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~~

26, 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~~30, 2020 there were ~~29,453,374~~29,683,465 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~~26, 2020 (Unaudited) and December ~~29, 2018~~28, 2019	4
	Consolidated Statements of Operations (Unaudited) - Thirteen and ~~Thirty-Nine~~Thirty-nine Weeks Ended September ~~28, 2019~~26, 2020 and September ~~29, 2018~~28, 2019	5
	Consolidated Statement of Stockholders’ Deficit (Unaudited) - ~~Thirty-Nine~~Thirty-nine Weeks Ended September ~~28, 2019~~26, 2020 and September ~~29, 2018~~28, 2019	6
	Consolidated Statements of Cash Flows (Unaudited) - ~~Thirty-Nine~~Thirty-nine Weeks Ended September ~~28, 2019~~26, 2020 and September ~~29, 2018~~28, 2019	8
	Notes to Consolidated Financial Statements (Unaudited)	9
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	1815
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	3228
Item 4.	Controls and Procedures	3329

PART II	Other Information	3430
Item 1.	Legal Proceedings	3430
Item 1A.	Risk Factors	3430
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	3431
Item 3.	Defaults Upon Senior Securities	3431
Item 4.	Mine Safety Disclosures	3431
Item 5.	Other Information	3431
Item 6.	Exhibits	3532
	Signatures	3633

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)


	September 26, 2020		December 28, 2019
	(Unaudited)
Assets
Current assets
Cash and cash equivalents	$	48,230	$	12,849
Restricted cash	4,114		4,790
Accounts receivable, net	5,378		5,175
Prepaid expenses and other current assets	5,630		2,449
Advertising fund assets, restricted	18,933		4,927
Total current assets	82,285		30,190
Property and equipment, net	27,196		27,842
Goodwill	53,290		50,188
Trademarks	32,700		32,700
Customer relationships, net	11,928		12,910
Other non-current assets	12,292		12,283
Total assets	$	219,691	$	166,113
Liabilities and stockholders' deficit
Current liabilities
Accounts payable	$	2,343	$	3,348
Other current liabilities	20,144		21,454
Current portion of debt	16,000		3,200
Advertising fund liabilities	18,933		4,927
Total current liabilities	57,420		32,929
Long-term debt, net	311,240		307,669
Deferred revenues, net of current	23,088		22,343
Deferred income tax liabilities, net	6,090		4,485
Other non-current liabilities	5,390		8,115
Total liabilities	403,228		375,541
Commitments and contingencies (see Note 7)
Stockholders' deficit
Common stock, $0.01 par value; 100,000,000 shares authorized; 29,683,465 and 29,457,228 shares issued and outstanding as of September 26, 2020 and December 28, 2019, respectively	297		295
Additional paid-in-capital	496		552
Accumulated deficit	(184,330)		(210,275)
Total stockholders' deficit	(183,537)		(209,428)
Total liabilities and stockholders' deficit	$	219,691	$	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				Thirty-Nine Weeks Ended
	September 26, 2020		September 28, 2019		September 26, 2020		September 28, 2019
Revenue:
Royalty revenue, franchise fees and other	$	28,806	$	21,876	$	80,863	$	64,391
Advertising fees and related income	19,653		14,056		55,590		40,753
Company-owned restaurant sales	15,529		13,943		49,076		41,346
Total revenue	63,988		49,875		185,529		146,490
Costs and expenses:
Cost of sales (1)	11,804		10,339		36,367		30,642
Advertising expenses	18,267		12,652		51,780		38,359
Selling, general and administrative	17,282		13,527		44,786		39,463
Depreciation and amortization	2,334		1,408		5,287		4,019
Total costs and expenses	49,687		37,926		138,220		112,483
Operating income	14,301		11,949		47,309		34,007
Interest expense, net	4,405		4,243		12,764		12,952

Income before income tax expense	9,896		7,706		34,545		21,055
Income tax expense (benefit)	(185)		1,801		4,829		3,626
Net income	$	10,081	$	5,905	$	29,716	$	17,429

Earnings per share
Basic	$	0.34	$	0.20	$	1.00	$	0.59
Diluted	$	0.34	$	0.20	$	1.00	$	0.59

Weighted average shares outstanding
Basic	29,642		29,449		29,572		29,401
Diluted	29,854		29,696		29,791		29,667

Dividends per share	$	0.14	$	0.11	$	0.36	$	0.29

(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 Weeks Ended September 29, 2018~~

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

~~(Unaudited)~~

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 )

~~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
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)
Net income	—	—		—		5,905		5,905
Shares issued under stock plans	11,560	—		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)

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 Stockholders' Deficit

For the Thirty-Nine Weeks Ended September 26, 2020

(amounts in thousands, except share data)

(Unaudited)


	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)
Net income	—	—		—		10,081		10,081
Shares issued under stock plans	87,751	1		328		—		329
Tax payments for restricted stock upon vesting	(633)	—		—		(99)		(99)
Stock-based compensation expense	—	—		3,007		—		3,007
Dividends paid	—	—		(2,882)		(1,301)		(4,183)
Balance at September 26, 2020	29,683,465	$	297	$	496	$	(184,330)	$	(183,537)

See accompanying notes to consolidated financial statements.

WINGSTOP INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(amounts in thousands)

(Unaudited)


	Thirty-Nine Weeks Ended
	September 26, 2020		September 28, 2019

Operating activities
Net income	$	29,716	$	17,429
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization	5,287		4,019
Deferred income taxes	377		(555)
Stock-based compensation expense	6,307		4,809
Gain on disposal of assets	(3,247)		0
Amortization of debt issuance costs	1,228		1,179
Changes in operating assets and liabilities:
Accounts receivable	(203)		(188)
Prepaid expenses and other assets	668		(979)
Advertising fund assets and liabilities, net	12,578		3,164
Accounts payable and other current liabilities	(4,165)		(1,014)
Deferred revenue	958		528
Other non-current liabilities	(2,725)		194
Cash provided by operating activities	46,779		28,586

Investing activities
Purchases of property and equipment	(3,729)		(21,082)
Acquisitions of restaurants from franchisees	(5,635)		(1,229)
Proceeds from sales of assets	4,800		0
Cash used in investing activities	(4,564)		(22,311)

Financing activities

Proceeds from exercise of stock options	891		480
Borrowings of long-term debt	16,000		5,000
Repayments of long-term debt	(800)		(1,600)
Payment of deferred financing costs	0		(15)
Tax payments for restricted stock upon vesting	(340)		(1,143)
Dividends paid	(10,683)		(8,474)
Cash provided by (used in) financing activities	5,068		(5,752)

