 5.	Other Information	3428
Item 6.	Exhibits	3529
	Signatures	3630

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

WINGSTOP INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(amounts in thousands, except share and ~~per share~~par value amounts)


	June 27, 2020		December 28, 2019
	(Unaudited)
Assets
Current assets
Cash and cash equivalents	$	45,766	$	12,849
Restricted cash	4,132		4,790
Accounts receivable, net	5,580		5,175
Prepaid expenses and other current assets	4,118		2,449
Advertising fund assets, restricted	7,860		4,927
Total current assets	67,456		30,190
Property and equipment, net	27,220		27,842
Goodwill	50,160		50,188
Trademarks	32,700		32,700
Customer relationships, net	12,255		12,910
Other non-current assets	11,323		12,283
Total assets	$	201,114	$	166,113
Liabilities and stockholders' deficit
Current liabilities
Accounts payable	$	2,890	$	3,348
Other current liabilities	20,829		21,454
Current portion of debt	16,000		3,200
Advertising fund liabilities	7,860		4,927
Total current liabilities	47,579		32,929
Long-term debt, net	310,846		307,669
Deferred revenues, net of current	22,280		22,343
Deferred income tax liabilities, net	6,043		4,485
Other non-current liabilities	7,038		8,115
Total liabilities	393,786		375,541
Commitments and contingencies (see Note 7)
Stockholders' deficit
Common stock, $0.01 par value; 100,000,000 shares authorized; 29,596,347 and 29,457,228 shares issued and outstanding as of June 27, 2020 and December 28, 2019, respectively	296		295
Additional paid-in-capital	43		552
Accumulated deficit	(193,011)		(210,275)
Total stockholders' deficit	(192,672)		(209,428)
Total liabilities and stockholders' deficit	$	201,114	$	166,113

September 28,
2019 December 29,
2018
(Unaudited)
Assets

Current assets

Cash and cash equivalents $ 9,472
$ 12,493
Restricted cash 4,842
4,462
Accounts receivable, net 5,859
5,764
Prepaid expenses and other current assets 3,540
2,056
Advertising fund assets, restricted 8,470
5,131
Total current assets 32,183
29,906
Property and equipment, net 27,291
8,338
Goodwill 50,172
49,655
Trademarks 32,700
32,700
Customer relationships, net 13,241
14,233
Other non-current assets 12,480
4,917
Total assets $ 168,067
$ 139,749
Liabilities and stockholders' deficit
Current liabilities
Accounts payable $ 2,359
$ 2,750
Other current liabilities 17,962
16,201
Current portion of debt 8,200
2,400
Advertising fund liabilities 8,470
5,131
Total current liabilities 36,991
26,482
Long-term debt, net 308,081
309,374
Deferred revenues, net of current 22,058
21,885
Deferred income tax liabilities, net 4,355
4,866
Other non-current liabilities 8,157
1,972
Total liabilities 379,642
364,579
Commitments and contingencies (see Note 9)

Stockholders' deficit
Common stock, $0.01 par value; 100,000,000 shares authorized; 29,453,374 and 29,296,939 shares issued and outstanding as of September 28, 2019 and December 29, 2018, respectively 295
293
Additional paid-in-capital 337
1,036
Accumulated deficit (212,207 ) (226,159 )
Total stockholders' deficit (211,575 ) (224,830 )
Total liabilities and stockholders' deficit $ 168,067
$ 139,749

See accompanying notes to consolidated financial statements.

WINGSTOP INC. AND SUBSIDIARIES

Consolidated Statements of Operations

(amounts in thousands, except per share data)

(Unaudited)

Thirteen Weeks Ended Thirty-Nine Weeks Ended
September 28,
2019 September 29,
2018 September 28,
2019 September 29,
2018
Revenue:

Royalty revenue, franchise fees and other $ 21,876
$ 17,787
$ 64,391
$ 52,772
Advertising fees and related income 14,056
8,614
40,753
25,574
Company-owned restaurant sales 13,943
11,845
41,346
34,326
Total revenue 49,875
38,246
146,490
112,672
Costs and expenses:

Cost of sales ⁽¹⁾
10,339
8,040
30,642
23,182
Advertising expenses 12,652
8,431
38,359
25,283
Selling, general and administrative 13,527
10,285
39,463
31,196
Depreciation and amortization 1,408
1,134
4,019
3,163
Total costs and expenses 37,926
27,890
112,483
82,824
Operating income 11,949
10,356
34,007
29,848
Interest expense, net 4,243
2,545
12,952
6,623
Income before income tax expense 7,706
7,811
21,055
23,225
Income tax expense 1,801
1,518
3,626
3,925
Net income $ 5,905
$ 6,293
$ 17,429
$ 19,300

Earnings per share
Basic $ 0.20
$ 0.21
$ 0.59
$ 0.66
Diluted $ 0.20
$ 0.21
$ 0.59
$ 0.65

Weighted average shares outstanding
Basic 29,449
29,284
29,401
29,210
Diluted 29,696
29,584
29,667
29,561

Dividends per share $ 0.11
$ 0.09
$ 0.29
$ 3.40


	Thirteen Weeks Ended						Twenty-Six Weeks Ended
	June 27, 2020		June 29, 2019		June 27, 2020		June 29, 2019
Revenue:
Royalty revenue, franchise fees and other	$	27,858	$	21,187	$	52,057	$	42,515
Advertising fees and related income	19,923		13,487		35,937		26,697
Company-owned restaurant sales	18,324		13,888		33,547		27,403
Total revenue	66,105		48,562		121,541		96,615
Costs and expenses:
Cost of sales ⁽¹⁾	13,387		10,573		24,563		20,303
Advertising expenses	18,589		12,973		33,513		25,707
Selling, general and administrative	13,194		13,394		27,504		25,936
Depreciation and amortization	1,398		1,335		2,953		2,611
Total costs and expenses	46,568		38,275		88,533		74,557
Operating income	19,537		10,287		33,008		22,058
Interest expense, net	4,214		4,299		8,359		8,709

Income before income tax expense	15,323		5,988		24,649		13,349
Income tax expense	3,784		1,070		5,014		1,825
Net income	$	11,539	$	4,918	$	19,635	$	11,524

Earnings per share
Basic	$	0.39	$	0.17	$	0.66	$	0.39
Diluted	$	0.39	$	0.17	$	0.66	$	0.39

Weighted average shares outstanding
Basic	29,588		29,418		29,538		29,377
Diluted	29,793		29,667		29,751		29,650

Dividends per share	$	0.11	$	0.09	$	0.22	$	0.18

⁽¹⁾ Cost of sales includes all operating expenses of company-owned restaurants, including advertising expenses, and excludes depreciation and amortization, which are presented separately.

See accompanying notes to consolidated financial statements.

WINGSTOP INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders' Deficit

For the ~~Thirty-Nine~~Twenty-Six Weeks Ended ~~September~~June 29, ~~2018~~2019 and June 27, 2020

(amounts in thousands, except share data)

(Unaudited)


	Common Stock
	Shares	Amount		Additional Paid-In Capital		Accumulated Deficit		Total Stockholders’ Deficit
Balance at December 29, 2018	29,296,939	$	293	$	1,036	$	(226,159)	$	(224,830)
Adjustment for ASC 842 adoption	—	—		—		154		154
Net income	—	—		—		6,606		6,606
Shares issued under stock plans	114,936	1		157		—		158
Tax payments for restricted stock upon vesting	(12,469)	—		—		(833)		(833)
Stock-based compensation expense	—	—		838		—		838
Dividends paid	—	—		(1,825)		(746)		(2,571)
Balance at March 30, 2019	29,399,406	294		206		(220,978)		(220,478)
Net income	—	—		—		4,918		4,918
Shares issued under stock plans	45,778	1		147		—		148
Tax payments for restricted stock upon vesting	(2,456)	—		—		(226)		(226)
Stock-based compensation expense	—	—		1,928		—		1,928
Dividends paid	—	—		(1,389)		(1,269)		(2,658)
Balance at June 29, 2019	29,442,728	$	295	$	892	$	(217,555)	$	(216,368)

Common Stock
Shares Amount
Additional
Paid-In Capital
Accumulated Deficit Total Stockholders’ Deficit
Balance at December 30, 2017 29,092,669
$ 291
$ 262
$ (58,971 ) $ (58,418 )
Net income —
—
—
6,168
6,168
Issuance of common stock 41,159
1
(1 ) —
—
Exercise of stock options 25,182
—
165
—
165
Tax payments for restricted stock upon vesting (3,187 ) —
—
(142 ) (142 )
Stock-based compensation expense —
—
514
—
514
Dividends paid —
—
(895 ) (93,902 ) (94,797 )
Balance at March 31, 2018 29,155,823
292
45
(146,847 ) (146,510 )
Net income —
—
—
6,839
6,839
Issuance of common stock 5,105
—
—
—
—
Exercise of stock options 110,615
1
289
—
290
Stock-based compensation expense —
—
742
—
742
Dividends paid —
—
(1,038 ) (1,020 ) (2,058 )
Balance at June 30, 2018 29,271,543
293
38
(141,028 ) (140,697 )
Net income —
—
—
6,293
6,293
Issuance of common stock 4,178
—
—
—
—
Exercise of stock options 21,130
—
51
—
51
Tax payments for restricted stock upon vesting (804 ) —
—
(40 ) (40 )
Stock-based compensation expense —
—
756
—
756
Dividends paid —
—
(745 ) (1,877 ) (2,622 )
Balance at September 29, 2018 29,296,047
$ 293
$ 100
$ (136,652 ) $ (136,259 )


	Common Stock
	Shares	Amount		Additional Paid-In Capital		Accumulated Deficit		Total Stockholders’ Deficit
Balance at December 28, 2019	29,457,228	$	295	$	552	$	(210,275)	$	(209,428)
Net income	—	—		—		8,096		8,096
Shares issued under stock plans	128,585	1		504		—		505
Tax payments for restricted stock upon vesting	(2,419)	—		—		(229)		(229)
Stock-based compensation expense	—	—		1,331		—		1,331
Dividends paid	—	—		(2,168)		(1,055)		(3,223)
Balance at March 28, 2020	29,583,394	296		219		(203,463)		(202,948)
Net income	—	—		—		11,539		11,539
Shares issued under stock plans	13,057	—		57		—		57
Tax payments for restricted stock upon vesting	(104)	—		—		(12)		(12)
Stock-based compensation expense	—	—		1,969		—		1,969
Dividends paid	—	—		(2,202)		(1,075)		(3,277)
Balance at June 27, 2020	29,596,347	$	296	$	43	$	(193,011)	$	(192,672)

See accompanying notes to consolidated financial statements.

~~WINGSTOP INC. AND SUBSIDIARIES~~

~~Consolidated Statements of Stockholders' Deficit~~

~~For the Thirty-Nine Weeks Ended September 28, 2019~~

~~(amounts in thousands, except share data)~~

~~(Unaudited)~~

Common Stock
Shares Amount Additional
Paid-In Capital Accumulated Deficit Total Stockholders’ Deficit
Balance at December 29, 2018 29,296,939
$ 293
$ 1,036
$ (226,159 ) $ (224,830 )
Adjustment for ASC 842 adoption —
—
—
154
154
Net income —
—
—
6,606
6,606
Issuance of common stock 60,683
1
(1 ) —
—
Exercise of stock options 54,253
—
158
—
158
Tax payments for restricted stock upon vesting (12,469 ) —
—
(833 ) (833 )
Stock-based compensation expense —
—
838
—
838
Dividends paid —
—
(1,825 ) (746 ) (2,571 )
Balance at March 30, 2019 29,399,406
294
206
(220,978 ) (220,478 )
Net income —
—
—
4,918
4,918
Issuance of common stock 12,339
—
—
—
—
Exercise of stock options 33,439
1
147
—
148
Tax payments for restricted stock upon vesting (2,456 ) —
—
(226 ) (226 )
Stock-based compensation expense —
—
1,928
—
1,928
Dividends paid —
—
(1,389 ) (1,269 ) (2,658 )
Balance at June 29, 2019 29,442,728
295
892
(217,555 ) (216,368 )
Net income —
—
—
5,905
5,905
Issuance of common stock 2,733
—
—
—
—
Exercise of stock options 8,827
—
174
—
174
Tax payments for restricted stock upon vesting (914 ) —
—
(84 ) (84 )
Stock-based compensation expense —
—
2,043
—
2,043
Dividends paid —
—
(2,772 ) (473 ) (3,245 )
Balance at September 28, 2019 29,453,374
$ 295
$ 337
$ (212,207 ) $ (211,575 )

~~See accompanying notes to consolidated financial statements.~~

WINGSTOP INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(amounts in thousands)

(Unaudited)


	Twenty-Six Weeks Ended
	June 27, 2020		June 29, 2019

Operating activities
Net income	$	19,635	$	11,524
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization	2,953		2,611
Deferred income taxes	1,720		(687)
Stock-based compensation expense	3,300		2,766
Gain on disposal of assets	(2,016)		—
Amortization of debt issuance costs	815		775
Changes in operating assets and liabilities:
Accounts receivable	(405)		123
Prepaid expenses and other assets	(652)		(678)
Advertising fund assets and liabilities, net	2,004		(2,664)
Accounts payable and other current liabilities	(675)		(3,503)
Deferred revenue	10		(258)
Other non-current liabilities	(1,077)		482
Cash provided by operating activities	25,612		10,491

Investing activities
Purchases of property and equipment	(2,670)		(1,442)

Proceeds from sales of assets	2,300		—
Cash used in investing activities	(370)		(1,442)

Financing activities

Proceeds from exercise of stock options	562		306
Borrowings of long-term debt	16,000		—
Repayments of long-term debt	(800)		(800)

Tax payments for restricted stock upon vesting	(241)		(1,059)
Dividends paid	(6,500)		(5,229)
Cash provided by (used in) financing activities	9,021		(6,782)

Net increase in cash, cash equivalents, and restricted cash	34,263		2,267
Cash, cash equivalents, and restricted cash at beginning of period	21,175		20,940
Cash, cash equivalents, and restricted cash at end of period	$	55,438	$	23,207

Thirty-Nine Weeks Ended
September 28,
2019 September 29,
2018

Operating activities

Net income $ 17,429
$ 19,300
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization 4,019
3,163
Deferred income taxes (555 ) (278 )
Stock-based compensation expense 4,809
2,012
Amortization of debt issuance costs 1,179
265
Changes in operating assets and liabilities:
Accounts receivable (188 ) 649
Prepaid expenses and other assets (979 ) (280 )
Advertising fund assets and liabilities, net 3,164
4,457
Accounts payable and other current liabilities (1,014 ) 587
Deferred revenue 528
877
Other non-current liabilities 194
(129 )
Cash provided by operating activities 28,586
30,623

Investing activities
Purchases of property and equipment (21,082 ) (2,883 )
Acquisition of restaurant from franchisee (1,229 ) (5,996 )
Cash used in investing activities (22,311 ) (8,879 )

Financing activities
Proceeds from exercise of stock options 480
506
Borrowings of long-term debt 5,000
231,108
Repayments of long-term debt (1,600 ) (149,500 )
Payment of deferred financing costs (15 ) (782 )
Tax payments for restricted stock upon vesting (1,143 ) (182 )
Dividends paid (8,474 ) (99,476 )
Cash used in financing activities (5,752 ) (18,326 )

Net change in cash, cash equivalents, and restricted cash 523
3,418
Cash, cash equivalents, and restricted cash at beginning of period 20,940
6,392
Cash, cash equivalents, and restricted cash at end of period $ 21,463
$ 9,810

See accompanying notes to consolidated financial statements.

