Wingstop Inc. 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations This Management's Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with the accompanying audited consolidated financial statements and notes. Forward-looking statements in this MD&A are not guarantees of future performance and may involve risks and uncertainties that could cause actual results to differ materially from those projected. Refer to "Cautionary Note Regarding Forward-Looking Statements" elsewhere in this report and Item 1A. Risk Factors for a discussion of these risks and uncertainties. A comparison of our results of operations and cash flows for fiscal year 2019 compared to fiscal year 2018 can be found under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended December 28, 2019, filed with the SEC on February 19, 2020. Overview Wingstop is the largest fast casual chicken wings-focused restaurant chain in the world and has demonstrated strong, consistent growth. As of December 26, 2020, we had a total 1,538 restaurants in our system. Our restaurant base is 98% franchised, with 1,506 franchised locations (including 179 international locations) and 32 company-owned restaurants as of December 26, 2020. We generate revenues by charging royalties, advertising fees and franchise fees to our franchisees and by operating a number of our own restaurants. 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. We plan to grow our business by opening new franchised restaurants and increasing our same store sales, while leveraging our franchise model to create shareholder value. Domestic same store sales have increased for 17 consecutive years beginning in 2004, which includes 5-year cumulative domestic same stores sales growth of 44.8% since the beginning of fiscal year 2016. We believe our asset-light, highly-franchised business model generates strong operating margins and requires low capital expenditures, creating shareholder value through strong and consistent free cash flow and capital-efficient growth. Impact of COVID-19 In March 2020, the novel coronavirus ("COVID-19") outbreak was declared a pandemic by the World Health Organization, significantly changing consumer behaviors as individuals are being encouraged to practice social distancing. This pandemic led to restaurants reducing restaurant seating capacity, and in some cases restaurant closures, due to various restrictions mandated by governments around the world. As of March 16, 2020, we made the decision to close our domestic dining rooms and limit our service to carryout and delivery only. Several of our international franchisees also closed their dining rooms as a result of the outbreak. Our domestic business was well-positioned for the transition to largely off-premise dining that has resulted from the outbreak. As a result of the required changes to consumer behavior to largely off-premise dining, as well as promotional activities associated with delivery, we experienced an increase in domestic same store sales growth through the end of the fourth quarter of 2020. Our international markets, which have historically had a higher mix of dine-in sales, have seen an overall decline in same store sales growth due to the required closure of dining rooms and, in some cases, temporary restaurant closures. Highlights for Fiscal Year 2020: • System-wide restaurant count increased 11.0% over the prior fiscal year to a total of 1,538 worldwide locations, driven by 153 net unit openings; • Domestic same store sales increased 21.4% over the prior fiscal year; • Company-owned restaurant same store sales increased 14.2% over the prior fiscal year; • Digital sales increased to 62.5% over the prior fiscal year; • Domestic restaurant AUV increased to approximately $1.5 million; • System-wide sales increased 28.8% over the prior fiscal year to approximately $2.0 billion; • Total revenue increased 24.6% over the prior fiscal year to $248.8 million; and • Net income increased 13.8% over the prior fiscal year to $23.3 million, or $0.78 per diluted share, compared to $20.5 million, or $0.69 per diluted share in the prior fiscal year. Adjusted net income and adjusted earnings per diluted share 30 increased 49.7% over the prior fiscal year to $32.5 million, or $1.09 per diluted share, compared to $21.7 million and $0.73 per diluted share in the prior fiscal year. • Adjusted EBITDA increased 26.1% over the prior fiscal year to $71.9 million. 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, system-wide sales, royalty and franchise fee revenue and company-owned restaurant sales. Year Ended December 26, 2020 December 28, 2019 Domestic Franchised Activity: Beginning of period 1,200 1,095 Openings 131 114 Closures (5) (8) Acquired by Company (6) (1) Re-franchised by Company 7 — Restaurants end of period 1,327 1,200 Domestic Company-Owned Activity: Beginning of period 31 29 Openings 2 1 Closures — — Acquired from franchisees 6 1 Re-franchised to franchisees (7) — Restaurants end of period 32 31 Total Domestic Restaurants 1,359 1,231 International Franchised Activity: Beginning of period 154 128 Openings 26 31 Closures (1) (5) Restaurants end of period 179 154 Total System-wide Restaurants 1,538 1,385 System-wide sales. System-wide sales represents net sales for all of our company-owned and franchised restaurants. 