Net increase in cash, cash equivalents, and restricted cash	47,283		523
Cash, cash equivalents, and restricted cash at beginning of period	21,175		20,940
Cash, cash equivalents, and restricted cash at end of period	$	68,458	$	21,463

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~~26, 2020, the Company had 1,277 domestic franchised restaurants ~~were in operation domestically,~~ and ~~141~~171 international franchised ~~restaurants were in operation internationally.~~restaurants. As of September ~~28, 2019,~~26, 2020, the Company owned and operated 3031 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 ~~28, 2019~~26, 2020 and December ~~29, 2018,~~28, 2019, and operating results are for the thirteen and thirty-nine weeks ended September ~~28, 2019~~26, 2020 and September ~~29, 2018.~~28, 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 ~~28, 2019~~26, 2020 and December ~~29, 2018~~28, 2019 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


	September 26, 2020		December 28, 2019
Cash and cash equivalents	$	48,230	$	12,849
Restricted cash	4,114		4,790
Restricted cash, included in Advertising fund assets, restricted	16,114		3,536
Total cash, cash equivalents, and restricted cash	$	68,458	$	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. During the second fiscal quarter of 2020, the Company ~~administers~~reevaluated its operating segments and determined it has one operating segment and 1 reporting segment due to changes in how the ~~Wingstop Restaurants Advertising Fund (“Ad Fund”), for which a percentage of gross sales is collected from Wingstop restaurant franchisees~~Company’s chief operating decision maker assesses the Company’s performance 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 franchisees 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.

allocates resources.

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		Thirty-Nine Weeks Ended
	September 26, 2020	September 28, 2019	September 26, 2020	September 28, 2019
Basic weighted average shares outstanding	29,642	29,449	29,572	29,401
Dilutive shares	212	247	219	266
Diluted weighted average shares outstanding	29,854	29,696	29,791	29,667

For the thirteen weeks ended September ~~28, 2019~~26, 2020 and September ~~29, 2018,~~28, 2019, equity awards representing approximately ~~100~~400 and ~~1,000~~100 shares, respectively, were excluded from the dilutive earnings per share calculation because the effect would have been anti-dilutive.

For the thirty-nine weeks ended September ~~28, 2019~~26, 2020 and September ~~29, 2018,~~28, 2019, equity awards representing approximately ~~2,000~~400 and ~~4,000~~2,000 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~~$0.11 per share of common stock in each of the first two quarters, and a quarterly dividend of ~~$0.11~~$0.14 per share of common stock in the third quarter, resulting in aggregate ~~dividends~~dividend payments of ~~$8.5~~$10.7 million, or ~~$0.29~~$0.36 per share of common stock, ~~being paid~~ during the thirty-nine weeks ended September ~~28, 2019.~~26, 2020.

Subsequent to the ~~end of the~~ third quarter, on November 2, 2020, the Company’s Board of Directors announced a quarterly dividend of $0.14 per share of common stock, payable to stockholders of record as of November 20, 2020. The regular quarterly dividend is to be paid on December 10, 2020, totaling approximately $4.2 million.

On October ~~29, 2019,~~30, 2020, in conjunction with the completion of a transaction to refinance the Company's existing securitized financing facility, the Company’s Board of Directors declared a ~~quarterly~~special dividend of ~~$0.11~~$5.00 per share of common stock, ~~for~~payable to stockholders of record as of November ~~29, 2019,~~20, 2020. The special dividend is to be paid on December ~~13, 2019,~~3, 2020, totaling approximately ~~$3.2~~$149 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	September 28, 2019				December 29, 2018					Fair Value Hierarchy	September 26, 2020				December 28, 2019
		Carrying Value		Fair Value		Carrying Value		Fair Value				Carrying Value		Fair Value		Carrying Value		Fair Value
Securitized Financing Facility:										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-2 Senior Secured Notes (1)	Level 2	$	316,800	$	322,775	$	317,600	$	331,247
2018-1 Class A-1 Variable Funding Senior Notes ⁽²⁾	Level 2	$	5,000	$	5,000	$	—	$	—	2018-1 Class A-1 Variable Funding Senior Notes (2)	Level 2	$	16,000	$	16,000	$	0	$	0

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

⁽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~~benefit and the effective tax rate were $0.2 million and (1.9)%, respectively, for the thirteen weeks ended September 26, 2020, compared to income tax expense and an effective tax rate of $1.8 million and 23.4%, respectively, for the thirteen weeks ended September 28, ~~2019, and $1.5 million and 19.4%, respectively, for the thirteen weeks ended September 29, 2018.~~2019. Income tax expense and the effective tax rate were $4.8 million and 14.0%, respectively, for the thirty-nine weeks ended September 26, 2020, and $3.6 million and 17.2%, respectively, for the thirty-nine weeks ended September 28, ~~2019, and $3.9 million and 16.9%, respectively, for the thirty-nine weeks ended September 29, 2018.~~2019.

Income tax expense for the thirteen and thirty-nine weeks ended September ~~28, 2019 includes $0.1~~26, 2020 included $2.9 million and ~~$1.9~~$4.4 million, respectively, in tax benefits resulting from the recognition of excess tax benefits from stock-based compensation, as compared to ~~$0.3~~$0.1 million and ~~$1.8~~$1.9 million ofin tax benefits ~~recognized in~~for the thirteen and thirty-nine weeks ended September ~~29, 2018,~~28, 2019, respectively.

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

~~On November 14, 2018, Wingstop Funding LLC (the “Issuer”), a limited-purpose, bankruptcy-remote, wholly owned indirect subsidiary~~Long-term debt consisted of ~~Wingstop Inc., issued $320~~the following components (in thousands):


	September 26, 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		0
Debt issuance costs, net of amortization	(5,560)		(6,731)
Total debt	327,240		310,869
Less: current portion of debt	(16,000)		(3,200)
Long-term debt, net	$	311,240	$	307,669

As of September 26, 2020, we had $316.8 million of ~~its~~outstanding Series 2018-1 4.97% Fixed Rate Senior Secured Notes, Class A-2 (the ~~“Class~~“2018 Class A-2 Notes”)~~. Interest~~ and ~~principal are payable on a quarterly basis, and the Class A-2 Notes have an anticipated repayment date~~$16.0 million of ~~December 2023.~~

~~In addition, the Issuer issued~~outstanding 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. As of September 28, 2019, there were borrowings of $5.0 million under the“2018 Variable Funding Notes, ~~which~~” and together with the 2018 Class A-2 Notes, the “2018 Notes”). The 2018 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 2018 Variable Funding Notes had a weighted average interest rate of 2.72% during the thirty-nine weeks ended September 26, 2020 and are classified as current debt. There were no borrowings outstanding under the 2018 Variable Funding Notes as of December ~~29, 2018.~~28, 2019. Further, as of September ~~28, 2019~~26, 2020 and December ~~29, 2018,~~28, 2019, $4.0 million of letters of credit were outstanding against the 2018 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~~26, 2020 or December ~~29, 2018.~~28, 2019.

