Wingstop Inc. 10-K

Item 9A. Controls and Procedures Evaluation of Disclosure Controls and Procedures Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures, pursuant to Rule 13a-15 under the Exchange Act, as of the end of the period covered by this Annual Report on Form 10-K. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 25, 2021 to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Changes in Internal Control over Financial Reporting There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 40 Management’s Report on Internal Control over Financial Reporting The management of Wingstop Inc. is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act. Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of our financial reporting for external purposes in accordance with accounting principles generally accepted in the United States. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Our management, including our Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of our internal control over financial reporting as of December 25, 2021. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework (2013) . Based on such assessment our management has concluded that, as of December 25, 2021, our internal control over financial reporting is effective based on those criteria. KPMG LLP, an independent registered public accounting firm, has issued an attestation report, included herein, on the effectiveness of our internal control over financial reporting as of December 25, 2021. 41 Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors Wingstop Inc.: Opinion on Internal Control Over Financial Reporting We have audited Wingstop Inc. and subsidiaries’ (the Company) internal control over financial reporting as of December 25, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 25, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 25, 2021 and December 26, 2020, the related consolidated statements of comprehensive income, stockholders’ deficit, and cash flows for each of the fiscal years in the three-year period ended December 25, 2021, and the related notes (collectively, the consolidated financial statements), and our report dated February 16, 2022 expressed an unqualified opinion on those consolidated financial statements. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ KPMG LLP Dallas, Texas February 16, 2022 42 Item 9B. Other Information None. Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections. Not applicable. 43 PART III Item 10. Directors, Executive Officers and Corporate Governance Information required by this Item 10 will be included in our definitive Proxy Statement for the 2022 Annual Meeting of Stockholders and such disclosure is incorporated herein by reference. Item 11. Executive Compensation Information required by this Item 11 will be included in our definitive Proxy Statement for the 2022 Annual Meeting of Stockholders and such disclosure is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information required by this Item 12 will be included in our definitive Proxy Statement for the 2022 Annual Meeting of Stockholders and such disclosure is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions, and Director Independence Information required by this Item 13 will be included in our definitive Proxy Statement for the 2022 Annual Meeting of Stockholders and such disclosure is incorporated herein by reference. Item 14. Principal Accounting Fees and Services The Company’s independent registered public accounting firm is KPMG LLP. Information required by this Item 14 will be included in our definitive Proxy Statement for the 2022 Annual Meeting of Stockholders and such disclosure is incorporated herein by reference. 44 PART IV Item 15. Exhibits and Financial Statement Schedules (a) Financial Statements Refer to Index to Financial Statements appearing on Page F-1. (b) Financial Statement Schedules No financial statement schedules are provided because the information called for is not required or is shown in the financial statements or the notes thereto. (c) Exhibits The exhibits listed below are filed or incorporated by reference as a part of this report. Exhibit No. Description 3.1 Amended and Restated Certificate of Incorporation of Wingstop Inc., as amended through June 15, 2020, filed as Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 27, 2020 (File No. 001-37425) and incorporated herein by reference. 3.2 Amended and Restated Bylaws of Wingstop Inc., filed as Exhibit 3.2 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 30, 2017 (File No. 001-37425) and incorporated herein by reference. 4.1 Form of Stock Certificate for Common Stock, filed as Exhibit 4.1 to the Company’s Registration Statement on Form S-1/A (Registration No. 333-203891) on June 2, 2015 and incorporated herein by reference. 4.2 Amended and Restated Base Indenture, dated as of October 30, 2020, by and between Wingstop Funding LLC, as Issuer, and Citibank, N.A., as Trustee and Securities Intermediary, filed as Exhibit 4.1 to the Current Report on Form 8-K (File No. 001-37425) of the Company on November 2, 2020 and incorporated herein by reference. 