Date: 10/30/2019 Form: 10-Q - Quarterly Report
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark one)
X
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 28, 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 class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, par value $0.01 per share
WING
NASDAQ Global Market
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes   ¨ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). x Yes   ¨ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer,” "accelerated filer,” "smaller reporting company,” and "emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
 
Accelerated filer
¨
Non-accelerated filer
¨
 
Smaller reporting company
 
 
 
Emerging growth company



If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes   x No
On October 29, 2019 there were 29,453,374 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.
 
 
 
 



3


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 28,
2019
 
December 29,
2018
 
(Unaudited)
 
 
Assets
 

 
 

Current assets
 

 
 

Cash and cash equivalents
$
9,472

 
$
12,493

Restricted cash
4,842

 
4,462

Accounts receivable, net
5,859

 
5,764

Prepaid expenses and other current assets
3,540

 
2,056

Advertising fund assets, restricted
8,470

 
5,131

Total current assets
32,183

 
29,906

Property and equipment, net
27,291

 
8,338

Goodwill
50,172

 
49,655

Trademarks
32,700

 
32,700

Customer relationships, net
13,241

 
14,233

Other non-current assets
12,480

 
4,917

Total assets
$
168,067

 
$
139,749

Liabilities and stockholders' deficit
 
 
 
Current liabilities
 
 
 
Accounts payable
$
2,359

 
$
2,750

Other current liabilities
17,962

 
16,201

Current portion of debt
8,200

 
2,400

Advertising fund liabilities
8,470

 
5,131

Total current liabilities
36,991

 
26,482

Long-term debt, net
308,081

 
309,374

Deferred revenues, net of current
22,058

 
21,885

Deferred income tax liabilities, net
4,355

 
4,866

Other non-current liabilities
8,157

 
1,972

Total liabilities
379,642

 
364,579

Commitments and contingencies (see Note 9)


 


Stockholders' deficit
 
 
 
Common stock, $0.01 par value; 100,000,000 shares authorized; 29,453,374 and 29,296,939 shares issued and outstanding as of September 28, 2019 and December 29, 2018, respectively
295

 
293

Additional paid-in-capital
337

 
1,036

Accumulated deficit
(212,207
)
 
(226,159
)
Total stockholders' deficit
(211,575
)
 
(224,830
)
Total liabilities and stockholders' deficit
$
168,067

 
$
139,749


See accompanying notes to consolidated financial statements.

4


WINGSTOP INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(amounts in thousands, except per share data)
(Unaudited)
 
Thirteen Weeks Ended
 
Thirty-Nine Weeks Ended
 
September 28,
2019
 
September 29,
2018
 
September 28,
2019
 
September 29,
2018
Revenue:
 
 
 
 
 

 
 

Royalty revenue, franchise fees and other
$
21,876

 
$
17,787

 
$
64,391

 
$
52,772

Advertising fees and related income
14,056

 
8,614

 
40,753

 
25,574

Company-owned restaurant sales
13,943

 
11,845

 
41,346

 
34,326

Total revenue
49,875

 
38,246

 
146,490

 
112,672

Costs and expenses:
 
 
 
 
 

 
 

Cost of sales (1)
10,339

 
8,040

 
30,642

 
23,182

Advertising expenses
12,652

 
8,431

 
38,359

 
25,283

Selling, general and administrative
13,527

 
10,285

 
39,463

 
31,196

Depreciation and amortization
1,408

 
1,134

 
4,019

 
3,163

Total costs and expenses
37,926

 
27,890

 
112,483

 
82,824

Operating income
11,949

 
10,356

 
34,007

 
29,848

Interest expense, net
4,243

 
2,545

 
12,952

 
6,623

Income before income tax expense
7,706

 
7,811

 
21,055

 
23,225

Income tax expense
1,801

 
1,518

 
3,626

 
3,925

Net income
$
5,905

 
$
6,293

 
$
17,429

 
$
19,300

 
 
 
 
 
 
 
 
Earnings per share
 
 
 
 
 
 
 
Basic
$
0.20

 
$
0.21

 
$
0.59

 
$
0.66

Diluted
$
0.20

 
$
0.21

 
$
0.59

 
$
0.65

 
 
 
 
 
 
 
 
Weighted average shares outstanding
 
 
 
 
 
 
 
Basic
29,449

 
29,284

 
29,401

 
29,210

Diluted
29,696

 
29,584

 
29,667

 
29,561

 
 
 
 
 
 
 
 
Dividends per share
$
0.11

 
$
0.09

 
$
0.29

 
$
3.40


(1) Cost of sales includes all operating expenses of company-owned restaurants, including advertising expenses, and excludes depreciation and amortization, which are presented separately.
See accompanying notes to consolidated financial statements.