~~Borrowings~~During the thirty-nine weeks ended September 26, 2020, the Company had a leverage ratio under the ~~Variable Funding~~2018 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 2018 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 forth in the Variable Funding Note Purchase Agreement, dated November 14,Company ceased

WINGSTOP INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

~~2018. There is a commitment fee on~~making principal payments beginning in the ~~unused portion~~second quarter of 2020. Accordingly, the entire outstanding balance of the ~~Variable Funding~~2018 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 2018 Class A-2 Notes and the 2018 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 2018 Notes and that have pledged substantially all of their ~~assets as collateral securing the Notes.~~assets.

~~The Notes are subject to a series of financial and non-financial covenants and restrictions. As of September 28, 2019,~~On October 30, 2020, the Company ~~was in compliance~~completed a transaction to refinance its existing securitized financing facility with ~~all such financial covenants.~~a new securitized financing facility. For additional information, see “Note 11—Subsequent Events."

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

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~~$6.3 million in stock-based compensation expense for the thirty-nine weeks ended September ~~28, 2019,~~26, 2020, with a corresponding increase to additional paid-in-capital. Stock-based compensation expense is included in ~~selling,~~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 years
Options granted	68	84.41
Options exercised	(130)	5.40

Outstanding - September 26, 2020	72	$	79.94	$	15,171	5.3 years

The total grant-date fair value of stock options vested during the thirty-nine weeks ended September ~~28, 2019~~26, 2020 was ~~$0.5~~$0.2 million. The total intrinsic value of stock options exercised during the thirty-nine weeks ended September ~~28, 2019~~26, 2020 was ~~$6.7~~$15.4 million. As of September ~~28, 2019,~~26, 2020, total unrecognized compensation expense related to unvested stock options was ~~$0.1~~$1.3 million, which is expected to be recognized over a weighted-average period of ~~0.4~~2.4 years. During the thirty-nine weeks ended September ~~28, 2019,~~26, 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 Per Share		Performance Stock Units	Weighted Average Grant Date Fair Value
Outstanding - December 28, 2019	82	$	52.73	169	$	55.92
Units granted	25	91.35		44	85.60
Units vested	(40)	44.45		(53)	41.54
Units canceled	(12)	64.03		(8)	66.04
Outstanding - September 26, 2020	55	$	74.04	152	$	68.92

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

WINGSTOP INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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 weeks ended September ~~28, 2019~~26, 2020 vest over a three-year service period. As of September ~~28, 2019,~~26, 2020, total unrecognized compensation expense related to unvested RSUs was ~~$3.3~~$3.1 million, which is expected to be recognized over a weighted-average period of 1.7 years.

The Company granted 41,199 PSUs ~~vest based on the outcome of certain performance criteria. For the PSUs granted~~ during the thirty-nine weeks ended September ~~28, 2019, the amount of units~~26, 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 “TSR PSUs”). The maximum vesting percentage that could be realized for each of the TSR 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. 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 $311.72 per unit based on the 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,~~26, 2020, total unrecognized compensation expense related to unvested PSUs was ~~$3.9~~$9.1 million.

(9) Company-owned Restaurant Transactions

During the ~~thirty-nine weeks ended September 28, 2019, there was a modification~~second fiscal quarter 2020, the Company completed the sale of 2 company-owned restaurants to ~~certain awards resulting in additional compensation expense~~an existing franchisee for aggregate 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 store sales was recorded in Selling, general and administrative expense in the Company’s ~~common stock~~Consolidated Statements of Operations.

During the third fiscal quarter 2020, the Company completed the sale of 5 company-owned restaurants to an existing franchisee for aggregate proceeds of $2.5 million. In connection with the sale of the restaurants, the Company recorded a $1.2 million pre-tax gain on the ~~date~~sale of ~~grant. As~~the related assets and liabilities, which was net of ~~September 28, 2019, total unrecognized compensation~~a $30,000 reduction in goodwill. The net gain on these restaurants was recorded in Selling, general and administrative 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 operation as~~Company's Consolidated Statements 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.~~

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⁾Operations. 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~~,31, 2020, the Company acquired ~~one~~5 existing ~~restaurant~~restaurants from a franchisee. The total purchase price was ~~$1.2~~$5.6 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	$	35
Property and equipment	622
Reacquired franchise rights	1,816
Goodwill	3,162
Operating lease right-of-use assets	1,195
Operating lease liabilities	(1,195)
Total purchase price	$	5,635

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~~Approximately $3.2 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.

WINGSTOP INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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 weeks ended September ~~28, 2019~~26, 2020 and September ~~29, 2018~~28, 2019 (in thousands):


	Thirteen Weeks Ended				Thirty-Nine Weeks Ended
	September 26, 2020		September 28, 2019		September 26, 2020		September 28, 2019
Royalty revenue	$	26,007	$	19,065	$	72,761	$	55,409
Advertising fees and related income	19,653		14,056		55,590		40,753
Franchise fees	1,151		875		2,914		3,396

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 weeks ended September ~~28, 2019~~26, 2020 was included in the deferred revenue balance as of December ~~29, 2018.~~28, 2019. Approximately ~~$8.5~~$8.6 million and ~~$9.2~~$8.3 million of deferred revenue as of September ~~28, 2019~~26, 2020 and December ~~29, 2018,~~28, 2019, 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~~did not have any material contract assets as of September ~~28, 2019.~~26, 2020.

(11) Subsequent Events

On October 30, 2020, the Company completed a transaction to refinance its existing securitized financing facility with a new securitized financing facility, pursuant to which Wingstop Funding LLC (the “Issuer”), a limited-purpose, bankruptcy-remote, wholly-owned indirect subsidiary of the Company, issued $480.0 million of its Series 2020-1 2.84% Fixed Rate Senior Notes, Class A-2 (the "2020 Class A-2 Notes"). The Issuer also entered into a revolving financing facility of Series 2020-1 Variable Funding Senior Notes, Class A-1 which permits borrowings of up to a maximum principal amount of $50.0 million, which may be used to issue letters of credit. A portion of the proceeds of the 2020 Class A-2 Notes was used to repay the $332.8 million of principal outstanding on the existing 2018 Class A-2 Notes and 2018 Variable Funding Notes, together with accrued and unpaid interest and make-whole prepayment consideration due thereon, and to pay related transaction fees. The Company intends to use the additional net proceeds to strengthen its liquidity position and for general corporate purposes, including a return of capital to the Company’s stockholders (see Note 3).