WINGSTOP INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

(1) Basis of Presentation and Update to Significant Accounting Policies

Basis of Presentation

Wingstop Inc., together with its consolidated subsidiaries (collectively, “Wingstop” or the “Company”), is in the business of franchising and operating Wingstop restaurants. As of ~~September 28, 2019, 1,169~~June 27, 2020, the Company had 1,244 domestic franchised restaurants, ~~were in operation domestically,~~ and ~~141~~162 international franchised ~~restaurants were in operation internationally.~~restaurants. As of ~~September 28, 2019,~~June 27, 2020, the Company owned and operated 30 restaurants.

The accompanying unaudited consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial information. Consequently, financial information and disclosures normally included in financial statements prepared annually in accordance with accounting principles generally accepted in the United States have been condensed or omitted. Balance sheet amounts are as of ~~September~~June 27, 2020 and December 28, 2019, ~~and December 29, 2018,~~ and operating results are for the thirteen and ~~thirty-nine~~twenty-six weeks ended ~~September 28, 2019~~June 27, 2020 and ~~September~~June 29, ~~2018.~~2019.

In the Company’s opinion, all necessary adjustments have been made for the fair presentation of the results of the interim periods presented. The results of operations for such interim periods are not necessarily indicative of the results to be expected for the full year. The accompanying interim unaudited consolidated financial statements should be read in conjunction with the audited financial statements and the related notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December ~~29, 2018.~~28, 2019.

The Company uses a 52/53-week fiscal year that ends on the last Saturday of the calendar year. Fiscal years 2020 and 2019 ~~and 2018~~each have 52 weeks.

Cash, Cash Equivalents, and Restricted Cash

Cash, cash equivalents, and restricted cash within the Consolidated Balance Sheets and the Consolidated Statements of Cash Flows as of ~~September~~June 27, 2020 and December 28, 2019 ~~and December 29, 2018~~ were as follows (in thousands):

September 28, 2019 December 29, 2018
Cash and cash equivalents $ 9,472
$ 12,493
Restricted cash 4,842
4,462
Restricted cash, included in Advertising fund assets, restricted 7,149
3,985
Total cash, cash equivalents, and restricted cash $ 21,463
$ 20,940


	June 27, 2020		December 28, 2019
Cash and cash equivalents	$	45,766	$	12,849
Restricted cash	4,132		4,790
Restricted cash, included in Advertising fund assets, restricted	5,540		3,536
Total cash, cash equivalents, and restricted cash	$	55,438	$	21,175

~~Advertising Fund~~Segment Reporting

Historically, the Company had two reporting segments: franchise operations and company restaurant operations. In accordance with Accounting Standards Codification 280 “Segment Reporting”, the Company uses the management approach for determining its reportable segments. The management approach is based upon the way management reviews performance and allocates resources. Due to changes in how the Company’s chief operating decision maker assesses the Company’s performance and allocates resources, the Company ~~administers the Wingstop Restaurants Advertising Fund (“Ad Fund”), for which a percentage of gross sales is collected from Wingstop restaurant franchisees~~reevaluated its operating segments and company-owned restaurants to be used for various forms of advertising for the Wingstop brand. Beginning in fiscal year 2019, the Ad Fund contribution collected from domestic Wingstop restaurant franchiseeshas determined it has one operating segment and ~~company-owned restaurants increased from 3% to 4% of gross sales.~~

The Company consolidates and reports all assets and liabilities of the Ad Fund as restricted assets and liabilities of the Ad Fund within current assets and current liabilities, respectively, in the Consolidated Balance Sheets. Ad Fund contributions, which were equal to 4% of gross sales for the thirty-nine weeks ended September 28, 2019 and 3% of gross sales for the thirty-nine weeks ended September 29, 2018, and Ad Fund expenditures are reported on a gross basis in the Consolidated Statements of Operations, which are largely offsetting and therefore do not impact our reported net income. Company-operated restaurants’ Ad Fund contributions are included in cost of sales in the Consolidated Statements of Operations.

one reporting segment.

Recently ~~Adopted~~Issued Accounting Pronouncements

In ~~February 2016,~~December 2019, the Financial Accounting Standards Board ~~(“FASB”)~~ issued Accounting Standard Update ~~(“ASU”) 2016-02,~~No. 2019-12, ~~Leases~~Income Taxes (Topic ~~842)~~740): Simplifying the Accounting for Income Taxes (“("ASU ~~2016-02”~~2019-12"). ASU ~~2016-02 amends the existing accounting standards~~2019-12 is effective for ~~lease accounting,~~fiscal years beginning after December 15, 2020, including ~~requiring lessees to recognize most leases on their balance sheets and making targeted changes to lessor accounting. The new guidance also requires additional disclosures about leases.~~applicable interim periods. The Company ~~adopted~~is currently assessing the ~~requirements~~impact of adopting this standard but does not expect the ~~new standard as~~adoption of ~~the~~this guidance to have a material impact on its consolidated financial statements.

WINGSTOP INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

first day of fiscal year 2019 using the modified retrospective approach without restating comparative periods. As part of our adoption, we elected the package of practical expedients, as well as the hindsight practical expedient, permitted under the new guidance, which, among other things, allowed the Company to continue utilizing historical classification of leases. In addition, we elected not to separate non-lease components for our real estate leases.

The adoption of the new standard resulted in the recording of a right-of-use asset of approximately $8.5 million and lease liabilities of approximately $10.3 million, and had an immaterial impact on retained earnings as of the beginning of fiscal year 2019. The standard did not materially impact our Consolidated Statements of Operations and had no impact on cash flows.

(2) Earnings per Share

Basic earnings per share is computed by dividing income available to common stockholders by the weighted average number of shares of common ~~shares~~stock outstanding for the reporting period. Diluted earnings per share reflects the potential dilution that could occur if securities convertible into, or other contracts to issue, common stock were exercised or converted into common stock. For the calculation of diluted earnings per share, the basic weighted average number of shares is increased by the dilutive effect of the exercise and vesting of stock options and restricted stock units, respectively, as determined using the treasury stock method.

Basic weighted average shares outstanding is reconciled to diluted weighted average shares outstanding as follows (in thousands):

Thirteen Weeks Ended Thirty-Nine Weeks Ended
September 28,
2019 September 29,
2018 September 28,
2019 September 29,
2018
Basic weighted average shares outstanding 29,449
29,284
29,401
29,210
Dilutive shares 247
300
266
351
Diluted weighted average shares outstanding 29,696
29,584
29,667
29,561


	Thirteen Weeks Ended			Twenty-Six Weeks Ended
	June 27, 2020	June 29, 2019	June 27, 2020	June 29, 2019
Basic weighted average shares outstanding	29,588	29,418	29,538	29,377
Dilutive shares	205	249	213	273
Diluted weighted average shares outstanding	29,793	29,667	29,751	29,650

For the thirteen weeks ended ~~September 28,~~June 27, 2020 and June 29, 2019, ~~and September 29, 2018,~~ equity awards representing approximately ~~100~~1,000 and ~~1,000~~6,000 shares, respectively, were excluded from the dilutive earnings per share calculation because the effect would have been anti-dilutive.

For the ~~thirty-nine~~twenty-six weeks ended ~~September 28,~~June 27, 2020 and June 29, 2019, ~~and September 29, 2018,~~ equity awards representing approximately ~~2,000~~1,000 and ~~4,000~~18,000 shares, respectively, were excluded from the dilutive earnings per share calculation because the effect would have been anti-dilutive.

(3) Dividends

~~The Company’s Board of Directors declared a quarterly dividend of $0.09 per share of common stock in~~In each of the first two quarters ~~and a quarterly dividend~~ of $0.11 per share of common stock in the third quarter, resulting in aggregate dividends of $8.5 million, or $0.29 per share of common stock, being paid during the thirty-nine weeks ended September 28, 2019.

~~Subsequent to the end of the third quarter, on October 29, 2019,~~2020, the Company’s Board of Directors declared a quarterly dividend of $0.11 per share of common stock, which, in the aggregate, totaled $6.5 million, or $0.22 per share of common stock, and which was paid during the twenty-six weeks ended June 27, 2020.

Subsequent to the second quarter, on July 28, 2020, the Company’s Board of Directors declared a quarterly dividend of $0.14 per share of common stock for stockholders of record as of ~~November 29, 2019,~~August 28, 2020, to be paid on ~~December 13, 2019,~~September 11, 2020, totaling approximately ~~$3.2~~$4.1 million.

(4) Fair Value Measurements

Fair value is the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date and in the principal or most advantageous market for that asset or liability. Assets and liabilities are classified using a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value as follows:

Level 1 — Unadjusted quoted prices for identical instruments traded in active markets.

Level 2 — Observable market-based inputs or unobservable inputs corroborated by market data.

Level 3 — Unobservable inputs reflecting management’s estimates and assumptions.

~~WINGSTOP INC. AND SUBSIDIARIES~~

~~Notes to Consolidated Financial Statements~~

~~(Unaudited)~~

The carrying values of cash and cash equivalents, accounts receivable, and accounts payable approximate fair value due to their short-term nature. Fair value of debt is determined on a non-recurring basis, which results are summarized as follows (in thousands):


	Fair Value Hierarchy	June 27, 2020									December 28, 2019
				Carrying Value			Fair Value			Carrying Value			Fair Value
Securitized Financing Facility:
2018-1 Class A-2 Senior Secured Notes ⁽¹⁾	Level 2	$	316,800		$	314,395		$	317,600		$	331,247
2018-1 Class A-1 Variable Funding Senior Notes ⁽²⁾	Level 2	$	16,000		$	16,000		$	—		$	—

Fair Value
Hierarchy
September 28, 2019 December 29, 2018

Carrying
Value
Fair Value
Carrying
Value
Fair Value
Securitized Financing Facility:
2018-1 Class A-2 Senior Secured Notes ⁽¹⁾
Level 2 $ 318,400
$ 334,629
$ 320,000
$ 320,000
2018-1 Class A-1 Variable Funding Senior Notes ⁽²⁾
Level 2 $ 5,000
$ 5,000
$ —
$ —

⁽¹⁾ The fair value of the 2018-1 Class A-2 Senior Secured Notes was estimated using available market information.

WINGSTOP INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

⁽²⁾ The fair value of the 2018-1 Class A-1 Variable Funding Senior Notes was estimated based on the borrowing rates currently available for variable rate loans obtained from ~~third party~~third-party lending institutions and approximated the book value of such 2018-1 Class A-1 Variable Funding Senior Notes.

The Company also measures certain non-financial assets (primarily long-lived assets, intangible assets, and goodwill) at fair value on a non-recurring basis in connection with its periodic evaluations of such assets for potential impairment.

~~(5) Property and Equipment~~

On June 19, 2019, the Company entered into an agreement to purchase an office building for a purchase price of $18.3 million, which closed in the third quarter of 2019 and was funded with cash on hand. The building will be used for the Company’s headquarters and is in Addison, Texas.

The building is included in construction in process within Property and equipment, net on the Consolidated Balance Sheet and will begin depreciating when the build out of the headquarters is complete and the assets are ready for their intended use, which we currently estimate to be at the beginning of fiscal year 2021.

~~(6)~~(5) Income Taxes

Income tax expense and the effective tax rate were ~~$1.8~~$3.8 million and ~~23.4%~~24.7%, respectively, for the thirteen weeks ended ~~September 28, 2019,~~June 27, 2020, and ~~$1.5~~$1.1 million and ~~19.4%~~17.9%, respectively, for the thirteen weeks ended ~~September~~June 29, ~~2018.~~2019. Income tax expense and the effective tax rate were ~~$3.6~~$5.0 million and ~~17.2%~~20.3%, respectively, for the ~~thirty-nine~~twenty-six weeks ended ~~September 28, 2019,~~June 27, 2020, and ~~$3.9~~$1.8 million and ~~16.9%~~13.7%, respectively, for the ~~thirty-nine~~twenty-six weeks ended ~~September~~June 29, ~~2018.~~2019.

Income tax expense for the thirteen and ~~thirty-nine~~twenty-six weeks ended ~~September 28, 2019 includes $0.1~~June 27, 2020 included $0.2 million and ~~$1.9~~$1.5 million, respectively, in tax benefits resulting from the recognition of excess tax benefits from stock-based compensation, as compared to ~~$0.3~~$0.6 million and $1.8 million ofin tax benefits ~~recognized in~~for the thirteen and ~~thirty-nine~~twenty-six weeks ended ~~September~~June 29, ~~2018,~~2019, respectively.

~~(7)~~(6) Debt Obligations

~~On November 14, 2018,~~Long-term debt consists of the following components (in thousands):


	June 27, 2020		December 28, 2019
2018-1 Class A-2 Senior Secured Notes	$	316,800	$	317,600
2018-1 Class A-1 Variable Funding Senior Notes	16,000		—
Debt issuance costs, net of amortization	(5,954)		(6,731)
Total debt	326,846		310,869
Less: current portion of debt	(16,000)		(3,200)
Long-term debt, net	$	310,846	$	307,669

The Company's outstanding debt consists of (i) Series 2018-1 4.97% Fixed Rate Senior Secured Notes, Class A-2 (the “Class A-2 Notes”) issued by Wingstop Funding LLC (the “Issuer”), a limited-purpose, bankruptcy-remote, wholly owned indirect subsidiary of Wingstop Inc.~~, issued $320 million of its Series 2018-1 4.97% Fixed Rate Senior Secured Notes, Class A-2 (the “Class A-2 Notes”). Interest~~ and ~~principal are payable on a quarterly basis, and the Class A-2 Notes have an anticipated repayment date of December 2023.~~

~~In addition, the Issuer issued~~(ii) Series 2018-1 Variable Funding Senior Notes, Class A-1, ~~(the “Variable Funding Notes”),~~ which permit borrowings of up to a maximum principal amount of $20 million, which may be used to borrow amounts on a revolving basis and to issue letters of ~~credit.~~ credit (the “Variable Funding Notes,” and together with the Class A-2 Notes, the “Notes”).

As of ~~September 28, 2019, there were borrowings~~June 27, 2020, we had $316.8 million of ~~$5.0~~Class A-2 Notes outstanding and $16.0 million ~~under the~~of Variable Funding Notes ~~which~~outstanding. The Variable Funding Notes were ~~used for general corporate purposes.~~issued in the first quarter of 2020 as a precautionary measure to improve the Company's cash position. The Variable Funding Notes had a weighted average interest rate of 2.72% during the twenty-six weeks ended June 27, 2020 and are classified as current debt. There were no borrowings outstanding under the Variable Funding Notes as of December ~~29, 2018.~~28, 2019. Further, as of ~~September~~June 27, 2020 and December 28, 2019, ~~and December 29, 2018,~~ $4.0 million of letters of credit were outstanding against the Variable Funding Notes, which relate primarily to interest reserves required under the base indenture and related supplemental indenture. There were no amounts drawn down on the ~~letter~~letters of credit as of ~~September 28, 2019~~June 27, 2020 or December ~~29, 2018.~~28, 2019.