4.3 Series 2020-1 Supplement to Base Indenture, dated as of October 30, 2020, by and between Wingstop Funding LLC, as Issuer of the Series 2020-1 fixed rate senior secured notes, Class A-2, and Series 2020-1 variable funding senior secured notes, Class A-1, and Citibank, N.A., as Trustee and Series 2020-1 Securities Intermediary, filed as Exhibit 4.2 to the Company's Current Report on Form 8-K (File No. 001-37425) of the Company on November 2, 2020 and incorporated herein by reference. 4.4* Description of Wingstop Inc. Common Stock. 10.1 Amended and Restated Guarantee and Collateral Agreement, dated as of October 30, 2020, by and among Wingstop Guarantor LLC and Wingstop Franchising LLC, each as a Guarantor, in favor of Citibank, N.A., as Trustee, filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K (File No. 001-37425) on November 2, 2020 and incorporated herein by reference. 10.2 Amended and Restated Management Agreement, dated as of October 30, 2020, by and among Wingstop Funding LLC, Wingstop Franchising LLC, Wingstop Guarantor LLC, Wingstop Restaurants Inc., as Manager, and Citibank, N.A., as Trustee, filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K (File No. 001-37425) on November 2, 2020 and incorporated herein by reference. 10.3† Wingstop Inc. 2015 Omnibus Incentive Compensation Plan, filed as Exhibit 10.18 to the Company’s Registration Statement on Form S-1/A (Registration No. 333-203891) on June 2, 2015 and incorporated herein by reference. 10.4† Amendment One to the Wingstop Inc. 2015 Omnibus Incentive Compensation Plan, effective as of June 11, 2015, filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 27, 2015 (File No. 001-37425) and incorporated herein by reference. 10.5† Amendment Two to the Wingstop Inc. 2015 Omnibus Incentive Compensation Plan, effective as of August 3, 2017, filed as Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2017 (File No. 001-37425) and incorporated herein by reference. 10.6† Amended and Restated Form of Performance-based Restricted Stock Unit Award Agreement under the Wingstop Inc. 2015 Omnibus Incentive Compensation Plan, filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 28, 2020 (File No. 001-37425) and incorporated herein by reference. 10.7† Amended and Restated Form of Service-based Restricted Stock Unit Award Agreement under the Wingstop Inc. 2015 Omnibus Incentive Compensation Plan, filed as Exhibit 10.14 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 28, 2019 (File No. 001-37425) and incorporated herein by reference. 45 10.8† Amended and Restated Form of Restricted Stock Award Agreement under the Wingstop Inc. 2015 Omnibus Incentive Compensation Plan, filed as Exhibit 10.15 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 28, 2019 (File No. 001-37425) and incorporated herein by reference. 10.9† Amended and Restated Form of Stock Option Award Agreement under the Wingstop Inc. 2015 Omnibus Incentive Compensation Plan, filed as Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 28, 2020 (File No. 001-37425) and incorporated herein by reference. 10.10† Wingstop Inc. Amended and Restated Executive Severance Plan, effective as of February 26, 2019, filed as Exhibit 10.22 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 29, 2018 (File No. 001-37425) and incorporated herein by reference. 10.11† Form of Wingstop Inc. Executive Severance Plan Participation Agreement, filed as Exhibit 10.21 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 29, 2018 (File No. 001-37425) and incorporated herein by reference. 10.12† Amended and Restated Employment Agreement, dated November 13, 2019, by and between Wingstop Restaurants Inc. and Charles Morrison, filed as Exhibit 10.18 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 28, 2019 (File No. 001-37425) and incorporated herein by reference. 10.13† Form of Indemnification Agreement, filed as Exhibit 10.16 to the Company’s Registration Statement on Form S-1/A (Registration No. 333-203891) on June 2, 2015 and incorporated herein by reference. 10.14† Wingstop Inc. Employee Stock Purchase Plan, filed as Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 30, 2019 (File No. 001-37425) and incorporated herein by reference. 21.1* List of Subsidiaries of Wingstop Inc. 23.1* Consent of KPMG LLP, independent registered public accounting firm. 24.1* Powers of Attorney (included on the signature page to this Annual Report on Form 10-K) 31.1* Certification of Chief Executive Officer, pursuant to Rule 13a-14(a) or 15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2* Certification of Chief Financial Officer, pursuant to Rule 13a-14(a) or 15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1** Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2** Certification of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 101.INS* Inline XBRL Instance Document (XBRL tags are embedded within the Inline XBRL document). 101.SCH* Inline XBRL Taxonomy Extension Schema Document. 101.CAL* Inline XBRL Taxonomy Extension Calculation Linkbase Document. 