5


WINGSTOP INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Deficit
For the Thirty-Nine Weeks Ended September 29, 2018
(amounts in thousands, except share data)
(Unaudited)
 
Common Stock
 
 
 
 
 
 
 
Shares
 
Amount
 
Additional
Paid-In Capital
 
Accumulated Deficit
 
Total Stockholders’ Deficit
Balance at December 30, 2017
29,092,669

 
$
291

 
$
262

 
$
(58,971
)
 
$
(58,418
)
Net income

 

 

 
6,168

 
6,168

Issuance of common stock
41,159

 
1

 
(1
)
 

 

Exercise of stock options
25,182

 

 
165

 

 
165

Tax payments for restricted stock upon vesting
(3,187
)
 

 

 
(142
)
 
(142
)
Stock-based compensation expense

 

 
514

 

 
514

Dividends paid

 

 
(895
)
 
(93,902
)
 
(94,797
)
Balance at March 31, 2018
29,155,823

 
292

 
45

 
(146,847
)
 
(146,510
)
Net income

 

 

 
6,839

 
6,839

Issuance of common stock
5,105

 

 

 

 

Exercise of stock options
110,615

 
1

 
289

 

 
290

Stock-based compensation expense

 

 
742

 

 
742

Dividends paid

 

 
(1,038
)
 
(1,020
)
 
(2,058
)
Balance at June 30, 2018
29,271,543

 
293

 
38

 
(141,028
)
 
(140,697
)
Net income

 

 

 
6,293

 
6,293

Issuance of common stock
4,178

 

 

 

 

Exercise of stock options
21,130

 

 
51

 

 
51

Tax payments for restricted stock upon vesting
(804
)
 

 

 
(40
)
 
(40
)
Stock-based compensation expense

 

 
756

 

 
756

Dividends paid

 

 
(745
)
 
(1,877
)
 
(2,622
)
Balance at September 29, 2018
29,296,047

 
$
293

 
$
100

 
$
(136,652
)
 
$
(136,259
)

See accompanying notes to consolidated financial statements.


6


WINGSTOP INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Deficit
For the Thirty-Nine Weeks Ended September 28, 2019
(amounts in thousands, except share data)
(Unaudited)
 
Common Stock
 
 
 
 
 
 
 
Shares
 
Amount
 
Additional
Paid-In Capital
 
Accumulated Deficit
 
Total Stockholders’ Deficit
Balance at December 29, 2018
29,296,939

 
$
293

 
$
1,036

 
$
(226,159
)
 
$
(224,830
)
Adjustment for ASC 842 adoption

 

 

 
154

 
154

Net income

 

 

 
6,606

 
6,606

Issuance of common stock
60,683

 
1

 
(1
)
 

 

Exercise of stock options
54,253

 

 
158

 

 
158

Tax payments for restricted stock upon vesting
(12,469
)
 

 

 
(833
)
 
(833
)
Stock-based compensation expense

 

 
838

 

 
838

Dividends paid

 

 
(1,825
)
 
(746
)
 
(2,571
)
Balance at March 30, 2019
29,399,406

 
294

 
206

 
(220,978
)
 
(220,478
)
Net income

 

 

 
4,918

 
4,918

Issuance of common stock
12,339

 

 

 

 

Exercise of stock options
33,439

 
1

 
147

 

 
148

Tax payments for restricted stock upon vesting
(2,456
)
 

 

 
(226
)
 
(226
)
Stock-based compensation expense

 

 
1,928

 

 
1,928

Dividends paid

 

 
(1,389
)
 
(1,269
)
 
(2,658
)
Balance at June 29, 2019
29,442,728

 
295

 
892

 
(217,555
)
 
(216,368
)
Net income

 

 

 
5,905

 
5,905

Issuance of common stock
2,733

 

 

 

 

Exercise of stock options
8,827

 

 
174

 

 
174

Tax payments for restricted stock upon vesting
(914
)
 

 

 
(84
)
 
(84
)
Stock-based compensation expense

 

 
2,043

 

 
2,043

Dividends paid

 

 
(2,772
)
 
(473
)
 
(3,245
)
Balance at September 28, 2019
29,453,374

 
$
295

 
$
337

 
$
(212,207
)
 
$
(211,575
)
See accompanying notes to consolidated financial statements.


7



WINGSTOP INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(amounts in thousands)
(Unaudited)
 
Thirty-Nine Weeks Ended
 
September 28,
2019
 
September 29,
2018
 
 
 
 
Operating activities
 

 
 

Net income
$
17,429

 
$
19,300

Adjustments to reconcile net income to cash provided by operating activities:
 
 
 
Depreciation and amortization
4,019

 
3,163

Deferred income taxes
(555
)
 
(278
)
Stock-based compensation expense
4,809

 
2,012

Amortization of debt issuance costs
1,179

 
265

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(188
)
 
649

Prepaid expenses and other assets
(979
)
 
(280
)
Advertising fund assets and liabilities, net
3,164

 
4,457

Accounts payable and other current liabilities
(1,014
)
 
587

Deferred revenue
528

 
877

Other non-current liabilities
194

 
(129
)
Cash provided by operating activities
28,586

 
30,623

 
 
 
 
Investing activities
 
 
 