~~Borrowings~~During the first fiscal quarter of 2020, the Company had a leverage ratio under the ~~Variable Funding~~Class A-2 Notes ~~accrue interest at~~of less than 5.0x. Per the terms of the Company’s debt agreements, principal payments on the Class A-2 Notes are not due until the repayment date as long as the Company maintains a ~~variable rate based on (i)~~leverage ratio of less than 5.0x. As such, the prime rate, (ii) overnight federal funds rates, (iii) the London interbank offered rate for U.S. Dollars or (iv) with respect to advances made by conduit investors, the weighted average cost of, or related to, the issuance of commercial paper allocated to fund or maintain such advances, in each case plus any applicable margin, as more fully set forthCompany ceased making principal payments beginning in the ~~Variable Funding Note Purchase Agreement, dated November 14,~~

~~WINGSTOP INC. AND SUBSIDIARIES~~

~~Notes to Consolidated Financial Statements~~

~~(Unaudited)~~

~~2018. There is a commitment fee on~~second quarter of 2020. Accordingly, the ~~unused portion~~entire outstanding balance of the ~~Variable Funding~~Class A-2 Notes facility, which is 50 basis points, based on the utilization under the Variable Funding Notes facility. Interest is payable on a quarterly basis and accrues on a weekly basis. The weighted average interest rate for the Variable Funding Notes was 4.35%has been classified as ~~of September 28, 2019.~~long-term debt.

The Class A-2 Notes and the Variable Funding Notes ~~are referred to collectively as the “Notes” and~~ were each issued in a securitization transaction pursuant to which certain of the Company’s domestic and foreign revenue-generating assets, consisting principally of franchise-related agreements and intellectual property, were contributed or otherwise transferred to the Issuer and certain other limited-purpose, bankruptcy-remote, wholly owned indirect subsidiaries of the Company that act as guarantors of the Notes and that have pledged substantially all of their ~~assets as collateral securing the Notes.~~

~~The Notes are subject to a series of financial and non-financial covenants and restrictions. As of September 28, 2019, the Company was in compliance with all such financial covenants.~~

~~As of September 28, 2019, the scheduled principal payments on the Class A-2 Notes were as follows (in thousands):~~assets.

Remainder of fiscal year 2019 $ 5,800
Fiscal year 2020 3,200
Fiscal year 2021 3,200
Fiscal year 2022 3,200
Fiscal year 2023 308,000
Total $ 323,400

~~(8)Leases~~

The Company determines whether an arrangement is a lease at inception. The Company has operating leases for office and retail space, as well as equipment. Our leases have remaining terms of one year to eight years, some of which include options to extend the lease term for up to ten years. Lease terms may include options to renew when it is reasonably certain that the Company will exercise that option. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.

As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. We have lease agreements that contain both lease and non-lease components. For real estate leases, we account for lease components together with non-lease components (e.g., common-area maintenance).

~~Components of lease expense are as follows (in thousands):~~

Thirteen Weeks Ended Thirty-Nine Weeks Ended
September 28,
2019 September 28,
2019
Operating lease cost ^(a)
$ 532
$ 1,561
Variable lease cost ^(b)
127
378
Total lease cost $ 659
$ 1,939

^(a) ~~Includes short-term leases, which are immaterial.~~

^(b) ~~Primarily related to adjustments for inflation, common area maintenance, and property tax.~~

~~Supplemental cash flow information related to leases is as follows (dollar amounts in thousands):~~

Thirty-Nine Weeks Ended
September 28,
2019
Operating cash flow information:
Cash paid for amounts included in the measurement of lease liabilities $ 1,658
Non-cash activity:
Right-of-use assets obtained in exchange for new operating lease liabilities $ 832

WINGSTOP INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

~~Supplemental balance sheet information related to our operating leases is as follows:~~

Balance Sheet Classification September 28, 2019
Right-of-use assets Other non-current assets $ 8,137
Current lease liabilities Other current liabilities 1,933
Non-current lease liabilities Other non-current liabilities 7,910

~~Weighted average lease term and discount rate information related to leases is as follows:~~



	~~Thirty-Nine Weeks Ended~~
	~~September 28, 2019~~
~~Weighted average remaining lease term of operating leases~~	~~5.3 years~~
~~Weighted average discount rate of operating leases~~	~~4.82~~	%

~~Maturities of lease liabilities by fiscal year are as follows (in thousands):~~

Remainder of fiscal year 2019 $ 586
Fiscal year 2020 2,351
Fiscal year 2021 2,145
Fiscal year 2022 1,943
Fiscal year 2023 1,666
Thereafter 2,447
Total lease payments 11,138
Less: imputed interest (1,295 )
Present value of lease liabilities $ 9,843

~~As of December 29, 2018, minimum lease payments under non-cancelable operating leases by period were expected to be as follows (in thousands):~~

Fiscal year 2019 $ 2,181
Fiscal year 2020 2,214
Fiscal year 2021 2,005
Fiscal year 2022 1,800
Fiscal year 2023 1,523
Thereafter 2,145
Total $ 11,868

~~(9)~~(7) Commitments and Contingencies

The Company is subject to legal proceedings, claims, and liabilities, such as employment-related claims and premises-liability cases, which arise in the ordinary course of business and are generally covered by insurance. In the opinion of management, the amount of ultimate liability with respect to such actions is not likely to have a material adverse impact on the Company’s financial position, results of operations, or cash flows.

~~WINGSTOP INC. AND SUBSIDIARIES~~

~~Notes to Consolidated Financial Statements~~

~~(Unaudited)~~

~~(10)~~(8) Stock-Based Compensation

Stock-based compensation is measured at the date of grant, based on the calculated fair value of the award, and is recognized as expense over the requisite employee service period (generally the vesting period of the ~~grant)~~award). The Company recognized ~~$4.8~~$3.3 million in stock-based compensation expense for the ~~thirty-nine~~twenty-six weeks ended ~~September 28, 2019,~~June 27, 2020, with a corresponding increase to additional paid-in-capital. Stock-based compensation expense is included in selling, general and administrative expense in the Consolidated Statements of Operations.

Stock Options

The following table summarizes stock option activity (in thousands, except term and per share data):

Stock Options Weighted Average Exercise Price Aggregate Intrinsic Value Weighted Average Remaining Term
Outstanding - December 29, 2018 236
$ 6.04
$ 13,848
4.8
Options granted —
—

Options exercised (97 ) 4.97

Options canceled (4 ) 26.21

Outstanding - September 28, 2019 135
$ 5.78
$ 10,979
4.0


	Stock Options	Weighted Average Exercise Price Per Share		Aggregate Intrinsic Value		Weighted Average Remaining Term
Outstanding - December 28, 2019	134	$	5.72	$	10,801	3.8
Options granted	67	84.41
Options exercised	(46)	12.12

Outstanding - June 27, 2020	155	$	38.02	$	15,086	5.6

The total grant-date fair value of stock options vested during the ~~thirty-nine~~twenty-six weeks ended ~~September 28, 2019~~June 27, 2020 was ~~$0.5~~$0.2 million. The total intrinsic value of stock options exercised during the ~~thirty-nine~~twenty-six weeks ended ~~September 28, 2019~~June 27, 2020 was ~~$6.7~~$2.8 million. As of ~~September 28, 2019,~~June 27, 2020, total unrecognized compensation expense related to unvested stock options was ~~$0.1~~$1.4 million, which is expected to be recognized over a weighted-average period of ~~0.4~~2.7 years. During the ~~thirty-nine~~twenty-six weeks ended ~~September 28, 2019,~~June 27, 2020, there was a modification to certain awards resulting in additional compensation expense of ~~$0.2~~$0.4 million.

Restricted Stock Units and Performance Stock Units

The following table summarizes activity related to restricted stock units (“RSUs”) and performance stock units (“PSUs”) (in thousands, except per share data):

Restricted Stock Units Weighted Average Grant Date Fair Value Performance Stock Units Weighted Average Grant Date Fair Value
Outstanding - December 29, 2018 103
$ 36.18
130
$ 40.46
Units granted 47
68.40
46
67.96
Units vested (45 ) 39.61
(26 ) 44.15
Units canceled (22 ) 47.70
(21 ) 50.48
Outstanding - September 28, 2019 83
$ 52.78
129
$ 50.01


	Restricted Stock Units	Weighted Average Grant Date Fair Value Per Share		Performance Stock Units	Weighted Average Grant Date Fair Value
Outstanding - December 28, 2019	82	$	52.73	169	$	55.92
Units granted	24	87.72		43	84.37
Units vested	(38)	44.57		(52)	41.54
Units canceled	(11)	63.89		(8)	66.04
Outstanding - June 27, 2020	57	$	70.82	152	$	68.49

The fair value of the Company’s RSUs and PSUs is based on the closing market price of the stock on the date of grant. The RSUs granted during the ~~thirty-nine~~twenty-six weeks ended ~~September 28, 2019~~June 27, 2020 vest over a three-year service period. As of ~~September 28, 2019,~~June 27, 2020, total unrecognized compensation expense related to unvested RSUs was ~~$3.3~~$3.4 million, which is expected to be recognized over a weighted-average period of ~~1.7~~1.9 years.

The Company granted 40,529 PSUs ~~vest based on the outcome of certain performance criteria. For the PSUs granted~~ during the ~~thirty-nine~~twenty-six weeks ended ~~September 28, 2019, the amount of units~~June 27, 2020 that ~~can be earned range from 0% to 100% of the number of PSUs granted~~are based on a service condition and a performance vesting condition based on the achievement of certain adjusted EBITDA targets ~~as defined by the Company’s Omnibus Incentive Compensation Plan,~~ over a performance period of ~~one~~three years. The maximum vesting percentage that could be realized for each of the PSUs is 250% based on the level of performance achieved for the respective awards, as well as a market vesting condition linked to ~~three years.~~the level of total stockholder return received by the Company’s stockholders during the performance period measured against the companies in the S&P 600 Restaurant Index (“TSR PSUs”). The TSR PSUs were valued based on a Monte Carlo simulation model to reflect the impact of the total stockholder return market condition, resulting in a grant-date fair value range of $0.00 to $157.96 per unit based on the

WINGSTOP INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

outcome of the performance condition. The probability of satisfying a market condition is considered in the estimation of the grant-date fair value for TSR PSUs and the compensation cost is not reversed if the market condition is not achieved, provided the requisite service has been provided. The compensation expense related to ~~these~~the PSUs is recognized over the vesting period when the achievement of the performance conditions becomes probable. The total compensation cost for the PSUs is determined based on the most likely outcome of the performance condition and the number of awards expected to vest. As of ~~September 28, 2019,~~June 27, 2020, total unrecognized compensation expense related to unvested PSUs was ~~$3.9~~$5.8 million.

(9) Company-owned Restaurant Transactions

During the ~~thirty-nine weeks~~Company’s fiscal quarter ended ~~September 28, 2019, there was a modification~~June 27, 2020, the Company sold two company-owned restaurants in the Houston market to ~~certain awards resulting in additional compensation expense~~an existing franchisee for proceeds of ~~$0.7~~$2.3 million.

~~WINGSTOP INC. AND SUBSIDIARIES~~

~~Notes to Consolidated Financial Statements~~

~~(Unaudited)~~

~~Restricted Stock Awards~~

~~The fair value~~ In connection with the sale of the ~~unvested restricted stock awards is based~~restaurants, the Company recorded a $2.0 million pre-tax gain on the ~~closing price~~sale of the related assets and liabilities, which was net of a $28,000 reduction in goodwill. The net gain on these restaurants was recorded in Selling, general and administrative expense on our Consolidated Statements of Operations.

Subsequent to the end of the Company’s ~~common stock~~fiscal quarter ended June 27, 2020, the Company completed the sale of 5 company-owned restaurants in the Kansas City market to an existing franchisee for proceeds of $2.5 million. The total assets associated with these restaurants held for sale totaled $1.9 million and were included in Prepaid expenses and other current assets on the date of grant. As of September 28, 2019, total unrecognized compensation expense related to unvested restricted stock awards was $0.6 million, which will be recognized over a weighted average period of approximately 1.6 years.

~~(11)Business Segments~~

The Company’s business operates in two segments: the “Franchise” segment and the “Company” segment. The Franchise segment consists of domestic and international franchise restaurants, which represent the majority of our system-wide restaurants. As of September 28, 2019, the Franchise segment consisted of 1,310 restaurants operated by Wingstop franchisees in the United States and international markets, compared to 1,189 franchised restaurants in operationConsolidated Balance Sheet as of ~~September 29, 2018. Franchise segment revenue consists primarily of franchise royalty revenue, advertising fee revenue, franchise and development fees revenue, and international territory fees.~~June 27, 2020.

As of September 28, 2019, the Company segment consisted of 30 company-owned restaurants located in the United States, compared to 26 company-owned restaurants as of September 29, 2018. Company segment revenue is comprised of food and beverage sales at company-owned restaurants. Company segment expenses consist of operating expenses at company-owned restaurants and include food, beverage, labor, benefits, utilities, rent, and other operating costs.

~~The following table reflects revenue and profit information with respect to each segment and reconciles segment profits to income before taxes (in thousands):~~

Thirteen Weeks Ended Thirty-Nine Weeks Ended
September 28,
2019 September 29,
2018 September 28,
2019 September 29,
2018
Revenue:
Franchise segment $ 35,932
$ 26,401
$ 105,144
$ 78,346
Company segment 13,943
11,845
41,346
34,326
Total segment revenue $ 49,875
$ 38,246
$ 146,490
$ 112,672

Segment Profit:
Franchise segment $ 9,631
$ 7,663
$ 27,107
$ 23,418
Company segment 2,318
2,693
6,900
7,892
Total segment profit 11,949
10,356
34,007
31,310
Corporate and other⁽¹⁾
—
—
—
1,462
Interest expense, net 4,243
2,545
12,952
6,623
Income before taxes $ 7,706
$ 7,811
$ 21,055
$ 23,225

⁽¹⁾ Corporate and other includes corporate related items not allocated to reportable segments and consists primarily of transaction costs associated with the refinancings of our credit agreement and payment of a special dividend.

~~(12) Restaurant Acquisition~~

On ~~August 22, 2019, the Company acquired one existing restaurant from a franchisee. The total purchase price was~~ ~~$1.2 million, which was funded by cash flows from operations.~~

~~WINGSTOP INC. AND SUBSIDIARIES~~

~~Notes to Consolidated Financial Statements~~

~~(Unaudited)~~

~~The following table summarizes the preliminary allocations of the purchase price to the estimated fair value of assets acquired and liabilities assumed at the date of the acquisition (in thousands):~~

Purchase Price Allocation
Working capital $ 3
Property and equipment 99
Reacquired franchise rights 610
Goodwill 517
Total purchase price $ 1,229

The estimates of fair value are preliminary, and are therefore subject to further refinement. The excess of the purchase price over the aggregate fair value of assets acquired was allocated to goodwill and is attributable to the benefits expected as a result of the acquisition, including sales and unit growth opportunities. As of September 28, 2019, $0.5 million of the goodwill from the acquisition is expected to be deductible for federal income tax purposes.

~~Pro-forma financial information of the combined entities is not presented due to the immaterial impact of the financial results of the acquired restaurant on our consolidated financial statements.~~

The fair value measurement of tangible and intangible assets and liabilities as of the acquisition date is based on significant inputs not observed in the market and thus represents a Level 3 fair value measurement. Fair value measurements for reacquired franchise rights were determined using the income approach. Fair value measurements for property and equipment were determined using the cost approach.

~~(13)~~(10) Revenue from Contracts with Customers

Revenue from contracts with customers consists primarily of royalties, Ad Fund contributions, initial and renewal franchise fees, and upfront fees from development agreements and international territory agreements. The performance obligations under franchise agreements consist of (a) a franchise license, (b) pre-opening services, such as training, and (c) ongoing services, such as management of the Ad Fund, development of training materials and menu items, and restaurant monitoring. These performance obligations are highly interrelated, so they are not considered to be individually distinct and therefore are accounted for as a single performance obligation, which is satisfied by providing a right to use our intellectual property over the term of each franchise agreement.

