UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark one)
xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 29, 2018March 30, 2019
¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____                   

Commission File No. 001-37425
 
WINGSTOP INC.
(Exact name of registrant as specified in its charter)
 
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) 686-6500
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, par value $0.01 per shareWINGNASDAQ Global Market
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. 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 filerx 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, 2018May 8, 2019 there were 29,296,04729,399,276 shares of common stock outstanding.
 

TABLE OF CONTENTS
  Page
PART I
Item 1.
 
 
 
 
Item 2.
Item 3.
Item 4.
   
PART II
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 
   



PART I.     FINANCIAL INFORMATION
Item 1.     Financial Statements
WINGSTOP INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(amounts in thousands, except share and per share amounts)
 September 29,
2018
 December 30,
2017
 (Unaudited) As adjusted*
Assets 
  
Current assets 
  
Cash and cash equivalents$3,023
 $4,063
Accounts receivable, net3,918
 4,567
Prepaid expenses and other current assets3,313
 4,334
Advertising fund assets, restricted7,484
 2,944
Total current assets17,738
 15,908
Property and equipment, net7,363
 5,826
Goodwill49,655
 46,557
Trademarks32,700
 32,700
Customer relationships, net14,566
 15,567
Other non-current assets5,814
 3,278
Total assets$127,836
 $119,836
Liabilities and stockholders' deficit   
Current liabilities   
Accounts payable$2,133
 $1,752
Other current liabilities10,107
 10,929
Current portion of debt3,750
 3,500
Advertising fund liabilities7,484
 2,944
Total current liabilities23,474
 19,125
Long-term debt, net211,100
 129,841
Deferred revenues, net of current21,866
 21,226
Deferred income tax liabilities, net5,642
 5,920
Other non-current liabilities2,013
 2,142
Total liabilities264,095
 178,254
Commitments and contingencies (see Note 7)

 

Stockholders' deficit   
Common stock, $0.01 par value; 100,000,000 shares authorized; 29,296,047 and 29,092,669 shares issued and outstanding as of September 29, 2018 and December 30, 2017, respectively293
 291
Additional paid-in-capital100
 262
Accumulated deficit(136,652) (58,971)
Total stockholders' deficit(136,259) (58,418)
Total liabilities and stockholders' deficit$127,836
 $119,836
*See Note 1.
 March 30,
2019
 December 29,
2018
 (Unaudited)  
Assets 
  
Current assets 
  
Cash and cash equivalents$13,625
 $12,493
Restricted cash4,824
 4,462
Accounts receivable, net4,918
 5,764
Prepaid expenses and other current assets1,641
 2,056
Advertising fund assets, restricted9,407
 5,131
Total current assets34,415
 29,906
Property and equipment, net8,299
 8,338
Goodwill49,655
 49,655
Trademarks32,700
 32,700
Customer relationships, net13,902
 14,233
Other non-current assets12,479
 4,917
Total assets$151,450
 $139,749
Liabilities and stockholders' deficit   
Current liabilities   
Accounts payable$2,190
 $2,750
Other current liabilities14,222
 16,201
Current portion of debt3,200
 2,400
Advertising fund liabilities9,407
 5,131
Total current liabilities29,019
 26,482
Long-term debt, net308,931
 309,374
Deferred revenues, net of current21,188
 21,885
Deferred income tax liabilities, net4,652
 4,866
Other non-current liabilities8,138
 1,972
Total liabilities371,928
 364,579
Commitments and contingencies (see Note 8)

 

Stockholders' deficit   
Common stock, $0.01 par value; 100,000,000 shares authorized; 29,399,276 and 29,296,939 shares issued and outstanding as of March 30, 2019 and December 29, 2018, respectively294
 293
Additional paid-in-capital206
 1,036
Accumulated deficit(220,978) (226,159)
Total stockholders' deficit(220,478) (224,830)
Total liabilities and stockholders' deficit$151,450
 $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 29,
2018
 September 30,
2017
 September 29,
2018
 September 30,
2017
Thirteen Weeks Ended
  As adjusted*   As adjusted*March 30,
2019
 March 31,
2018
Revenue:     
  
   
Royalty revenue, franchise fees and other$17,787
 $15,872
 $52,772
 $48,735
$21,328
 $17,781
Advertising fees and related income8,614
 7,579
 25,574
 22,313
13,210
 8,605
Company-owned restaurant sales11,845
 9,672
 34,326
 27,063
13,515
 11,003
Total revenue38,246
 33,123
 112,672
 98,111
48,053
 37,389
Costs and expenses:     
  
   
Cost of sales (1)
8,040
 7,823
 23,182
 21,290
9,730
 7,397
Advertising expenses8,431
 7,665
 25,283
 24,522
12,734
 8,643
Selling, general and administrative10,285
 8,058
 31,196
 24,485
12,542
 10,833
Depreciation and amortization1,134
 881
 3,163
 2,407
1,276
 950
Total costs and expenses27,890
 24,427
 82,824
 72,704
36,282
 27,823
Operating income10,356
 8,696
 29,848
 25,407
11,771
 9,566
Interest expense, net2,545
 1,302
 6,623
 3,908
4,410
 1,736
Income before income tax expense7,811
 7,394
 23,225
 21,499
7,361
 7,830
Income tax expense1,518
 2,690
 3,925
 5,631
755
 1,662
Net income$6,293
 $4,704
 $19,300
 $15,868
$6,606
 $6,168
          
Earnings per share          
Basic$0.21
 $0.16
 $0.66
 $0.55
$0.23
 $0.21
Diluted$0.21
 $0.16
 $0.65
 $0.54
$0.22
 $0.21
          
Weighted average shares outstanding          
Basic29,284
 29,081
 29,210
 29,003
29,337
 29,116
Diluted29,584
 29,384
 29,561
 29,362
29,637
 29,503
          
Dividends per share$0.09
 $0.07
 $3.40
 $0.07
$0.09
 $3.24

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

* See Note 1.separately.
See accompanying notes to consolidated financial statements.



WINGSTOP INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Deficit
For the Thirteen Weeks ended March 31, 2018and March 30, 2019
(amounts in thousands, except share data)
(Unaudited)

 Common Stock      
 Shares Amount 
Additional
Paid-In Capital
 Accumulated Deficit Total Stockholders’ Deficit
Balance at December 30, 201729,092,669
 291
 262
 (58,971) (58,418)
Net income
 
 
 6,168
 6,168
Issuance of common stock, net41,159
 1
 (1) 
 
Exercise of stock options25,182
 
 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, 201829,155,823
 $292
 $45
 $(146,847) $(146,510)
          
 Common Stock      
 Shares Amount Additional
Paid-In Capital
 Accumulated Deficit Total Stockholders’ Deficit
Balance at December 29, 201829,296,939
 $293
 $1,036
 $(226,159) $(224,830)
Adjustment for ASC 842 adoption
 
 
 154
 154
Net income
 
 
 6,606
 6,606
Issuance of common stock, net60,553
 1
 (1) 
 
Exercise of stock options54,253
 
 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, 201929,399,276
 $294
 $206
 $(220,978) $(220,478)

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 29,
2018
 September 30,
2017
   As adjusted*
    
Operating activities 
  
Net income$19,300
 $15,868
Adjustments to reconcile net income to cash provided by operating activities:   
Depreciation and amortization3,163
 2,407
Deferred income taxes(278) (797)
Stock-based compensation expense2,012
 894
Amortization of debt issuance costs265
 219
Changes in operating assets and liabilities:   
Accounts receivable649
 (1,442)
Prepaid expenses and other assets(280) (951)
Advertising fund assets and liabilities, net4,457
 1,887
Accounts payable and other current liabilities587
 (331)
Deferred revenue877
 2,240
Other non-current liabilities(129) (127)
Cash provided by operating activities30,623
 19,867
    
Investing activities   
Purchases of property and equipment(2,883) (1,834)
Acquisition of restaurants from franchisees(5,996) (3,949)
Cash used in investing activities(8,879) (5,783)
    
Financing activities   
Proceeds from exercise of stock options506
 1,301
Borrowings of long-term debt231,108
 3,500
Repayments of long-term debt(149,500) (14,125)
Payment of deferred financing costs(782) 
Tax payments for restricted stock upon vesting(182) 
Dividends paid(99,476) (2,034)
Cash used in financing activities(18,326) (11,358)
    
Net change in cash, cash equivalents, and restricted cash3,418
 2,726
Cash, cash equivalents, and restricted cash at beginning of period6,392
 5,693
Cash, cash equivalents, and restricted cash at end of period$9,810
 $8,419
*See Note 1.
 Thirteen Weeks Ended
 March 30,
2019
 March 31,
2018
    
Operating activities 
  
Net income$6,606
 $6,168
Adjustments to reconcile net income to cash provided by operating activities:   
Depreciation and amortization1,276
 950
Deferred income taxes(258) 38
Stock-based compensation expense838
 514
Amortization of debt issuance costs376
 85
Changes in operating assets and liabilities:   
Accounts receivable846
 707
Prepaid expenses and other assets1,107
 327
Advertising fund assets and liabilities, net4,217
 1,398
Accounts payable and other current liabilities(4,480) (703)
Deferred revenue(507) 14
Other non-current liabilities(423) (42)
Cash provided by operating activities9,598
 9,456
    
Investing activities   
Purchases of property and equipment(641) (426)
Acquisition of restaurant from franchisee
 (1,900)
Cash used in investing activities(641) (2,326)
    
Financing activities   
Proceeds from exercise of stock options158
 165
Borrowings of long-term debt
 229,108
Repayments of long-term debt
 (139,500)
Payment of deferred financing costs
 (782)
Tax payments for restricted stock upon vesting(833) (142)
Dividends paid(2,571) (94,796)
Cash used in financing activities(3,246) (5,947)
    
Net change in cash, cash equivalents, and restricted cash5,711
 1,183
Cash, cash equivalents, and restricted cash at beginning of period20,940
 6,392
Cash, cash equivalents, and restricted cash at end of period$26,651
 $7,575
See accompanying notes to consolidated financial statements.