Purchases of property and equipment
(21,082
)
 
(2,883
)
Acquisition of restaurant from franchisee
(1,229
)
 
(5,996
)
Cash used in investing activities
(22,311
)
 
(8,879
)
 
 
 
 
Financing activities
 
 
 
Proceeds from exercise of stock options
480

 
506

Borrowings of long-term debt
5,000

 
231,108

Repayments of long-term debt
(1,600
)
 
(149,500
)
Payment of deferred financing costs
(15
)
 
(782
)
Tax payments for restricted stock upon vesting
(1,143
)
 
(182
)
Dividends paid
(8,474
)
 
(99,476
)
Cash used in financing activities
(5,752
)
 
(18,326
)
 
 
 
 
Net change in cash, cash equivalents, and restricted cash
523

 
3,418

Cash, cash equivalents, and restricted cash at beginning of period
20,940

 
6,392

Cash, cash equivalents, and restricted cash at end of period
$
21,463

 
$
9,810


See accompanying notes to consolidated financial statements.



8

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


(1)    Basis of Presentation
Basis of Presentation
Wingstop Inc., together with its consolidated subsidiaries (collectively, "Wingstop” or the "Company”), is in the business of franchising and operating Wingstop restaurants. As of September 28, 2019, 1,169 franchised restaurants were in operation domestically, and 141 franchised restaurants were in operation internationally. As of September 28, 2019, the Company owned and operated 30 restaurants.
The accompanying unaudited consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission ("SEC”) for interim financial information. Consequently, financial information and disclosures normally included in financial statements prepared annually in accordance with accounting principles generally accepted in the United States have been condensed or omitted. Balance sheet amounts are as of September 28, 2019 and December 29, 2018, and operating results are for the thirteen and thirty-nine weeks ended September 28, 2019 and September 29, 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 29, 2018.
The Company uses a 52/53-week fiscal year that ends on the last Saturday of the calendar year. Fiscal years 2019 and 2018 have 52 weeks.
Cash, Cash Equivalents, and Restricted Cash
Cash, cash equivalents, and restricted cash within the Consolidated Balance Sheets and the Consolidated Statements of Cash Flows as of September 28, 2019 and December 29, 2018 were as follows (in thousands):
 
September 28, 2019
 
December 29, 2018
Cash and cash equivalents
$
9,472

 
$
12,493

Restricted cash
4,842

 
4,462

Restricted cash, included in Advertising fund assets, restricted
7,149

 
3,985

Total cash, cash equivalents, and restricted cash
$
21,463

 
$
20,940


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

Recently Adopted 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 requiring lessees to recognize most leases on their balance sheets and making targeted changes to lessor accounting. The new guidance also requires additional disclosures about leases. The Company adopted the requirements of the new standard as of the

9

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

first day of fiscal year 2019 using the modified retrospective approach without restating comparative periods. As part of our adoption, we elected the package of practical expedients, as well as the hindsight practical expedient, permitted under the new guidance, which, among other things, allowed the Company to continue utilizing historical classification of leases. In addition, we elected not to separate non-lease components for our real estate leases.
The adoption of the new standard resulted in the recording of a right-of-use asset of approximately $8.5 million and lease liabilities of approximately $10.3 million, and had an immaterial impact on retained earnings as of the beginning of fiscal year 2019. The standard did not materially impact our Consolidated Statements of Operations and had no impact on cash flows.
(2)    Earnings per Share
Basic earnings per share is computed by dividing income available to common stockholders by the weighted average number of 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.
Basic weighted average shares outstanding is reconciled to diluted weighted average shares outstanding as follows (in thousands):
 
Thirteen Weeks Ended
 
Thirty-Nine Weeks Ended
 
September 28,
2019
 
September 29,
2018
 
September 28,
2019
 
September 29,
2018
Basic weighted average shares outstanding
29,449

 
29,284

 
29,401

 
29,210

Dilutive shares
247

 
300

 
266

 
351

Diluted weighted average shares outstanding
29,696

 
29,584

 
29,667

 
29,561


For the thirteen weeks ended September 28, 2019 and September 29, 2018, equity awards representing approximately 100 and 1,000 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 28, 2019 and September 29, 2018, equity awards representing approximately 2,000 and 4,000 shares, respectively, were excluded from the dilutive earnings per share calculation because the effect would have been anti-dilutive.
(3)    Dividends
The Company’s Board of Directors declared a quarterly dividend of $0.09 per share of common stock in each of the first two quarters, and a quarterly dividend of $0.11 per share of common stock in the third quarter, resulting in aggregate dividends of $8.5 million, or $0.29 per share of common stock, being paid during the thirty-nine weeks ended September 28, 2019.
Subsequent to the end of the third quarter, on October 29, 2019, the Company’s Board of Directors declared a quarterly dividend of $0.11 per share of common stock for stockholders of record as of November 29, 2019, to be paid on December 13, 2019, totaling approximately $3.2 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.