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. Domestic average unit volume (“AUV”). Domestic 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. Domestic AUV allows management to assess our domestic company-owned and franchised restaurant economics. Our domestic AUV growth is primarily driven by increases in same store sales and is also influenced by opening new restaurants. Domestic same store sales. Domestic 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 31 domestic company-owned restaurants as well as system-wide domestic restaurants. Domestic same store sales growth is driven by increases in transactions and average transaction size. Transaction size increases are driven by price increases or favorable mix shift from either an increase in items purchased or shifts into higher priced 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 net income before interest expense, net, income tax expense, and depreciation and amortization, with further adjustments for losses on debt extinguishment and refinancing transactions, transaction costs, costs and fees associated with investments in our strategic initiatives, gains and losses on the disposal of assets, and stock-based compensation expense. Adjusted EBITDA may not be comparable to other similarly titled captions 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. Adjusted Net Income and Adjusted Earnings Per Diluted Share. We define Adjusted net income as net income adjusted for losses on debt extinguishment and refinancing transactions, transaction costs, costs and fees associated with investments in our strategic initiatives, gains and losses on the disposal of assets, and related tax adjustments. We define Adjusted earnings per diluted share as Adjusted net income divided by weighted average diluted share count. For a reconciliation of net income to Adjusted net income and for further discussion of Adjusted net income and Adjusted earnings per diluted share as non-GAAP measures and how we utilize them, see footnote 3 below. The following table sets forth our key performance indicators for the fiscal years ended December 26, 2020 and December 28, 2019 (in thousands, except unit data): Year ended December 26, 2020 December 28, 2019 Number of system-wide restaurants at period end 1,538 1,385 System-wide sales (1) $ 1,950,570 $ 1,514,590 Domestic restaurant AUV $ 1,489 $ 1,246 Domestic same store sales growth 21.4 % 11.1 % Company-owned domestic same store sales growth 14.2 % 9.8 % Total revenue $ 248,811 $ 199,676 Net income $ 23,306 $ 20,476 Adjusted EBITDA (2) $ 71,882 $ 56,989 Adjusted net income (3) $ 32,500 $ 21,716 (1) The percentage of system-wide sales attributable to company-owned restaurants was 3.2% and 3.7% for the fiscal years ended December 26, 2020 and December 28, 2019, respectively. The remainder was generated by franchised restaurants, as reported by our franchisees. (2) EBITDA and Adjusted EBITDA are supplemental measures of our performance that are not required by, or presented in accordance with, accounting principles generally accepted in the United States (“GAAP”). EBITDA and Adjusted EBITDA 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 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. 32 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 losses on debt extinguishment and refinancing transactions, transaction costs, costs and fees associated with investments in our strategic initiatives, gains and losses on the disposal of assets, and stock-based compensation expense. It is reasonable to expect that these items 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. 33 The following table reconciles net income to EBITDA and Adjusted EBITDA for the fiscal years ended December 26, 2020 and December 28, 2019 (in thousands): Year ended December 26, 2020 December 28, 2019 Net income $ 23,306 $ 20,476 Interest expense, net 16,782 17,136 Income tax expense 3,637 5,289 Depreciation and amortization 7,518 5,484 EBITDA $ 51,243 $ 48,385 Additional adjustments: Loss on debt extinguishment and refinancing transactions (a) 13,816 — Gain on disposal of assets, net (b) (3,093) — Consulting fees (c) 1,358 1,630 Stock-based compensation expense (d) 8,558 6,974 Adjusted EBITDA $ 71,882 $ 56,989 (a) Represents costs and expenses related to the refinancing of our securitized financing facility and payment of a special dividend; all transaction costs are included in Loss on debt extinguishment and refinancing