WINGSTOP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)


(1)    Basis of Presentation
Basis of Presentation
Wingstop Inc., throughtogether with its primary operating subsidiary, Wingstop Restaurants Inc. (“WRI”), collectively referred to asconsolidated subsidiaries (collectively, “Wingstop” or the “Company,”“Company”), is in the business of franchising and operating Wingstop restaurants. As of September 29, 2018, 1,059March 30, 2019, 1,112 franchised restaurants were in operation domestically, and 130 international132 franchised restaurants were in operation across nine countries.internationally. As of September 29, 2018,March 30, 2019, the Company owned and operated 2629 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 SeptemberMarch 30, 2019 and December 29, 2018 and December 30, 2017 and operating results are for the thirteen and thirty-nine weeks ended September 29, 2018March 30, 2019 and September 30, 2017.March 31, 2018.
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 30, 2017.29, 2018.
The Company uses a 52/53-week fiscal year that ends on the last Saturday of the calendar year. Fiscal years 20182019 and 20172018 have 52 weeks.
The Company has reclassified certain prior period amounts due toCash, Cash Equivalents, and Restricted Cash
Cash, cash equivalents, and restricted cash within the adoptionConsolidated Balance Sheets and the Consolidated Statements of ASU 2014-09Cash Flows as of March 30, 2019 and ASU 2016-18,December 29, 2018 were as defined below.follows (in thousands):
 March 30, 2019 December 29, 2018
Cash and cash equivalents$13,625
 $12,493
Restricted cash4,824
 4,462
Restricted cash, included in Advertising fund assets, restricted8,202
 3,985
Total cash, cash equivalents, and restricted cash$26,651
 $20,940
Advertising Fund
The Company administers the Wingstop Restaurants Advertising Fund (“Ad Fund”), for which a percentage of gross sales is collected from Wingstop restaurant franchisees and company-owned restaurants to be used for various forms of advertising for the Wingstop brand. Advertising fundBeginning 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 restricted liabilities of the Ad Fund within current assets and current liabilities, respectively, in the Consolidated Balance Sheets. Ad Fund contributions and expenditures are reported on a gross basis in the Consolidated Statements of Operations, which are largely offsetting and therefore do not significantly impact our reported net income. Advertising expenses incurred by company-owned restaurantsCompany-operated restaurants’ Ad Fund contributions, which were equal to 4% of gross sales for the thirteen weeks ended March 30, 2019 and 3% of gross sales for the thirteen weeks ended March 31, 2018, are included withinin cost of sales in the Consolidated Statements of Operations. Administrative support services and compensation expenses of employees that provide services directly to the Ad Fund, are included in selling, general and administrative expenses (“SG&A”) in the Consolidated Statements of Operations.
The Ad Fund contribution collected from Wingstop restaurant franchisees and company-owned and operated restaurants during the thirty-nine weeks ended September 29, 2018 and September 30, 2017 was equal to 3% of gross sales. For the thirty-nine weeks ended September 29, 2018 and September 30, 2017, the Company contributed $2.8 million and $4.8 million, respectively, for the purpose of supplementing the national advertising campaign, which amounts were included in Advertising expenses in the Consolidated Statements of Operations.
The Company consolidates and reports all assets and liabilities of the Ad Fund as restricted assets of the Ad Fund and liabilities of the Ad Fund within current assets and current liabilities, respectively, in the Consolidated Balance Sheets. The assets and liabilities of the Ad Fund consist primarily of cash, receivables, accrued expenses, other liabilities, and any cumulative surplus related to the Ad Fund. Pursuant to the Company’s franchise agreements, use of Ad Fund contributions is restricted to advertising, public relations, merchandising, similar activities, and administrative expenses to increase sales and further enhance the public reputation of the Wingstop brand. The aforementioned administrative expenses may also include personnel expenses and allocated costs incurred by the Company that are directly associated with administering the Ad Fund, as outlined in the provisions of the applicable franchise agreements. Total cash balances related to the Ad Fund as of September 29, 2018 and December 30, 2017 were $6.8 million and $2.3 million, respectively.
Recently IssuedAdopted Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2016-02, Leases (Topic 842) (“ASU 2016-02”). ASU 2016-02 amends the existing accounting standards for lease accounting, including
WINGSTOP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)

requiring lessees to recognize most leases on their balance sheets and making targeted changes to lessor accounting. ASU 2016-02 will be effective beginning in the first quarter of fiscal year 2019. Early adoption of ASU 2016-02 as of its issuance is permitted. ThisThe new guidance also requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief.additional disclosures about leases. The Company expects to adopt this new guidance in fiscal year 2019 without restating comparative periods. The discounted minimum remaining rental payments will beadopted the starting point for determining the right-of-use asset and lease liability. The Company expects that adoptionrequirements of the new guidance will have a material impact on the consolidated balance sheets due to the recognition of the right-of-use asset and lease liability related to our current operating leases.
Though the majority of the assessment is complete, the Company continues to evaluate the impact the adoption of this new guidance will have on the Company’s consolidated financial statements, as well as the impact on accounting policies and related disclosures. Additionally, the Company is in the process of implementing new accounting systems, business processes, and internal controls related to lease accounting to assist in the application of the new guidance.
In March 2018, the FASB issued ASU 2018-05, Income Taxes (Topic 740) (“ASU 2018-05”). ASU 2018-05 provides guidance on accounting for the income tax effects of the Tax Cuts and Jobs Act of 2017 (the “Act”), which impacts U.S. corporate tax rates, business-related exclusions, and deductions and credits. The Act also has tax consequences for many companies that operate internationally. The Company recognized the income tax effects of the Act in its 2017 financial statements in accordance with Staff Accounting Bulletin No. 118, which provides SEC staff guidance for the application of Accounting Standards Codification (“ASC”) Topic 740, "Income Taxes," in the reporting period in which the Act was signed into law. As such, the Company’s financial results reflect the income tax effects of the Act for which the accounting under ASC Topic 740 is complete and provisional amounts for those specific income tax effects of the Act for which the accounting under ASC Topic 740 is incomplete but a reasonable estimate could be determined.

The Company will continue to analyze additional information and guidance related to the Act as supplemental legislation, regulatory guidance, or evolving technical interpretations become available. The final impacts may differ from the recorded amountsstandard as of September 29, 2018, and we will continue to refine such amounts within the measurement period provided by Staff Accounting Bulletin No. 118. We expect to complete our analysis no later than the fourth quarter of 2018.

Recently Adopted Accounting Pronouncements
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which superseded nearly all existing revenue recognition guidance. The new guidance provided a single framework in which revenue is required to be recognized to depict the transfer of goods or services to customers in amounts that reflect the consideration to which a company expects to be entitled in exchange for those goods or services.
The Company adopted this new guidance effective the first day of fiscal year 2018,2019 using the fullmodified retrospective transition method, which resulted in adjusting each prior reporting period presented and a cumulative effect adjustment, which was recorded asapproach without restating comparative periods. As part of the first day of 2016. The adoption changed the timing of recognition of initial franchise fees, development fees, territory fees for our international business and renewal and transfer fees, as well as the reporting of Ad Fund contributions and related expenditures. See Note 11 to our consolidated financial statements, Revenue from Contracts with Customers, for further discussion.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (“ASU 2016-18”), which requires that restricted cash and cash equivalents be included as components of total cash and cash equivalents as presented on the statement of cash flows. ASU 2016-18 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017 and a retrospective transition method is required. The Company adopted this new guidance effective the first day of fiscal year 2018, using the full retrospective transition method, which resulted in adjusting the Statement of Cash Flows for each prior period presented.
WINGSTOP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)

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 following table presents the effectadoption of the adoptionnew standard resulted in the recording of ASU 2014-09 on our consolidated balance sheetsa right-of-use asset of approximately $8.5 million and lease liabilities of approximately $10.3 million, and had an immaterial impact to retained earnings as of December 30, 2017 (in thousands):
  As reported Adjustments for adoption of ASU 2014-09 As Adjusted
Assets     
Current assets     
Cash and cash equivalents$4,063
 $
 $4,063
Accounts receivable, net4,567
 
 4,567
Prepaid expenses and other current assets4,334
 
 4,334
Advertising fund assets, restricted2,944
 
 2,944
Total current assets15,908
 
 15,908
Property and equipment, net5,826
 
 5,826
Goodwill46,557
 
 46,557
Trademarks32,700
 
 32,700
Customer relationships, net15,567
 
 15,567
Other non-current assets3,278
 
 3,278
Total assets$119,836
 $
 $119,836
Liabilities and stockholders' deficit     
Current liabilities     
Accounts payable$1,752
 $
 $1,752
Other current liabilities10,683
 246
 10,929
Current portion of debt3,500
 
 3,500
Advertising fund liabilities2,944
 
 2,944
Total current liabilities18,879
 246
 19,125
Long-term debt, net129,841
 
 129,841
Deferred revenues, net of current8,427
 12,799
 21,226
Deferred income tax liabilities, net8,799
 (2,879) 5,920
Other non-current liabilities2,142
 
 2,142
Total liabilities168,088
 10,166
 178,254
Commitments and contingencies (see Note 7)     
Stockholders' deficit     
Common stock291
 
 291
Additional paid-in-capital262
 
 262
Accumulated deficit(48,805) (10,166) (58,971)
Total stockholders' deficit(48,252) (10,166) (58,418)
Total liabilities and stockholders' deficit$119,836
 $
 $119,836
WINGSTOP INC. AND SUBSIDIARIES
Notes tothe beginning of fiscal year 2019. The standard did not materially impact our Consolidated Financial Statements
(Unaudited)

The following table presents the effect of the adoption of ASU 2014-09Operations and had no impact on our consolidated statements of operations for the thirteen weeks ended September 30, 2017 (in thousands, except per share amounts):
   Adjustments for adoption of ASU 2014-09  
  As reported  Franchise Fees  Advertising As Adjusted
Revenue:       
Royalty revenue, franchise fees and other$16,354
 $(482) $
 $15,872
Advertising fees and related income
 
 7,579
 7,579
Company-owned restaurant sales9,672
 
 
 9,672
Total revenue26,026
 (482) 7,579
 33,123
Costs and expenses:       
Cost of sales (1)
7,823
 
 
 7,823
Advertising expenses
 
 7,665
 7,665
Selling, general and administrative8,144
 
 (86) 8,058
Depreciation and amortization881
 
 
 881
Total costs and expenses16,848
 
 7,579
 24,427
Operating income9,178
 (482) 
 8,696
Interest expense, net1,302
 
 
 1,302
Income before income tax expense7,876
 (482) 
 7,394
Income tax expense2,864
 (174) 
 2,690
Net income$5,012
 $(308) $
 $4,704
        
Earnings per share       
Basic$0.17
 $(0.01) $
 $0.16
Diluted$0.17
 $(0.01) $
 $0.16
(1) Cost of sales excludes depreciation and amortization, which are presented separately, and includes advertising expenses incurred at company-owned restaurants.
WINGSTOP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)

The following table presents the effect of the adoption of ASU 2014-09 on our consolidated statements of operations for the thirty-nine weeks ended September 30, 2017 (in thousands, except per share amounts):
   Adjustments for adoption of ASU 2014-09  
  As reported  Franchise Fees  Advertising As Adjusted
Revenue:       
Royalty revenue, franchise fees and other$50,204
 $(1,469) $
 $48,735
Advertising fees and related income
 
 22,313
 22,313
Company-owned restaurant sales27,063
 
 
 27,063
Total revenue77,267
 (1,469) 22,313
 98,111
Costs and expenses:       
Cost of sales (1)
21,290
 
 
 21,290
Advertising expenses
 
 24,522
 24,522
Selling, general and administrative26,694
 
 (2,209) 24,485
Depreciation and amortization2,407
 
 
 2,407
Total costs and expenses50,391
 
 22,313
 72,704
Operating income26,876
 (1,469) 
 25,407
Interest expense, net3,908
 
 
 3,908
Income before income tax expense22,968
 (1,469) 
 21,499
Income tax expense6,161
 (530) 
 5,631
Net income$16,807
 $(939) $
 $15,868
        
Earnings per share       
Basic$0.58
 $(0.03) $
 $0.55
Diluted$0.57
 $(0.03) $
 $0.54
(1) Cost of sales excludes depreciation and amortization, which are presented separately, and includes advertising expenses incurred at company-owned restaurants.