Royalties and franchisee contributions to the Ad Fund, are calculated as a percentage of franchise restaurant sales over the term of the franchise agreement. Initial and renewal franchise fees are payable by the franchisee prior to the restaurant opening or at the time of a renewal of an existing franchise agreement. Franchise agreement royalties and Ad Fund contributions represent sales-based royalties that are related entirely to the performance obligation under the franchise agreement and are recognized as franchise sales occur. Additionally, initial and renewal franchise fees are recognized as revenue on a straight-line basis over the term of the respective agreement. The performance obligation under development agreements and international territory agreements generally consists of an obligation to grant exclusive development rights over a stated term. These development rights are not distinct from franchise agreements, so upfront fees paid by franchisees for development rights are deferred and apportioned to each franchise restaurant opened by the franchisee. The pro rata amount apportioned to each restaurant is accounted for as an initial franchise fee.

The following table represents a disaggregation of revenue from contracts with customers for the thirteen and ~~thirty-nine~~twenty-six weeks ended ~~September 28,~~June 27, 2020 and June 29, 2019 ~~and September 29, 2018~~ (in thousands):


	Thirteen Weeks Ended						Twenty-Six Weeks Ended
	June 27, 2020		June 29, 2019		June 27, 2020		June 29, 2019
Royalty revenue	$	25,447	$	18,437	$	46,755	$	36,344
Advertising fees and related income	19,923		13,487		35,937		26,697
Franchise fees	881		939		1,763		2,521

Thirteen Weeks Ended Thirty-Nine Weeks Ended
September 28, 2019 September 29, 2018 September 28, 2019 September 29, 2018
Royalty revenue $ 19,065
$ 15,461
$ 55,409
$ 45,797
Advertising fees and related income 14,056
8,614
40,753
25,574
Franchise fees 875
656
3,396
1,959

~~WINGSTOP INC. AND SUBSIDIARIES~~

~~Notes to Consolidated Financial Statements~~

~~(Unaudited)~~

Franchise fee, development fee, and international territory fee payments received by the Company are recorded as deferred revenue on the Consolidated Balance Sheets, which represents a contract liability. Deferred revenue is reduced as fees are recognized in revenue over the term of the franchise license for the respective restaurant. As the term of the franchise license is typically ten years, substantially all of the franchise fee revenue recognized in the thirteen and ~~thirty-nine~~twenty-six weeks ended ~~September 28, 2019~~June 27, 2020 was included in the deferred revenue balance as of December ~~29, 2018.~~28, 2019. Approximately ~~$8.5~~$8.3 million and ~~$9.2~~$8.3 million of deferred revenue as of ~~September~~June 27, 2020 and December 28, 2019, ~~and December 29, 2018,~~ respectively, relates to restaurants that have not yet opened, so the fees are not yet being amortized. The weighted average remaining amortization period for deferred franchise and renewal fees related to open restaurants is ~~7.3~~7.2 years. The Company does not have any material contract assets as of ~~September 28, 2019.~~June 27, 2020.

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

The following discussion and analysis of the financial condition and results of operations of Wingstop Inc. (collectively with its direct and indirect subsidiaries on a consolidated basis, “Wingstop,” the “Company,” “we,” “our,” or “us”) should be read in conjunction with the accompanying unaudited consolidated financial statements and related notes in Part I, Item 1 of this Quarterly Report on Form 10-Q (this “Quarterly Report”) and with the audited consolidated financial statements and the related notes included in our Annual Report on Form 10-K for the fiscal year ended December ~~29, 2018~~28, 2019 (our “Annual Report”). The statements in this discussion regarding industry outlook, our expectations regarding our future performance, liquidity, and capital resources, and other non-historical statements are forward-looking statements. These forward-looking statements are subject to risks and uncertainties, including, but not limited to, the risks and uncertainties described in “Special Note Regarding Forward-Looking Statements,” below and “Risk Factors” on page 1410 of our Annual Report and in Part II, Item 1A of this Quarterly Report. Our actual results may differ materially from those contained in or implied by any forward-looking statements.

We operate on a 52 or 53 week fiscal year ending on the last Saturday of each calendar year. Our fiscal quarters are comprised of 13 weeks, with the exception of the fourth quarter of a 53 week year, which contains 14 weeks. Fiscal years ~~2019~~2020 and ~~2018~~2019 each contain 52 weeks.

Overview

~~Wingstop is a high-growth franchisor and operator of restaurants that offer cooked-to-order, hand-sauced and tossed chicken wings.~~

We believe we pioneered the concept of wings as a “center-of-the-plate” item for all of our meal occasions. While other concepts include wings as add-on menu items or focus on wings in a bar or sports-centric setting, we are focused on wings, fries, and sides, which generate approximately 93% of our system-wide sales.

We offer our guests 11 bold, distinctive and craveable flavors on our bone-in and boneless chicken wings and tenders that are always cooked to order and paired with our fresh-cut, seasoned fries and freshly-made ranch and bleu cheese dips. Our menu is highly-customizable for different dining occasions, and we believe it delivers a compelling value proposition for groups, families, and individuals. We have broad and growing consumer appeal anchored by a sought after core demographic of 18-34 year old Millennials, which we believe is a loyal consumer group that dines at fast casual restaurants more frequently than other consumer groups.

Wingstop is the largest fast casual chicken wings-focused restaurant chain in the world, with over 1,400 locations worldwide. We are dedicated to serving the world flavor through an unparalleled guest experience and offering of classic wings, boneless wings and tenders, always cooked to order and hand-sauced-and-tossed in 11 bold, distinctive flavors.

The Company is primarily a franchisor, with approximately 98% of Wingstop’s restaurants currently owned and operated by independent franchisees. We believe our asset-light, highly-franchised business model generates strong operating margins and requires low capital expenditures, creating stockholder value through strong and consistent free cash flow and capital-efficient growth.

Impact of COVID-19

In March 2020, the novel coronavirus ("COVID-19") outbreak was declared a pandemic by the World Health Organization, significantly changing consumer behaviors as individuals are being encouraged to practice social distancing. This has also led to restaurants reducing restaurant seating capacity, and in some cases restaurant closures, due to various restrictions mandated by governments around the world. As of ~~September 28, 2019,~~March 16, 2020, we made the decision to close our domestic dining rooms and limit our service to carryout and delivery only. Several of our international markets also closed their dining rooms as a result of the outbreak. As of the end of the second quarter, approximately eight of our international restaurants and six domestic restaurants were temporarily closed. While we cannot predict the extent to which COVID-19 will impact our business or the global economy, we believe our business is well-positioned for the transition to largely off-premise dining that has resulted from the outbreak. Prior to the COVID-19 outbreak, carry-out and delivery represented approximately 80% of our domestic sales mix and our digital sales mix was just over 40%. As a result of the required changes to consumer behavior to largely off-premise dining, as well as promotional activities associated with delivery, we have seen an increase in domestic same store sales growth through the end of the second quarter. Our international markets, which have historically had a ~~total~~higher mix of ~~1,340 restaurants~~dine-in sales, have seen an overall decline in same store sales growth due to the required closure of dining rooms and in some cases temporary restaurant closures. We did not experience difficulties with our ~~system. Our restaurant base is 98% franchised,~~supply chain as a result of COVID-19 during the first or second quarter of 2020; however, there can be no assurances that we will not experience supply chain challenges in the future. Lastly, to further secure our liquidity position and provide financial flexibility in light of uncertain market conditions, we borrowed $16 million under our Variable Funding Notes (as defined below) in the first quarter of 2020, providing the Company with ~~1,310 franchised locations (including 141 international locations) and 30 company-owned restaurants~~an unrestricted cash balance of approximately $45.8 million as of ~~September 28, 2019.~~June 27, 2020. See "Liquidity and Capital Resources" below for further details.

Key Performance Indicators

Key measures that we use in evaluating our restaurants and assessing our business include the following:

Number of restaurants. Management reviews the number of new restaurants, the number of closed restaurants, and the number of acquisitions and divestitures of restaurants to assess net new restaurant growth.


	Thirteen Weeks Ended				Thirty-Nine Weeks Ended					Thirteen Weeks Ended			Twenty-Six Weeks Ended
	September 28, 2019		September 29, 2018		September 28, 2019		September 29, 2018			June 27, 2020	June 29, 2019	June 27, 2020	June 29, 2019
Domestic Franchised Activity:									Domestic Franchised Activity:
Beginning of period	1,139		1,040		1,095		1,004		Beginning of period	1,221	1,112	1,200	1,095
Openings	31		21		80		64		Openings	23	29	45	49
Closures	—		(2	)	(5	)	(6	)	Closures	(2)	(2)	(3)	(5)
Acquired by Company	(1	)	—		(1	)	(3	)
Re-franchised by Company									Re-franchised by Company	2	—	2	—
Restaurants end of period	1,169		1,059		1,169		1,059		Restaurants end of period	1,244	1,139	1,244	1,139

Domestic Company-Owned Activity:									Domestic Company-Owned Activity:
Beginning of period	29		26		29		23		Beginning of period	32	29	31	29
Openings	—		—		—		—		Openings	—	—	1	—
Closures	—		—		—		—		Closures	—	—	—	—
Acquired from franchisees	1		—		1		3
Re-franchised to franchisees									Re-franchised to franchisees	(2)	—	(2)	—
Restaurants end of period	30		26		30		26		Restaurants end of period	30	29	30	29

Total Domestic Restaurants	1,199		1,085		1,199		1,085		Total Domestic Restaurants	1,274	1,168	1,274	1,168

International Franchised Activity:									International Franchised Activity:
Beginning of period	135		122		128		106		Beginning of period	160	132	154	128
Openings	7		8		18		24		Openings	2	5	8	11
Closures	(1	)	—		(5	)	—		Closures	—	(2)	—	(4)

Restaurants end of period	141		130		141		130		Restaurants end of period	162	135	162	135

Total System-wide Restaurants	1,340		1,215		1,340		1,215		Total System-wide Restaurants	1,436	1,303	1,436	1,303

System-wide sales. System-wide sales represents net sales for all of our company-owned and franchised restaurants, with franchised restaurant sales reported by franchisees. While we do not record franchised restaurant sales as revenue, our royalty revenue is calculated based on a percentage of franchised restaurant sales, which generally ranges from 5.0% to 6.0% of gross sales, net of discounts. This measure allows management to better assess changes in our royalty revenue, our overall store performance, the health of our brand, and the strength of our market position relative to competitors. Our system-wide sales growth is driven by new restaurant openings as well as increases in same store sales.

Average unit volume (“AUV”). AUV consists of the average annual sales of all restaurants that have been open for a trailing 52-week period or longer. This measure is calculated by dividing sales during the applicable period for all restaurants being measured by the number of restaurants being measured. Domestic AUV includes revenue from both company-owned and franchised restaurants. AUV allows management to assess our company-owned and franchised restaurant economics. Changes in AUV are primarily driven by increases in same store sales and are also influenced by opening new restaurants.

Same store sales. Same store sales reflects the change in year-over-year sales for the same store base. We define the same store base to include those restaurants open for at least 52 full weeks. This measure highlights the performance of existing restaurants, while excluding the impact of new restaurant openings and permanent closures. We review same store sales for company-owned restaurants as well as franchised restaurants. Same store sales are driven by changes in transactions and average transaction size. Transaction size changes are driven by price changes or product mix shifts from either a change in the number of items purchased or shifts into higher or lower priced categories of items.

EBITDA and Adjusted EBITDA. We define EBITDA as net income before interest expense, net, income tax expense, and depreciation and amortization. We define Adjusted EBITDA as EBITDA further adjusted for transaction costs, costs and fees associated with investments in our strategic initiatives, gains and losses on the disposal of assets, and stock-based compensation expense. EBITDA and Adjusted EBITDA may not be comparable to other similarly titled measures of other companies due to differences in methods of calculation. For a reconciliation of net income to EBITDA and Adjusted EBITDA and for further discussion of EBITDA and Adjusted EBITDA as non-GAAP measures and how we utilize them, see footnote 2 below.

The following table sets forth our key performance indicators as well as our total revenue and net income, for the thirteen and ~~thirty-nine~~twenty-six weeks ended ~~September 28,~~June 27, 2020 and June 29, 2019 ~~and September 29, 2018~~ (dollars in thousands):


	Thirteen Weeks Ended									Twenty-Six Weeks Ended
	June 27, 2020			June 29, 2019			June 27, 2020			June 29, 2019
Number of system-wide restaurants open at end of period	1,436			1,303			1,436			1,303
System-wide sales ⁽¹⁾	$	509,045		$	371,505		$	938,952		$	733,865
Domestic restaurant AUV	$	1,366		$	1,189		$	1,366		$	1,189
Domestic same store sales growth	31.9		%	12.8		%	21.0		%	9.9		%
Company-owned domestic same store sales growth	24.7		%	13.8		%	15.7		%	9.1		%
Total revenue	$	66,105		$	48,562		$	121,541		$	96,615
Net income	$	11,539		$	4,918		$	19,635		$	11,524
Adjusted EBITDA ⁽²⁾	$	20,888		$	13,549		$	37,245		$	27,435

Thirteen Weeks Ended Thirty-Nine Weeks Ended
September 28, 2019 September 29, 2018 September 28, 2019 September 29, 2018
Number of system-wide restaurants open at end of period 1,340
1,215
1,340
1,215
System-wide sales ⁽¹⁾
$ 383,469
$ 315,312
$ 1,117,341
$ 933,250
Domestic restaurant AUV $ 1,219
$ 1,131
$ 1,219
$ 1,131
Domestic same store sales growth 12.3 % 6.3 % 10.7 % 6.7 %
Company-owned domestic same store sales growth 11.9 % 5.0 % 10.1 % 6.8 %
Total revenue $ 49,875
$ 38,246
$ 146,490
$ 112,672
Net income $ 5,905
$ 6,293
$ 17,429
$ 19,300
Adjusted EBITDA ⁽²⁾
$ 15,400
$ 12,246
$ 42,835
$ 36,485

(1) The percentage of system-wide sales attributable to company-owned restaurants was ~~3.7%~~3.3% and ~~3.8%~~3.7% for the thirteen weeks ended ~~September 28,~~June 27, 2020 and June 29, 2019, ~~and September 29, 2018,~~ respectively, and was ~~3.8%~~3.2% and 3.7% for the ~~thirty-nine~~twenty-six weeks ended ~~September 28,~~June 27, 2020 and June 29, 2019, ~~and September 29, 2018,~~ respectively. The remainder was generated by franchised restaurants, as reported by our franchisees.

(2) EBITDA and Adjusted EBITDA are supplemental measures of our performance that are not required by, or presented in accordance with, accounting principles generally accepted in the United States (“GAAP”). EBITDA and Adjusted EBITDA ~~are not measurements of our financial performance under GAAP and~~ should not be considered as an alternative to net income or any other performance measure derived in accordance with GAAP, or as an alternative to cash flows from operating activities as a measure of our liquidity.

We define “EBITDA” as net income before interest expense, net, income tax expense, and depreciation and amortization. We define “Adjusted EBITDA” as EBITDA further adjusted for transaction costs, gains and losses on the disposal of assets, and stock-based compensation expense. There were no gains or losses on disposal of assets during the thirteen and thirty-nine weeks ended September 28, 2019 and September 29, 2018. We caution investors that amounts presented in accordance with our definitions of EBITDA and Adjusted EBITDA may not be comparable to similar measures disclosed by our competitors, because not all companies and analysts calculate EBITDA and Adjusted EBITDA in the same manner. We present EBITDA and Adjusted EBITDA because we consider them to be important supplemental measures of our performance and believe they are frequently used by securities analysts, investors, and other interested parties in the evaluation of companies in our industry. Management believes that investors’ understanding of our performance is enhanced by including these non-GAAP financial measures as a reasonable basis for comparing our ongoing results of operations. Many investors are interested in understanding the performance of our business by comparing our results from ongoing operations on a period-over-period basis and would ordinarily add back non-cash expenses such as depreciation and amortization, as well as items that are not part of normal day-to-day operations of our business.