10

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

The carrying values of cash and cash equivalents, accounts receivable, and accounts payable approximate fair value due to their short-term nature. Fair value of debt is determined on a non-recurring basis, which results are summarized as follows (in thousands):
 
Fair Value
Hierarchy
 
September 28, 2019
 
December 29, 2018
 
 
Carrying
Value 
 
Fair Value
 
Carrying
Value 
 
Fair Value
Securitized Financing Facility:
 
 
 
 
 
 
 
 
 
2018-1 Class A-2 Senior Secured Notes (1)
Level 2
 
$
318,400

 
$
334,629

 
$
320,000

 
$
320,000

2018-1 Class A-1 Variable Funding Senior Notes (2)
Level 2
 
$
5,000

 
$
5,000

 
$

 
$

(1) The fair value of the 2018-1 Class A-2 Senior Secured Notes was estimated using available market information.
(2) The fair value of the 2018-1 Class A-1 Variable Funding Senior Notes was estimated based on the borrowing rates currently available for variable rate loans obtained from third party lending institutions and approximated the book value of such 2018-1 Class A-1 Variable Funding Senior Notes.
The Company also measures certain non-financial assets (primarily long-lived assets, intangible assets, and goodwill) at fair value on a non-recurring basis in connection with its periodic evaluations of such assets for potential impairment.
(5)    Property and Equipment
On June 19, 2019, the Company entered into an agreement to purchase an office building for a purchase price of $18.3 million, which closed in the third quarter of 2019 and was funded with cash on hand. The building will be used for the Company’s headquarters and is in Addison, Texas.
The building is included in construction in process within Property and equipment, net on the Consolidated Balance Sheet and will begin depreciating when the build out of the headquarters is complete and the assets are ready for their intended use, which we currently estimate to be at the beginning of fiscal year 2021.
(6)    Income Taxes
Income tax expense and the effective tax rate were $1.8 million and 23.4%, respectively, for the thirteen weeks ended September 28, 2019, and $1.5 million and 19.4%, respectively, for the thirteen weeks ended September 29, 2018. Income tax expense and the effective tax rate were $3.6 million and 17.2%, respectively, for the thirty-nine weeks ended September 28, 2019, and $3.9 million and 16.9%, respectively, for the thirty-nine weeks ended September 29, 2018.
Income tax expense for the thirteen and thirty-nine weeks ended September 28, 2019 includes $0.1 million and $1.9 million, respectively, in tax benefits resulting from the recognition of excess tax benefits from stock-based compensation, compared to $0.3 million and $1.8 million of tax benefits recognized in the thirteen and thirty-nine weeks ended September 29, 2018, respectively.
(7)    Debt Obligations
On 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 4.97% Fixed Rate Senior Secured Notes, Class A-2 (the "Class A-2 Notes”). Interest and principal are payable on a quarterly basis, and the Class A-2 Notes have an anticipated repayment date of December 2023.
In addition, the Issuer issued Series 2018-1 Variable Funding Senior Notes, Class A-1 (the "Variable Funding Notes”), which permit borrowings of up to a maximum principal amount of $20 million, which may be used to borrow amounts on a revolving basis and to issue letters of credit. As of September 28, 2019, there were borrowings of $5.0 million under the Variable Funding Notes, which were used for general corporate purposes. There were no borrowings outstanding under the Variable Funding Notes as of December 29, 2018. Further, as of September 28, 2019 and December 29, 2018, $4.0 million of letters of credit were outstanding against the Variable Funding Notes, which relate primarily to interest reserves required under the base indenture and related supplemental indenture. There were no amounts drawn down on the letter of credit as of September 28, 2019 or December 29, 2018.
Borrowings under the Variable Funding Notes accrue interest at a variable rate based on (i) the prime rate, (ii) overnight federal funds rates, (iii) the London interbank offered rate for U.S. Dollars or (iv) with respect to advances made by conduit investors, the weighted average cost of, or related to, the issuance of commercial paper allocated to fund or maintain such advances, in each case plus any applicable margin, as more fully set forth in the Variable Funding Note Purchase Agreement, dated November 14,

11

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

2018. There is a commitment fee on the unused portion of the Variable Funding Notes facility, which is 50 basis points, based on the utilization under the Variable Funding Notes facility. Interest is payable on a quarterly basis and accrues on a weekly basis. The weighted average interest rate for the Variable Funding Notes was 4.35% as of September 28, 2019.
The Class A-2 Notes and the Variable Funding Notes are referred to collectively as the "Notes” and were issued in a securitization transaction pursuant to which certain of the Company’s domestic and foreign revenue-generating assets, consisting principally of franchise-related agreements and intellectual property, were contributed or otherwise transferred to the Issuer and certain other limited-purpose, bankruptcy-remote, wholly owned indirect subsidiaries of the Company that act as guarantors of the Notes and that have pledged substantially all of their assets as collateral securing the Notes.
The Notes are subject to a series of financial and non-financial covenants and restrictions. As of September 28, 2019, the Company was in compliance with all such financial covenants.
As of September 28, 2019, the scheduled principal payments on the Class A-2 Notes were as follows (in thousands):
Remainder of fiscal year 2019
$
5,800