WINGSTOP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)

The following table presents the effect of the adoption of ASU 2014-09 and ASU 2016-18 on our consolidated statements of cash flows for the thirty-nine weeks ended September 30, 2017 (in thousands):
  As reported Adjustments for adoption of ASU 2014-09 Adjustments for adoption of ASU 2016-18 As adjusted
Operating activities       
Net income$16,807
 $(939) $
 $15,868
Adjustments to reconcile net income to cash provided by operating activities:  
Depreciation and amortization2,407
 
 
 2,407
Deferred income taxes(265) (532) 
 (797)
Stock-based compensation expense894
 
 
 894
Amortization of debt issuance costs219
 
 
 219
Changes in operating assets and liabilities:  

    
Accounts receivable(1,442) 
 
 (1,442)
Prepaid expenses and other assets(951) 
 
 (951)
Advertising fund assets and liabilities, net
 
 1,887
 1,887
Accounts payable and other current liabilities(331) 
 
 (331)
Deferred revenue769
 1,471
 
 2,240
Other non-current liabilities(127) 
 
 (127)
Cash provided by operating activities17,980
 
 1,887
 19,867
   
    
Investing activities  

    
Purchases of property and equipment(1,834) 
 
 (1,834)
Acquisition of restaurant from franchisee(3,949) 
 
 (3,949)
Cash used in investing activities(5,783) 
 
 (5,783)
   
    
Financing activities  

 

  
Proceeds from exercise of stock options1,301
 
 
 1,301
Borrowings of long-term debt3,500
 
 
 3,500
Repayments of long-term debt(14,125) 
 
 (14,125)
Dividends paid(2,034) 
 
 (2,034)
Cash used in financing activities(11,358) 
 
 (11,358)
   
    
Net change in cash, cash equivalents, and restricted cash839
 
 1,887
 2,726
Cash, cash equivalents, and restricted cash at beginning of period3,750
 

 1,943
 5,693
Cash, cash equivalents, and restricted cash at end of period$4,589
 

 $3,830
 $8,419
flows.
(2)    Earnings per Share
Basic earnings per share is computed by dividing income available to common stockholders by the weighted average number of common shares 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, determined using the treasury stock method.
WINGSTOP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)

Basic weighted average shares outstanding is reconciled to diluted weighted average shares outstanding as follows (in thousands):
Thirteen Weeks Ended Thirty-Nine Weeks EndedThirteen Weeks Ended
September 29,
2018
 September 30,
2017
 September 29,
2018
 September 30,
2017
March 30,
2019
 March 31,
2018
Basic weighted average shares outstanding29,284
 29,081
 29,210
 29,003
29,337
 29,116
Dilutive shares300
 303
 351
 359
300
 387
Diluted weighted average shares outstanding29,584
 29,384
 29,561
 29,362
29,637
 29,503
For the thirteen weeks ended September 29,March 30, 2019 and March 31, 2018, and September 30, 2017, equity awards representing approximately 1,00040,000 and 3,000 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 29, 2018 and September 30, 2017, equity awards representing approximately 4,000 and 11,00057,000 shares, respectively, were excluded from the dilutive earnings per share calculation because the effect would have been anti-dilutive.  
(3)    Dividends
During 2018, the Company’s Board of Directors approved a quarterly dividend of $0.07 per share of common stock in each of the first two quarters, and a quarterly dividend of $0.09 per share of common stock in the third quarter, with aggregate dividends of $6.8 million, or $0.23 per common share, which were paid during the thirty-nine weeks ended September 29, 2018. On January 30, 2018, the Company’s Board of Directors declared a special cash dividend of $3.17 per share, which was paid on February 14, 2018, totaling $92.7 million.
Subsequent to the third quarter, on October 26, 2018,2019, the Company’s Board of Directors declared a quarterly dividend of $0.09 per share of common stock for stockholders of record as of December 4, 2018,March 13, 2019, which was paid on March 27, 2019, totaling $2.6 million.
Subsequent to the first quarter, on May 6, 2019, the Company’s Board of Directors declared a quarterly dividend of $0.09 per share of common stock for stockholders of record as of June 7, 2019, to be paid on December 18, 2018,June 21, 2019, totaling approximately $2.6$2.7 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.
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 29, 2018 December 30, 2017
  
Carrying
Value (1)
 
Fair Value (2)
 
Carrying
Value (1)
 
Fair Value (2)
Senior Secured Credit Facility:   
  
  
  
Term loan facilityLevel 2 $96,250
 $96,250
 $64,750
 $64,750
Revolving credit facilityLevel 2 $119,108
 $119,108
 $69,000
 $69,000
 
Fair Value
Hierarchy
 March 30, 2019 December 29, 2018
  
Carrying
Value 
 Fair Value 
Carrying
Value 
 Fair Value
Securitized Financing Facility:         
2018-1 Class A-2 Senior Secured Notes (1)
Level 2 $320,000
 $328,474
 $320,000
 $320,000
WINGSTOP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)

(1) Excluding issuance costs netted on the Consolidated Balance Sheet.
(2) The fair value of long-term debt was estimated using available market information.
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.
WINGSTOP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)

(5)    Income Taxes
Income tax expense and the effective tax rate were $1.5$0.8 million and 19.4%10.3%, respectively, for the thirteen weeks ended September 29, 2018,March 30, 2019, and $2.7$1.7 million and 36.4%21.2%, respectively, for the thirteen weeks ended September 30, 2017. Income tax expense and the effective tax rate were $3.9 million and 16.9%, respectively, for the thirty-nine weeks ended September 29, 2018, and $5.6 million and 26.2%, respectively, for the thirty-nine weeks ended September 30, 2017.March 31, 2018.
Income tax expense for the thirteen and thirty-nine weeks ended September 29, 2018March 30, 2019 includes $0.3$1.2 million and $1.8 million, respectively, in tax benefits resulting from the recognition of excess tax benefits from stock-based compensation, compared to $0.1 million and $2.5$0.4 million of tax benefits recognized in the thirteen and thirty-nine weeks ended September 30, 2017, respectively. Income tax expense for the thirteen and thirty-nine weeks ended September 29, 2018 also reflects the reduction in the federal statutory rate from 35% to 21% effective the first day of fiscalMarch 31, 2018.
(6)    Debt Obligations
On January 30,November 14, 2018, Wingstop Funding LLC (the “Issuer”), a limited-purpose, bankruptcy-remote, wholly owned indirect subsidiary of Wingstop Inc., issued $320 million of its Series 2018-1 4.970% Fixed Rate Senior Secured Notes, Class A-2 (the “Class A-2 Notes”). Interest and principal are payable on a quarterly basis and the Company entered intoClass A-2 Notes have an amended senior secured credit facilityanticipated repayment date of December 2023.
In addition, the Issuer issued Series 2018-1 Variable Funding Senior Notes, Class A-1 (the “2018 Facility”“Variable Funding Notes”), which replaced its senior secured credit facility dated June 30, 2016 (the “2016 Facility”). The 2018 Facility includespermit borrowings of up to a term loan facility in an aggregatemaximum principal amount of $100$20 million, and a revolving credit facility upwhich may be used to an aggregate principal amountissue letters of $150 million. The Company used the proceeds from the 2018 Facility to refinance $133.8credit. As of March 30, 2019, $5.0 million of indebtednessletters of credit were outstanding against the Variable Funding Notes, which relate primarily to interest reserves required under the 2016 Facilitybase indenture and related supplemental indenture. There were no amounts drawn down on the letter of credit as of March 30, 2019 or December 29, 2018.
The Class A-2 Notes and the Variable Funding Notes are referred to paycollectively as the “Notes” and were issued in a special dividendsecuritization transaction pursuant to which certain of $92.7 million to its stockholders. Borrowings under the 2018 Facility bear interest, payable quarterly, at the Company’s option, atdomestic and foreign revenue-generating assets, consisting principally of franchise-related agreements and intellectual property, were contributed or otherwise transferred to the base rate plus a margin (0.75% to 1.75%, dependent on the Company’s reported leverage ratio) or LIBOR plus a margin (1.75% to 2.75%, dependent on the Company’s reported leverage ratio). The 2018 Facility matures in January 2023.
As of September 29, 2018, the term loan facilityIssuer and the revolving credit facility under the 2018 Facility had outstanding balances of $96.3 million and $119.1 million, respectively, bearing interest at 4.49%.
During the thirty-nine weeks ended September 29, 2018, the Company made payments of $12.0 million and $3.8 million on the outstanding principal balance of its revolving credit facility and term loan facility, respectively, under the 2018 Facility.
In conjunction with the 2018 Facility, the Company evaluated the refinancing of the 2016 Facility and determined $202.5 million should be accounted for as a debt modification and $47.5 million should be new debt issuance. The Company incurred $1.0 million in financing costs of which $0.2 million was expensed and $0.8 million was capitalized and is being amortized using the effective interest rate method.
The 2018 Facility is secured by substantially all assetscertain other limited-purpose, bankruptcy-remote, wholly owned indirect subsidiaries of the Company that act as guarantors of the Notes and requires compliance with certainthat have pledged substantially all of their assets as collateral securing the Notes.
The Notes are subject to a series of financial and non-financial covenants.covenants and restrictions. As of September 29, 2018,March 30, 2019, the Company was in compliance with all such financial covenants.
As of September 29, 2018,March 30, 2019, the scheduled principal payments on debt outstanding under the 2018 Facility were as follows (in thousands):
Remainder of fiscal year 2018$1,250
Fiscal year 20193,750
Remainder of fiscal year 2019$2,400
Fiscal year 20205,000
3,200
Fiscal year 20215,000
3,200
Fiscal year 20226,250
3,200
Fiscal year 2023194,108
308,000
Total$215,358
$320,000
(7)    Commitments and ContingenciesLeases
WRIThe Company determines whether an arrangement is a lease at inception. The Company has operating leases certainfor 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 equipment under non-cancelable operatingnon-lease components. For real estate leases, we account for lease components together with terms expiring at various dates through March 2034.non-lease components (e.g., common-area maintenance).
WINGSTOP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)