transactions on the Consolidated Statements of Operations, with the exception of $151,000 during the year ended December 26, 2020 that is included in Selling, general and administrative expense on the Consolidated Statements of Operations. (b) Represents a gain resulting from the re-franchise of company-owned restaurants to franchisees, which is included in Gain on sale of restaurants and other expenses, net on the Consolidated Statements of Operations. (c) Represents costs and expenses related to consulting projects to support the Company's strategic initiatives, which are included in Selling, general and administrative expense on the Consolidated Statements of Operations. (d) Includes non-cash, stock-based compensation. (3) Adjusted net income and adjusted earnings per diluted share are supplemental measures of operating performance that do not represent and should not be considered alternatives to net income and earnings per share, as determined by GAAP. These measures have not been prepared in accordance with Article 11 of Regulation S-X promulgated under the Securities Act. Management believes adjusted net income and adjusted earnings per diluted share supplement GAAP measures and enable management to more effectively evaluate the Company’s performance period-over-period and relative to competitors. 34 The following table reconciles net income to Adjusted net income and calculates adjusted earnings per diluted share for the fiscal years ended December 26, 2020 and December 28, 2019 (in thousands): Year Ended December 26, 2020 December 28, 2019 Numerator: Net income $ 23,306 $ 20,476 Adjustments: Loss on debt extinguishment and refinancing transactions (a) 13,816 — Gain on disposal of assets, net (b) (3,093) — Consulting fees (c) 1,358 1,630 Tax effect of adjustments (d) (2,887) (390) Adjusted net income $ 32,500 $ 21,716 Denominator: Weighted-average shares outstanding - diluted 29,804 29,670 Adjusted earnings per diluted share $ 1.09 $ 0.73 (a) Represents costs and expenses related to the refinancing of our securitized financing facility and payment of a special dividend; all transaction costs are included in Loss on debt extinguishment and refinancing transactions with the exception of $151,000 during the year ended December 26, 2020 that is included in Selling, general and administrative expense on the Consolidated Statements of Operations. (b) Represents a gain resulting from the re-franchise of company-owned restaurants to franchisees which is included in Gain on sale of restaurants and other expenses, net on the Consolidated Statements of Operations. (c) Represents costs and expenses related to a consulting project to support the Company's strategic initiatives, which are included in Selling, general and administrative expense on the Consolidated Statements of Operations. (d) Represents the tax effect of the aforementioned adjustments to reflect corporate income taxes at an assumed effective tax rate of 24% for the periods ended December 26, 2020 and December 28, 2019, which includes provisions for U.S. federal income taxes, and assumes the respective statutory rates for applicable state and local jurisdictions. 35 Results of Operations Year ended December 26, 2020 compared to year ended December 28, 2019 The following table sets forth the Consolidated Statements of Operations for fiscal year 2020 and fiscal year 2019 (in thousands, except for percentages): Year ended Increase / (Decrease) December 26, 2020 December 28, 2019 $ % Revenue: Royalty revenue, franchise fees and other $ 108,883 $ 88,291 $ 20,592 23.3 % Advertising fees 74,930 55,932 18,998 34.0 % Company-owned restaurant sales 64,998 55,453 9,545 17.2 % Total revenue 248,811 199,676 49,135 24.6 % Costs and expenses: Cost of sales (1) 48,583 41,105 7,478 18.2 % Advertising expenses 69,428 52,891 16,537 31.3 % Selling, general and administrative 68,985 57,295 11,690 20.4 % Depreciation and amortization 7,518 5,484 2,034 37.1 % Gain on sale of restaurants and other expenses, net (3,093) — (3,093) N/A Total costs and expenses 191,421 156,775 34,646 22.1 % Operating income 57,390 42,901 14,489 33.8 % Interest expense, net 16,782 17,136 (354) (2.1) % Loss on debt extinguishment and refinancing transactions 13,665 — 13,665 N/A Income before income tax expense 26,943 25,765 1,178 4.6 % Income tax expense 3,637 5,289 (1,652) (31.2) % Net income $ 23,306 $ 20,476 $ 2,830 13.8 % (1) Cost of sales includes all operating expenses of company-owned restaurants, including advertising expenses, and excludes depreciation and amortization, which are presented separately. Total Revenue. Total revenue consists of the collection of development fees, franchise fees, royalties, and other fees associated with franchise and development rights, contributions to the Ad Fund, and sales of wings and other food and beverage products by our company-owned restaurants. Total