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~~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~~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 third quarter of 2020, approximately four of our international restaurants and one domestic restaurant 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 third quarter of 2020. 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. In the third quarter of 2020, the decline in same store sales lessened due to the reopening and resumption of normal store hours at the majority of our ~~system. Our restaurant base is 98%~~international franchised stores that had been temporarily closed for portions of the prior quarter. We did not experience difficulties with ~~1,310 franchised locations (including 141 international locations)~~our supply chain as a result of COVID-19 during the first three quarters 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 ~~30 company-owned restaurants~~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 an unrestricted cash balance of approximately $48.2 million as of September ~~28, 2019.~~26, 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		Thirty-Nine Weeks Ended
	September 28, 2019		September 29, 2018		September 28, 2019		September 29, 2018			September 26, 2020	September 28, 2019	September 26, 2020	September 28, 2019
Domestic Franchised Activity:									Domestic Franchised Activity:
Beginning of period	1,139		1,040		1,095		1,004		Beginning of period	1,244	1,139	1,200	1,095
Openings	31		21		80		64		Openings	34	31	79	80
Closures	—		(2	)	(5	)	(6	)	Closures	(1)	—	(4)	(5)
Acquired by Company	(1	)	—		(1	)	(3	)	Acquired by Company	(5)	(1)	(5)	(1)
Re-franchised by Company									Re-franchised by Company	5	—	7	—
Restaurants end of period	1,169		1,059		1,169		1,059		Restaurants end of period	1,277	1,169	1,277	1,169

Domestic Company-Owned Activity:									Domestic Company-Owned Activity:
Beginning of period	29		26		29		23		Beginning of period	30	29	31	29
Openings	—		—		—		—		Openings	1	—	2	—
Closures	—		—		—		—		Closures	—	—	—	—
Acquired from franchisees	1		—		1		3
Acquired by Company									Acquired by Company	5	1	5	1
Re-franchised to franchisees									Re-franchised to franchisees	(5)	—	(7)	—
Restaurants end of period	30		26		30		26		Restaurants end of period	31	30	31	30

Total Domestic Restaurants	1,199		1,085		1,199		1,085		Total Domestic Restaurants	1,308	1,199	1,308	1,199

International Franchised Activity:									International Franchised Activity:
Beginning of period	135		122		128		106		Beginning of period	162	135	154	128
Openings	7		8		18		24		Openings	10	7	18	18
Closures	(1	)	—		(5	)	—		Closures	(1)	(1)	(1)	(5)

Restaurants end of period	141		130		141		130		Restaurants end of period	171	141	171	141

Total System-wide Restaurants	1,340		1,215		1,340		1,215		Total System-wide Restaurants	1,479	1,340	1,479	1,340

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 weeks ended September ~~28, 2019~~26, 2020 and September ~~29, 2018~~28, 2019 (dollars in thousands):


	Thirteen Weeks Ended						Thirty-Nine Weeks Ended
	September 26, 2020			September 28, 2019			September 26, 2020			September 28, 2019
Number of system-wide restaurants open at end of period	1,479			1,340			1,479			1,340
System-wide sales (1)	$	509,155		$	383,469		$	1,448,108		$	1,117,341
Domestic restaurant AUV	$	1,435		$	1,219		$	1,435		$	1,219
Domestic same store sales growth	25.4		%	12.3		%	22.5		%	10.7		%
Company-owned domestic same store sales growth	15.2		%	11.9		%	15.3		%	10.1		%
Total revenue	$	63,988		$	49,875		$	185,529		$	146,490
Net income	$	10,081		$	5,905		$	29,716		$	17,429
Adjusted EBITDA (2)	$	18,409		$	15,400		$	55,654		$	42,835

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%~~3.2% and ~~3.8%~~3.7% for the thirteen weeks ended September ~~28, 2019~~26, 2020 and September ~~29, 2018,~~28, 2019, respectively, and was ~~3.8%~~3.4% and ~~3.7%~~3.8% for the thirty-nine weeks ended September ~~28, 2019~~26, 2020 and September ~~29, 2018,~~28, 2019, 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 weeks ended September ~~28, 2019~~26, 2020 and September ~~29, 2018~~28, 2019 (in thousands):


	Thirteen Weeks Ended				Thirty-Nine Weeks Ended
	September 26, 2020		September 28, 2019		September 26, 2020		September 28, 2019
Net income	$	10,081	$	5,905	$	29,716	$	17,429
Interest expense, net	4,405		4,243		12,764		12,952
Income tax expense	(185)		1,801		4,829		3,626
Depreciation and amortization	2,334		1,408		5,287		4,019
EBITDA	$	16,635	$	13,357	$	52,596	$	38,026
Additional adjustments:

Gain on disposal of assets (a)	(1,233)		—		(3,249)		—
Stock-based compensation expense (b)	3,007		2,043		6,307		4,809
Adjusted EBITDA	$	18,409	$	15,400	$	55,654	$	42,835

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~~franchisees 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~~26, 2020 compared to Thirteen Weeks Ended September ~~29, 2018~~28, 2019

The following table sets forth our results of operations for the thirteen weeks ended September ~~28, 2019~~26, 2020 and September ~~29, 2018~~28, 2019 (dollars in thousands):


	Thirteen Weeks Ended				Increase / (Decrease)
	September 26, 2020		September 28, 2019		$		%
Revenue:
Royalty revenue, franchise fees and other	$	28,806	$	21,876	$	6,930	31.7	%
Advertising fees and related income	19,653		14,056		5,597		39.8	%
Company-owned restaurant sales	15,529		13,943		1,586		11.4	%
Total revenue	63,988		49,875		14,113		28.3	%
Costs and expenses:
Cost of sales (1)	11,804		10,339		1,465		14.2	%
Advertising expenses	18,267		12,652		5,615		44.4	%
Selling, general and administrative	17,282		13,527		3,755		27.8	%
Depreciation and amortization	2,334		1,408		926		65.8	%
Total costs and expenses	49,687		37,926		11,761		31.0	%
Operating income	14,301		11,949		2,352		19.7	%
Interest expense, net	4,405		4,243		162		3.8	%

Income before income tax expense	9,896		7,706		2,190		28.4	%
Income tax expense (benefit)	(185)		1,801		(1,986)		(110.3)	%
Net income	$	10,081	$	5,905	$	4,176	70.7	%

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,~~26, 2020, total revenue was ~~$49.9~~$64.0 million, an increase of ~~$11.6~~$14.1 million, or ~~30.4%~~28.3%, compared to ~~$38.2~~$49.9 million in the comparable period in ~~2018.~~2019.