A scheduleComponents of future minimum rental payments required under our operating leases, excluding contingent rent, that have initial or remaining non-cancelable lease terms in excess of one year, as of September 29, 2018, isexpense are as follows (in thousands):
Remainder of fiscal year 2018$493
Fiscal year 20191,970
Fiscal year 20201,855
Fiscal year 20211,703
Fiscal year 20221,651
Fiscal year 20231,451
Thereafter4,979
Total$14,102
 Thirteen Weeks Ended
 March 30,
2019
Operating lease cost (a)
$502
Variable lease cost (b)
125
Total lease cost$627
Rent expense under cancelable(a) Includes short-term leases, which are immaterial.
(b) Primarily related to adjustments for inflation, common area maintenance, and non-cancelableproperty tax.
Supplemental cash flow information related to leases was $556,000is as follows (dollar amounts in thousands):
 Thirteen Weeks Ended
 March 30,
2019
Operating cash flow information: 
Cash paid for amounts included in the measurement of lease liabilities$545
Supplemental balance sheet information related to our operating leases is as follows:
   Thirteen Weeks Ended
 Balance Sheet Classification March 30,
2019
Right-of-use assetsOther non-current assets $8,170
Current lease liabilitiesOther current liabilities 1,751
Non-current lease liabilitiesOther non-current liabilities 8,138
Weighted average lease term and $508,000 for the thirteen weeks ended Septemberdiscount rate information related to leases is as follows:
Thirteen Weeks Ended
March 30,
2019
Weighted average remaining lease term of operating leases5.6 years
Weighted average discount rate of operating leases4.97%
Maturities of lease liabilities by fiscal year are as follows (in thousands):
Fiscal year 2019$1,636
Fiscal year 20202,213
Fiscal year 20212,003
Fiscal year 20221,798
Fiscal year 20231,520
Thereafter2,140
Total lease payments11,310
Less: imputed interest(1,421)
Present value of lease liabilities$9,889
WINGSTOP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)

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 20202,214
Fiscal year 20212,005
Fiscal year 20221,800
Fiscal year 20231,523
Thereafter2,145
Total$11,868

(8)    Commitments and September 30, 2017, respectively, and $1.7 million and $1.5 million for the thirty-nine weeks ended September 29, 2018 and September 30, 2017, respectively.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.
(8)(9)    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). The Company recognized $2.0$0.8 million in stock-based compensation expense for the thirty-ninethirteen weeks ended September 29, 2018,March 30, 2019, with a corresponding increase to additional paid-in-capital. Stock-based compensation expense is included in SG&Aselling, 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 TermStock Options Weighted Average Exercise Price Aggregate Intrinsic Value Weighted Average Remaining Term
Outstanding - December 30, 2017420
 $5.45
 $14,068
 5.7
Outstanding - December 29, 2018236
 $6.04
 $13,848
 4.8
Options granted2
 44.03
   
 
   
Options exercised(157) 3.22
   (54) 2.92
   
Options canceled(27) 6.68
   (1) 40.98
   
Outstanding - September 29, 2018238
 $6.18
 $14,741
 5.0
Outstanding - March 30, 2019181
 $6.43
 $12,526
 4.7
The total grant-date fair value of stock options vested during the thirty-ninethirteen weeks ended September 29, 2018March 30, 2019 was $0.5$0.2 million. The total intrinsic value of stock options exercised during the thirty-ninethirteen weeks ended September 29, 2018March 30, 2019 was $7.6$3.5 million. As of September 29, 2018,March 30, 2019, total unrecognized compensation expense related to unvested stock options was $0.5$0.1 million, which is expected to be recognized over a weighted-average period of 1.31.1 years.
WINGSTOP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)

Restricted Stock Units and Performance Stock Units
The following table summarizes activity related to restricted stock units (“RSUs”) and performance stock units (“PSUs”) (in thousands, except per share data):
Restricted Stock Units Weighted Average Grant Date Fair Value Performance Stock Units Weighted Average Grant Date Fair ValueRestricted Stock Units Weighted Average Grant Date Fair Value Performance Stock Units Weighted Average Grant Date Fair Value
Outstanding - December 30, 201794
 $27.11
 86
 $27.63
Outstanding - December 29, 2018103
 $36.18
 130
 $40.46
Units granted62
 44.51
 72
 46.80
43
 65.86
 44
 65.86
Units vested(31) 27.12
 (14) 26.25
(40) 34.02
 (21) 36.10
Units canceled(19) 31.19
 (15) 31.65
(10) 35.68
 (8) 35.21
Outstanding - September 29, 2018106
 $36.58
 129
 $40.74
Outstanding - March 30, 201996
 $51.05
 145
 $49.46
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-ninethirteen weeks ended September 29, 2018March 30, 2019 vest over a three yearthree-year service period. As of September 29, 2018,March 30, 2019, total unrecognized compensation expense related to unvested RSUs was $3.0$4.7 million, which is expected to be recognized over a weighted-average period of 2.02.2 years.
The Company granted 72,130 PSUs during the thirty-nine weeks ended September 29, 2018 that arevest based on the outcome of certain performance criteria. OfFor the total PSUs granted 56,840 are subjectduring the thirteen weeks ended March 30, 2019, the amount of units that can be earned range from 0% to 100% of the number of PSUs granted based on a service condition and a performance vesting condition based on the achievement of certain adjusted EBITDA targets, as defined by the plan, over a performance period of one to three years. The compensation expense related to these 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. The remaining 15,290 PSUs granted are subject to a service condition and a performance vesting condition based on the level of new sales growth achieved over the performance period. The maximum vesting percentage that could be realized for each of the PSUs is 500% based on the level of performance achieved for the respective awards, as well as a market vesting condition linked to the level of total stockholder return received by the Companys stockholders during the performance period measured against the companies in the S&P 600 Restaurant Index (“TSR PSUs”). The TSR PSUs were valued based on a Monte Carlo simulation model to reflect the impact of the total stockholder return market condition, resulting in a grant-date fair value range of $0.00 to $179.27 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.
As of September 29, 2018,March 30, 2019, total unrecognized compensation expense related to unvested PSUs was $4.5 million, which is expected to be recognized over a weighted-average period of 1.9 years.$5.3 million.
Restricted Stock Awards
The fair value of the unvested restricted stock awards is based on the closing price of the Company’s common stock on the date of grant. As of September 29, 2018,March 30, 2019, total unrecognized compensation expense related to unvested restricted stock awards was $0.5$0.3 million, which will be recognized over a weighted average period of approximately 1.91.4 years.
(9)(10)    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 29, 2018,March 30, 2019, the Franchise segment consisted of 1,1891,244 restaurants operated by Wingstop franchisees in the United States and nine countries outside of the United States,international markets, compared to 1,0651,133 franchised restaurants in operation as of September 30, 2017.March 31, 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 29, 2018,March 30, 2019, the Company segment consisted of 2629 company-owned restaurants located in the United States, compared to 2324 company-owned restaurants as of September 30, 2017.March 31, 2018. Company segment sales arerevenue 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.
WINGSTOP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)

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 29,
2018
 September 30,
2017
 September 29,
2018
 September 30,
2017
Thirteen Weeks Ended
  As adjusted*   As adjusted*March 30,
2019
 March 31,
2018
Revenue:          
Franchise segment$26,401
 $23,451
 $78,346
 $71,048
$34,538
 $26,386
Company segment11,845
 9,672
 34,326
 27,063
13,515
 11,003
Total segment revenue$38,246
 $33,123
 $112,672
 $98,111
$48,053
 $37,389
          
Segment Profit:          
Franchise segment$7,663
 $7,763
 $23,418
 $22,317
$9,255
 $8,387
Company segment2,693
 933
 7,892
 3,090
2,516
 2,641
Total segment profit10,356
 8,696
 31,310
 25,407
11,771
 11,028
Corporate and other (1)

 
 1,462
 

 1,462
Interest expense, net2,545
 1,302
 6,623
 3,908
4,410
 1,736
Income before taxes$7,811
 $7,394
 $23,225
 $21,499
$7,361
 $7,830
 
(1) Corporate and other includes corporate related items not allocated to reportable segments and consists primarily of expensestransaction costs associated with the refinancingrefinancings of the 2016 Facilityour credit agreement and payment of a special dividend.
* See Note 1.
(10)    Restaurant Acquisitions
On February 19, 2018, April 16, 2018 and May 1, 2018, the Company acquired one existing restaurant each from three separate franchisees (the “Acquisitions”). The total purchase prices were $1.9 million, $1.9 million, and $2.2 million, respectively, which were funded by cash flows from operations.
The following table summarizes the preliminary allocations of the purchase prices to the estimated fair values of assets acquired and liabilities assumed in connection with the Acquisitions, at the respective dates of such acquisitions (in thousands): 
 Purchase Price Allocation
 February 19, 2018 April 16, 2018 May 1, 2018
 Acquisition Acquisition Acquisition
Working capital$4
 $20
 $7
Property and equipment26
 160
 28
Reacquired franchise rights541
 1,277
 887
Goodwill1,331
 458
 1,309
Gift card liability(2) 
 
Total purchase price$1,900
 $1,915
 $2,231
The results of operations of the acquired restaurants beginning as of their respective dates of acquisition are included in our Consolidated Statements of Operations. The Acquisitions were accounted for as business combinations.
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 Acquisitions, including sales and unit growth opportunities. As of September 29, 2018, $3.1 million of the goodwill from the Acquisitions is expected to be deductible for federal income tax purposes.
Pro-forma financial information for the Acquisitions is not presented due to the immaterial impact of the financial results of the acquired restaurants on our consolidated financial statements.
WINGSTOP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)

The fair value measurements of tangible and intangible assets and liabilities as of the respective dates of acquisition are based on significant inputs not observed in the market and thus represent Level 3 fair value measurements. 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.
(11)    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. TheseThe 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 includingand 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 inclusive ofand 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 29,March 30, 2019 and March 31, 2018 and September 30, 2017 (in thousands):
Thirteen Weeks Ended Thirty-Nine Weeks Ended
September 29, 2018 September 30, 2017 September 29, 2018 September 30, 2017Thirteen Weeks Ended
  As adjusted*   As adjusted*March 30, 2019 March 31, 2018
Royalty revenue$15,461
 $13,415
 $45,797
 $39,239
$17,907
 $15,386
Advertising fees and related income8,614
 7,579
 25,574
 22,313
13,210
 8,605
Franchise fees656
 598
 1,959
 1,865
1,582
 685
* See Note 1.
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 weeks ended March 30, 2019 was included in the deferred revenue balance as of December 29, 2018. Approximately $9.6$8.0 million and $10.1$9.2 million of deferred revenue as of SeptemberMarch 30, 2019 and December 29, 2018, and December 30, 2017, 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 7.67.4 years. The Company does not have any material contract assets as of September 29, 2018.
WINGSTOP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)

(12)    Subsequent Events
Subsequent to the fiscal third quarter of 2018, the Company announced its intention to complete a refinancing transaction. A wholly owned subsidiary of the Company intends to issue approximately $300 million of new, fixed rate notes and use the proceeds to prepay and retire all of the Company’s existing debt, to pay transaction costs associated with the transaction, and for general corporate purposes. In connection therewith, the Company also expects to enter into a new $25 million variable funding note facility. The Company anticipates that the refinancing transaction will close during the fiscal fourth quarter of 2018.March 30, 2019.

