Wingstop Inc. 10-Q

Item 1. Financial Statements WINGSTOP INC. AND SUBSIDIARIES Consolidated Balance Sheets (amounts in thousands, except share and par value amounts) September 26, 2020 December 28, 2019 (Unaudited) Assets Current assets Cash and cash equivalents $ 48,230 $ 12,849 Restricted cash 4,114 4,790 Accounts receivable, net 5,378 5,175 Prepaid expenses and other current assets 5,630 2,449 Advertising fund assets, restricted 18,933 4,927 Total current assets 82,285 30,190 Property and equipment, net 27,196 27,842 Goodwill 53,290 50,188 Trademarks 32,700 32,700 Customer relationships, net 11,928 12,910 Other non-current assets 12,292 12,283 Total assets $ 219,691 $ 166,113 Liabilities and stockholders' deficit Current liabilities Accounts payable $ 2,343 $ 3,348 Other current liabilities 20,144 21,454 Current portion of debt 16,000 3,200 Advertising fund liabilities 18,933 4,927 Total current liabilities 57,420 32,929 Long-term debt, net 311,240 307,669 Deferred revenues, net of current 23,088 22,343 Deferred income tax liabilities, net 6,090 4,485 Other non-current liabilities 5,390 8,115 Total liabilities 403,228 375,541 Commitments and contingencies (see Note 7) Stockholders' deficit Common stock, $ 0.01 par value; 100,000,000 shares authorized; 29,683,465 and 29,457,228 shares issued and outstanding as of September 26, 2020 and December 28, 2019, respectively 297 295 Additional paid-in-capital 496 552 Accumulated deficit ( 184,330 ) ( 210,275 ) Total stockholders' deficit ( 183,537 ) ( 209,428 ) Total liabilities and stockholders' deficit $ 219,691 $ 166,113 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 26, 2020 September 28, 2019 September 26, 2020 September 28, 2019 Revenue: Royalty revenue, franchise fees and other $ 28,806 $ 21,876 $ 80,863 $ 64,391 Advertising fees and related income 19,653 14,056 55,590 40,753 Company-owned restaurant sales 15,529 13,943 49,076 41,346 Total revenue 63,988 49,875 185,529 146,490 Costs and expenses: Cost of sales (1) 11,804 10,339 36,367 30,642 Advertising expenses 18,267 12,652 51,780 38,359 Selling, general and administrative 17,282 13,527 44,786 39,463 Depreciation and amortization 2,334 1,408 5,287 4,019 Total costs and expenses 49,687 37,926 138,220 112,483 Operating income 14,301 11,949 47,309 34,007 Interest expense, net 4,405 4,243 12,764 12,952 Income before income tax expense 9,896 7,706 34,545 21,055 Income tax expense (benefit) ( 185 ) 1,801 4,829 3,626 Net income $ 10,081 $ 5,905 $ 29,716 $ 17,429 Earnings per share Basic $ 0.34 $ 0.20 $ 1.00 $ 0.59 Diluted $ 0.34 $ 0.20 $ 1.00 $ 0.59 Weighted average shares outstanding Basic 29,642 29,449 29,572 29,401 Diluted 29,854 29,696 29,791 29,667 Dividends per share $ 0.14 $ 0.11 $ 0.36 $ 0.29 (1) Cost of sales includes all operating expenses of company-owned restaurants, including advertising expenses, and excludes depreciation and amortization, which are presented separately. See accompanying notes to consolidated financial statements. 5 WINGSTOP INC. AND SUBSIDIARIES Consolidated Statements of Stockholders' Deficit For the Thirty-Nine Weeks Ended September 28, 2019 (amounts in thousands, except share data) (Unaudited) Common Stock Shares Amount Additional Paid-In Capital Accumulated Deficit Total Stockholders’ Deficit Balance at December 29, 2018 29,296,939 $ 293 $ 1,036 $ ( 226,159 ) $ ( 224,830 ) Adjustment for ASC 842 adoption — — — 154 154 Net income — — — 6,606 6,606 Shares issued under stock plans 114,936 1 157 — 158 Tax payments for restricted stock upon vesting ( 12,469 ) — — ( 833 ) ( 833 ) Stock-based compensation expense — — 838 — 838 Dividends paid — — ( 1,825 ) ( 746 ) ( 2,571 ) Balance at March 30, 2019 29,399,406 294 206 ( 220,978 ) ( 220,478 ) Net income — — — 4,918 4,918 Shares issued under stock plans 45,778 1 147 — 148 Tax payments for restricted stock upon vesting ( 2,456 ) — — ( 226 ) ( 226 ) Stock-based compensation expense — — 1,928 — 1,928 Dividends paid — — ( 1,389 ) ( 1,269 ) ( 2,658 ) Balance at June 29, 2019 29,442,728 295 892 ( 217,555 ) ( 216,368 ) Net income — — — 5,905 5,905 Shares issued under stock plans 11,560 — 174 — 174 Tax payments for restricted stock upon vesting ( 914 ) — — ( 84 ) ( 84 ) Stock-based compensation expense — — 2,043 — 2,043 Dividends paid — — ( 2,772 ) ( 473 ) ( 3,245 ) Balance at September 28, 2019 29,453,374 $ 295 $ 337 $ ( 212,207 ) $ ( 211,575 ) See accompanying notes to consolidated financial statements. 