Management uses EBITDA and Adjusted EBITDA:

•as a measurement of operating performance because they assist us in comparing the operating performance of our restaurants on a consistent basis, as they remove the impact of items not directly resulting from our core operations;

•for planning purposes, including the preparation of our internal annual operating budget and financial projections;

•to evaluate the performance and effectiveness of our operational strategies;

•to evaluate our capacity to fund capital expenditures and expand our business; and

•to calculate incentive compensation payments for our employees, including assessing performance under our annual incentive compensation plan and determining the vesting of performance-based equity awards.

By providing these non-GAAP financial measures, together with a reconciliation to the most comparable GAAP measure, we believe we are enhancing investors’ understanding of our business and our results of operations, as well as assisting investors in evaluating how well we are executing our strategic initiatives. In addition, the instruments governing our

indebtedness use EBITDA (with additional adjustments) to measure our compliance with covenants, such as our fixed charge coverage, lease adjusted leverage, and debt incurrence. EBITDA and Adjusted EBITDA have limitations as analytical tools and should not be considered in isolation, or as an alternative to, or a substitute for net income or other financial statement data presented in our consolidated financial statements as indicators of financial performance. Some of the limitations are:

•such measures do not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments;

•such measures do not reflect changes in, or cash requirements for, our working capital needs;

•such measures do not reflect the interest expense or the cash requirements necessary to service interest or principal payments on our debt;

•such measures do not reflect our tax expense or the cash requirements to pay our taxes;

•although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future and such measures do not reflect any cash requirements for such replacements; and

•other companies in our industry may calculate such measures differently than we do, limiting their usefulness as comparative measures.

Due to these limitations, EBITDA and Adjusted EBITDA should not be considered as measures of discretionary cash available to us to invest in the growth of our business. We compensate for these limitations by relying primarily on our GAAP results and using these non-GAAP measures only supplementally. As noted in the table below, Adjusted EBITDA includes adjustments for transaction costs, costs and fees associated with investments in our strategic initiatives, gains and losses on the disposal of assets, and stock-based compensation expense. It is reasonable to expect that ~~these items~~this item will occur in future periods. However, we believe these adjustments are appropriate because the amounts recognized can vary significantly from period to period, do not directly relate to the ongoing operations of our restaurants, and complicate comparisons of our internal operating results and operating results of other restaurant companies over time. Each of the normal recurring adjustments and other adjustments described in this paragraph and in the reconciliation table below help management measure our core operating performance over time by removing items that are not related to day-to-day operations.

The following table reconciles net income to EBITDA and Adjusted EBITDA for the thirteen and ~~thirty-nine~~twenty-six weeks ended ~~September 28,~~June 27, 2020 and June 29, 2019 ~~and September 29, 2018~~ (in thousands):


	Thirteen Weeks Ended						Twenty-Six Weeks Ended
	June 27, 2020		June 29, 2019		June 27, 2020		June 29, 2019
Net income	$	11,539	$	4,918	$	19,635	$	11,524
Interest expense, net	4,214		4,299		8,359		8,709
Income tax expense	3,784		1,070		5,014		1,825
Depreciation and amortization	1,398		1,335		2,953		2,611
EBITDA	$	20,935	$	11,622	$	35,961	$	24,669
Additional adjustments:

Gain on disposal of assets ^(a)	(2,016)		—		(2,016)		—
Stock-based compensation expense ^(b)	1,969		1,927		3,300		2,766
Adjusted EBITDA	$	20,888	$	13,549	$	37,245	$	27,435

Thirteen Weeks Ended Thirty-Nine Weeks Ended
September 28,
2019 September 29,
2018 September 28,
2019 September 29,
2018
Net income $ 5,905
$ 6,293
$ 17,429
$ 19,300
Interest expense, net 4,243
2,545
12,952
6,623
Income tax expense 1,801
1,518
3,626
3,925
Depreciation and amortization 1,408
1,134
4,019
3,163
EBITDA $ 13,357
$ 11,490
$ 38,026
$ 33,011
Additional adjustments:
Transaction costs ^(a)
—
—
—
1,462
Stock-based compensation expense ^(b)
2,043
756
4,809
2,012
Adjusted EBITDA $ 15,400
$ 12,246
$ 42,835
$ 36,485

^(a) Represents ~~costs and expenses related~~a gain resulting from the re-franchise of company-owned restaurants to ~~the refinancing of the senior secured credit facility dated June 30, 2016 and payment of~~ a ~~special dividend; all transaction costs are~~franchisee which is included in ~~selling,~~Selling, general and administrative ~~expenses (“SG&A”).~~expense in the Consolidated Statements of Operations.

^(b) Includes non-cash, stock-based compensation.

Results of Operations

Thirteen Weeks Ended ~~September 28, 2019~~June 27, 2020 compared to Thirteen Weeks Ended ~~September~~June 29, ~~2018~~2019

The following table sets forth our results of operations for the thirteen weeks ended ~~September 28,~~June 27, 2020 and June 29, 2019 ~~and September 29, 2018~~ (dollars in thousands):


	Thirteen Weeks Ended						Increase / (Decrease)
	June 27, 2020		June 29, 2019		$		%
Revenue:
Royalty revenue, franchise fees and other	$	27,858	$	21,187	$	6,671	31.5	%
Advertising fees and related income	19,923		13,487		6,436		47.7	%
Company-owned restaurant sales	18,324		13,888		4,436		31.9	%
Total revenue	66,105		48,562		17,543		36.1	%
Costs and expenses:
Cost of sales ⁽¹⁾	13,387		10,573		2,814		26.6	%
Advertising expenses	18,589		12,973		5,616		43.3	%
Selling, general and administrative	13,194		13,394		(200)		(1.5)	%
Depreciation and amortization	1,398		1,335		63		4.7	%
Total costs and expenses	46,568		38,275		8,293		21.7	%
Operating income	19,537		10,287		9,250		89.9	%
Interest expense, net	4,214		4,299		(85)		(2.0)	%

Income before income tax expense	15,323		5,988		9,335		155.9	%
Income tax expense	3,784		1,070		2,714		253.6	%
Net income	$	11,539	$	4,918	$	6,621	134.6	%

Thirteen Weeks Ended Increase / (Decrease)
September 28,
2019 September 29,
2018 $ %
Revenue:
Royalty revenue, franchise fees and other $ 21,876
$ 17,787
$ 4,089
23.0 %
Advertising fees and related income 14,056
8,614
5,442
63.2 %
Company-owned restaurant sales 13,943
11,845
2,098
17.7 %
Total revenue 49,875
38,246
11,629
30.4 %
Costs and expenses:
Cost of sales ⁽¹⁾
10,339
8,040
2,299
28.6 %
Advertising expenses 12,652
8,431
4,221
50.1 %
Selling, general and administrative 13,527
10,285
3,242
31.5 %
Depreciation and amortization 1,408
1,134
274
24.2 %
Total costs and expenses 37,926
27,890
10,036
36.0 %
Operating income 11,949
10,356
1,593
15.4 %
Interest expense, net 4,243
2,545
1,698
66.7 %
Income before income tax expense 7,706
7,811
(105 ) (1.3 )%
Income tax expense 1,801
1,518
283
18.6 %
Net income $ 5,905
$ 6,293
$ (388 ) (6.2 )%

⁽¹⁾Cost of sales includes all operating expenses of company-owned restaurants, including advertising expenses, and excludes depreciation and amortization, which are presented separately.

Total revenue. During the thirteen weeks ended ~~September 28, 2019,~~June 27, 2020, total revenue was ~~$49.9~~$66.1 million, an increase of ~~$11.6~~$17.5 million, or ~~30.4%~~36.1%, compared to ~~$38.2~~$48.6 million in the comparable period in ~~2018.~~2019.

Royalty revenue, franchise fees and other. During the thirteen weeks ended ~~September 28, 2019,~~June 27, 2020, royalty revenue, franchise fees and other was ~~$21.9~~$27.9 million, an increase of ~~$4.1~~$6.7 million, or ~~23.0%~~31.5%, compared to ~~$17.8~~$21.2 million in the comparable period in ~~2018.~~2019. Royalty revenue increased primarily due to ~~121 net franchise restaurant openings since September 29, 2018and~~ domestic same store sales growth of ~~12.3%.~~31.9% as well as 132 net franchise restaurant openings since June 29, 2019.

Advertising fees and related income. During the thirteen weeks ended ~~September 28, 2019,~~June 27, 2020, advertising fees and related income was ~~$14.1~~$19.9 million, an increase of ~~$5.4~~$6.4 million, compared to ~~$8.6~~$13.5 million in the comparable period in ~~2018.~~2019. Advertising fees increased primarily due to the ~~increase in the Ad Fund contribution rate from 3% to 4% of gross sales beginning in fiscal year 2019 as well as the 21.6%~~37.0% increase in system-wide sales in the thirteen weeks ended ~~September 28, 2019~~June 27, 2020 compared to the thirteen weeks ended ~~September~~June 29, ~~2018.~~2019.

Company-owned restaurant sales. During the thirteen weeks ended ~~September 28, 2019,~~June 27, 2020, company-owned restaurant sales were ~~$13.9~~$18.3 million, an increase of ~~$2.1~~$4.4 million, or ~~17.7%~~31.9%, compared to ~~$11.8~~$13.9 million in the comparable period in ~~2018.~~2019. The increase was primarily due to company-owned same store sales growth of ~~11.9%~~24.7%, which was ~~primarily~~ driven by both an increase in transactions and transaction size. Also contributing to the increase was the acquisition of ~~four~~one franchised restaurant and the opening of two company-owned restaurants since the prior year comparable period, resulting in additional company-owned restaurant sales of ~~$0.7~~$1.1 million.

Cost of sales. During the thirteen weeks ended ~~September 28, 2019,~~June 27, 2020, cost of sales was ~~$10.3~~$13.4 million, an increase of ~~$2.3~~$2.8 million, or ~~28.6%~~26.6%, compared to ~~$8.0~~$10.6 million in the comparable period in ~~2018.~~2019. Cost of sales as a percentage of company-owned restaurant sales was ~~74.2%~~73.1% in the thirteen weeks ended ~~September 28, 2019,~~June 27, 2020, compared to ~~67.9%~~76.1% in the comparable period in ~~2018.~~2019.

The table below presents the major components of cost of sales (dollars in thousands):


	Thirteen Weeks Ended											Thirteen Weeks Ended
	September 28, 2019					September 29, 2018						June 27, 2020						June 29, 2019
	In dollars			As a % of company-owned restaurant sales		In dollars			As a % of company-owned restaurant sales			In dollars		As a % of company-owned restaurant sales		In dollars		As a % of company-owned restaurant sales
Cost of sales:											Cost of sales:
Food, beverage and packaging costs	$	5,162		37.0	%	$	3,926		33.1	%	Food, beverage and packaging costs	$	5,954	32.5	%	$	5,205	37.5	%
Labor costs	3,098			22.2	%	2,621			22.1	%	Labor costs	4,687		25.6	%	3,193		23.0	%
Other restaurant operating expenses	2,456			17.6	%	1,795			15.2	%	Other restaurant operating expenses	3,086		16.8	%	2,556		18.4	%
Vendor rebates	(377		)	(2.7	)%	(302		)	(2.5	)%	Vendor rebates	(340)		(1.9)	%	(381)		(2.7)	%
Total cost of sales	$	10,339		74.2	%	$	8,040		67.9	%	Total cost of sales	$	13,387	73.1	%	$	10,573	76.1	%

Food, beverage and packaging costs as a percentage of company-owned restaurant sales were ~~37.0%~~32.5% in the thirteen weeks ended ~~September 28, 2019,~~June 27, 2020, compared to ~~33.1%~~37.5% in the comparable period in ~~2018.~~2019. The ~~increase~~decrease was primarily due to a 22.7% ~~increase~~decrease in the cost of bone-in chicken wings as compared to the prior year period.

Labor costs as a percentage of company-owned restaurant sales were ~~22.2%~~25.6% for the thirteen weeks ended ~~September 28, 2019,~~June 27, 2020, compared to ~~22.1%~~23.0% in the comparable period in ~~2018.~~2019. The increase ~~as a~~ percentage of company-owned restaurant sales was primarily due ~~primarily~~ to ~~labor associated with~~additional incentive pay provided to team members during the ~~three franchised restaurants that we acquired in the fiscal fourth quarter of 2018 as these newer restaurants operate at lower AUVs than our other company-owned restaurants.~~COVID-19 pandemic. This increase was ~~largely~~partially offset by our ability to leverage costs due to the increase in company-owned same store sales of ~~11.9%~~24.7%.

Other restaurant operating expenses as a percentage of company-owned restaurant sales were ~~17.6%~~16.8% for the thirteen weeks ended ~~September 28, 2019,~~June 27, 2020, compared to ~~15.2%~~18.4% in the comparable period in ~~2018.~~2019. The ~~increase~~decrease as a percentage of company-owned restaurant sales was due to ~~an increase in the Ad Fund contribution rate from 3%~~our ability to ~~4% of gross sales beginning in fiscal year 2019, an increase in third-party delivery fees~~leverage costs due to the completion of the launch of delivery at all company-owned restaurants in the second quarter of 2019, as well as other restaurant operating expenses associated with the three franchised restaurants that we acquired in the fiscal fourth quarter of 2018 as these newer restaurants operate at lower AUVs than our other company-owned restaurants. This increase was slightly offset by the increase in company-owned same store sales of ~~11.9%~~24.7%.

Advertising expenses. During the thirteen weeks ended ~~September 28, 2019,~~June 27, 2020, advertising expenses were ~~$12.7~~$18.6 million, an increase of ~~$4.2~~$5.6 million compared to ~~$8.4~~$13.0 million in the comparable period in ~~2018,~~2019. Advertising expenses are recognized at the same time the related revenue is recognized, which does not necessarily correlate to the actual timing of the related advertising spend.

Selling, general and administrative ("SG&A"). During the thirteen weeks ended June 27, 2020, SG&A expense was $13.2 million, a decrease of $0.2 million compared to $13.4 million in the comparable period in 2019. The decrease in SG&A expense was primarily due to a gain of $2.0 million recognized due to the re-franchising of two company-owned restaurants, which was offset by a one-time donation to the National Restaurant Employee Relief Fund of $1.0 million to support restaurant workers in times of need, $0.6 million in COVID-19 related expenses and support provided to international franchisees, and $0.3 million associated with additional expenses to support our national advertising campaign which has an equal and offsetting contribution in revenue.

Depreciation and amortization. During the thirteen weeks ended June 27, 2020, depreciation expense was $1.4 million, an increase of $0.1 million compared to $1.3 million in the comparable period in 2019. The increase in depreciation and amortization was primarily due to additional capital expenditures related to investments in technology.

Interest expense, net. During the thirteen weeks ended June 27, 2020, interest expense was $4.2 million, which was comparable to the $4.3 million of interest expense in the comparable period in 2019.

Income tax expense. Income tax expense was $3.8 million in the thirteen weeks ended June 27, 2020, yielding an effective tax rate of 24.7%, compared to an effective tax rate of 17.9% in the prior year period. The increase in the effective tax rate was primarily due to the ~~Ad Fund contribution rate increasing from 3%~~impact of excess tax benefits associated with stock options on the effective rate.