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 30, 201729, 2018 (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 1514 of our Annual Report. Our actual results may differ materially from those contained in or implied by any forward-looking statements.
We operate on a 52 or 53 week fiscal year ending on the last Saturday of each calendar year. Our fiscal quarters are comprised of 13 weeks, with the exception of the fourth quarter of a 53 week year, which contains 14 weeks. Fiscal years 20182019 and 20172018 each contain 52 weeks.
Amounts presented in this Part I, Item 2 for the thirteen and thirty-nine weeks ended September 30, 2017 have been retrospectively adjusted to reflect the adoption of ASU 2014-09. See Note 1 to our consolidated financial statements, Basis of Presentation, for more information regarding such adjustment.
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 singularly focused on wings, fries, and sides, which generate approximately 92%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 hand-cut,our fresh-cut, seasoned fries and sides made fresh daily.made-from-scratch 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 and has demonstrated strong, consistent growth. As of September 29, 2018,March 30, 2019, we had a total of 1,2151,273 restaurants across ten countries in our global system (including 43 states in the United States).system. Our restaurant base is 98% franchised, with 1,1891,244 franchised locations (including 130132 international locations) and 2629 company-owned restaurants as of September 29, 2018.March 30, 2019.

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 EndedThirteen Weeks Ended
September 29,
2018
 September 30,
2017
 September 29,
2018
 September 30,
2017
March 30,
2019
 March 31,
2018
Domestic Franchised Activity:          
Beginning of period1,040
 946
 1,004
 901
1,095
 1,004
Openings21
 28
 64
 79
20
 22
Closures(2) (1) (6) (7)(3) (4)
Acquired by Company
 (2) (3) (2)
 (1)
Restaurants end of period1,059
 971
 1,059
 971
1,112
 1,021
          
Domestic Company-Owned Activity:          
Beginning of period26
 21
 23
 21
29
 23
Openings
 
 
 

 
Closures
 
 
 

 
Acquired from franchisees
 2
 3
 2

 1
Restaurants end of period26
 23
 26
 23
29
 24
          
Total Domestic Restaurants1,085
 994
 1,085
 994
1,141
 1,045
          
International Franchised Activity:          
Beginning of period122
 89
 106
 76
128
 106
Openings8
 5
 24
 20
6
 6
Closures
 
 
 (2)(2) 
Restaurants end of period130
 94
 130
 94
132
 112
          
Total System-wide Restaurants1,215
 1,088
 1,215
 1,088
1,273
 1,157
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 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, 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 29,March 30, 2019 and March 31, 2018 and September 30, 2017 (dollars in thousands):
Thirteen Weeks Ended Thirty-Nine Weeks EndedThirteen Weeks Ended
September 29, 2018 September 30, 2017 September 29, 2018 September 30, 2017March 30, 2019 March 31, 2018
Number of system-wide restaurants open at end of period1,215
 1,088
 1,215
 1,088
1,273
 1,157
System-wide sales (1)
$315,312
 $274,021
 $933,250
 $802,420
$362,369
 $312,981
Domestic restaurant AUV$1,131
 $1,102
 $1,131
 $1,102
$1,156
 $1,120
System-wide domestic same store sales growth6.3% 4.1% 6.7% 1.7%7.1% 9.5%
Company-owned domestic same store sales growth5.0% 5.5% 6.8% 0.5%4.7% 12.5%
Total revenue$38,246
 $33,123
 $112,672
 $98,111
$48,053
 $37,389
Net income$6,293
 $4,704
 $19,300
 $15,868
$6,606
 $6,168
Adjusted EBITDA (2)
$12,246
 $9,930
 $36,485
 $28,708
$13,885
 $12,492
 
(1) The percentage of system-wide sales attributable to company-owned restaurants was 3.8%3.7% and 3.5% for the thirteen weeks ended September 29,March 30, 2019 and March 31, 2018, and September 30, 2017, respectively, and was 3.7% and 3.4% for the thirty-nine weeks ended September 29, 2018 and September 30, 2017, 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 29, 2018March 30, 2019 and September 30, 2017.March 31, 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, gains and losses on disposal of assets, and stock-based compensation among other items.expense. It is reasonable to expect that these items 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 29,March 30, 2019 and March 31, 2018 and September 30, 2017 (in thousands):
Thirteen Weeks Ended Thirty-Nine Weeks EndedThirteen Weeks Ended
September 29,
2018
 September 30,
2017
 September 29,
2018
 September 30,
2017
March 30,
2019
 March 31,
2018
Net income$6,293
 $4,704
 $19,300
 $15,868
$6,606
 $6,168
Interest expense, net2,545
 1,302
 6,623
 3,908
4,410
 1,736
Income tax expense1,518
 2,690
 3,925
 5,631
755
 1,662
Depreciation and amortization1,134
 881
 3,163
 2,407
1,276
 950
EBITDA$11,490
 $9,577
 $33,011
 $27,814
$13,047
 $10,516
Additional adjustments:          
Transaction costs (a)

 
 1,462
 

 1,462
Stock-based compensation expense (b)
756
 353
 2,012
 894
838
 514
Adjusted EBITDA$12,246
 $9,930
 $36,485
 $28,708
$13,885
 $12,492
 
(a) Represents costs and expenses related to the refinancing of the senior secured credit facility dated June 30, 2016 (the “2016 Facility”) and payment of a special dividend; all transaction costs are included in selling, general and administrative expenses (“SG&A”).
(b) Includes non-cash, stock-based compensation.

Results of Operations
Thirteen Weeks Ended September 29, 2018March 30, 2019 compared to Thirteen Weeks Ended September 30, 2017March 31, 2018
The following table sets forth our results of operations for the thirteen weeks ended September 29,March 30, 2019 and March 31, 2018 and September 30, 2017 (dollars in thousands):
Thirteen Weeks Ended Increase / (Decrease)Thirteen Weeks Ended Increase / (Decrease)
September 29,
2018
 September 30,
2017
 $ %March 30,
2019
 March 31,
2018
 $ %
Revenue:              
Royalty revenue, franchise fees and other$17,787
 $15,872
 $1,915
 12.1 %$21,328
 $17,781
 $3,547
 19.9 %
Advertising fees and related income8,614
 7,579
 1,035
 13.7 %13,210
 8,605
 4,605
 53.5 %
Company-owned restaurant sales11,845
 9,672
 2,173
 22.5 %13,515
 11,003
 2,512
 22.8 %
Total revenue38,246
 33,123
 5,123
 15.5 %48,053
 37,389
 10,664
 28.5 %
Costs and expenses:              
Cost of sales (1)
8,040
 7,823
 217
 2.8 %9,730
 7,397
 2,333
 31.5 %
Advertising expenses8,431
 7,665
 766
 10.0 %12,734
 8,643
 4,091
 47.3 %
Selling, general and administrative10,285
 8,058
 2,227
 27.6 %12,542
 10,833
 1,709
 15.8 %
Depreciation and amortization1,134
 881
 253
 28.7 %1,276
 950
 326
 34.3 %
Total costs and expenses27,890
 24,427
 3,463
 14.2 %36,282
 27,823
 8,459
 30.4 %
Operating income10,356
 8,696
 1,660
 19.1 %11,771
 9,566
 2,205
 23.1 %
Interest expense, net2,545
 1,302
 1,243
 95.5 %4,410
 1,736
 2,674
 154.0 %
Income before income tax expense7,811
 7,394
 417
 5.6 %7,361
 7,830
 (469) (6.0)%
Income tax expense1,518
 2,690
 (1,172) (43.6)%755
 1,662
 (907) (54.6)%
Net income$6,293
 $4,704
 $1,589
 33.8 %$6,606
 $6,168
 $438
 7.1 %
 
(1)Cost of sales includes all operating expenses of company-owned restaurants, including advertising expenses, and excludes depreciation and amortization, which are presented separately, and includes advertising expenses incurred at company-owned restaurants.separately.
Total revenue. During the thirteen weeks ended September 29, 2018,March 30, 2019, total revenue was $38.2$48.1 million, an increase of $5.1$10.7 million, or 15.5%28.5%, compared to $33.1$37.4 million in the comparable period in 2017.2018.
Royalty revenue, franchise fees and other. During the thirteen weeks ended September 29, 2018,March 30, 2019, royalty revenue, franchise fees and other was $17.8$21.3 million, an increase of $1.9$3.5 million, or 12.1%19.9%, compared to $15.9$17.8 million in the comparable period in 2017. The increase is2018. Royalty revenue increased due to 124111 net franchise restaurant openings since September 30, 2017March 31, 2018 and domestic same store sales growth of 6.3%7.1%. Franchise fees increased $0.9 million due to higher termination fees recognized in the current period.
Advertising fees and related income. During the thirteen weeks ended September 29, 2018,March 30, 2019, advertising fees and related income was $8.6$13.2 million, an increase of $1.0$4.6 million, or 13.7%53.5%, compared to $7.6$8.6 million in the comparable period in 2017.2018. Advertising fees increased primarily due to the increase in Ad Fund contributions from 3% to 4% of gross sales beginning in fiscal year 2019 as well as the 15.8% increase in system-wide sales in the thirteen weeks ended September 29, 2018March 30, 2019 compared to the thirteen weeks ended September 30, 2017.March 31, 2018.
Company-owned restaurant sales. During the thirteen weeks ended September 29, 2018,March 30, 2019, company-owned restaurant sales were $11.8$13.5 million, an increase of $2.2$2.5 million, or 22.5%22.8%, compared to $9.7$11.0 million in the comparable period in 2017.2018. The increase was primarily due to the acquisition of threefive franchised restaurants since the prior year comparable period resulting in additional sales of $1.5$1.6 million and company-owned domestic same store sales growth of 5.0%4.7%, which was primarily driven by both an increase in transactions and an increase in average transaction size.transactions.
Cost of sales. During the thirteen weeks ended September 29, 2018,March 30, 2019, cost of sales was $8.0$9.7 million, an increase of $0.2$2.3 million, or 2.8%31.5%, compared to $7.8$7.4 million in the comparable period in 2017.2018. Cost of sales as a percentage of company-owned restaurant sales was 67.9%72.0% in the thirteen weeks ended September 29, 2018,March 30, 2019, compared to 80.9%67.2% in the comparable period in 2017.2018.