Royalty revenue, franchise fees and other. During the thirteen weeks ended September ~~28, 2019,~~26, 2020, royalty revenue, franchise fees and other was ~~$21.9~~$28.8 million, an increase of ~~$4.1~~$6.9 million, or ~~23.0%~~31.7%, compared to ~~$17.8~~$21.9 million in the comparable period in ~~2018.~~2019. Royalty revenue increased primarily due to ~~121~~domestic same store sales growth of 25.4% as well as 138 net franchise restaurant openings since September ~~29, 2018and domestic same store sales growth of 12.3%.~~28, 2019.

Advertising fees and related income. During the thirteen weeks ended September ~~28, 2019,~~26, 2020, advertising fees and related income was ~~$14.1~~$19.7 million, an increase of ~~$5.4~~$5.6 million, compared to ~~$8.6~~$14.1 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%~~32.8% increase in system-wide sales in the thirteen weeks ended September ~~28, 2019~~26, 2020 compared to the thirteen weeks ended September ~~29, 2018.~~28, 2019.

Company-owned restaurant sales. During the thirteen weeks ended September ~~28, 2019,~~26, 2020, company-owned restaurant sales were ~~$13.9~~$15.5 million, an increase of ~~$2.1~~$1.6 million, or ~~17.7%~~11.4%, 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%~~15.2%, which was ~~primarily~~ driven by both an increase in ~~transactions,~~transaction size and an increase in transactions. Also contributing to the increase was the acquisition of ~~four franchised~~five corporate restaurants and the opening of three corporate restaurants since the prior year comparable period, resulting in additional sales of ~~$0.7~~$1.1 million. These increases were partially offset by the re-franchising of seven corporate restaurants since the prior year comparable period, resulting in a decline in sales of $1.4 million.

Cost of sales. During the thirteen weeks ended September ~~28, 2019,~~26, 2020, cost of sales was ~~$10.3~~$11.8 million, an increase of ~~$2.3~~$1.5 million, or ~~28.6%~~14.2%, compared to ~~$8.0~~$10.3 million in the comparable period in ~~2018.~~2019. Cost of sales as a percentage of company-owned

restaurant sales was ~~74.2%~~76.0% in the thirteen weeks ended September ~~28, 2019,~~26, 2020, compared to ~~67.9%~~74.2% 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						September 26, 2020				September 28, 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	$	5,655	36.4	%	$	5,162	37.0	%
Labor costs	3,098			22.2	%	2,621			22.1	%	Labor costs	3,944		25.4	%	3,098		22.2	%
Other restaurant operating expenses	2,456			17.6	%	1,795			15.2	%	Other restaurant operating expenses	2,512		16.2	%	2,456		17.6	%
Vendor rebates	(377		)	(2.7	)%	(302		)	(2.5	)%	Vendor rebates	(307)		(2.0)	%	(377)		(2.7)	%
Total cost of sales	$	10,339		74.2	%	$	8,040		67.9	%	Total cost of sales	$	11,804	76.0	%	$	10,339	74.2	%

Food, beverage and packaging costs as a percentage of company-owned restaurant sales were ~~37.0%~~36.4% in the thirteen weeks ended September ~~28, 2019,~~26, 2020, compared to ~~33.1%~~37.0% in the comparable period in ~~2018.~~2019. The ~~increase~~decrease was primarily due to a ~~22.7% increase~~1.4% 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%~~25.4% for the thirteen weeks ended September ~~28, 2019,~~26, 2020, compared to ~~22.1%~~22.2% 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%~~15.2%.

Other restaurant operating expenses as a percentage of company-owned restaurant sales were ~~17.6%~~16.2% for the thirteen weeks ended September ~~28, 2019,~~26, 2020, compared to ~~15.2%~~17.6% in the comparable period in ~~2018.~~2019. The ~~increase~~decrease as a percentage of company-owned restaurant sales was a result of our ability to leverage costs due to an increase in the Ad Fund contribution rate from 3% to 4% of gross sales beginning in fiscal year 2019, an increase in 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 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%~~15.2%.

Advertising expenses. During the thirteen weeks ended September ~~28, 2019,~~26, 2020, advertising expenses were ~~$12.7~~$18.3 million, an increase of ~~$4.2~~$5.6 million compared to ~~$8.4~~$12.7 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.~~administrative ("SG&A"). During the thirteen weeks ended September ~~28, 2019,~~26, 2020, SG&A expense was ~~$13.5~~$17.3 million, an increase of ~~$3.2~~$3.8 million compared to ~~$10.3~~$13.5 million in the comparable period in ~~2018.~~2019. The increase in SG&A expense was primarily due to approximately ~~$1.4~~$3.4 million ~~associated with additional~~in higher variable-based compensation expense, inclusive of stock-based compensation expense, and $1.0 million in headcount-related expenses to support ~~our continued investment~~the growth in our ~~national advertising campaign, which was~~business. We also incurred expenses of $0.5 million related to COVID-19 and support provided to international franchisees. These increases were partially offset by ~~advertising contributions recorded in advertising fees and related income, as well as $1.3~~a gain of $1.2 million ~~in additional stock-based compensation which was~~ recognized due to the ~~Company’s year-to-date performance.~~re-franchising of five company-owned restaurants.

Depreciation and amortization. During the thirteen weeks ended September ~~28, 2019,~~26, 2020, depreciation expense was ~~$1.4~~$2.3 million, an increase of ~~$0.3~~$0.9 million compared to ~~$1.1~~$1.4 million in the comparable period in ~~2018.~~2019. The increase in depreciation and amortization was primarily due to ~~additional capital expenditures related to investments in technology.~~accelerated depreciation on certain assets.

Interest expense, net. During the thirteen weeks ended September ~~28, 2019,~~26, 2020, interest expense, net was ~~$4.2~~$4.4 million, an increase of ~~$1.7~~$0.2 million compared to ~~$2.5~~$4.2 million of interest expense, net in the comparable period in ~~2018.~~2019. The increase in interest expense, net was primarily due to a higher average outstanding debt balance ~~and applicable interest rate related to our securitized debt facility.~~from the prior year comparable period.