Twenty-Six Weeks Ended June 27, 2020 compared to 4%Twenty-Six Weeks Ended June 29, 2019

The following table sets forth our results of ~~gross~~operations for the twenty-six weeks ended June 27, 2020 and June 29, 2019 (dollars in thousands):


	Twenty-Six Weeks Ended						Increase / (Decrease)
	June 27, 2020		June 29, 2019		$		%
Revenue:
Royalty revenue, franchise fees and other	$	52,057	$	42,515	$	9,542	22.4	%
Advertising fees and related income	35,937		26,697		9,240		34.6	%
Company-owned restaurant sales	33,547		27,403		6,144		22.4	%
Total revenue	121,541		96,615		24,926		25.8	%
Costs and expenses:
Cost of sales ⁽¹⁾	24,563		20,303		4,260		21.0	%
Advertising expenses	33,513		25,707		7,806		30.4	%
Selling, general and administrative	27,504		25,936		1,568		6.0	%
Depreciation and amortization	2,953		2,611		342		13.1	%
Total costs and expenses	88,533		74,557		13,976		18.7	%
Operating income	33,008		22,058		10,950		49.6	%
Interest expense, net	8,359		8,709		(350)		(4.0)	%

Income before income tax expense	24,649		13,349		11,300		84.7	%
Income tax expense	5,014		1,825		3,189		174.7	%
Net income	$	19,635	$	11,524	$	8,111	70.4	%

⁽¹⁾Cost of sales ~~beginning~~includes all operating expenses of company-owned restaurants, including advertising expenses, and excludes depreciation and amortization, which are presented separately.

Total revenue. During the twenty-six weeks ended June 27, 2020, total revenue was $121.5 million, an increase of $24.9 million, or 25.8%, compared to $96.6 million in ~~fiscal~~the comparable period in 2019.

Royalty revenue, franchise fees and other. During the twenty-six weeks ended June 27, 2020, royalty revenue, franchise fees and other was $52.1 million, an increase of $9.5 million, or 22.4%, compared to $42.5 million in the comparable period in 2019. Royalty revenue increased due to 132 net franchise restaurant openings since June 29, 2019 and domestic same store sales growth of 21.0%.

Advertising fees and related income. During the twenty-six weeks ended June 27, 2020, advertising fees and related income was $35.9 million, an increase of $9.2 million, or 34.6%, compared to $26.7 million in the comparable period in 2019. Advertising fees increased primarily due to the 27.9% increase in system-wide sales in the twenty-six weeks ended June 27, 2020 compared to the twenty-six weeks ended June 29, 2019.

Company-owned restaurant sales. During the twenty-six weeks ended June 27, 2020, company-owned restaurant sales were $33.5 million, an increase of $6.1 million, or 22.4%, compared to $27.4 million in the comparable period in 2019. The increase was primarily due an increase in company-owned same store sales of 15.7%, which was driven by both an increase in transactions and transaction size. Also contributing to the increase was the acquisition of one franchised restaurant and the opening of two company-owned restaurants since the prior year comparable period, resulting in additional sales of $2.0 million.

Cost of sales. During the twenty-six weeks ended June 27, 2020, cost of sales was $24.6 million, an increase of $4.3 million, or 21.0%, compared to $20.3 million in the comparable period in 2019. Cost of sales as a percentage of company-owned restaurant sales was 73.2% in the twenty-six weeks ended June 27, 2020 compared to 74.1% in the prior year period.

The table below presents the major components of cost of sales (dollars in thousands):


	Twenty-Six Weeks Ended
	June 27, 2020						June 29, 2019
	In dollars		As a % of company-owned restaurant sales		In dollars		As a % of company-owned restaurant sales
Cost of sales:
Food, beverage and packaging costs	$	11,431	34.1	%	$	10,022	36.6	%
Labor costs	8,211		24.5	%	6,217		22.7	%
Other restaurant operating expenses	5,652		16.8	%	4,833		17.6	%
Vendor rebates	(731)		(2.2)	%	(769)		(2.8)	%
Total cost of sales	$	24,563	73.2	%	$	20,303	74.1	%

Food, beverage and packaging costs as a percentage of company-owned restaurant sales were 34.1% in the twenty-six weeks ended June 27, 2020, compared to 36.6% in the comparable period in 2019. The decrease was primarily due to a 14.5% decrease in the cost of bone-in chicken wings as compared to the prior year period.

Labor costs as a percentage of company-owned restaurant sales were 24.5% for the twenty-six weeks ended June 27, 2020, compared to 22.7% in the comparable period in 2019. The increase was primarily due to additional incentive pay provided to team members during the COVID-19 pandemic. These increases were partially offset by our ability to leverage costs due to the increase in company-owned same store sales of 15.7%.

Other restaurant operating expenses as a percentage of company-owned restaurant sales were 16.8% for the twenty-six weeks ended June 27, 2020, compared to 17.6% in the comparable period in 2019. The decrease as a percentage of company-owned restaurant sales was due to sales leverage achieved as a result of the increase in company-owned same store sales of 15.7%. This decrease was slightly offset by an increase in delivery fees payable to third-party delivery providers due to the growth in delivery mix as a percent of total sales during the twenty-six weeks ended June 27, 2020.

Advertising expenses. During the twenty-six weeks ended June 27, 2020, advertising expenses were $33.5 million, an increase of $7.8 million, or 30.4%, compared to $25.7 million in the comparable period in 2019. Advertising expenses are recognized at the same time the related revenue is recognized, which does not necessarily correlate to the actual timing of the related advertising spend.

Selling, general and administrative. During the ~~thirteen~~twenty-six weeks ended ~~September 28, 2019,~~June 27, 2020, SG&A expense was ~~$13.5~~$27.5 million, an increase of ~~$3.2~~$1.6 million, or 6.0%, compared to ~~$10.3~~$25.9 million in the comparable period in ~~2018.~~2019. The increase in SG&A expense was primarily due to ~~approximately $1.4~~a one-time donation to the National Restaurant Employee Relief Fund of $1.0 million to support restaurant workers in times of need. Also contributing to the increase was an increase of $0.7 million associated with additional expenses to support our ~~continued investment in our~~ national advertising campaign which ~~was~~has an equal and offsetting contribution in revenue, an increase of $0.7 million of charges associated with certain organizational changes, expenses of $0.7 million related to COVID-19 and support provided to international franchisees, and an increase of $0.5 million in stock-based compensation expense. These increases were partially offset by ~~advertising contributions recorded in advertising fees and related income, as well as $1.3~~a gain of $2.0 million ~~in additional stock-based compensation which was~~ recognized due to the ~~Company’s year-to-date performance.~~re-franchising of two company-owned restaurants.

Depreciation and amortization. During the ~~thirteen~~twenty-six weeks ended ~~September 28, 2019,~~June 27, 2020, depreciation and amortization expense was ~~$1.4~~$3.0 million, an increase of $0.3 million, or 13.1%, compared to ~~$1.1~~$2.6 million in the comparable period in ~~2018.~~2019. The increase in depreciation and amortization expense was primarily due to additional capital expenditures related to investments in technology.

Interest expense, net. During the ~~thirteen~~twenty-six weeks ended ~~September 28, 2019,~~June 27, 2020, interest expense was ~~$4.2~~$8.4 million, ~~an increase~~a decrease of ~~$1.7~~$0.4 million, or 4.0%, compared to ~~$2.5~~$8.7 million in the comparable period in ~~2018.~~2019. The ~~increase~~decrease in interest expense was primarily due to a ~~higher~~lower average outstanding debt balance ~~and applicable interest rate related to our securitized debt facility.~~from the prior year comparable period.

Income tax expense. Income tax expense was ~~$1.8~~$5.0 million in the ~~thirteen~~twenty-six weeks ended ~~September 28, 2019,~~June 27, 2020, yielding an effective tax rate of ~~23.4%~~20.3%, compared to an effective tax rate of ~~19.4%~~13.7% in the prior ~~year.~~year period. The increase in the effective tax rate was primarily due to ~~$0.1 million in tax benefits resulting from~~ the ~~recognition~~impact of excess tax benefits ~~from stock-based compensation in income tax expense in~~associated with stock options on the ~~current fiscal quarter compared to $0.3 million of excess tax benefits in the prior year period.~~

~~Segment results.~~ ~~The following table sets forth our revenue and operating profit for each of our segments for the period presented (dollars in thousands):~~effective rate.

Thirteen Weeks Ended Increase / (Decrease)
September 28,
2019 September 29,
2018 $ %
Revenue:
Franchise segment $ 35,932
$ 26,401
$ 9,531
36.1 %
Company segment 13,943
11,845
2,098
17.7 %
Total segment revenue $ 49,875
$ 38,246
$ 11,629
30.4 %

Segment Profit:
Franchise segment $ 9,631
$ 7,663
$ 1,968
25.7 %
Company segment 2,318
2,693
(375 ) (13.9 )%
Total segment profit $ 11,949
$ 10,356
$ 1,593
15.4 %

~~Franchise segment.~~ During the thirteen weeks ended September 28, 2019, franchise segment revenue was $35.9 million, an increase of $9.5 million, or 36.1%, compared to $26.4 million in the comparable period in 2018. Royalty revenue increased $3.6 million due to 121 net franchise restaurant openings since September 29, 2018 and domestic same store sales growth of 12.3%. Advertising fees and related income increased $5.4 million primarily due to the increase in the Ad Fund contribution rate from 3% to 4% of gross sales beginning in fiscal year 2019 as well as the increase in system-wide sales in the thirteen weeks ended September 28, 2019 compared to the thirteen weeks ended September 29, 2018.

During the thirteen weeks ended September 28, 2019, franchise segment profit was $9.6 million, an increase of $2.0 million, or 25.7%, compared to $7.7 million in the comparable period in 2018, primarily due to the growth in franchise segment revenue of $9.5 million, which was offset by an increase of $4.2 million in advertising expenses and an increase of $3.2 million in SG&A expenses related to investments to support our national advertising campaign and increased stock-based compensation due to the Company’s year-to-date performance.

~~Company segment.~~ During the thirteen weeks ended September 28, 2019, company-owned restaurant sales were $13.9 million, an increase of $2.1 million, or 17.7%, compared to $11.8 million in the comparable period in 2018. The increase was primarily due to an increase in company-owned same store sales of 11.9%, which was primarily driven by an increase in transactions, and the acquisition of four franchised restaurants since the prior year comparable period, resulting in additional sales of $0.7 million.

During the thirteen weeks ended September 28, 2019, company segment profit was $2.3 million, a decrease of $0.4 million, or 13.9%, compared to $2.7 million in the comparable period in 2018. The decrease was primarily due to a 22.7% increase in the cost of bone-in chicken wings, an increase in the Ad Fund contribution rate from 3% to 4% of gross sales beginning in fiscal year 2019, and an increase in third-party delivery fees.

~~Thirty-Nine Weeks Ended September 28, 2019 compared to Thirty-Nine Weeks Ended September 29, 2018~~

~~The following table sets forth our results of operations for the thirty-nine weeks ended September 28, 2019 and September 29, 2018 (dollars in thousands):~~

Thirty-Nine Weeks Ended Increase / (Decrease)
September 28,
2019 September 29,
2018 $ %
Revenue:
Royalty revenue, franchise fees and other $ 64,391
$ 52,772
$ 11,619
22.0 %
Advertising fees and related income 40,753
25,574
15,179
59.4 %
Company-owned restaurant sales 41,346
34,326
7,020
20.5 %
Total revenue 146,490
112,672
33,818
30.0 %
Costs and expenses:
Cost of sales ⁽¹⁾
30,642
23,182
7,460
32.2 %
Advertising expenses 38,359
25,283
13,076
51.7 %
Selling, general and administrative 39,463
31,196
8,267
26.5 %
Depreciation and amortization 4,019
3,163
856
27.1 %
Total costs and expenses 112,483
82,824
29,659
35.8 %
Operating income 34,007
29,848
4,159
13.9 %
Interest expense, net 12,952
6,623
6,329
95.6 %
Income before income tax expense 21,055
23,225
(2,170 ) (9.3 )%
Income tax expense 3,626
3,925
(299 ) (7.6 )%
Net income $ 17,429
$ 19,300
$ (1,871 ) (9.7 )%

⁽¹⁾~~Cost of sales includes all operating expenses of company-owned restaurants, including advertising expenses, and excludes depreciation and amortization, which are presented separately.~~

~~Total revenue.~~ ~~During the thirty-nine weeks ended September 28, 2019, total revenue was $146.5 million, an increase of $33.8 million, or 30.0%, compared to $112.7 million in the comparable period in 2018.~~

~~Royalty revenue, franchise fees and other.~~ During the thirty-nine weeks ended September 28, 2019, royalty revenue, franchise fees and other was $64.4 million, an increase of $11.6 million, or 22.0%, compared to $52.8 million in the comparable period in 2018. Royalty revenue increased due to 121 net franchise restaurant openings since September 29, 2018 and domestic same store sales growth of 10.7%. Franchise fees increased $1.4 million primarily due to higher termination fees recognized in the first fiscal quarter of 2019.

~~Advertising fees and related income.~~ During the thirty-nine weeks ended September 28, 2019, advertising fees and related income was $40.8 million, an increase of $15.2 million, compared to $25.6 million in the comparable period in 2018. Advertising fees increased primarily due to the increase in the Ad Fund contribution rate from 3% to 4% of gross sales beginning in fiscal year 2019 as well as the 19.7% increase in system-wide sales in the thirty-nine weeks ended September 28, 2019 compared to the thirty-nine weeks ended September 29, 2018.

~~Company-owned restaurant sales.~~ During the thirty-nine weeks ended September 28, 2019, company-owned restaurant sales were $41.3 million, an increase of $7.0 million, compared to $34.3 million in the comparable period in 2018. The increase was primarily due to the acquisition of six franchised restaurants since the prior year comparable period resulting in additional sales of $3.4 million, as well as an increase in company-owned same store sales of 10.1%, which was primarily driven by an increase in transactions.

~~Cost of sales.~~ During the thirty-nine weeks ended September 28, 2019, cost of sales was $30.6 million, an increase of $7.5 million, or 32.2%, compared to $23.2 million in the comparable period in 2018. Cost of sales as a percentage of company-owned restaurant sales was 74.1% in the thirty-nine weeks ended September 28, 2019 compared to 67.5% in the prior year period.

~~The table below presents the major components of cost of sales (dollars in thousands):~~

Thirty-Nine Weeks Ended
September 28, 2019 September 29, 2018
In dollars As a % of company-owned restaurant sales In dollars As a % of company-owned restaurant sales
Cost of sales:
Food, beverage and packaging costs $ 15,184
36.7 % $ 11,306
32.9 %
Labor costs 9,314
22.5 % 7,555
22.0 %
Other restaurant operating expenses 7,289
17.6 % 5,190
15.1 %
Vendor rebates (1,145 ) (2.8 )% (869 ) (2.5 )%
Total cost of sales $ 30,642
74.1 % $ 23,182
67.5 %

Food, beverage and packaging costs as a percentage of company-owned restaurant sales were 36.7% in the thirty-nine weeks ended September 28, 2019, compared to 32.9% in the comparable period in 2018. The increase was primarily due to a 21.1% increase in the cost of bone-in chicken wings as compared to the prior year period.

Labor costs as a percentage of company-owned restaurant sales were 22.5% for the thirty-nine weeks ended September 28, 2019, compared to 22.0% in the comparable period in 2018. The increase was primarily due to investment in labor as well as training associated with the three franchised restaurants that we acquired in the fiscal fourth quarter of 2018 as we make investments to prepare these restaurants to be refranchised in a future period. This increase was offset by the increase in company-owned domestic same store sales of 10.1%.