The table below presents the major components of cost of sales (dollars in thousands):
  Thirteen Weeks Ended
  September 29,
2018
 As a % of company-owned restaurant sales September 30,
2017
 As a % of company-owned restaurant sales
 
 Cost of sales:       
 Food, beverage and packaging costs$3,926
 33.1 % $4,136
 42.8 %
 Labor costs2,621
 22.1 % 2,295
 23.7 %
 Other restaurant operating expenses1,795
 15.2 % 1,634
 16.9 %
 Vendor rebates(302) (2.5)% (242) (2.5)%
 Total cost of sales$8,040
 67.9 % $7,823
 80.9 %
  Thirteen Weeks Ended
  March 30,
2019
 As a % of company-owned restaurant sales March 31,
2018
 As a % of company-owned restaurant sales
 
 Cost of sales:       
 Food, beverage and packaging costs$4,816
 35.6 % $3,684
 33.5 %
 Labor costs3,024
 22.4 % 2,385
 21.7 %
 Other restaurant operating expenses2,277
 16.8 % 1,606
 14.6 %
 Vendor rebates(387) (2.9)% (278) (2.5)%
 Total cost of sales$9,730
 72.0 % $7,397
 67.2 %
Food, beverage and packaging costs as a percentage of company-owned restaurant sales were 33.1%35.6% in the thirteen weeks ended September 29, 2018,March 30, 2019, compared to 42.8%33.5% in the comparable period in 2017.2018. The decreaseincrease was primarily due to a 29.8% decrease10.0% increase in the cost of bone-in chicken wings as compared to the prior year period.
Labor costs as a percentage of company-owned restaurant sales were 22.1%22.4% for the thirteen weeks ended September 29, 2018,March 30, 2019, compared to 23.7%21.7% in the comparable period in 2017.2018. The decrease as a percentage of company-owned restaurant salesincrease was primarily due to our abilityinvestment in labor as well as training associated with the three franchised restaurants that we acquired in the fiscal fourth quarter of 2018 as we make investments to leverage costs dueprepare these restaurants to be refranchised in a future period. This increase is offset slightly by the increase in company-owned domestic same store sales increase of 5.0%4.7%.
Other restaurant operating expenses as a percentage of company-owned restaurant sales were 15.2%16.8% for the thirteen weeks ended September 29, 2018,March 30, 2019, compared to 16.9%14.6% in the comparable period in 2017.2018. The decreaseincrease as a percentage of company-owned restaurant sales was primarily due to our abilityan increase in Ad Fund contributions from 3% to leverage costs due4% of gross sales, as well as investments in repairs and maintenance associated with the three franchised restaurants that we acquired in the fiscal fourth quarter of 2018 as we make investments to prepare these restaurants to be refranchised in a future period. This increase was slightly offset by the increase in company-owned domestic same store sales increase of 5.0%4.7%.
Advertising expenses. During the thirteen weeks ended September 29, 2018,March 30, 2019, advertising expenses were $8.4$12.7 million, an increase of $0.8$4.1 million compared to $7.7$8.6 million in the comparable period in 2017. Under the new accounting guidance,2018. Ad Fund contributions increased from 3% to 4% of gross sales beginning in fiscal year 2019 and advertising expenses are recognized at the same time the related revenue is recognized, which does not necessarily correlate to the actual timing of the related advertising spend.
 Selling, general and administrative. During the thirteen weeks ended September 29, 2018,March 30, 2019, SG&A expense was $10.3$12.5 million, an increase of $2.2$1.7 million compared to $8.1$10.8 million in the comparable period in 2017.2018. The increase in SG&A expense was primarily due to an increase of $1.6 million in payrollheadcount related expenses as we make investments to support our strategic initiatives. Also contributing to the increase is $0.6 million associated with additional expenses to support our continued investment in our national advertising campaign. The remaining increases were in various SG&A items to support investments in technology and benefit expensesother initiatives. These year over year increases were offset by nonrecurring costs of $1.5 million incurred in the first quarter of 2018 related to planned headcount additions.our debt refinancing and payment of a special dividend.
Depreciation and amortization. During the thirteen weeks ended September 29, 2018,March 30, 2019, depreciation expense was $1.1$1.3 million, an increase of $0.3 million compared to $0.9$1.0 million in the comparable period in 2017.2018. The increase in depreciation and amortization was primarily due to additional amortization associated with reacquired franchise rights resulting from the acquisition of franchised restaurants.
Interest expense, net. During the thirteen weeks ended September 29, 2018,March 30, 2019, interest expense was $2.5$4.4 million, an increase of $1.2$2.7 million compared to $1.3$1.7 million in the comparable period in 2017.2018. The increase was primarily due to an increase in the principal amount of indebtednessa higher average outstanding debt balance and applicable interest rate related to the refinancing of the 2016 Facility in January 2018.our securitized debt facility.
Income tax expense. Income tax expense was $1.5$0.8 million in the thirteen weeks ended September 29, 2018,March 30, 2019, yielding an effective tax rate of 19.4%10.3%, compared to an effective tax rate of 36.4%21.2% in the prior year. The decrease in the effective tax rate was due to the reduction in the federal statutory rate for the thirteen weeks ended September 29, 2018 from 35% to 21% effective the first day of fiscal 2018, as well as $0.3$1.2 million in tax benefits resulting from the recognition of excess tax benefits from stock-based compensation in income tax expense compared to $0.1$0.4 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):
Thirteen Weeks Ended Increase / (Decrease)Thirteen Weeks Ended Increase / (Decrease)
September 29,
2018
 September 30,
2017
 $ %March 30,
2019
 March 31,
2018
 $ %
Revenue:              
Franchise segment$26,401
 $23,451
 $2,950
 12.6 %$34,538
 $26,386
 $8,152
 30.9 %
Company segment11,845
 9,672
 2,173
 22.5 %13,515
 11,003
 2,512
 22.8 %
Total segment revenue$38,246
 $33,123
 $5,123
 15.5 %$48,053
 $37,389
 $10,664
 28.5 %
              
Segment Profit:              
Franchise segment$7,663
 $7,763
 $(100) (1.3)%$9,255
 $8,387
 $868
 10.3 %
Company segment2,693
 933
 1,760
 188.6 %2,516
 2,641
 (125) (4.7)%
Total segment profit$10,356
 $8,696
 $1,660
 19.1 %$11,771
 $11,028
 $743
 6.7 %
Franchise segment. During the thirteen weeks ended September 29, 2018,March 30, 2019, franchise segment revenue was $26.4$34.5 million, an increase of $3.0$8.2 million, or 12.6%30.9%, compared to $23.5$26.4 million in the comparable period in 2017.2018. Royalty revenue increased $2.0$2.5 million due to 124111 net franchise restaurant openings since September 30, 2017March 31, 2018 and domestic same store sales growth of 6.3%7.1%. Advertising fees and related income increased $1.0$4.6 million primarily due to the increase in Ad Fund contributions from 3% to 4% of gross sales beginning in fiscal year 2019 as well as the increase in system-wide sales from Septemberin the thirteen weeks ended March 30, 20172019 compared to September 29,the thirteen weeks ended March 31, 2018. Franchise fees increased $0.9 million due to higher termination fees recognized in the current period.
During the thirteen weeks ended September 29, 2018,March 30, 2019, franchise segment profit was $7.7$9.3 million, a decreasean increase of $0.1$0.9 million, or 1.3%10.3%, compared to $7.8$8.4 million in the comparable period in 2017,2018, primarily due to increasesthe growth in SG&A, primarily related to planned headcount additions.franchise segment revenue.
Company segment. During the thirteen weeks ended September 29, 2018,March 30, 2019, company-owned restaurant sales were $11.8$13.5 million, an increase of $2.2$2.5 million, or 22.5%22.8%, compared to $9.7$11.0 million in the comparable period in 2017. The increase was primarily due to the acquisition of three franchised restaurants since the prior year comparable period, resulting in additional sales of $1.5 million and an increase in company-owned domestic same store sales of 5.0%, which was driven by both an increase in transactions and an increase in average transaction size.
During the thirteen weeks ended September 29, 2018, company segment profit was $2.7 million, an increase of $1.8 million, or 188.6%, compared to $0.9 million in the comparable period in 2017. The increase was due to the leveraging of fixed costs due to company-owned same store sales growth of 5.0%, as well as a 29.8% decrease in the cost of bone-in chicken wings. Additionally, a combined profit of $0.5 million from the three additional company-owned locations acquired from franchisees in the periods subsequent to September 30, 2017, further increased company segment profit in the thirteen weeks ended September 29, 2018 compared to the prior year period.