Fiscal year 2020
3,200

Fiscal year 2021
3,200

Fiscal year 2022
3,200

Fiscal year 2023
308,000

Total
$
323,400


(8)    Leases
The Company determines whether an arrangement is a lease at inception. The Company has operating leases for office and retail space, as well as equipment. Our leases have remaining terms of one year to eight years, some of which include options to extend the lease term for up to ten years. Lease terms may include options to renew when it is reasonably certain that the Company will exercise that option. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.
As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. We have lease agreements that contain both lease and non-lease components. For real estate leases, we account for lease components together with non-lease components (e.g., common-area maintenance).
Components of lease expense are as follows (in thousands):
 
Thirteen Weeks Ended
 
Thirty-Nine Weeks Ended
 
September 28,
2019
 
September 28,
2019
Operating lease cost (a)
$
532

 
$
1,561

Variable lease cost (b)
127

 
378

Total lease cost
$
659

 
$
1,939

(a) Includes short-term leases, which are immaterial.
(b) Primarily related to adjustments for inflation, common area maintenance, and property tax.
Supplemental cash flow information related to leases is as follows (dollar amounts in thousands):
 
Thirty-Nine Weeks Ended
 
September 28,
2019
Operating cash flow information:
 
Cash paid for amounts included in the measurement of lease liabilities
$
1,658

Non-cash activity:
 
Right-of-use assets obtained in exchange for new operating lease liabilities
$
832



12

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

Supplemental balance sheet information related to our operating leases is as follows:
 
Balance Sheet Classification
 
September 28, 2019
Right-of-use assets
Other non-current assets
 
$
8,137

Current lease liabilities
Other current liabilities
 
1,933

Non-current lease liabilities
Other non-current liabilities
 
7,910


Weighted average lease term and discount rate information related to leases is as follows:
 
Thirty-Nine Weeks Ended
 
September 28, 2019
Weighted average remaining lease term of operating leases
5.3 years

Weighted average discount rate of operating leases
4.82
%

Maturities of lease liabilities by fiscal year are as follows (in thousands):
Remainder of fiscal year 2019
$
586

Fiscal year 2020
2,351

Fiscal year 2021
2,145

Fiscal year 2022
1,943

Fiscal year 2023
1,666

Thereafter
2,447

Total lease payments
11,138

Less: imputed interest
(1,295
)
Present value of lease liabilities
$
9,843


As of December 29, 2018, minimum lease payments under non-cancelable operating leases by period were expected to be as follows (in thousands):
Fiscal year 2019
$
2,181

Fiscal year 2020
2,214

Fiscal year 2021
2,005

Fiscal year 2022
1,800

Fiscal year 2023
1,523

Thereafter
2,145

Total
$
11,868


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

13

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

(10)    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 $4.8 million in stock-based compensation expense for the thirty-nine weeks ended September 28, 2019, with a corresponding increase to additional paid-in-capital. Stock-based compensation expense is included in selling, general and administrative expense in the Consolidated Statements of Operations.
Stock Options
The following table summarizes stock option activity (in thousands, except term and per share data):
 
Stock Options
 
Weighted Average Exercise Price
 
Aggregate Intrinsic Value
 
Weighted Average Remaining Term
Outstanding - December 29, 2018
236

 
$
6.04

 
$
13,848

 
4.8
Options granted

 

 
 
 
 
Options exercised
(97
)
 
4.97

 
 
 
 
Options canceled
(4
)
 
26.21

 
 
 
 
Outstanding - September 28, 2019
135

 
$
5.78

 
$
10,979

 
4.0

The total grant-date fair value of stock options vested during the thirty-nine weeks ended September 28, 2019 was $0.5 million. The total intrinsic value of stock options exercised during the thirty-nine weeks ended September 28, 2019 was $6.7 million. As of September 28, 2019, total unrecognized compensation expense related to unvested stock options was $0.1 million, which is expected to be recognized over a weighted-average period of 0.4 years. During the thirty-nine weeks ended September 28, 2019, there was a modification to certain awards resulting in additional compensation expense of $0.2 million.
Restricted Stock Units and Performance Stock Units
The following table summarizes activity related to restricted stock units ("RSUs”) and performance stock units ("PSUs”) (in thousands, except per share data):
 
Restricted Stock Units
 
Weighted Average Grant Date Fair Value
 
Performance Stock Units
 
Weighted Average Grant Date Fair Value
Outstanding - December 29, 2018
103

 
$
36.18

 
130

 
$
40.46

Units granted
47

 
68.40

 
46

 
67.96

Units vested
(45
)
 
39.61

 
(26
)
 
44.15

Units canceled
(22
)
 
47.70

 
(21
)
 
50.48

Outstanding - September 28, 2019
83

 
$
52.78

 
129

 
$
50.01


The fair value of the Company’s RSUs and PSUs is based on the closing market price of the stock on the date of grant. The RSUs granted during the thirty-nine weeks ended September 28, 2019 vest over a three-year service period. As of September 28, 2019, total unrecognized compensation expense related to unvested RSUs was $3.3 million, which is expected to be recognized over a weighted-average period of 1.7 years.
The PSUs vest based on the outcome of certain performance criteria. For the PSUs granted during the thirty-nine weeks ended September 28, 2019, the amount of units 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 Company’s Omnibus Incentive Compensation 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. As of September 28, 2019, total unrecognized compensation expense related to unvested PSUs was $3.9 million. During the thirty-nine weeks ended September 28, 2019, there was a modification to certain awards resulting in additional compensation expense of $0.7 million.