Other restaurant operating expenses as a percentage of company-owned restaurant sales were 17.6% for the thirty-nine weeks ended September 28, 2019, compared to 15.1% in the comparable period in 2018. The increase as a percentage of company-owned restaurant sales was due to an increase in the Ad Fund contribution rate from 3% to 4% of gross sales beginning in fiscal year 2019 and an increase in the amount of third-party delivery fees due to the completion of the launch of delivery at all company-owned restaurants in the second quarter of 2019, as well as investments associated with the three franchised restaurants that we acquired in the fiscal fourth quarter of 2018 as we prepare these restaurants to be refranchised in a future period. These increases were slightly offset by the increase in company-owned domestic same store sales of 10.1%.

~~Advertising expenses.~~ During the thirty-nine weeks ended September 28, 2019, advertising expenses were $38.4 million, an increase of $13.1 million compared to $25.3 million in the comparable period in 2018 primarily due to the Ad Fund contribution rate increasing from 3% to 4% of gross sales beginning in fiscal year 2019. Advertising expenses are recognized at the same time the related revenue is recognized, which does not necessarily correlate to the actual timing of the related advertising spend.

~~Selling, general and administrative.~~ During the thirty-nine weeks ended September 28, 2019, SG&A expense was $39.5 million, an increase of $8.3 million compared to $31.2 million in the comparable period in 2018. The increase in SG&A expense was primarily due to an increase of $2.8 million in stock-based compensation due to the modification of certain awards in the second fiscal quarter as well as additional compensation due to the Company’s year-to-date performance. Also contributing to the increase was approximately $2.4 million associated with additional expenses to support our continued investment in our national advertising campaign, $1.5 million in professional fees and $2.0 million in headcount related expenses to support the growth of our business. These year-over-year increases were offset by nonrecurring costs of $1.5 million incurred in the first quarter of 2018 related to our debt refinancing and payment of a special dividend.

~~Depreciation and amortization.~~ During the thirty-nine weeks ended September 28, 2019, depreciation expense was $4.0 million, an increase of $0.9 million, compared to $3.2 million in the comparable period in 2018. The increase in depreciation and amortization was primarily due to additional capital expenditures related to investments in technology.

~~Interest expense, net.~~ During the thirty-nine weeks ended September 28, 2019, interest expense was $13.0 million, an increase of $6.3 million compared to $6.6 million in the comparable period in 2018. The increase was primarily due to a higher average outstanding debt balance and applicable interest rate related to our securitized debt facility.

~~Income tax expense.~~ Income tax expense was $3.6 million in the thirty-nine weeks ended September 28, 2019, yielding an effective tax rate of 17.2%, which was comparable to an effective tax rate of 16.9% in the prior year period.

~~Segment results.~~ ~~The following table sets forth our revenue and operating profit for each of our segments for the period presented (dollars in thousands):~~

Thirty-Nine Weeks Ended Increase / (Decrease)
September 28,
2019 September 29,
2018 $ %
Revenue:
Franchise segment $ 105,144
$ 78,346
$ 26,798
34.2 %
Company segment 41,346
34,326
7,020
20.5 %
Total segment revenue $ 146,490
$ 112,672
$ 33,818
30.0 %

Segment Profit:
Franchise segment $ 27,107
$ 23,418
$ 3,689
15.8 %
Company segment 6,900
7,892
(992 ) (12.6 )%
Total segment profit $ 34,007
$ 31,310
$ 2,697
8.6 %

~~Franchise segment.~~ During the thirty-nine weeks ended September 28, 2019, franchise segment revenue was $105.1 million, an increase of $26.8 million, or 34.2%, compared to $78.3 million in the comparable period in 2018. Royalty revenue increased $9.6 million, primarily due to 121 net franchise restaurant openings since September 29, 2018 and domestic same store sales growth of 10.7%. Advertising fees and related income increased $15.2 million primarily due to the increase in the Ad Fund contribution rate from 3% to 4% of gross sales beginning in fiscal year 2019 as well as the 19.7% increase in system-wide sales in the thirty-nine weeks ended September 28, 2019 compared to the thirty-nine weeks ended September 29, 2018. Franchise fees increased $1.4 million primarily due to higher termination fees recognized in the first thirteen weeks of fiscal year 2019.

During the thirty-nine weeks ended September 28, 2019, franchise segment profit was $27.1 million, an increase of $3.7 million, or 15.8%, compared to $23.4 million in the comparable period in 2018, primarily due to the growth in franchise segment revenue, which was offset by an increase of $13.1 million in advertising expenses and an increase of $9.8 million in SG&A expenses related to increased stock-based compensation and investments to support our strategic initiatives and our national advertising campaign, which were offset by non-recurring costs of $1.5 million incurred in the first quarter of 2018.

~~Company segment.~~ During the thirty-nine weeks ended September 28, 2019, company-owned restaurant sales were $41.3 million, an increase of $7.0 million, compared to $34.3 million in the comparable period in 2018. The increase was primarily due to the acquisition of six franchised restaurants since the prior year comparable period resulting in additional sales of $3.4 million and an increase in company-owned same store sales of 10.1%, which was primarily driven by an increase in transactions.

During the thirty-nine weeks ended September 28, 2019, company segment profit was $6.9 million, a decrease of $1.0 million, or 12.6%, compared to $7.9 million in the comparable period in 2018. The decrease was primarily due to a 21.1% increase in the cost of bone-in chicken wings, an increase in third-party delivery fees, and an increase in the Ad Fund contribution rate from 3% to 4% of gross sales beginning in fiscal year 2019.

Liquidity and Capital Resources

General. Our primary sources of liquidity and capital resources are cash provided from operating activities, cash and cash equivalents on hand, and proceeds from the incurrence of debt. Our primary requirements for liquidity and capital are working capital and general corporate needs. Historically, we have operated with minimal positive working capital or with negative working capital. We have in the past, and may in the future, refinance our existing indebtedness with new debt arrangements and/or equity issuances and utilize a portion of funds to return capital to our stockholders. We believe ~~that~~ our sources of liquidity and capital will be sufficient to finance our continued operations and growth strategy for at least the next twelve months.

The following table shows summary cash flows information for the ~~thirty-nine~~twenty-six weeks ended ~~September 28,~~June 27, 2020 and June 29, 2019 ~~and September 29, 2018~~ (in thousands):


	Thirty-Nine Weeks Ended							Twenty-Six Weeks Ended
	September 28, 2019			September 29, 2018				June 27, 2020		June 29, 2019
Net cash provided by (used in):							Net cash provided by (used in):
Operating activities	$	28,586		$	30,623		Operating activities	$	25,612	$	10,491
Investing activities	(22,311		)	(8,879		)	Investing activities	(370)		(1,442)
Financing activities	(5,752		)	(18,326		)	Financing activities	9,021		(6,782)
Net change in cash and cash equivalents	$	523		$	3,418		Net change in cash and cash equivalents	$	34,263	$	2,267

Operating activities. Our cash flows from operating activities are principally driven by sales at both franchise restaurants and company-owned restaurants, as well as franchise and development fees. We collect franchise royalties from our franchise owners on a weekly basis. Restaurant-level operating costs at our company-owned restaurants, unearned franchise and development fees, and corporate overhead costs also impact our cash flows from operating activities.

Net cash provided by operating activities was ~~$28.6~~$25.6 million in the ~~thirty-nine~~twenty-six weeks ended ~~September 28, 2019, a decrease~~June 27, 2020, an increase of ~~$2.0~~$15.1 million from cash provided by ~~operations~~operating activities of ~~$30.6~~$10.5 million in the ~~thirty-nine~~twenty-six weeks ended ~~September~~June 29, ~~2018.~~2019. The ~~decrease was primarily~~increase is the result of increased operating income associated with the increased sales over the prior period coupled with the increase in working capital due to ~~the~~ timing of ~~changes in working capital.~~payments associated with our national advertising campaign and taxes.

Investing activities. Our net cash used in investing activities was ~~$22.3~~$0.4 million in the ~~thirty-nine~~twenty-six weeks ended ~~September 28, 2019, an increase~~June 27, 2020, a decrease of ~~$13.4~~$1.1 million from ~~$8.9 million~~cash used in investing activities of $1.4 million in the ~~comparable period in 2018. The increase was primarily due to the purchase of a new corporate headquarters building for $18.3 million during the thirty-nine~~twenty-six weeks ended ~~September 28, 2019, offset by a~~June 29, 2019. The decrease in cash used ~~for restaurant acquisitions~~in investing activities was due to proceeds received from the sale of ~~$4.8 million.~~two company-owned restaurants during the fiscal quarter ended June 27, 2020, which offset increased capital expenditures associated with the opening of a new company-owned restaurant.

Financing activities. Our net cash ~~used in~~provided by financing activities was ~~$5.8~~$9.0 million in the ~~thirty-nine~~twenty-six weeks ended ~~September 28, 2019, a decrease~~June 27, 2020, an increase of ~~$12.6~~$15.8 million from cash used in financing activities of ~~$18.3~~$6.8 million in ~~2018.~~2019. The ~~decrease~~increase was primarily due to the payment of a special dividend in the first quarter of 2018 totaling $92.7 million, offset by net borrowings of $81.6 million in the comparable period in 2018. These decreases were offset by an increase in the amount of our regular dividend, and principal payments associated with our securitized financing facility, offset by additional borrowings under our Variable Funding Notes (as defined below) of ~~$5.0~~$16.0 million in the ~~thirty-nine~~twenty-six weeks ended ~~September 28, 2019.~~June 27, 2020, partially offset by an increase in the amount of our regular dividend.

Securitized financing facility. On November 14, 2018, we entered into a securitized financing facility comprised of $320 million of Series 2018-1 4.97% Fixed Rate Senior Secured Notes, Class A-2 (the “Class A-2 Notes”) as well as a variable funding note facility of Series 2018-1 Variable Funding Senior Notes, Class A-1, ~~(the “Variable Funding Notes” and, together with the Class A-2 Notes, the “Notes”),~~ which allow us to borrow up to $20 million as needed on a revolving ~~basis.~~basis and to issue letters of credit (the “Variable Funding Notes” and, together with the Class A-2 Notes, the “Notes”). As of ~~September 28, 2019,~~June 27, 2020, we had ~~$5.0~~$16.0 million outstanding borrowings under the Variable Funding Notes, with $4.0 million letters of credit ~~outstanding.~~outstanding, and $316.8 million outstanding under the Class A-2 Notes. There were no amounts drawn down on the letters of credit as of June 27, 2020.

The Class A-2 Notes are generally subject to 1% annual amortization, bear interest at a fixed rate of 4.97% per annum, and have an anticipated repayment date of December 2023. ~~Interest and~~During the first fiscal quarter of 2020, the Company had a leverage ratio under the Class A-2 Notes of less than 5.0x. Per the terms of the Company’s debt agreements, principal payments onare not due until the ~~Notes are payable on~~repayment date as long as the Company maintains a ~~quarterly basis.~~leverage ratio of less than 5.0x. As such, the Company ceased making principal payments beginning in the second quarter of 2020.

Borrowings under the Variable Funding Notes accrue interest at a variable rate based on (i) the prime rate, (ii) overnight federal funds rates, (iii) the London interbank offered rate for U.S. Dollars or (iv) with respect to advances made by conduit investors, the weighted average cost of, or related to, the issuance of commercial paper allocated to fund or maintain such advances, in each case plus any applicable margin, as more fully set forth in the Variable Funding Note Purchase Agreement, dated November 14, 2018. Interest ispayments on the Notes are payable on a quarterly basis.

Dividends. ~~The Company’s Board of Directors declared~~We paid a quarterly cash dividend of ~~$0.09~~$0.11 per share of common stock in each of the first two quarters ~~and a quarterly dividend~~ of ~~to $0.11 per share of common stock in the third quarter,~~2020, resulting in aggregate ~~dividends~~dividend payments of ~~$8.5~~$6.5 million ~~or $0.29 per share of common stock, being paid~~ during the ~~thirty-nine~~twenty-six weeks ended ~~September~~June 27, 2020. On July 28, ~~2019.~~

~~Subsequent to the end of the third quarter, on October 29, 2019,~~2020, the Company’s Board of Directors ~~declared~~approved a ~~quarterly~~ dividend of ~~$0.11~~$0.14 per share, ~~of common stock for~~to be paid on September 11, 2020 to stockholders of record as of ~~November 29, 2019, to be paid on December 13, 2019,~~August 28, 2020, totaling approximately ~~$3.2~~$4.1 million.

We do not currently expect the restrictions in our debt instruments to impact our ability to make regularly quarterly dividends pursuant to our quarterly dividend program. However, any future declarations of dividends, as well as the amount and timing of such dividends, are subject to capital availability and the discretion of our Board of Directors, which must evaluate, among other things, whether cash dividends are in the best interest of our stockholders.

Contractual Obligations

There have been no material changes to our contractual obligations disclosed in the contractual obligations section of Management’s Discussion and Analysis of Financial Condition and Results of Operations in ~~the~~our Annual Report. For additional information regarding our long-term debt and our commitments and contingencies, see Note 10, Debt Obligations and Note ~~11,~~12, Commitments and Contingencies in ~~the~~our Annual Report and the corresponding Notes 76 and 97 in the notes to our unaudited consolidated financial statements included elsewhere in this Quarterly Report.

Off-Balance Sheet Arrangements

~~We had no~~The Company is required to provide standby letters of credit related to our securitized financing facility. Although the letters of credit are off-balance sheet, the obligations to which they relate are reflected as liabilities in the Consolidated Balance Sheet. Outstanding letters of credit totaled $4.0 million at June 27, 2020. We do not believe these arrangements have or ~~obligations as~~are likely to have a material effect on our results of ~~September 28, 2019.~~operations, financial condition, revenues or expenses, capital expenditures or liquidity.

Critical Accounting Policies and Estimates

Our consolidated financial statements and accompanying notes are prepared in accordance with GAAP. Preparing consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. These estimates and assumptions are affected by the application of our accounting policies. Critical accounting estimates are those that require application of management’s most difficult, subjective, or complex judgments, often as a result of matters that are inherently uncertain and may change in subsequent periods. While we apply our judgment based on assumptions believed to be reasonable under the circumstances, actual results could vary from these assumptions. It is possible that materially different amounts would be reported using different assumptions. Our critical accounting policies and estimates are identified and described in our annual consolidated financial statements and the related notes included in our Annual Report, and there have been no material changes since the filing of our Annual Report.

Recent Accounting Pronouncements

~~See Note 1~~The Company has reviewed all recently issued, but not yet effective, accounting pronouncements and does not believe the future adoption of any such pronouncements may be expected to ~~our consolidated~~cause a material impact on its financial ~~statements,~~ ~~Basis~~condition or the results of ~~Presentation~~its operations.

~~, for a summary of recent accounting pronouncements.~~

Special Note Regarding Forward-Looking Statements

This report includes statements of our expectations, intentions, plans and beliefs that constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and are intended to come within the safe harbor protection provided by those sections. These statements, which involve risks and uncertainties, relate to the discussion of our business strategies and our expectations concerning future operations, margins, profitability, trends, liquidity and capital resources and to analyses and other information that are based on forecasts of future results and estimates of amounts not yet determinable. These forward-looking statements can generally by identified by the use of forward-looking terminology, including the terms “may,” “will,” “should,” “expect,” “intend,” “plan,” “anticipate,” “believe,” “think,” “estimate,” “seek,” “expect,” “predict,” “could,” “project,” “potential” or, in each case, their negative or other variations or comparable terminology, although not all forward-looking statements are accompanied by such terms. These forward-looking statements are made based on expectations and beliefs concerning future events affecting us and are subject to uncertainties, risks, and factors relating to our operations and business environments, all of which are difficult to predict and many of which are beyond our control, that could cause our actual results to differ materially from those matters expressed or implied by these forward-looking statements.