6 WINGSTOP INC. AND SUBSIDIARIES Consolidated Statements of Stockholders' Deficit For the Thirty-Nine Weeks Ended September 26, 2020 (amounts in thousands, except share data) (Unaudited) Common Stock Shares Amount Additional Paid-In Capital Accumulated Deficit Total Stockholders’ Deficit Balance at December 28, 2019 29,457,228 $ 295 $ 552 $ ( 210,275 ) $ ( 209,428 ) Net income — — — 8,096 8,096 Shares issued under stock plans 128,585 1 504 — 505 Tax payments for restricted stock upon vesting ( 2,419 ) — — ( 229 ) ( 229 ) Stock-based compensation expense — — 1,331 — 1,331 Dividends paid — — ( 2,168 ) ( 1,055 ) ( 3,223 ) Balance at March 28, 2020 29,583,394 296 219 ( 203,463 ) ( 202,948 ) Net income — — — 11,539 11,539 Shares issued under stock plans 13,057 — 57 — 57 Tax payments for restricted stock upon vesting ( 104 ) — — ( 12 ) ( 12 ) Stock-based compensation expense — — 1,969 — 1,969 Dividends paid — — ( 2,202 ) ( 1,075 ) ( 3,277 ) Balance at June 27, 2020 29,596,347 296 43 ( 193,011 ) ( 192,672 ) Net income — — — 10,081 10,081 Shares issued under stock plans 87,751 1 328 — 329 Tax payments for restricted stock upon vesting ( 633 ) — — ( 99 ) ( 99 ) Stock-based compensation expense — — 3,007 — 3,007 Dividends paid — — ( 2,882 ) ( 1,301 ) ( 4,183 ) Balance at September 26, 2020 29,683,465 $ 297 $ 496 $ ( 184,330 ) $ ( 183,537 ) See accompanying notes to consolidated financial statements. 7 WINGSTOP INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (amounts in thousands) (Unaudited) Thirty-Nine Weeks Ended September 26, 2020 September 28, 2019 Operating activities Net income $ 29,716 $ 17,429 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization 5,287 4,019 Deferred income taxes 377 ( 555 ) Stock-based compensation expense 6,307 4,809 Gain on disposal of assets ( 3,247 ) — Amortization of debt issuance costs 1,228 1,179 Changes in operating assets and liabilities: Accounts receivable ( 203 ) ( 188 ) Prepaid expenses and other assets 668 ( 979 ) Advertising fund assets and liabilities, net 12,578 3,164 Accounts payable and other current liabilities ( 4,165 ) ( 1,014 ) Deferred revenue 958 528 Other non-current liabilities ( 2,725 ) 194 Cash provided by operating activities 46,779 28,586 Investing activities Purchases of property and equipment ( 3,729 ) ( 21,082 ) Acquisitions of restaurants from franchisees ( 5,635 ) ( 1,229 ) Proceeds from sales of assets 4,800 — Cash used in investing activities ( 4,564 ) ( 22,311 ) Financing activities Proceeds from exercise of stock options 891 480 Borrowings of long-term debt 16,000 5,000 Repayments of long-term debt ( 800 ) ( 1,600 ) Payment of deferred financing costs — ( 15 ) Tax payments for restricted stock upon vesting ( 340 ) ( 1,143 ) Dividends paid ( 10,683 ) ( 8,474 ) Cash provided by (used in) financing activities 5,068 ( 5,752 ) Net increase in cash, cash equivalents, and restricted cash 47,283 523 Cash, cash equivalents, and restricted cash at beginning of period 21,175 20,940 Cash, cash equivalents, and restricted cash at end of period $ 68,458 $ 21,463 See accompanying notes to consolidated financial statements. 8 WINGSTOP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited) (1) Basis of Presentation and Update to Significant Accounting Policies Basis of Presentation Wingstop Inc., together with its consolidated subsidiaries (collectively, “Wingstop” or the “Company”), is in the business of franchising and operating Wingstop restaurants. As of September 26, 2020, the Company had 1,277 domestic franchised restaurants and 171 international franchised restaurants. As of September 26, 2020, the Company owned and operated 31 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 26, 2020 and December 28, 2019, and operating results are for the thirteen and thirty-nine weeks ended September 26, 2020 and September 28, 2019. In the Company’s opinion, all necessary adjustments have been made for the fair presentation of the results of the interim periods presented. The results of operations for such interim periods are not necessarily indicative of the results to be expected for the full year. The accompanying interim unaudited consolidated financial statements should be read in conjunction with the audited financial statements and the related notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 28, 2019. The Company uses a 52/53-week fiscal year that ends on the last Saturday of the calendar year. Fiscal years 2020 and 2019 each have 52 weeks . Cash, Cash Equivalents, and Restricted Cash Cash, cash equivalents, and restricted cash within the Consolidated Balance Sheets and the Consolidated Statements of Cash Flows as of September 26, 2020 and December 28, 2019 were as follows (in thousands): September 26, 2020 December 28, 2019 Cash and cash