14

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

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 28, 2019, total unrecognized compensation expense related to unvested restricted stock awards was $0.6 million, which will be recognized over a weighted average period of approximately 1.6 years.
(11)    Business Segments
The Company’s business operates in two segments: the "Franchise” segment and the "Company” segment. The Franchise segment consists of domestic and international franchise restaurants, which represent the majority of our system-wide restaurants. As of September 28, 2019, the Franchise segment consisted of 1,310 restaurants operated by Wingstop franchisees in the United States and international markets, compared to 1,189 franchised restaurants in operation as of September 29, 2018. Franchise segment revenue consists primarily of franchise royalty revenue, advertising fee revenue, franchise and development fees revenue, and international territory fees.
As of September 28, 2019, the Company segment consisted of 30 company-owned restaurants located in the United States, compared to 26 company-owned restaurants as of September 29, 2018. Company segment revenue is comprised of food and beverage sales at company-owned restaurants. Company segment expenses consist of operating expenses at company-owned restaurants and include food, beverage, labor, benefits, utilities, rent, and other operating costs.
The following table reflects revenue and profit information with respect to each segment and reconciles segment profits to income before taxes (in thousands):
 
Thirteen Weeks Ended
 
Thirty-Nine Weeks Ended
 
September 28,
2019
 
September 29,
2018
 
September 28,
2019
 
September 29,
2018
Revenue:
 
 
 
 
 
 
 
Franchise segment
$
35,932

 
$
26,401

 
$
105,144

 
$
78,346

Company segment
13,943

 
11,845

 
41,346

 
34,326

Total segment revenue
$
49,875

 
$
38,246

 
$
146,490

 
$
112,672

 
 
 
 
 
 
 
 
Segment Profit:
 
 
 
 
 
 
 
Franchise segment
$
9,631

 
$
7,663

 
$
27,107

 
$
23,418

Company segment
2,318

 
2,693

 
6,900

 
7,892

Total segment profit
11,949

 
10,356

 
34,007

 
31,310

Corporate and other (1)

 

 

 
1,462

Interest expense, net
4,243

 
2,545

 
12,952

 
6,623

Income before taxes
$
7,706

 
$
7,811

 
$
21,055

 
$
23,225

 
(1) Corporate and other includes corporate related items not allocated to reportable segments and consists primarily of transaction costs associated with the refinancings of our credit agreement and payment of a special dividend.
(12)    Restaurant Acquisition
On August 22, 2019, the Company acquired one existing restaurant from a franchisee. The total purchase price was $1.2 million, which was funded by cash flows from operations.

15

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

The following table summarizes the preliminary allocations of the purchase price to the estimated fair value of assets acquired and liabilities assumed at the date of the acquisition (in thousands):
 
Purchase Price Allocation
Working capital
$
3

Property and equipment
99

Reacquired franchise rights
610

Goodwill
517

Total purchase price
$
1,229


The estimates of fair value are preliminary, and are therefore subject to further refinement. The excess of the purchase price over the aggregate fair value of assets acquired was allocated to goodwill and is attributable to the benefits expected as a result of the acquisition, including sales and unit growth opportunities. As of September 28, 2019$0.5 million of the goodwill from the acquisition is expected to be deductible for federal income tax purposes.
Pro-forma financial information of the combined entities is not presented due to the immaterial impact of the financial results of the acquired restaurant on our consolidated financial statements.
The fair value measurement of tangible and intangible assets and liabilities as of the acquisition date is based on significant inputs not observed in the market and thus represents a Level 3 fair value measurement. Fair value measurements for reacquired franchise rights were determined using the income approach. Fair value measurements for property and equipment were determined using the cost approach.
(13)    Revenue from Contracts with Customers
Revenue from contracts with customers consists primarily of royalties, Ad Fund contributions, initial and renewal franchise fees, and upfront fees from development agreements and international territory agreements. The performance obligations under franchise agreements consist of (a) a franchise license, (b) pre-opening services, such as training, and (c) ongoing services, such as management of the Ad Fund, development of training materials and menu items, and restaurant monitoring. These performance obligations are highly interrelated, so they are not considered to be individually distinct and therefore are accounted for as a single performance obligation, which is satisfied by providing a right to use our intellectual property over the term of each franchise agreement.
Royalties and franchisee contributions to the Ad Fund, are calculated as a percentage of franchise restaurant sales over the term of the franchise agreement. Initial and renewal franchise fees are payable by the franchisee prior to the restaurant opening or at the time of a renewal of an existing franchise agreement. Franchise agreement royalties and Ad Fund contributions represent sales-based royalties that are related entirely to the performance obligation under the franchise agreement and are recognized as franchise sales occur. Additionally, initial and renewal franchise fees are recognized as revenue on a straight-line basis over the term of the respective agreement. The performance obligation under development agreements and international territory agreements generally consists of an obligation to grant exclusive development rights over a stated term. These development rights are not distinct from franchise agreements, so upfront fees paid by franchisees for development rights are deferred and apportioned to each franchise restaurant opened by the franchisee. The pro rata amount apportioned to each restaurant is accounted for as an initial franchise fee.
The following table represents a disaggregation of revenue from contracts with customers for the thirteen and thirty-nine weeks ended September 28, 2019 and September 29, 2018 (in thousands):
 