revenue was $248.8 million in fiscal year 2020, an increase of $49.1 million, or 24.6%, compared to $199.7 million in the prior fiscal year. These changes in revenues are more fully described below. Royalty revenue, franchise fees and other. Royalty revenue and franchise fees were $108.9 million in fiscal year 2020, an increase of $20.6 million, or 23.3%, compared to $88.3 million in the prior fiscal year. Royalty revenue increased by $23.4 million primarily due to 152 net franchise restaurant openings since December 28, 2019 as well as domestic same store sales growth of 21.4%. Other revenue decreased $2.4 million primarily due to contributions received for our franchisee convention that occurred in the fourth quarter of 2019. Advertising fees. Ad Fund contributions are earned from domestic franchisees based on a percentage of gross sales net of discounts. Ad Fund contributions were equal to 4% in fiscal years 2019 and 2020. Advertising fees were $74.9 million in fiscal year 2020, an increase of $19.0 million, or 34.0%, compared to $55.9 million in the comparable period in 2019. Advertising fees increased primarily due to the increase in domestic system-wide sales in fiscal year 2020 compared to the prior fiscal year. Company-owned restaurant sales. Company-owned restaurant sales were $65.0 million in fiscal year 2020, an increase of $9.5 million, or 17.2%, compared to $55.5 million in the prior fiscal year. The increase was primarily due to an increase in company-owned same store sales of 14.2%, which was driven by both an increase in transaction size and transactions, as well as an 36 increase in the number of company-owned restaurants. Since the beginning of the prior fiscal year period, we acquired seven company-owned restaurants from franchisees, opened three new company-owned restaurants, and refranchised seven company-owned restaurants to franchisees. Cost of sales. The table below presents the major components of Cost of sales (in thousands, except for percentages): Year ended As a % of company-owned restaurant sales Year ended As a % of company-owned restaurant sales December 26, 2020 December 28, 2019 Cost of sales: Food, beverage and packaging costs 23,303 35.9 % 20,317 36.6 % Labor costs 15,801 24.3 % 12,582 22.7 % Other restaurant operating expenses 10,821 16.6 % 9,794 17.7 % Vendor rebates (1,342) (2.1) % (1,588) (2.9) % Total cost of sales $ 48,583 74.7 % $ 41,105 74.1 % Food, beverage and packaging costs as a percentage of company-owned restaurant sales were 35.9% in fiscal year 2020 compared to 36.6% in the prior fiscal year. The decrease is primarily due to a 3.3% decrease in the cost of bone-in chicken wings compared to the prior fiscal year. Labor costs as a percentage of company-owned restaurant sales were 24.3% in fiscal year 2020 compared to 22.7% in the prior fiscal year. The increase as a percentage of company-owned restaurant sales was primarily due to incentive pay provided to team members in response to the COVID-19 pandemic. This increase was partially offset by the increase in company-owned domestic same store sales of 14.2%. Other restaurant operating expenses as a percentage of company-owned restaurant sales were 16.6% in fiscal year 2020 compared to 17.7% in the prior fiscal year. The decrease as a percentage of company-owned restaurant sales was due to sales leverage achieved as a result of the increase in company-owned same store sales of 14.2%. This decrease was slightly offset by an increase in delivery fees payable to third-party delivery providers due to the growth in delivery mix as a percent of total sales during fiscal year 2020. Advertising expenses. Advertising expenses were $69.4 million in fiscal year 2020, an increase of $16.5 million, or 31.3%, compared to $52.9 million in the prior fiscal year, primarily due to domestic system-wide sales growth. Advertising expenses are recognized at the same time the related revenue is recognized, which does not necessarily correlate to the actual timing of the related advertising spend. Selling, general and administrative ("SG&A"). SG&A expense was $69.0 million in fiscal year 2020, an increase of $11.7 million, or 20.4%, compared to $57.3 million in the prior fiscal year. The increase in SG&A expense was primarily due to approximately $5.5 million in higher variable performance-based compensation expense, inclusive of stock-based compensation expense, and $1.9 million in headcount-related expenses to support the growth in our business, and an increase of $1.4 million associated with additional expenses to support our national advertising campaign, which has an equal and offsetting contribution in revenue. We also incurred expenses of $2.8 million related to COVID-19 and support provided to international franchisees, $1.4 million in consulting fees related to support for strategic initiatives, and a one-time donation to the