equivalents $ 48,230 $ 12,849 Restricted cash 4,114 4,790 Restricted cash, included in Advertising fund assets, restricted 16,114 3,536 Total cash, cash equivalents, and restricted cash $ 68,458 $ 21,175 Segment Reporting Historically, the Company had two reporting segments: franchise operations and company restaurant operations. In accordance with Accounting Standards Codification 280 “Segment Reporting”, the Company uses the management approach for determining its reportable segments. The management approach is based upon the way management reviews performance and allocates resources. During the second fiscal quarter of 2020, the Company reevaluated its operating segments and determined it has one operating segment and one reporting segment due to changes in how the Company’s chief operating decision maker assesses the Company’s performance and allocates resources. Recently Issued Accounting Pronouncements In December 2019, the Financial Accounting Standards Board issued Accounting Standard Update No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes ("ASU 2019-12"). ASU 2019-12 is effective for fiscal years beginning after December 15, 2020, including applicable interim periods. The Company is currently assessing the impact of adopting this standard but does not expect the adoption of this guidance to have a material impact on its consolidated financial statements. 9 WINGSTOP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited) (2) Earnings per Share Basic earnings per share is computed by dividing income available to common stockholders by the weighted average number of shares of common stock outstanding for the reporting period. Diluted earnings per share reflects the potential dilution that could occur if securities convertible into, or other contracts to issue, common stock were exercised or converted into common stock. For the calculation of diluted earnings per share, the basic weighted average number of shares is increased by the dilutive effect of the exercise and vesting of stock options and restricted stock units, respectively, as determined using the treasury stock method. Basic weighted average shares outstanding is reconciled to diluted weighted average shares outstanding as follows (in thousands): Thirteen Weeks Ended Thirty-Nine Weeks Ended September 26, 2020 September 28, 2019 September 26, 2020 September 28, 2019 Basic weighted average shares outstanding 29,642 29,449 29,572 29,401 Dilutive shares 212 247 219 266 Diluted weighted average shares outstanding 29,854 29,696 29,791 29,667 For the thirteen weeks ended September 26, 2020 and September 28, 2019, equity awards representing approximately 400 and 100 shares, respectively, were excluded from the dilutive earnings per share calculation because the effect would have been anti-dilutive. For the thirty-nine weeks ended September 26, 2020 and September 28, 2019, equity awards representing approximately 400 and 2,000 shares, respectively, were excluded from the dilutive earnings per share calculation because the effect would have been anti-dilutive. (3) Dividends The Company’s Board of Directors declared a quarterly dividend of $0.11 per share of common stock in each of the first two quarters, and a quarterly dividend of $0.14 per share of common stock in the third quarter, resulting in aggregate dividend payments of $ 10.7 million, or $ 0.36 per share of common stock, during the thirty-nine weeks ended September 26, 2020. Subsequent to the third quarter, on November 2, 2020, the Company’s Board of Directors announced a quarterly dividend of $0.14 per share of common stock, payable to stockholders of record as of November 20, 2020. The regular quarterly dividend is to be paid on December 10, 2020, totaling approximately $ 4.2 million. On October 30, 2020, in conjunction with the completion of a transaction to refinance the Company's existing securitized financing facility, the Company’s Board of Directors declared a special dividend of $ 5.00 per share of common stock, payable to stockholders of record as of November 20, 2020. The special dividend is to be paid on December 3, 2020, totaling approximately $ 149 million. (4) Fair Value Measurements Fair value is the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date and in the principal or most advantageous market for that asset or liability. Assets and liabilities are classified using a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value as follows: Level 1 — Unadjusted quoted prices for identical instruments traded in active markets. Level 2 — Observable market-based inputs or unobservable inputs corroborated by market data. Level 3 — Unobservable inputs reflecting management’s estimates and assumptions. 