Thirteen Weeks Ended
 
Thirty-Nine Weeks Ended
 
September 28, 2019
 
September 29, 2018
 
September 28, 2019
 
September 29, 2018
Royalty revenue
$
19,065

 
$
15,461

 
$
55,409

 
$
45,797

Advertising fees and related income
14,056

 
8,614

 
40,753

 
25,574

Franchise fees
875

 
656

 
3,396

 
1,959



16

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

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

17


Item 2.     Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of the financial condition and results of operations of Wingstop Inc. (collectively with its direct and indirect subsidiaries on a consolidated basis, "Wingstop,” the "Company,” "we,” "our,” or "us”) should be read in conjunction with the accompanying unaudited consolidated financial statements and related notes in Part I, Item 1 of this Quarterly Report on Form 10-Q (this "Quarterly Report”) and with the audited consolidated financial statements and the related notes included in our Annual Report on Form 10-K for the fiscal year ended December 29, 2018 (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 14 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 2019 and 2018 each contain 52 weeks.
Overview
Wingstop is a high-growth franchisor and operator of restaurants that offer cooked-to-order, hand-sauced and tossed chicken wings.

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

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

Wingstop is the largest fast casual chicken wings-focused restaurant chain in the world and has demonstrated strong, consistent growth. As of September 28, 2019, we had a total of 1,340 restaurants in our system. Our restaurant base is 98% franchised, with 1,310 franchised locations (including 141 international locations) and 30 company-owned restaurants as of September 28, 2019.

18


Key Performance Indicators
Key measures that we use in evaluating our restaurants and assessing our business include the following:
Number of restaurants. Management reviews the number of new restaurants, the number of closed restaurants, and the number of acquisitions and divestitures of restaurants to assess net new restaurant growth.
 
Thirteen Weeks Ended
 
Thirty-Nine Weeks Ended
 
September 28,
2019
 
September 29,
2018
 
September 28,
2019
 
September 29,
2018
Domestic Franchised Activity:
 
 
 
 
 
 
 
Beginning of period
1,139

 
1,040

 
1,095

 
1,004

Openings
31

 
21

 
80

 
64

Closures

 
(2
)
 
(5
)
 
(6
)
Acquired by Company
(1
)
 

 
(1
)
 
(3
)
Restaurants end of period
1,169

 
1,059

 
1,169

 
1,059

 
 
 
 
 
 
 
 
Domestic Company-Owned Activity:
 
 
 
 
 
 
 
Beginning of period
29

 
26

 
29

 
23

Openings

 

 

 

Closures

 

 

 

Acquired from franchisees
1

 

 
1

 
3

Restaurants end of period
30

 
26

 
30

 
26

 
 
 
 
 
 
 
 
Total Domestic Restaurants
1,199

 
1,085

 
1,199

 
1,085

 
 
 
 
 
 
 
 
International Franchised Activity:
 
 
 
 
 
 
 
Beginning of period
135

 
122

 
128

 
106

Openings
7

 
8

 
18

 
24

Closures
(1
)
 

 
(5
)
 

Restaurants end of period
141

 
130

 
141

 
130

 
 
 
 
 
 
 
 
Total System-wide Restaurants
1,340

 
1,215

 
1,340

 
1,215

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.
 