101.DEF* Inline XBRL Taxonomy Extension Definition Linkbase Document. 101.LAB* Inline XBRL Taxonomy Extension Label Linkbase Document. 101.PRE* Inline XBRL Taxonomy Extension Presentation Linkbase Document. 104* Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101). ___________________ * Filed herewith. ** The certifications attached as Exhibits 32.1 and 32.2 furnished herewith are not deemed “filed” with the SEC and are not to be incorporated by reference into any filing of Wingstop Inc. under the Securities Act or the Exchange Act, whether made before or after the date of this Annual Report on Form 10-K, irrespective of any general incorporation language contained in such filing except to the extent the registrant specifically incorporates it by reference. † Indicates management contract or compensatory plan or arrangement. Item 16. Form 10-K Summary None. 46 Signatures Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Wingstop Inc. /s/ Charles R. Morrison Charles R. Morrison Chairman and Chief Executive Officer (Principal Executive Officer and duly authorized officer) Pursuant to the requirements of the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Name Title Date /s/ Charles R. Morrison Chairman and Chief Executive Officer February 16, 2022 Charles R. Morrison (Principal Executive Officer) /s/ Alex R. Kaleida Chief Financial Officer February 16, 2022 Alex R. Kaleida (Principal Financial and Accounting Officer) /s/ Lynn Crump-Caine Lead Independent Director February 16, 2022 Lynn Crump-Caine /s/ Krishnan Anand Director February 16, 2022 Krishnan Anand /s/ David L. Goebel Director February 16, 2022 David L. Goebel /s/ Michael J. Hislop Director February 16, 2022 Michael J. Hislop /s/ Kate S. Lavelle Director February 16, 2022 Kate S. Lavelle /s/ Kilandigalu M. Madati Director February 16, 2022 Kilandigalu M. Madati /s/ Wesley S. McDonald Director February 16, 2022 Wesley S. McDonald 47 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Consolidated Financial Statements Report of Independent Registered Public Accounting Firm (PCAOB ID 185 ) 2 Consolidated Balance Sheets as of December 25, 2021 and December 26, 2020 4 Consolidated Statements of Comprehensive Income for the fiscal years ended December 25, 2021, December 26, 2020, and December 28, 2019 5 Consolidated Statements of Stockholders’ Deficit for the fiscal years ended December 25, 2021, December 26, 2020, and December 28, 2019 6 Consolidated Statements of Cash Flows for the fiscal years ended December 25, 2021, December 26, 2020, and December 28, 2019 7 Notes to Consolidated Financial Statements for the fiscal years ended December 25, 2021, December 26, 2020, and December 28, 2019 8 F-1 Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors Wingstop Inc.: Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of Wingstop Inc. and subsidiaries (the Company) as of December 25, 2021 and December 26, 2020, the related consolidated statements of comprehensive income, stockholders’ deficit, and cash flows for each of the fiscal years in the three-year period ended December 25, 2021, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 25, 2021 and December 26, 2020, and the results of its operations and its cash flows for each of the fiscal years in the three-year period ended December 25, 2021, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 25, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 16, 2022 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Evaluation of the sufficiency of audit evidence obtained over royalty revenue and advertising fees As discussed in Notes 1 and 17 to the consolidated financial statements, the Company recognized $119.4 million of royalty revenue and $81.5 million of advertising fees for the year ended December 25, 2021. Royalty revenue and advertising fees are calculated as a percentage of franchise restaurant sales over the term of the franchise agreement. We identified the evaluation of the sufficiency of audit evidence obtained over royalty revenue and advertising fees as a critical audit matter. This evaluation required especially challenging auditor judgement because such revenue streams are dependent upon the franchise restaurant sales reported by the franchised restaurants through the franchisees’ point-of-sale systems. The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls over the Company’s revenue process, including controls over F-2 (1) the royalty and advertising fund contribution rates and (2) the reconciliation of royalty revenue and advertising fees recognized with the amount of cash received from franchisees for royalty and advertising fees. We involved IT professionals with specialized skills and knowledge who assisted in testing the information systems used in the revenue process. We compared revenue recognized to cash received for the year for royalty revenue and advertising fees. We sent third-party confirmations to a sample of franchisees regarding the amount of royalties and advertising fees that they owed to the Company. In addition, we evaluated the overall sufficiency of the audit evidence