Thirty-Nine Weeks Ended September 29, 2018 compared to Thirty-Nine Weeks Ended September 30, 2017
The following table sets forth our results of operations for the thirty-nine weeks ended September 29, 2018 and September 30, 2017 (dollars in thousands):
 Thirty-Nine Weeks Ended Increase / (Decrease)
 September 29,
2018
 September 30,
2017
 $ %
Revenue:       
Royalty revenue, franchise fees and other$52,772
 $48,735
 $4,037
 8.3 %
Advertising fees and related income25,574
 22,313
 3,261
 14.6 %
Company-owned restaurant sales34,326
 27,063
 7,263
 26.8 %
Total revenue112,672
 98,111
 14,561
 14.8 %
Costs and expenses:       
Cost of sales (1)
23,182
 21,290
 1,892
 8.9 %
Advertising expenses25,283
 24,522
 761
 3.1 %
Selling, general and administrative31,196
 24,485
 6,711
 27.4 %
Depreciation and amortization3,163
 2,407
 756
 31.4 %
Total costs and expenses82,824
 72,704
 10,120
 13.9 %
Operating income29,848
 25,407
 4,441
 17.5 %
Interest expense, net6,623
 3,908
 2,715
 69.5 %
Income before income tax expense23,225
 21,499
 1,726
 8.0 %
Income tax expense3,925
 5,631
 (1,706) (30.3)%
Net income$19,300
 $15,868
 $3,432
 21.6 %
(1) Exclusive of depreciation and amortization, shown separately.
Total revenue. During the thirty-nine weeks ended September 29, 2018, total revenue was $112.7 million, an increase of $14.6 million, or 14.8%, compared to $98.1 million in the comparable period in 2017.
Royalty revenue, franchise fees and other. During the thirty-nine weeks ended September 29, 2018, royalty revenue, franchise fees and other was $52.8 million, an increase of $4.0 million, or 8.3%, compared to $48.7 million in the comparable period in 2017. Royalty revenue increased $6.6 million due to 124 net franchise restaurant openings since September 30, 2017 and domestic same store sales growth of 6.7%. Other revenue decreased $2.6 million, primarily due to a one-time payment received in conjunction with a new vendor agreement that was executed during the first quarter of 2017. The funding from this agreement was used to support our national advertising campaign.
Advertising fees and related income. During the thirty-nine weeks ended September 29, 2018, advertising fees and related income was $25.6 million, an increase of $3.3 million, or 14.6%, compared to $22.3 million in the comparable period in 2017. Advertising fees increased primarily due to the increase in system-wide sales in the thirty-nine weeks ended September 29, 2018 compared to the thirty-nine weeks ended September 30, 2017.
Company-owned restaurant sales. During the thirty-nine weeks ended September 29, 2018, company-owned restaurant sales were $34.3 million, an increase of $7.3 million, compared to $27.1 million in the comparable period in 2017.2018. The increase was primarily due to the acquisition of five franchised restaurants since the prior year comparable period, resulting in additional sales of $5.0$1.6 million and an increase in company-owned domestic same store sales of 6.8%4.7%, which was primarily driven by both an increase in transactions and an increase in average transaction size.transactions.
Cost of sales. During the thirty-ninethirteen weeks ended September 29, 2018, costMarch 30, 2019, company segment profit was $2.5 million, a decrease of sales was $23.2 million, an increase of $1.9$0.1 million, or 8.9%4.7%, compared to $21.3$2.6 million in the comparable period in 2017. Cost of sales as a percentage of company-owned restaurant sales was 67.5% in the thirty-nine weeks ended September 29, 2018 compared to 78.7% in the prior year period.


The table below presents the major components of cost of sales (dollars in thousands):
  Thirty-Nine Weeks Ended
  September 29,
2018
 As a % of company-owned restaurant sales September 30,
2017
 As a % of company-owned restaurant sales
 
 Cost of sales:       
 Food, beverage and packaging costs$11,306
 32.9 % $11,002
 40.7 %
 Labor costs7,555
 22.0 % 6,535
 24.1 %
 Other restaurant operating expenses5,190
 15.1 % 4,431
 16.4 %
 Vendor rebates(869) (2.5)% (678) (2.5)%
 Total cost of sales$23,182
 67.5 % $21,290
 78.7 %
Food, beverage and packaging costs as a percentage of company-owned restaurant sales were 32.9% in the thirty-nine weeks ended September 29, 2018, compared to 40.7% in the comparable period in 2017.2018. The decrease iswas primarily due to a 21.5% decrease in the cost of bone-in chicken wings as compared to the prior year period.
Labor costs as a percentage of company-owned restaurant sales were 22.0% for the thirty-nine weeks ended September 29, 2018, compared to 24.1% in the comparable period in 2017. The decrease as a percentage of company-owned restaurant sales was primarily due to our ability to leverage costs as a result of the company-owned domestic same store sales10.0% increase of 6.8%.
Other restaurant operating expenses as a percentage of company-owned restaurant sales were 15.1% for the thirty-nine weeks ended September 29, 2018, compared to 16.4% in the comparable period in 2017. The decrease as a percentage of company-owned restaurant sales was primarily due to our ability to leverage costs as a result of the company-owned domestic same store sales increase of 6.8%.
Advertising expenses. During the thirty-nine weeks ended September 29, 2018, advertising expenses were $25.3 million, an increase of $0.8 million compared to $24.5 million in the comparable period in 2017. Under the new accounting guidance, 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 29, 2018, SG&A expense was $31.2 million, an increase of $6.7 million compared to $24.5 million in the comparable period in 2017. The increase in SG&A expense was primarily due to nonrecurring costs of $1.5 million related to the refinancing of the 2016 Facility and subsequent special dividend payout, which occurred in the first quarter of 2018. Also contributing to the increase in SG&A were increases in payroll and benefits expenses associated with planned headcount additions.
Depreciation and amortization. During the thirty-nine weeks ended September 29, 2018, depreciation expense was $3.2 million, an increase of $0.8 million, compared to $2.4 million in the comparable period in 2017. The increase in depreciation and amortization was primarily due to additional amortization associated with reacquired franchise rights resulting from the acquisition of franchised restaurants.
Interest expense, net. During the thirty-nine weeks ended September 29, 2018, interest expense was $6.6 million, an increase of $2.7 million compared to $3.9 million in the comparable period in 2017. The increase was primarily due to an increase in the principal amount of indebtedness related to the refinancing of the 2016 Facility in January 2018 and an increase in the applicable interest rate.
Income tax expense. Income tax expense was $3.9 million in the thirty-nine weeks ended September 29, 2018, yielding an annual effective tax rate of 16.9%, compared to an annual effective tax rate of 26.2% in the comparable period in 2017. The decrease in the effective tax rate was due to the reduction in the federal statutory rate from 35% to 21% effective the first day of fiscal 2018. The effective tax rate was further impacted by excess tax benefits of $1.8 million during the thirty-nine weeks ended September 29, 2018, which is lower than the excess tax benefits in the prior year period of $2.5 million.

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 29,
2018
 September 30,
2017
 $ %
Revenue:       
Franchise segment$78,346
 $71,048
 $7,298
 10.3%
Company segment34,326
 27,063
 7,263
 26.8%
Total segment revenue$112,672
 $98,111
 $14,561
 14.8%
        
Segment Profit:       
Franchise segment$23,418
 $22,317
 $1,101
 4.9%
Company segment7,892
 3,090
 4,802
 155.4%
Total segment profit$31,310
 $25,407
 $5,903
 23.2%
Franchise segment. During the thirty-nine weeks ended September 29, 2018, franchise segment revenue was $78.3 million, an increase of $7.3 million, or 10.3%, compared to $71.0 million in the comparable period in 2017. Royalty revenue increased $6.6 million, primarily due to 124 net franchise restaurant openings since September 30, 2017 and domestic same store sales growth of 6.7%. Other revenue decreased $2.6 million, primarily due to an decrease in vendor rebates related to a one-time payment received in conjunction with a vendor agreement executed during the first quarter of 2017.
During the thirty-nine weeks ended September 29, 2018, franchise segment profit was $23.4 million, an increase of $1.1 million, or 4.9%, compared to $22.3 million in the comparable period in 2017, primarily due to increases in revenue, which was offset by increases in payroll and benefit expenses related to planned headcount additions.
Company segment. During the thirty-nine weeks ended September 29, 2018, company-owned restaurant sales were $34.3 million, an increase of $7.3 million, compared to $27.1 million in the comparable period in 2017. The increase was primarily due to the acquisition of five franchised restaurants since the prior year comparable period resulting in additional sales of $5.0 million and an increase in company-owned domestic same store sales of 6.8%, which was driven by both an increase in transactions and an increase in average transaction size.
During the thirty-nine weeks ended September 29, 2018, company segment profit was $7.9 million, an increase of $4.8 million, or 155.4%, compared to $3.1 million in the comparable period in 2017. The increase was due to a combined profit of $1.8 million from the five additional company-owned locations acquired from franchisees in the periods subsequent to September 30, 2017. Additionally, the 21.5% decrease in the cost of bone-in chicken wings as well as the leveragingan increase in Ad Fund contributions from 3% to 4% of fixed costs duegross sales beginning in fiscal year 2019. Also contributing to the increase was an increase in labor and other restaurant operating expenses associated with the three franchised restaurants that we acquired in the fiscal fourth quarter of 2018 as we make investments to prepare these restaurants to be refranchised in a future period. The decrease was offset slightly by an increase in company-owned domestic same store sales growth of 6.8%4.7%, further increased company segment profitwhich was primarily driven by an increase in the thirty-nine weeks ended September 29, 2018 compared to the prior year period.

transactions.