Income tax ~~expense.~~expense (benefit). ~~Income tax expense was $1.8 million in~~During the thirteen weeks ended September ~~28, 2019,~~26, 2020, we recognized an income tax benefit of $0.2 million yielding an effective tax rate of ~~23.4%~~(1.9)%, compared to an effective tax rate of ~~19.4%~~23.4% in the prior ~~year.~~year period. The ~~increase~~decrease in the effective tax rate was 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 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):~~associated with stock options exercised.

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~~26, 2020 compared to Thirty-Nine Weeks Ended September ~~29, 2018~~28, 2019

The following table sets forth our results of operations for the thirty-nine weeks ended September ~~28, 2019~~26, 2020 and September ~~29, 2018~~28, 2019 (dollars in thousands):


	Thirty-Nine Weeks Ended				Increase / (Decrease)
	September 26, 2020		September 28, 2019		$		%
Revenue:
Royalty revenue, franchise fees and other	$	80,863	$	64,391	$	16,472	25.6	%
Advertising fees and related income	55,590		40,753		14,837		36.4	%
Company-owned restaurant sales	49,076		41,346		7,730		18.7	%
Total revenue	185,529		146,490		39,039		26.6	%
Costs and expenses:
Cost of sales (1)	36,367		30,642		5,725		18.7	%
Advertising expenses	51,780		38,359		13,421		35.0	%
Selling, general and administrative	44,786		39,463		5,323		13.5	%
Depreciation and amortization	5,287		4,019		1,268		31.6	%
Total costs and expenses	138,220		112,483		25,737		22.9	%
Operating income	47,309		34,007		13,302		39.1	%
Interest expense, net	12,764		12,952		(188)		(1.5)	%

Income before income tax expense	34,545		21,055		13,490		64.1	%
Income tax expense	4,829		3,626		1,203		33.2	%
Net income	$	29,716	$	17,429	$	12,287	70.5	%

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,~~26, 2020, total revenue was ~~$146.5~~$185.5 million, an increase of ~~$33.8~~$39.0 million, or ~~30.0%~~26.6%, compared to ~~$112.7~~$146.5 million in the comparable period in ~~2018.~~2019.

Royalty revenue, franchise fees and other. During the thirty-nine weeks ended September ~~28, 2019,~~26, 2020, royalty revenue, franchise fees and other was ~~$64.4~~$80.9 million, an increase of ~~$11.6~~$16.5 million, or ~~22.0%~~25.6%, compared to ~~$52.8~~$64.4 million in the comparable period in ~~2018.~~2019. Royalty revenue increased due to ~~121~~138 net franchise restaurant openings since September ~~29, 2018~~28, 2019 and domestic same store sales growth of ~~10.7%~~22.5%. ~~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,~~26, 2020, advertising fees and related income was ~~$40.8~~$55.6 million, an increase of ~~$15.2~~$14.8 million, or 36.4%, compared to ~~$25.6~~$40.8 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 19.7%~~29.6% increase in system-wide sales in the thirty-nine weeks ended September ~~28, 2019~~26, 2020 compared to the thirty-nine weeks ended September ~~29, 2018.~~28, 2019.

Company-owned restaurant sales. During the thirty-nine weeks ended September ~~28, 2019,~~26, 2020, company-owned restaurant sales were ~~$41.3~~$49.1 million, an increase of ~~$7.0~~$7.7 million, or 18.7%, compared to ~~$34.3~~$41.3 million in the comparable period in ~~2018.~~2019. The increase was primarily due an increase in company-owned same store sales of 15.3%, which was driven by both an increase in transaction size and transactions. Also contributing to the increase was the acquisition of ~~six franchised~~five corporate restaurants and the opening of three corporate restaurants since the prior year comparable period, resulting in additional sales of ~~$3.4 million, as well as an increase~~$3.1 million. These increases were partially offset by the re-franchising of seven corporate restaurants since the prior year comparable period, resulting in ~~company-owned same store~~a decline in sales of ~~10.1%, which was primarily driven by an increase in transactions.~~$0.8 million.

Cost of sales. During the thirty-nine weeks ended September ~~28, 2019,~~26, 2020, cost of sales was ~~$30.6~~$36.4 million, an increase of ~~$7.5~~$5.7 million, or ~~32.2%~~18.7%, compared to ~~$23.2~~$30.6 million in the comparable period in ~~2018.~~2019. Cost of sales as a percentage of company-owned restaurant sales was 74.1% in the thirty-nine weeks ended September 26, 2020 and September 28, ~~2019 compared to 67.5% in the prior year period.~~2019.

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


	Thirty-Nine Weeks Ended											Thirty-Nine Weeks Ended
	September 28, 2019					September 29, 2018						September 26, 2020				September 28, 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	$	15,184		36.7	%	$	11,306		32.9	%	Food, beverage and packaging costs	$	17,085	34.8	%	$	15,184	36.7	%
Labor costs	9,314			22.5	%	7,555			22.0	%	Labor costs	12,156		24.8	%	9,314		22.5	%
Other restaurant operating expenses	7,289			17.6	%	5,190			15.1	%	Other restaurant operating expenses	8,164		16.6	%	7,289		17.6	%
Vendor rebates	(1,145		)	(2.8	)%	(869		)	(2.5	)%	Vendor rebates	(1,038)		(2.1)	%	(1,145)		(2.8)	%
Total cost of sales	$	30,642		74.1	%	$	23,182		67.5	%	Total cost of sales	$	36,367	74.1	%	$	30,642	74.1	%

Food, beverage and packaging costs as a percentage of company-owned restaurant sales were ~~36.7%~~34.8% in the thirty-nine weeks ended September ~~28, 2019,~~26, 2020, compared to ~~32.9%~~36.7% in the comparable period in ~~2018.~~2019. The ~~increase~~decrease was primarily due to a ~~21.1% increase~~10.4% 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 ~~22.5%~~24.8% for the thirty-nine weeks ended September ~~28, 2019,~~26, 2020, compared to ~~22.0%~~22.5% in the comparable period in ~~2018.~~2019. The increase was primarily due to ~~investment in labor as well as training 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 we make investments~~COVID-19 pandemic. These increases were partially offset by our ability to ~~prepare these restaurants~~leverage costs due to ~~be refranchised in a future period. This increase was offset by~~ the increase in company-owned ~~domestic~~ same store sales of ~~10.1%~~15.3%.

Other restaurant operating expenses as a percentage of company-owned restaurant sales were ~~17.6%~~16.6% for the thirty-nine weeks ended September ~~28, 2019,~~26, 2020, compared to ~~15.1%~~17.6% 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% to 4%~~sales leverage achieved as a result 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%~~15.3%. 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 thirty-nine weeks ended September 26, 2020.