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 26, 2020 December 28, 2019 Carrying Value Fair Value Carrying Value Fair Value Securitized Financing Facility: 2018-1 Class A-2 Senior Secured Notes (1) Level 2 $ 316,800 $ 322,775 $ 317,600 $ 331,247 2018-1 Class A-1 Variable Funding Senior Notes (2) Level 2 $ 16,000 $ 16,000 $ — $ — (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) Income Taxes Income tax benefit and the effective tax rate were $ 0.2 million and ( 1.9 )%, respectively, for the thirteen weeks ended September 26, 2020, compared to income tax expense and an effective tax rate of $ 1.8 million and 23.4 %, respectively, for the thirteen weeks ended September 28, 2019. Income tax expense and the effective tax rate were $ 4.8 million and 14.0 %, respectively, for the thirty-nine weeks ended September 26, 2020, and $ 3.6 million and 17.2 %, respectively, for the thirty-nine weeks ended September 28, 2019. Income tax expense for the thirteen and thirty-nine weeks ended September 26, 2020 included $ 2.9 million and $ 4.4 million, respectively, in tax benefits resulting from the recognition of excess tax benefits from stock-based compensation, as compared to $ 0.1 million and $ 1.9 million in tax benefits for the thirteen and thirty-nine weeks ended September 28, 2019, respectively. (6) Debt Obligations Long-term debt consisted of the following components (in thousands): September 26, 2020 December 28, 2019 2018-1 Class A-2 Senior Secured Notes $ 316,800 $ 317,600 2018-1 Class A-1 Variable Funding Senior Notes 16,000 — Debt issuance costs, net of amortization ( 5,560 ) ( 6,731 ) Total debt 327,240 310,869 Less: current portion of debt ( 16,000 ) ( 3,200 ) Long-term debt, net $ 311,240 $ 307,669 As of September 26, 2020, we had $ 316.8 million of outstanding Series 2018-1 4.97 % Fixed Rate Senior Secured Notes, Class A-2 (the “2018 Class A-2 Notes”) and $ 16.0 million of outstanding Series 2018-1 Variable Funding Senior Notes, Class A-1 (the “2018 Variable Funding Notes,” and together with the 2018 Class A-2 Notes, the “2018 Notes”). The 2018 Variable Funding Notes were issued in the first quarter of 2020 as a precautionary measure to improve the Company's cash position. The 2018 Variable Funding Notes had a weighted average interest rate of 2.72 % during the thirty-nine weeks ended September 26, 2020 and are classified as current debt. There were no borrowings outstanding under the 2018 Variable Funding Notes as of December 28, 2019. Further, as of September 26, 2020 and December 28, 2019, $ 4.0 million of letters of credit were outstanding against the 2018 Variable Funding Notes, which relate primarily to interest reserves required under the base indenture and related supplemental indenture. There were no amounts drawn down on the letters of credit as of September 26, 2020 or December 28, 2019. During the thirty-nine weeks ended September 26, 2020, the Company had a leverage ratio under the 2018 Class A-2 Notes of less than 5.0 x. Per the terms of the Company’s debt agreements, principal payments on the 2018 Class A-2 Notes are not due until the repayment date as long as the Company maintains a leverage ratio of less than 5.0x. As such, the Company ceased 11 WINGSTOP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited) making principal payments beginning in the second quarter of 2020. Accordingly, the entire outstanding balance of the 2018 Class A-2 Notes has been classified as long-term debt. The 2018 Class A-2 Notes and the 2018 Variable Funding Notes were each issued in a securitization transaction pursuant to which certain of the Company’s domestic and foreign revenue-generating assets, consisting principally of franchise-related agreements and intellectual property, were contributed or otherwise transferred to the Issuer and certain other limited-purpose, bankruptcy-remote, wholly owned indirect subsidiaries of the Company that act as guarantors of the 2018 Notes and that have pledged substantially all of their assets. On October 30, 2020, the Company completed a transaction to refinance its existing securitized financing facility with a new securitized financing facility. For additional information, see “Note 11—Subsequent Events." (7) Commitments and Contingencies The Company is subject to legal proceedings, claims, and liabilities, such as employment-related claims and premises-liability cases, which arise in the ordinary course of business and are generally covered by insurance. In the opinion of management, the