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 negative working capital. We believe that our sources of liquidity and capital will be sufficient to finance our continued operations and growth strategy overfor at least the next twelve months.
The following table shows summary cash flows information for the thirty-ninethirteen weeks ended September 29,March 30, 2019 and March 31, 2018 and September 30, 2017 (in thousands):
Thirty-Nine Weeks EndedThirteen Weeks Ended
September 29,
2018
 September 30,
2017
March 30,
2019
 March 31,
2018
Net cash provided by (used in):      
Operating activities$30,623
 $19,867
$9,598
 $9,456
Investing activities(8,879) (5,783)(641) (2,326)
Financing activities(18,326) (11,358)(3,246) (5,947)
Net change in cash and cash equivalents$3,418
 $2,726
$5,711
 $1,183
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 franchiseesfranchise 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 $30.6$9.6 million in the thirty-ninethirteen weeks ended September 29, 2018, an increaseMarch 30, 2019, which was relatively consistent with net cash provided by operating activities of $10.8 million from $19.9$9.5 million in 2017. The increase was primarily due to the increase in net income as well as timing of changes in working capital.2018.
Investing activities. Our net cash used in investing activities was $8.9$0.6 million in the thirty-ninethirteen weeks ended September 29, 2018, an increaseMarch 30, 2019, a decrease of $3.1$1.7 million from $5.8$2.3 million used in investing activities in 2017.2018. The increasedecrease was primarily due to thean acquisition of three restaurantsa restaurant from franchiseesa franchisee during the thirty-ninethirteen weeks ended September 29, 2018 and a $1.0 million increase in property and equipment purchases.March 31, 2018.
Financing activities. Our net cash used in financing activities was $18.3$3.2 million in the thirty-ninethirteen weeks ended September 29, 2018, an increaseMarch 30, 2019, a decrease of $7.0$2.7 million from cash used in financing activities of $11.4$5.9 million in 2017.2018. The increasedecrease was due to the payment of regular quarterly dividends in the thirty-nine weeks ended September 29, 2018, a special dividend paid in the first quarter of 2018 totaling $92.7 million. This was partiallymillion, offset by net borrowings of long-term debt of $81.6 million during the thirty-nine weeks ended September 29, 2018, compared to net payments of $10.6$89.6 million in the comparable period in 2017.2018.
Senior secured creditSecuritized financing facility. On January 30,November 14, 2018, we entered into an amended $250.0a securitized financing facility comprised of $320 million of Series 2018-1 4.97% Fixed Rate Senior Secured Notes, Class A-2 (the “Class A-2 Notes”) as well as a variable funding note facility of Series 2018-1 Variable Funding Senior Notes, Class A-1 (the “Variable Funding Notes” and, together with the Class A-2 Notes, the “Notes”), which will allow us to borrow up to $20 million as needed on a revolving basis. We utilized approximately $314 million of proceeds from the Class A-2 Notes to repay the approximately $215 million of indebtedness under our 2018 senior secured credit facility (the “2018 Facility”), which replaced the 2016 Facility. The 2018 Facility consists of a term loan facility in the aggregate amount of $100.0 million and a revolving credit facility up to an aggregate amount of $150.0 million. The 2018 Facility has a five year term and matures on January 30, 2023.
We utilized approximately $230 million of proceeds from the 2018 Facility to refinance $133.8 million of indebtedness under the 2016 Facility and to pay a special cash dividend of $92.7approximately $89.7 million to our stockholders.
The 2018 Facility bearsClass A-2 Notes are subject to 1% annual amortization, bear interest at our option, at either the prime rate plus an applicable margin ranging from 0.75% to 1.75% or at an adjusted LIBOR rate plus an applicable margin ranging from 1.75% to 2.75%, in each case based on our lease adjusted leverage ratio.
The 2018 Facility is secured by a first-priority security interest in substantially all of our assets. Obligations under the 2018 Facility are guaranteed by the Company and its subsidiaries. The 2018 Facility also requires compliance with certain financial and non-financial covenants, including a specified lease adjusted leverage ratio and a specified fixed charge coverage ratio. Failure to comply with these covenants in the future could cause an acceleration of outstanding amounts under the term loan and revolver and restrict us from borrowing under the revolving credit facility to fund our liquidity requirements.
As of September 29, 2018, the term loan facility and the revolving credit facility had outstanding balances of $96.3 million and $119.1 million, respectively, bearing interest at 4.49%.

Refinancing. Subsequent to the fiscal third quarter of 2018, the Company announced its intention to complete a refinancing transaction. The Company intends to issue approximately $300 million of new, fixed rate notesof 4.97% per annum, and usehave an anticipated repayment date of December 2023. Interest and principal payments on the proceeds to retire all of the Company’s existing debt, to pay transaction costs associated with the refinancing, and for general corporate purposes. The Company also expects to enter intoNotes are payable on a new $25 million variable funding note facility and anticipates that the refinancing transaction will close during the fiscal fourth quarter of 2018.quarterly basis.
Dividends. In the third quarterWe paid a quarterly cash dividend of 2017, we announced that our Board$0.09 per share of Directors authorized the initiation of a regular dividend program under which we intend to pay quarterly dividends on our common stock, subject to quarterly declarations by our Board of Directors. Dividends of $0.07 per share were announcedaggregating $2.6 million during the first and second quartersquarter of 2018, and were paid on March 23, 2018 and June 18, 2018, respectively. The dividend was increased to $0.09 per share during the third quarter and was paid on September 18, 2018.2019. On October 26, 2018,May 6, 2019, the Company’s Board of Directors approved a dividend of $0.09 per share, to be paid on December 18, 2018.June 21, 2019, totaling approximately $2.7 million.
Separate from our regular dividend program, during the first quarter of 2018, we paid a special cash dividend of $3.17 per share in connection with the execution of the 2018 Facility.
We do not currently expect the restrictions in the 2018 Facilityour debt instruments to impact our ability to make regularregularly quarterly dividend paymentsdividends pursuant to our regularquarterly dividend program. However, any future declarations of dividends, as well as the amount and timing of such dividends, is subject to capital availability and the discretion of our Boardboard of Directors,directors, which must evaluate, among other things, whether cash dividends are in the best interest of our stockholders.

Contractual Obligations
In connection withThere have been no material changes to our contractual obligations disclosed in the 2018 Facility, principal paymentscontractual obligations section of $1,250,000 are due quarterly, with all unpaid amounts due at maturityManagement’s Discussion and Analysis of Financial Condition and Results of Operations in January 2023.the Annual Report. For additional information regarding our long-term debt and our commitments and contingencies, see Note 10, Debt Obligations and Note 11, Commitments and Contingencies in the Annual Report and the corresponding Notes 6 and 8 in the notes to our unaudited consolidated financial statements included elsewhere in this Quarterly Report.
Off-Balance Sheet Arrangements
We had no off-balance sheet arrangements or obligations except for leases, as of September 29, 2018.March 30, 2019.
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 to our consolidated financial statements, Basis of Presentation, for a summary of recent accounting pronouncements.

Special Note Regarding Forward-Looking Statements
This document containsreport includes statements about future eventsof our expectations, intentions, plans and expectationsbeliefs that constitute forward-looking statements“forward-looking statements” within the meaning of Section 27A of the federal securities laws. Forward-lookingSecurities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 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 beliefs, assumptions, and expectationsuse of management regarding our future financial and operating performance and growth plans, taking into accountforward-looking terminology, including the information currently available to us. Such statements include, in particular, statements about our plans, strategies, and prospects. Words such asterms “may,” “will,” “should,” “expect,” “anticipate,” “intend,” “plan,” “anticipate,” “believe,” “think,” “estimate,” “seek,” “estimate,“expect,” “predict,” “could,” “would,” “will,” “project,” “may,” “target,” “potential,” “continue,” and“potential” or, in each case, their negative or other variations of such words and similar expressions are intended to identify such forward-looking statements. Examples ofor comparable terminology, although not all forward-looking statements in this Quarterly Report may include, but are not limitedaccompanied 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 expectations with respect to our future revenue, system-wide sales, new restaurant openings, unit level performance, stockholder value, brand awareness, international expansion, liquidity, expensesoperations and consumer appeal. These statements are not guaranteesbusiness environments, all of future performance and involve assumptions and risks and uncertainties thatwhich are difficult to predict and many of which are outside ofbeyond our control. Therefore,control, that could cause our actual outcomes and results mayto differ materially from what isthose matters expressed or implied or forecasted in suchby these forward-looking statements and you should not rely on such statements.
Such risks and other factors include those listed in Item 1A., “Risk Factors,” and elsewhere in this report, including the following factors that could cause actual results or outcomes to differ from the results expressed or implied by forward-looking statements include, among other things:statements:

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;

our ability to effectively compete within our industry;

our ability to successfully expand into new markets;

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;

risks associated with our ability to implement our domesticfuture performance and international growth strategies;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;

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;

our ability to successfully advertisecomply with the terms of our securitized debt financing and marketgenerate sufficient cash flows to satisfy our business;significant debt service obligations thereunder;

risks associated with changes in customer preferencesour ability to attract and perceptions;retain our executive officers and other key employees; and

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

our ability to comply with the covenants and restrictions in the 2018 Facility; and

our ability to complete our planned recapitalization transaction.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. WeWhen 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, except as required by applicable securities laws, 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 25.6%28.0% and 31.7%27.2% of our company-owned restaurant cost of sales during the thirty-ninethirteen weeks ended September 29,March 30, 2019 and March 31, 2018, and September 30, 2017, respectively. A hypothetical 10% increase in the bone-in chicken wing costs would have increased costs of sales by approximately $0.6$0.3 million during the thirty-ninethirteen weeks ended September 29, 2018.March 30, 2019. 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. We are subjectAs discussed in “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation” under “Liquidity and Capital Resources,” the Company entered into a securitized financing facility on November 14, 2018, issuing $320.0 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 entered into a revolving financing facility which allows for the drawing of up to $20.0 million using various credit instruments, including a letter of credit facility. 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.
Our long-term debt, including current portion, consisted entirely of the $320.0 million incurred under the Notes as of March 30, 2019 (excluding unamortized debt issuance costs and the effect of purchase accounting adjustments). The Company’s predominantly fixed-rate debt structure has reduced the Company’s exposure to interest rate risk in connection with borrowings under the 2018 Facility, which bears interest at variable rates. As of September 29, 2018, we had $215.4 million outstanding under the 2018 Facility. Derivative financial instruments, such as interest rate swap agreements and interest rate cap agreements, may be used for the purpose of managing fluctuating interest rate exposuresincreases that exist from our variable rate debt obligations that are expected to remain outstanding. Interest rate changes do notcould adversely affect the market value of such debt, but could impact the amount of our interest payments, and accordingly, our futureits earnings and cash flows, assuming other factors are held constant. A hypothetical 1.0% percentage point increase or decreasebut the Company remains exposed to changes in market interest rates reflected in the fair value of the debt and to the risk that the Company may in the future need to refinance maturing debt with new debt at a higher rate. The Company is exposed to interest rate associatedincreases under the Variable Funding Notes; however, the Company had no outstanding borrowings under its Variable Funding Notes, with our$5.0 million of letters of credit facilities would have resulted in a $2.2 million impact on interest expense on an annualized basis.outstanding, as of March 30, 2019.

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 29, 2018,March 30, 2019, pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as amended (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 risk factors associated with our business is contained in the “Risk Factors” section of our Annual Report.
There have been no material changes to our Risk Factors as previously reported.
Item 2.     Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3.     Defaults upon Senior Securities
None.
Item 4.     Mine Safety Disclosures
Not applicable.
Item 5.     Other Information
None.

Item 6.    Exhibits
Index to Exhibits
Exhibit No.Description
3.1
3.2
10.110.1†
10.210.2†
10.3†
10.4*†
31.1*
31.2*
32.1**
32.2**
101 INS*XBRL Instance Document
101 SCH*XBRL Taxonomy Extension Schema Document
101 CAL*XBRL Taxonomy Extension Calculation Linkbase Document
101 DEF*XBRL Taxonomy Extension Definition Linkbase Document
101 LAB*XBRL Taxonomy Extension Label Linkbase Document
101 PRE*XBRL Taxonomy Extension Presentation Linkbase Document
 
* Filed herewith.
** Furnished, not filed.

† Indicates management agreement.

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:October 29, 2018May 8, 2019 By:/s/ Charles R. Morrison
    Chairman and Chief Executive Officer
    (Principal Executive Officer)
     
Date:October 29, 2018May 8, 2019 By:/s/ Michael J. Skipworth
    Chief Financial Officer
    (Principal Financial and Accounting Officer)


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