Such risks and other factors include those listed in Item 1A., “Risk Factors,” and elsewhere in this report, including the following factors that could cause actual results or outcomes to differ from the results expressed or implied by forward-looking statements:

•the impacts of the novel coronavirus (COVID-19) pandemic on our business;

•the response of governments and of our Company to the pandemic;

•our ability to effectively implement our growth strategy;

•risks associated with changes in food and supply costs;

•our relationships with, and the performance of, our franchisees, as well as actions by franchisees that could harm our business;

•our ability to identify, recruit and contract with a sufficient number of qualified franchisees;

•risks associated with food safety, food-borne illness and other health concerns;

•our ability to successfully expand into new markets;

•our ability to effectively compete within our industry;

•risks associated with interruptions in our supply ~~chain;~~chain, including availability of food products;

•risks associated with our future performance and operating results falling below the expectations of securities analysts and investors;

•risks associated with data privacy, cyber security, and the use and implementation of information technology;

•risks associated with our increasing dependence on digital commerce platforms and third-party delivery service providers;

•uncertainty in the law with respect to the assignment of liabilities in the franchise business model;

•risks associated with litigation against us or our franchisees;

•our ability to successfully advertise and market our business;

•risks associated with changes in customer preferences and perceptions;

•our ability to comply with government regulations relating to food products and franchising, including increased costs associated with new or changing regulations;

•risks associated with the geographic concentration of our business;

•our ability to maintain adequate insurance coverage for our business;

•risks associated with damage to our reputation or lack of acceptance of our brand in existing or new markets;

•risks associated with our expansion into international markets and foreign government restrictions on operations;

•our ability to comply with the terms of our securitized debt financing and generate sufficient cash flows to satisfy our significant debt service obligations thereunder;

•our ability to attract and retain our executive officers and other key employees; and

•our ability to protect our intellectual property, including trademarks and trade secrets.

The above list of factors is not exhaustive. Some of these and other factors are discussed in more detail under “Risk Factors” in our Annual Report and Part II, Item 1A in this Quarterly Report. When considering forward-looking statements in this report or that we make in other reports or statements, you should keep in mind the cautionary statements in this report and future reports we file with the SEC. New risks and uncertainties arise from time to time, and we cannot predict when they may arise or how they may affect us. Except as required by law, we assume no obligation to update or revise any forward-looking statements for any reason, or to update the reasons actual results

could differ materially from those anticipated in any forward-looking statements, even if new information becomes available in the future.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Impact of Inflation. The primary inflationary factors affecting our and our franchisees’ operations are food and beverage costs, labor costs, energy costs and the costs and materials used in the construction of new restaurants. Our restaurant operations are subject to federal and state minimum wage laws governing such matters as working conditions, overtime and tip credits. Significant numbers of our and our franchisees’ restaurant personnel are paid at rates related to the federal and/or state minimum wage and, accordingly, increases in the minimum wage increase our and our franchisees’ labor costs. To the extent permitted by competition and the economy, we have mitigated increased costs by increasing menu prices and may continue to do so if deemed necessary in future years. Substantial increases in costs and expenses could impact our operating results to the extent such increases cannot be passed through to our customers. Historically, inflation has not had a material effect on our results of operations. Severe increases in inflation, however, could affect the global and U.S. economies and could have an adverse impact on our business, financial condition and results of operations.

Commodity Price Risk. We are exposed to market risks from changes in commodity prices. Many of the food products purchased by us are affected by weather, production, availability and other factors outside our control. Although we attempt to minimize the effect of price volatility by negotiating fixed price contracts for the supply of key ingredients, there are no established fixed price markets for fresh bone-in chicken wings, so we are subject to prevailing market conditions. Bone-in chicken wings accounted for approximately ~~28.4%~~25.4% and ~~25.6%~~28.1% of our company-owned restaurant cost of sales during the ~~thirty-nine~~twenty-six weeks ended ~~September 28,~~June 27, 2020 and June 29, 2019, ~~and September 29, 2018,~~ respectively. A hypothetical 10% increase in the bone-in chicken wing costs would have increased costs of sales by approximately ~~$0.9~~$0.6 million during the ~~thirty-nine~~twenty-six weeks ended ~~September 28, 2019.~~June 27, 2020. We do not engage in speculative financial transactions nor do we hold or issue financial instruments for trading purposes. In instances when we use fixed pricing arrangements with our suppliers, these arrangements cover our physical commodity needs, are not net-settled, and are accounted for as normal purchases.

Interest Rate Risk. As discussed in “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation” under “Liquidity and Capital Resources,” the Company entered into a securitized financing facility on November 14, 2018, issuing $320 million of Class A-2 Notes. The proceeds from the Class A-2 Notes were used to repay all amounts outstanding onunder the ~~2018 Facility,~~Company's previous senior secured credit facility, to pay transaction costs, for general corporate purposes, and for the payment of a special dividend. Concurrently, the Company issued the Variable Funding Notes, which permit borrowings of up to $20 million and may be used to issue letters of credit. The final legal maturity date of the Notes is in 2048; however, the anticipated repayment date of the Notes is December 2023. ~~The 2018 Facility was canceled upon repayment of all outstanding amounts thereunder in connection with the closing of our securitized financing transaction.~~

The Company is exposed to interest rate risk on borrowings under the Variable Funding Notes. As of ~~September 28, 2019,~~June 27, 2020, the Company had borrowings of ~~$5.0~~$16.0 million under the Variable Funding Notes and $4.0 million of letters of credit outstanding. A hypothetical increase or decrease of 100 basis points on our existing variable rate under the Variable Funding Notes would not materially affect our results of operations or cash flows.

The majority of our long-term debt ~~including the related current portion,~~ consisted of the ~~$318.4~~$316.8 million outstanding under the Class A-2 Notes as of ~~September 28, 2019~~June 27, 2020 (excluding unamortized debt issuance costs and the effect of purchase accounting adjustments). The Company’s fixed rate securitized debt exposes the Company to changes in market interest rates reflected in the fair value of the debt and to the risk that the Company may need to refinance maturing debt with new debt at a higher rate.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of ~~September 28, 2019,~~June 27, 2020, pursuant to Rule 13a-15 under the Exchange Act. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There have been no significant changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

From time to time we may be involved in claims and legal actions that arise in the ordinary course of business. To our knowledge, there are no material pending legal proceedings to which we are a party or of which any of our property is the subject.

Item 1A. Risk Factors

~~A description of~~The Company is providing this additional risk factor to supplement the risk factors ~~associated with our business is~~ contained in ~~the “Risk Factors” section~~Item 1A. of our Annual Report.

~~There~~Public health epidemics or outbreaks, such as COVID-19, could materially and adversely impact our business.

The pandemic novel coronavirus (COVID-19) outbreak, federal, state and local government responses to COVID-19 and our Company’s response to the outbreak have all disrupted and will continue to disrupt our business. In the United States and throughout much of the world, individuals are being encouraged to practice social distancing, restricted from gathering in groups and, in some areas, placed on complete restriction from non-essential movements outside of their homes. In response to the COVID-19 outbreak and these changing conditions, we closed the dining rooms in all of our domestic, which at the time represented approximately 20% of our domestic system sales, and also closed the dining rooms in some of our international restaurants in the first quarter.We have also incurred additional operating expenses at our company-owned restaurants due to the payment of increased incentive compensation to our full-time team members in light of COVID-19. The COVID-19 outbreak and these responses to date have affected and will continue to adversely affect our guest traffic, international sales, and operating costs and we cannot predict how long the outbreak will last or what other government responses may occur.

The early impact of the COVID-19 outbreak adversely affected our ability to open new restaurants during the months of March and April of 2020. Social distancing and stay-at-home or shelter-in-place orders and mandates as well as construction restrictions related to COVID-19 caused an initial slowdown in planned openings and in construction related processes such as onsite inspections, permitting, and construction completion in some jurisdictions. These changes adversely affected, our ability to grow our business during this time period, and may continue to affect our ability to open new restaurants if stay-at-home or shelter-in-place orders are reinstated.

Disruptions in operations for a significant amount of time due to COVID-19-related social distancing, or other movement restricting policies put in place in an effort to slow the spread of COVID-19, could impact our revenues or result in our providing payment relief or other forms of support to franchisees, and may materially adversely affect our business and results of operations. Restaurant operations could be further disrupted if any employees are diagnosed with COVID-19 since this could require some or all of a restaurant’s employees to be quarantined and restaurant facilities to be closed to disinfect. If a significant percentage of the workforce is unable to work, whether because of illness, quarantine, limitations on travel, or other government restrictions in connection with COVID-19, operations may be negatively impacted, potentially adversely affecting our liquidity, financial condition or results of operations. In addition, any report or publicity linking our facilities to instances of coronavirus exposure could adversely impact our brand and reputation as well as our revenue and profits.

In addition, our suppliers could be adversely impacted by the COVID-19 outbreak. If our suppliers’ employees are unable to work, whether because of illness, quarantine, limitations on travel or other government restrictions in connection with COVID-19, we could face shortages of food items or other supplies at our or our franchisees' restaurants, and our and our franchisees' operations and sales could be adversely impacted by such supply interruptions.

If the business interruptions caused by COVID-19 last longer than we expect, we or our franchisees may need to seek other sources of liquidity. The COVID-19 outbreak is adversely affecting the availability of liquidity generally in the credit markets, and there can be no guarantee that additional liquidity, whether through the credit markets or government programs, will be readily available or available on favorable terms, especially the longer the COVID-19 outbreak lasts.

The ultimate impact of the COVID-19 pandemic on the Company’s operations is unknown and will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the COVID-19 outbreak, new information which may emerge concerning the severity of the COVID-19 pandemic, and any additional preventative and protective actions that governments, or the Company, may direct, which may result in an extended period of continued business disruption, reduced customer traffic, and reduced operations. Both franchised restaurants and company-owned restaurants, across all geographies, have been ~~no material changes~~impacted, and management expects that they will continue to ~~our Risk Factors as previously reported.~~be impacted

to some degree, but the significance of the impact of the COVID-19 outbreak on the Company’s business and the duration for which it may have an impact cannot be determined at this time.

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

None.

Item 3. Defaults upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

Index to Exhibits



Exhibit No.			Description
~~3.1~~3.1*			Amended and Restated Certificate of Incorporation of Wingstop Inc., ~~filed~~ as ~~Exhibit 3.1 to the Company’s Registration Statement on Form S-1/A (Registration No. 333-203891) on~~amended through June ~~2, 2015 and incorporated herein by reference.~~15, 2020.
3.2			Amended and Restated Bylaws of Wingstop Inc., filed as Exhibit 3.2 to the Company’s Annual Report on Form 10-K (File No. 001-37425) for the fiscal year ended December 30, 2017 and incorporated herein by reference.
31.1*			Certification of Principal Executive Officer under Section 302 of the Sarbanes–Oxley Act of 2002.
31.2*			Certification of Principal Financial Officer under Section 302 of the Sarbanes–Oxley Act of 2002.
32.1**			Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes–Oxley Act of 2002.
32.2**			Certification of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes–Oxley Act of 2002.
101 INS*			Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101 SCH*			Inline XBRL Taxonomy Extension Schema Document
101 CAL*			Inline XBRL Taxonomy Extension Calculation Linkbase Document
101 DEF*			Inline XBRL Taxonomy Extension Definition Linkbase Document
101 LAB*			Inline XBRL Taxonomy Extension Label Linkbase Document
101 PRE*			Inline XBRL Taxonomy Extension Presentation Linkbase Document
104*			Cover Page Interactive Data File (formatted as Inline XBRL and Contained in Exhibit 101)

* Filed herewith.

** Furnished, not filed.

Signatures

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

Wingstop Inc.

(Registrant)

Date:

July 29, 2020

By:

~~Wingstop Inc.~~

~~(Registrant)~~

~~Date:~~

~~October 30, 2019~~

~~By:~~

/s/ Charles R. Morrison

Chairman and Chief Executive Officer

(Principal Executive Officer)

Date:

~~October 30, 2019~~July 29, 2020

By:

/s/ Michael J. Skipworth

Chief Financial Officer

(Principal Financial and Accounting Officer)



	September 28, 2019			December 29, 2018
	(Unaudited)
Assets
Current assets
Cash and cash equivalents	$	9,472		$	12,493
Restricted cash	4,842			4,462
Accounts receivable, net	5,859			5,764
Prepaid expenses and other current assets	3,540			2,056
Advertising fund assets, restricted	8,470			5,131
Total current assets	32,183			29,906
Property and equipment, net	27,291			8,338
Goodwill	50,172			49,655
Trademarks	32,700			32,700
Customer relationships, net	13,241			14,233
Other non-current assets	12,480			4,917
Total assets	$	168,067		$	139,749
Liabilities and stockholders' deficit
Current liabilities
Accounts payable	$	2,359		$	2,750
Other current liabilities	17,962			16,201
Current portion of debt	8,200			2,400
Advertising fund liabilities	8,470			5,131
Total current liabilities	36,991			26,482
Long-term debt, net	308,081			309,374
Deferred revenues, net of current	22,058			21,885
Deferred income tax liabilities, net	4,355			4,866
Other non-current liabilities	8,157			1,972
Total liabilities	379,642			364,579
Commitments and contingencies (see Note 9)
Stockholders' deficit
Common stock, $0.01 par value; 100,000,000 shares authorized; 29,453,374 and 29,296,939 shares issued and outstanding as of September 28, 2019 and December 29, 2018, respectively	295			293
Additional paid-in-capital	337			1,036
Accumulated deficit	(212,207		)	(226,159		)
Total stockholders' deficit	(211,575		)	(224,830		)
Total liabilities and stockholders' deficit	$	168,067		$	139,749



	September 28, 2019		December 29, 2018
Cash and cash equivalents	$	9,472	$	12,493
Restricted cash	4,842		4,462
Restricted cash, included in Advertising fund assets, restricted	7,149		3,985
Total cash, cash equivalents, and restricted cash	$	21,463	$	20,940



Remainder of fiscal year 2019	$	5,800
Fiscal year 2020	3,200
Fiscal year 2021	3,200
Fiscal year 2022	3,200
Fiscal year 2023	308,000
Total	$	323,400



	Thirty-Nine Weeks Ended
	September 28, 2019
Operating cash flow information:
Cash paid for amounts included in the measurement of lease liabilities	$	1,658
Non-cash activity:
Right-of-use assets obtained in exchange for new operating lease liabilities	$	832



	Balance Sheet Classification	September 28, 2019
Right-of-use assets	Other non-current assets	$	8,137
Current lease liabilities	Other current liabilities	1,933
Non-current lease liabilities	Other non-current liabilities	7,910



Remainder of fiscal year 2019	$	586
Fiscal year 2020	2,351
Fiscal year 2021	2,145
Fiscal year 2022	1,943
Fiscal year 2023	1,666
Thereafter	2,447
Total lease payments	11,138
Less: imputed interest	(1,295		)
Present value of lease liabilities	$	9,843



Fiscal year 2019	$	2,181
Fiscal year 2020	2,214
Fiscal year 2021	2,005
Fiscal year 2022	1,800
Fiscal year 2023	1,523
Thereafter	2,145
Total	$	11,868



	Stock Options		Weighted Average Exercise Price		Aggregate Intrinsic Value		Weighted Average Remaining Term
Outstanding - December 29, 2018	236		$	6.04	$	13,848	4.8
Options granted	—		—
Options exercised	(97	)	4.97
Options canceled	(4	)	26.21
Outstanding - September 28, 2019	135		$	5.78	$	10,979	4.0



	Purchase Price Allocation
Working capital	$	3
Property and equipment	99
Reacquired franchise rights	610
Goodwill	517
Total purchase price	$	1,229