amount of ultimate liability with respect to such actions is not likely to have a material adverse impact on the Company’s financial position, results of operations, or cash flows. (8) Stock-Based Compensation Stock-based compensation is measured at the date of grant, based on the calculated fair value of the award, and is recognized as expense over the requisite employee service period (generally the vesting period of the award). The Company recognized $ 6.3 million in stock-based compensation expense for the thirty-nine weeks ended September 26, 2020, with a corresponding increase to additional paid-in-capital. Stock-based compensation expense is included in Selling, general and administrative expense in the Consolidated Statements of Operations. Stock Options The following table summarizes stock option activity (in thousands, except term and per share data): Stock Options Weighted Average Exercise Price Per Share Aggregate Intrinsic Value Weighted Average Remaining Term Outstanding - December 28, 2019 134 $ 5.72 $ 10,801 3.8 years Options granted 68 84.41 Options exercised ( 130 ) 5.40 Outstanding - September 26, 2020 72 $ 79.94 $ 15,171 5.3 years The total grant-date fair value of stock options vested during the thirty-nine weeks ended September 26, 2020 was $ 0.2 million. The total intrinsic value of stock options exercised during the thirty-nine weeks ended September 26, 2020 was $ 15.4 million. As of September 26, 2020, total unrecognized compensation expense related to unvested stock options was $ 1.3 million, which is expected to be recognized over a weighted-average period of 2.4 years. During the thirty-nine weeks ended September 26, 2020, there was a modification to certain awards resulting in additional compensation expense of $ 0.4 million. Restricted Stock Units and Performance Stock Units The following table summarizes activity related to restricted stock units (“RSUs”) and performance stock units (“PSUs”) (in thousands, except per share data): Restricted Stock Units Weighted Average Grant Date Fair Value Per Share Performance Stock Units Weighted Average Grant Date Fair Value Outstanding - December 28, 2019 82 $ 52.73 169 $ 55.92 Units granted 25 91.35 44 85.60 Units vested ( 40 ) 44.45 ( 53 ) 41.54 Units canceled ( 12 ) 64.03 ( 8 ) 66.04 Outstanding - September 26, 2020 55 $ 74.04 152 $ 68.92 12 WINGSTOP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited) The fair value of the Company’s RSUs and PSUs is based on the closing market price of the stock on the date of grant. The RSUs granted during the thirty-nine weeks ended September 26, 2020 vest over a three-year service period. As of September 26, 2020, total unrecognized compensation expense related to unvested RSUs was $ 3.1 million, which is expected to be recognized over a weighted-average period of 1.7 years. The Company granted 41,199 PSUs during the thirty-nine weeks ended September 26, 2020 that are based on a service condition and a performance vesting condition based on the achievement of certain adjusted EBITDA targets over a performance period of three years (the “TSR PSUs”). The maximum vesting percentage that could be realized for each of the TSR PSUs is 250 % based on the level of performance achieved for the respective awards, as well as a market vesting condition linked to the level of total stockholder return received by the Company’s stockholders during the performance period measured against the companies in the S&P 600 Restaurant Index. The TSR PSUs were valued based on a Monte Carlo simulation model to reflect the impact of the total stockholder return market condition, resulting in a grant-date fair value range of $ 0.00 to $ 311.72 per unit based on the outcome of the performance condition. The probability of satisfying a market condition is considered in the estimation of the grant-date fair value for TSR PSUs and the compensation cost is not reversed if the market condition is not achieved, provided the requisite service has been provided. The compensation expense related to the PSUs is recognized over the vesting period when the achievement of the performance conditions becomes probable. The total compensation cost for the PSUs is determined based on the most likely outcome of the performance condition and the number of awards expected to vest. As of September 26, 2020, total unrecognized compensation expense related to unvested PSUs was $ 9.1 million. (9) Company-owned Restaurant Transactions During the second fiscal quarter 2020, the Company completed the sale of two company-owned restaurants to an existing franchisee for aggregate proceeds