19


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 28, 2019 and September 29, 2018 (dollars in thousands):
 
Thirteen Weeks Ended
 
Thirty-Nine Weeks Ended
 
September 28, 2019
 
September 29, 2018
 
September 28, 2019
 
September 29, 2018
Number of system-wide restaurants open at end of period
1,340

 
1,215

 
1,340

 
1,215

System-wide sales (1)
$
383,469

 
$
315,312

 
$
1,117,341

 
$
933,250

Domestic restaurant AUV
$
1,219

 
$
1,131

 
$
1,219

 
$
1,131

Domestic same store sales growth
12.3
%
 
6.3
%
 
10.7
%
 
6.7
%
Company-owned domestic same store sales growth
11.9
%
 
5.0
%
 
10.1
%
 
6.8
%
Total revenue
$
49,875

 
$
38,246

 
$
146,490

 
$
112,672

Net income
$
5,905

 
$
6,293

 
$
17,429

 
$
19,300

Adjusted EBITDA (2)
$
15,400

 
$
12,246

 
$
42,835

 
$
36,485

 
(1) The percentage of system-wide sales attributable to company-owned restaurants was 3.7% and 3.8% for the thirteen weeks ended September 28, 2019 and September 29, 2018, respectively, and was 3.8% and 3.7% for the thirty-nine weeks ended September 28, 2019 and September 29, 2018, respectively. The remainder was generated by franchised restaurants, as reported by our franchisees.
(2) EBITDA and Adjusted EBITDA are supplemental measures of our performance that are not required by, or presented in accordance with, accounting principles generally accepted in the United States ("GAAP”). EBITDA and Adjusted EBITDA are not measurements of our financial performance under GAAP and should not be considered as an alternative to net income or any other performance measure derived in accordance with GAAP, or as an alternative to cash flows from operating activities as a measure of our liquidity.
We define "EBITDA” as net income before interest expense, net, income tax expense, and depreciation and amortization. We define "Adjusted EBITDA” as EBITDA further adjusted for transaction costs, gains and losses on the disposal of assets, and stock-based compensation expense. There were no gains or losses on disposal of assets during the thirteen and thirty-nine weeks ended September 28, 2019 and September 29, 2018. We caution investors that amounts presented in accordance with our definitions of EBITDA and Adjusted EBITDA may not be comparable to similar measures disclosed by our competitors, because not all companies and analysts calculate EBITDA and Adjusted EBITDA in the same manner. We present EBITDA and Adjusted EBITDA because we consider them to be important supplemental measures of our performance and believe they are frequently used by securities analysts, investors, and other interested parties in the evaluation of companies in our industry. Management believes that investors’ understanding of our performance is enhanced by including these non-GAAP financial measures as a reasonable basis for comparing our ongoing results of operations. Many investors are interested in understanding the performance of our business by comparing our results from ongoing operations on a period-over-period basis and would ordinarily add back non-cash expenses such as depreciation and amortization, as well as items that are not part of normal day-to-day operations of our business.
Management uses EBITDA and Adjusted EBITDA:
as a measurement of operating performance because they assist us in comparing the operating performance of our restaurants on a consistent basis, as they remove the impact of items not directly resulting from our core operations;
for planning purposes, including the preparation of our internal annual operating budget and financial projections;
to evaluate the performance and effectiveness of our operational strategies;
to evaluate our capacity to fund capital expenditures and expand our business; and

20


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 and stock-based compensation 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 28, 2019 and September 29, 2018 (in thousands):
 
Thirteen Weeks Ended
 
Thirty-Nine Weeks Ended
 
September 28,
2019
 
September 29,
2018
 
September 28,
2019
 
September 29,
2018
Net income
$
5,905

 
$
6,293

 
$
17,429

 
$
19,300

Interest expense, net
4,243

 
2,545

 
12,952

 
6,623

Income tax expense
1,801

 
1,518

 
3,626

 
3,925

Depreciation and amortization
1,408

 
1,134

 
4,019

 
3,163

EBITDA
$
13,357

 
$
11,490

 
$
38,026

 
$
33,011

Additional adjustments:
 
 
 
 
 
 
 
Transaction costs (a)

 

 

 
1,462

Stock-based compensation expense (b)
2,043

 
756

 
4,809

 
2,012

Adjusted EBITDA
$
15,400

 
$
12,246

 
$
42,835

 
$
36,485

 
(a) Represents costs and expenses related to the refinancing of the senior secured credit facility dated June 30, 2016 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.

21


Results of Operations
Thirteen Weeks Ended September 28, 2019 compared to Thirteen Weeks Ended September 29, 2018
The following table sets forth our results of operations for the thirteen weeks ended September 28, 2019 and September 29, 2018 (dollars in thousands):
 
Thirteen Weeks Ended
 
Increase / (Decrease)
 
September 28,
2019
 
September 29,
2018
 
$
 
%
Revenue:
 
 
 
 
 
 
 
Royalty revenue, franchise fees and other
$
21,876

 
$
17,787

 
$
4,089

 
23.0
 %
Advertising fees and related income
14,056

 
8,614

 
5,442

 
63.2
 %
Company-owned restaurant sales
13,943

 
11,845

 
2,098

 
17.7
 %
Total revenue
49,875

 
38,246

 
11,629

 
30.4
 %
Costs and expenses:
 
 
 
 
 
 
 
Cost of sales (1)
10,339

 
8,040

 
2,299

 
28.6
 %
Advertising expenses
12,652

 
8,431

 
4,221

 
50.1
 %
Selling, general and administrative
13,527

 
10,285

 
3,242

 
31.5
 %
Depreciation and amortization
1,408

 
1,134