National Restaurant Employee Relief Fund of $1.0 million to support restaurant workers in times of need. These increases were slightly offset by a $2.1 million decrease in travel expenses, as well as a $1.8 million decrease in convention expenses related to the franchisee convention that occurred in the fourth quarter of 2019. Depreciation and amortization. Depreciation and amortization was $7.5 million in fiscal year 2020, an increase of $2.0 million, or 37.1%, compared to $5.5 million in the prior fiscal year. The increase in depreciation and amortization expense was primarily due to accelerated depreciation on certain assets. Gain on sale of restaurants and other expense, net. Gain on sale of restaurants and other expense, net increased primarily due to the gain recognized due to the sale of seven company-owned restaurants to franchisees. Interest expense, net. Interest expense, net was $16.8 million in fiscal year 2020, a decrease of $0.4 million, or 2.1%, compared to $17.1 million in the prior fiscal year. The decrease was due to the refinancing of our securitized financing facility on October 30, 2020, which increased our outstanding debt by $162.4 million and reduced our interest rate from 4.97% to 2.84%. 37 Loss on debt extinguishment and refinancing transactions. Loss on debt extinguishment and refinancing transactions was $13.7 million due to costs and fees associated with the refinancing of our securitized financing facility on October 30, 2020. Income tax expense. Income tax expense was $3.6 million in fiscal year 2020, yielding an effective tax rate of 13.5%, compared to an effective tax rate of 20.5% in the prior fiscal year. The decrease in the effective tax rate was primarily due to the impact of excess tax benefits associated with stock options exercised during fiscal year 2020. Liquidity and Capital Resources General. Our primary sources of liquidity and capital resources are cash provided from operating activities, cash and cash equivalents on hand, and proceeds from the incurrence of debt. Our primary requirements for liquidity and capital are working capital and general corporate needs. Historically, we have operated with minimal positive working capital or with negative working capital. We have in the past, and may in the future, refinance our existing indebtedness with new debt arrangements and utilize a portion of borrowings to return capital to our stockholders. We believe that our sources of liquidity and capital will be sufficient to finance our continued operations and growth strategy for at least the next twelve months. The following table shows summary cash flows information for the fiscal years 2020 and 2019 (in thousands): Year ended December 26, 2020 December 28, 2019 Net cash provided by (used in): Operating activities $ 65,530 $ 38,583 Investing activities (7,987) (23,731) Financing activities (19,448) (14,617) Net change in cash and cash equivalents $ 38,095 $ 235 Operating activities . Our cash flows from operating activities are principally driven by sales at both franchise restaurants and company-owned restaurants, as well as franchise and development fees. We collect franchise royalties from our franchise owners on a weekly basis. Restaurant-level operating costs at our company-owned restaurants, unearned franchise and development fees, and corporate overhead costs also impact our cash flows from operating activities. Net cash provided by operating activities was $65.5 million in fiscal year 2020, an increase of $26.9 million from cash provided by operating activities of $38.6 million in the prior fiscal year. The increase is primarily due to the timing of changes in working capital as well as an increase in royalties and advertising fees due to the increase in system-wide sales. Investing activities . Our net cash used in investing activities was $8.0 million in fiscal year 2020, a decrease of $15.7 million, from $23.7 million in fiscal year 2019. The decrease in cash used in investing activities was primarily due to the purchase of a new corporate headquarters building for $18.3 million during fiscal year 2019. Financing activities . Our net cash used in financing activities was $19.4 million in fiscal year 2020, an increase of $4.8 million, from cash used in financing activities of $14.6 million in fiscal year 2019. The increase was primarily due to an increase in the regular quarterly dividend, which totaled $14.3 million in fiscal year 2020, compared to $11.7 million in fiscal year 2019. Additionally, in fiscal year 2020, we paid a special dividend in connection with the refinancing of our debt totaling $148.4 million and incurred deferred financing and other debt related costs of $18.6 million, which were funded by additional net borrowings of $162.4 million. Securitized financing facility . 