Advertising expenses. During the thirty-nine weeks ended September ~~28, 2019,~~26, 2020, advertising expenses were ~~$38.4~~$51.8 million, an increase of ~~$13.1~~$13.4 million, or 35.0%, compared to ~~$25.3~~$38.4 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,~~26, 2020, SG&A expense was ~~$39.5~~$44.8 million, an increase of ~~$8.3~~$5.3 million, or 13.5%, compared to ~~$31.2~~$39.5 million in the comparable period in ~~2018.~~2019. The increase in SG&A expense was primarily due to ~~an increase of $2.8~~approximately $4.3 million in higher variable performance-based compensation expense, inclusive of 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, $1.5expense, and $1.9 million in ~~professional fees and $2.0 million in headcount related~~headcount-related expenses to support the growth ofin our business. We also incurred expenses of $1.1 million related to COVID-19 and support provided to international franchisees and a one-time donation to the National Restaurant Employee Relief Fund of $1.0 million to support restaurant workers in times of need. These ~~year-over-year~~ increases were partially offset by ~~nonrecurring costs~~a gain of ~~$1.5~~$3.2 million ~~incurred in~~recognized due to the ~~first quarter~~re-franchising of ~~2018 related to our debt refinancing and payment of a special dividend.~~seven company-owned restaurants.

Depreciation and amortization. During the thirty-nine weeks ended September ~~28, 2019,~~26, 2020, depreciation and amortization expense was ~~$4.0~~$5.3 million, an increase of ~~$0.9~~$1.3 million, or 31.6%, compared to ~~$3.2~~$4.0 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.~~accelerated depreciation on certain assets.

Interest expense, net. During the thirty-nine weeks ended September ~~28, 2019,~~26, 2020, interest expense, net was ~~$13.0~~$12.8 million, ~~an increase~~a decrease of ~~$6.3~~$0.2 million, or 1.5%, compared to ~~$6.6~~$13.0 million in the comparable period in ~~2018.~~2019. The ~~increase~~decrease in interest expense, net 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 ~~$3.6~~$4.8 million in the thirty-nine weeks ended September ~~28, 2019,~~26, 2020, yielding an effective tax rate of ~~17.2%~~14.0%, ~~which was comparable~~compared to an effective tax rate of ~~16.9%~~17.2% 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~~decrease 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 contributioneffective tax 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~~impact of ~~six franchised restaurants since~~excess tax benefits associated with stock options exercised during 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.~~period.

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 weeks ended September ~~28, 2019~~26, 2020 and September ~~29, 2018~~28, 2019 (in thousands):


	Thirty-Nine Weeks Ended							Thirty-Nine Weeks Ended
	September 28, 2019			September 29, 2018				September 26, 2020		September 28, 2019
Net cash provided by (used in):							Net cash provided by (used in):
Operating activities	$	28,586		$	30,623		Operating activities	$	46,779	$	28,586
Investing activities	(22,311		)	(8,879		)	Investing activities	(4,564)		(22,311)
Financing activities	(5,752		)	(18,326		)	Financing activities	5,068		(5,752)
Net change in cash and cash equivalents	$	523		$	3,418		Net change in cash and cash equivalents	$	47,283	$	523

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 $46.8 million in the thirty-nine weeks ended September 26, 2020, an increase of $18.2 million from cash provided by operating activities of $28.6 million in the thirty-nine weeks ended September 28, ~~2019, a decrease~~2019. The increase is the result of ~~$2.0 million from cash provided by operations of $30.6 million~~increased operating income associated with the increased sales over the prior period, coupled with the increase in ~~the thirty-nine weeks ended September 29, 2018. The decrease was primarily~~working capital due to ~~the~~ timing of ~~changes in working capital.~~payments associated with our national advertising campaign.

Investing activities. Our net cash used in investing activities was $4.6 million in the thirty-nine weeks ended September 26, 2020, a decrease of $17.7 million from cash used in investing activities of $22.3 million in the thirty-nine weeks ended September 28, ~~2019, an increase of $13.4 million from $8.9 million~~2019. The decrease in cash used in investing activities ~~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 weeks ended September 28, ~~2019, offset by a decrease in cash used for restaurant acquisitions of $4.8 million.~~2019.

Financing activities. Our net cash ~~used in~~provided by financing activities was ~~$5.8~~$5.1 million in the thirty-nine weeks ended September ~~28, 2019, a decrease~~26, 2020, an increase of ~~$12.6~~$10.8 million from cash used in financing activities of ~~$18.3~~$5.8 million in ~~2018.~~2019. The ~~decrease~~increase was primarily due to ~~the payment~~additional borrowings under our 2018 Variable Funding Notes (as defined below) of ~~a special dividend in the first quarter of 2018 totaling $92.7 million, offset by net borrowings of $81.6~~$16.0 million in the ~~comparable period in 2018. These decreases were~~thirty-nine weeks ended September 26, 2020, partially 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 million in the thirty-nine weeks ended September 28, 2019.dividend.

Securitized financing facility. On ~~November 14, 2018, we entered into~~October 30, 2020, the Company completed a transaction to refinance its existing securitized financing facility ~~comprised~~with a new securitized financing facility, pursuant to which Wingstop Funding LLC (the “Issuer”), a limited-purpose, bankruptcy-remote, wholly-owned indirect subsidiary of ~~$320~~the Company, issued $480.0 million of its Series ~~2018-1 4.97%~~2020-1 2.84% Fixed Rate Senior ~~Secured~~ Notes, Class A-2 (the ~~“Class~~"2020 Class A-2 ~~Notes”~~Notes") ~~as well as~~. The Issuer also entered into a ~~variable funding note~~revolving financing facility of Series ~~2018-1~~2020-1 Variable Funding Senior Notes, Class A-1 which permits borrowings of up to a maximum principal amount of $50.0 million, which may be used to issue letters of credit (the ~~“Variable~~“2020 Variable Funding Notes” and, together with the 2020 Class A-2 Notes, the ~~“Notes”~~“2020 Notes”)~~, which allow us to borrow up to $20 million as needed on a revolving basis. As~~. A portion of ~~September 28, 2019, we had $5.0 million outstanding borrowings under~~ the ~~Variable Funding Notes, with $4.0 million letters~~proceeds of ~~credit outstanding.~~

~~The~~the 2020 Class A-2 Notes was used to repay the $332.8 million of principal outstanding on the existing 2018 Class A-2 Notes and 2018 Variable Funding Notes”), together with accrued and unpaid interest and make-whole prepayment consideration due thereon, and to pay related transaction fees. The Company intends to use the additional net proceeds to strengthen its liquidity position and for general corporate purposes, including a return of capital to the Company’s stockholders.