of $ 2.3 million. In connection with the sale of the restaurants, the Company recorded a $ 2.0 million pre-tax gain on the sale of the related assets and liabilities, which was net of a $ 28,000 reduction in goodwill. The net gain on these store sales was recorded in Selling, general and administrative expense in the Company’s Consolidated Statements of Operations. During the third fiscal quarter 2020, the Company completed the sale of five company-owned restaurants to an existing franchisee for aggregate proceeds of $ 2.5 million. In connection with the sale of the restaurants, the Company recorded a $ 1.2 million pre-tax gain on the sale of the related assets and liabilities, which was net of a $ 30,000 reduction in goodwill. The net gain on these restaurants was recorded in Selling, general and administrative expense in the Company's Consolidated Statements of Operations. On August 31, 2020, the Company acquired five existing restaurants from a franchisee. The total purchase price was $ 5.6 million, which was funded by cash flows from operations. The following table summarizes the preliminary allocations of the purchase price to the estimated fair value of assets acquired and liabilities assumed at the date of the acquisition (in thousands): Purchase Price Allocation Working capital $ 35 Property and equipment 622 Reacquired franchise rights 1,816 Goodwill 3,162 Operating lease right-of-use assets 1,195 Operating lease liabilities ( 1,195 ) Total purchase price $ 5,635 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. Approximately $ 3.2 million of the goodwill from the acquisition is expected to be deductible for federal income tax purposes. Pro-forma financial information of the combined entities is not presented due to the immaterial impact of the financial results of the acquired restaurant on our consolidated financial statements. 13 WINGSTOP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited) The fair value measurement of tangible and intangible assets and liabilities as of the acquisition date is based on significant inputs not observed in the market and thus represents a Level 3 fair value measurement. Fair value measurements for reacquired franchise rights were determined using the income approach. Fair value measurements for property and equipment were determined using the cost approach. (10) Revenue from Contracts with Customers The following table represents a disaggregation of revenue from contracts with customers for the thirteen and thirty-nine weeks ended September 26, 2020 and September 28, 2019 (in thousands): Thirteen Weeks Ended Thirty-Nine Weeks Ended September 26, 2020 September 28, 2019 September 26, 2020 September 28, 2019 Royalty revenue $ 26,007 $ 19,065 $ 72,761 $ 55,409 Advertising fees and related income 19,653 14,056 55,590 40,753 Franchise fees 1,151 875 2,914 3,396 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 26, 2020 was included in the deferred revenue balance as of December 28, 2019. Approximately $ 8.6 million and $ 8.3 million of deferred revenue as of September 26, 2020 and December 28, 2019, respectively, relates to restaurants that have not yet opened, so the fees are not yet being amortized. The weighted average remaining amortization period for deferred franchise and renewal fees related to open restaurants is 7.2 years. The Company did not have any material contract assets as of September 26, 2020. (11) Subsequent Events On October 30, 2020, the Company completed a transaction to refinance its existing securitized financing facility with a new securitized financing facility, pursuant to which Wingstop Funding LLC (the “Issuer”), a limited-purpose, bankruptcy-remote, wholly-owned indirect subsidiary of the Company, issued $ 480.0 million of its Series 2020-1 2.84 % Fixed Rate Senior Notes, Class A-2 (the "2020 Class A-2 Notes"). The Issuer also entered into a revolving financing facility of Series 2020-1 Variable Funding Senior Notes, Class A-1 which permits borrowings of up to a maximum principal amount of $ 50.0 million, which may be used to issue letters of credit. A portion of the proceeds of the 2020 Class A-2 Notes was used to repay the $ 332.8 million of principal outstanding on the existing 2018 Class A-2 Notes and 2018 Variable Funding Notes, together with accrued and unpaid interest and make-whole prepayment consideration due thereon, and to pay related transaction fees. The Company intends to use the additional net proceeds to strengthen its liquidity position and for general corporate purposes, including a return of capital to the Company’s stockholders (see Note 3). 14