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 (the “2020 Variable Funding Notes,” and together with the 2020 Class A-2 Notes, the “2020 Notes”) 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 Series 2018-1 4.97% Fixed Rate Senior Secured Notes, Class A-2 and Series 2018-1 Variable Funding Senior Secured Notes, Class A-1 and to pay a special cash dividend of approximately $148.4 million to our stockholders. 38 The 2020 Class A-2 Notes are generally subject to 1% annual amortization, bear interest at a fixed rate of 2.84% per annum, and have an anticipated repayment date of December 2027. Dividends . We paid quarterly cash dividends of $0.11 per share of common stock aggregating $6.5 million for the first two quarters of 2020. We paid quarterly cash dividends of $0.14 per share of common stock aggregating $8.3 million for the third and fourth quarters of 2020. On February 16, 2021, the Company’s board of directors approved a dividend of $0.14 per share, to be paid on March 26, 2021 to stockholders of record as of March 5, 2021, totaling approximately $4.2 million. Separate from our regular dividend program, in December 2020, we paid a special cash dividend of $5.00 per share in connection with the refinancing of our existing securitized financing facility in October of 2020. We do not currently expect the restrictions in our debt instruments to impact our ability to make regularly quarterly dividends pursuant to our quarterly dividend program. However, any future declarations of dividends, as well as the amount and timing of such dividends, is subject to capital availability and the discretion of our board of directors, which must evaluate, among other things, whether cash dividends are in the best interest of our stockholders. Impact of Inflation Historically, inflation has not had a material effect on our results of operations. However, increases in food and beverage, labor and energy costs, as well as the costs and materials used in the construction of new restaurants could affect our results. 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. In addition, severe increases in inflation could affect the global and U.S. economies and could have an adverse impact on our business, financial condition, and results of operations. Further discussion on the impact of commodities and other cost pressures is included above as well as in “ Item 7A. Quantitative and Qualitative Disclosures About Market Risk. ” Contractual Obligations The following table sets forth our contractual obligations and commercial commitments as of December 26, 2020 (in thousands): Payments due by period Fiscal year 2021 Fiscal years 2022-2023 Fiscal years 2024-2025 Thereafter 2020 Notes $ 3,600 $ 9,600 $ 9,600 $ 457,200 Operating leases (a) 2,614 3,636 1,633 594 Interest payments 15,060 27,054 13,323 25,963 Total $ 21,274 $ 40,290 $ 24,556 $ 483,757 (a) Includes base lease terms and certain optional renewal periods that are included in the lease term in accordance with accounting guidance related to leases. Indemnifications. We are parties to certain indemnifications to third parties in the ordinary course of business. We believe the probability of incurring an actual liability under such indemnifications is sufficiently remote so that no liability has been recorded. Off-Balance Sheet Arrangements The Company is required to provide standby letters of credit related to our securitized financing facility. Although the letters of credit are off-balance sheet, the obligations to which they relate are reflected as liabilities in the Consolidated Balance Sheet. Outstanding letters of credit totaled $4.9 million at December 26, 2020. We do not believe that these arrangements have or are likely to have a material effect on our results of operations, financial condition, revenues or expenses, capital expenditures or liquidity. Critical Accounting Policies and Estimates Our consolidated financial statements and accompanying notes are prepared in accordance with GAAP. Preparing consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, 39 revenues 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 more fully described in Note 1 to our consolidated financial statements. However, we believe the accounting policies described below are particularly important to the portrayal and understanding of our financial position and results of operations. Revenue Recognition 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. Our 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 we do not consider them to be individually distinct and therefore account for them 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, including 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. Our franchise agreement royalties, inclusive of Ad Fund contributions, represent sales-based royalties that are related entirely to our 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. Our 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.