The 2020 Class A-2 Notes are generally subject to 1% annual amortization, bear interest at a fixed rate of ~~4.97%~~2.84% per annum, and have an anticipated repayment date of December ~~2023. Interest and principal payments on the Notes are payable on a quarterly basis.~~2027.

Borrowings under the 2020 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.~~October 30, 2020. Interest ispayments on the 2020 Notes are payable on a quarterly basis.

As of September 26, 2020, we had $16.0 million outstanding borrowings under the 2018 Variable Funding Notes, with $4.0 million letters of credit outstanding, and $316.8 million outstanding under the 2018 Class A-2 Notes. There were no amounts drawn down on the letters of credit as of September 26, 2020.

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 of 2020, and a quarterly cash dividend of ~~to $0.11~~$0.14 per share of common stock in the third quarter of 2020, resulting in aggregate ~~dividends~~dividend payments of ~~$8.5~~$10.7 million, or ~~$0.29~~$0.36 per share of common stock, ~~being paid~~ during the thirty-nine weeks ended September ~~28, 2019.~~26, 2020. On November 2, 2020, the Company’s Board of Directors announced a quarterly dividend of $0.14 per share of common stock, payable to stockholders of record as of November 20, 2020. The regular quarterly dividend is to be paid on December 10, 2020, totaling approximately $4.2 million.

~~Subsequent~~

On October 30, 2020, in conjunction with the completion of a transaction to refinance the ~~end of the third quarter, on October 29, 2019,~~Company's existing securitized financing facility, the Company’s Board of Directors declared a ~~quarterly~~special dividend of ~~$0.11~~$5.00 per share of common stock, ~~for~~payable to stockholders of record as of November ~~29, 2019,~~20, 2020. The special dividend is to be paid on December ~~13, 2019,~~3, 2020, totaling approximately ~~$3.2~~$149 million.

We do not currently expect the restrictions in our debt instruments to impact our ability to make ~~regularly~~regular 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~~During the thirteen weeks ended September 26, 2020, there were 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 98 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 September 26, 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, for a summary of recent accounting pronouncements.~~its operations.

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 Part II, 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%~~26.2% and ~~25.6%~~28.4% of our company-owned restaurant cost of sales during the thirty-nine weeks ended September ~~28, 2019~~26, 2020 and September ~~29, 2018,~~28, 2019, respectively. A hypothetical 10% increase in the bone-in chicken wing costs would have increased costs of sales by approximately ~~$0.9~~$1.0 million during the thirty-nine weeks ended September ~~28, 2019.~~26, 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,”~~September 26, 2020, 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 on the 2018 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 2018 Variable Funding Notes. As of September ~~28, 2019,~~26, 2020, the Company had borrowings of ~~$5.0~~$16.0 million under the 2018 Variable Funding Notes and $4.0 million of letters of credit outstanding. A hypothetical increase or decrease of 100 basis points on ~~our existing~~the variable rate under the 2018 Variable Funding Notes as of September 26, 2020 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 2018 Class A-2 Notes as of September ~~28, 2019~~26, 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.

On October 30, 2020, the Company completed a transaction to refinance its existing securitized financing facility with a new securitized financing facility, pursuant to which the Issuer issued the 2020 Class A-2 Notes and entered into a revolving financing facility of 2020 Variable Funding Notes that permit borrowings of up to a maximum principal amount of $50.0 million. The new securitized financing facility exposes the Company to substantially the same interest rate risks as discussed above.

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,~~26, 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~~Part I, 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 and increased Selling, general and administrative expense due to COVID-19-related support provided to international franchisees. 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~~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			Amended and Restated Certificate of Incorporation of Wingstop Inc., as amended through June 15, 2020, filed as Exhibit 3.1 to the Company’s ~~Registration Statement~~Quarterly Report on Form ~~S-1/A (Registration~~10-Q for the quarterly period ended June 27, 2020 (File No. ~~333-203891) on June 2, 2015~~001-37425) and incorporated ~~herein~~ by ~~reference.~~reference herein.
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*4.1			Amended and Restated Base Indenture, dated as of October 30, 2020, by and between Wingstop Funding LLC, as Issuer, and Citibank, N.A., as Trustee and Securities Intermediary, filed as Exhibit 4.1 to the Current Report on Form 8-K (File No. 001-37425) of the Company on November 2, 2020 and incorporated herein by reference.
4.2			Series 2020-1 Supplement to Base Indenture, dated as of October 30, 2020, by and between Wingstop Funding LLC, as Issuer of the Series 2020-1 fixed rate senior secured notes, Class A-2, and Series 2020-1 variable funding senior secured notes, Class A-1, and Citibank, N.A., as Trustee and Series 2020-1 Securities Intermediary, filed as Exhibit 4.2 to the Current Report on Form 8-K (File No. 001-37425) of the Company on November 2, 2020 and incorporated herein by reference.
10.1			Purchase Agreement, dated as of October 9, 2020, by and among the Company, certain indirect subsidiaries of the Company party thereto and Barclays Capital Inc., filed as Exhibit 10.1 to the Current Report on Form 8-K (File No. 001-37425) of the Company on October 9, 2020 and incorporated herein by reference.
10.2			Class A-1 Note Purchase Agreement, dated as of October 30, 2020, by and among Wingstop Funding LLC, as Issuer, each of Wingstop Guarantor LLC and Wingstop Franchising LLC, as Guarantor, Wingstop Restaurants Inc., as Manager, the conduit investors party thereto, the financial institutions party thereto, certain funding agents, Barclays Bank PLC, Swingline Lender and Administrative Agent, and Barclays Bank PLC, New York Branch, as L/C Provider, filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 001-37425) on November 2, 2020 and incorporated herein by reference.
10.3			Guarantee and Collateral Agreement, dated as of October 30, 2020, by and among Wingstop Guarantor LLC and Wingstop Franchising LLC, each as a Guarantor, in favor of Citibank, N.A., as Trustee, filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K (File No. 001-37425) on November 2, 2020 and incorporated herein by reference.
10.4			Management Agreement, dated as of October 30, 2020, by and among Wingstop Funding LLC, Wingstop Franchising LLC, Wingstop Guarantor LLC. Wingstop Restaurants Inc., as Manager, and Citibank, N.A., as Trustee, filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K (File No. 001-37425) on November 2, 2020 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:

November 2, 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~~November 2, 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



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