obtained over royalty revenue and advertising fees. /s/ KPMG LLP We have served as the Company’s auditor since 2019. Dallas, Texas February 16, 2022 F-3 WINGSTOP INC. AND SUBSIDIARIES Consolidated Balance Sheets (amounts in thousands, except share and par value data) December 25, 2021 December 26, 2020 Assets Current assets Cash and cash equivalents $ 48,583 $ 40,858 Restricted cash 3,448 4,815 Accounts receivable, net 6,993 4,929 Prepaid expenses and other current assets 4,928 5,532 Advertising fund assets, restricted 6,197 16,486 Total current assets 70,149 72,620 Property and equipment, net 54,503 27,948 Goodwill 56,877 53,690 Trademarks 32,700 32,700 Customer relationships, net 10,302 11,600 Other non-current assets 24,672 13,007 Total assets $ 249,203 $ 211,565 Liabilities and stockholders' deficit Current liabilities Accounts payable $ 5,414 $ 3,658 Other current liabilities 28,070 26,729 Current portion of debt — 3,600 Advertising fund liabilities 6,197 16,486 Total current liabilities 39,681 50,473 Long-term debt, net 469,394 466,933 Deferred revenues, net of current 28,024 24,962 Deferred income tax liabilities, net 7,432 4,480 Other non-current liabilities 14,197 6,027 Total liabilities 558,728 552,875 Commitments and contingencies (see Note 13) Stockholders' deficit Common stock, $ 0.01 par value; 100,000,000 shares authorized; 29,837,454 and 29,687,123 shares issued and outstanding as of December 25, 2021 and December 26, 2020, respectively 299 297 Additional paid-in-capital 463 421 Retained deficit ( 310,031 ) ( 342,028 ) Accumulated other comprehensive loss ( 256 ) — Total stockholders' deficit ( 309,525 ) ( 341,310 ) Total liabilities and stockholders' deficit $ 249,203 $ 211,565 See accompanying notes to consolidated financial statements. F-4 WINGSTOP INC. AND SUBSIDIARIES Consolidated Statements of Comprehensive Income (amounts in thousands, except per share data) Fiscal Year Ended December 25, 2021 December 26, 2020 December 28, 2019 Revenue: Royalty revenue, franchise fees and other $ 130,676 $ 108,883 $ 88,291 Advertising fees 81,529 74,930 55,932 Company-owned restaurant sales 70,297 64,998 55,453 Total revenue 282,502 248,811 199,676 Costs and expenses: Cost of sales (1) 57,416 48,583 41,105 Advertising expenses 83,989 77,329 60,008 Selling, general and administrative 62,895 61,084 50,178 Depreciation and amortization 7,943 7,518 5,484 Gain on sale of restaurants and other expenses, net ( 3,497 ) ( 3,093 ) — Total costs and expenses 208,746 191,421 156,775 Operating income 73,756 57,390 42,901 Interest expense, net 14,984 16,782 17,136 Loss on debt extinguishment and refinancing transactions — 13,665 — Other income ( 135 ) — — Income before income tax expense 58,907 26,943 25,765 Income tax expense 16,249 3,637 5,289 Net income $ 42,658 $ 23,306 $ 20,476 Earnings per share Basic $ 1.43 $ 0.79 $ 0.70 Diluted $ 1.42 $ 0.78 $ 0.69 Weighted average shares outstanding Basic 29,769 29,601 29,415 Diluted 29,944 29,804 29,670 Dividends per share $ 0.62 $ 5.50 $ 0.40 Other comprehensive income (loss) Currency translation adjustment $ ( 256 ) $ — $ — Other comprehensive income (loss) ( 256 ) — — Comprehensive income $ 42,402 $ 23,306 $ 20,476 (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. F-5 WINGSTOP INC. AND SUBSIDIARIES Consolidated Statements of Stockholders’ Deficit (amounts in thousands, except share data) Common Stock Shares Amount Additional Paid-In Capital Retained Deficit Accumulated Other Comprehensive Loss 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 — — — 20,476 — 20,476 Shares issued under stock plans 176,201 2 687 — — 689 Tax payments for restricted stock upon vesting ( 15,912 ) — — ( 1,149 ) — ( 1,149 ) Stock-based compensation expense — — 6,974 — — 6,974 Dividends declared on common stock and equivalents — — ( 8,145 ) ( 3,597 ) — ( 11,742 ) Balance at December 28, 2019 29,457,228 295 552 ( 210,275 ) — ( 209,428 ) Net income — — — 23,306 — 23,306 Shares issued under stock plans 233,051 2 923 — — 925 Tax payments for restricted stock upon vesting ( 3,156 ) — — ( 340 ) — ( 340 ) Stock-based compensation expense — — 8,558 — — 8,558 Dividends declared on common stock and equivalents — — ( 9,612 ) ( 154,719 ) — ( 164,331 ) Balance at December 26, 2020 29,687,123 297 421 ( 342,028 ) — ( 341,310 ) Net income — — — 42,658 — 42,658 Shares issued under stock plans 161,873 2 746 — — 748 Tax payments for restricted stock upon vesting ( 11,542 ) — — ( 1,915 ) — ( 1,915 ) Stock-based compensation expense — — 9,631 — — 9,631 Dividends declared on common stock and equivalents — — ( 10,335 ) ( 8,746 ) — ( 19,081 ) Currency translation adjustment — — — — ( 256 ) ( 256 ) Balance at December 25, 2021 29,837,454 299 463 ( 310,031 ) ( 256 ) ( 309,525 ) See accompanying notes to consolidated financial statements. F-6 WINGSTOP INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (amounts in thousands) Fiscal Year Ended December 25, 2021 December 26, 2020 December 28, 2019 Operating activities Net income $ 42,658 $ 23,306 $ 20,476 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization 7,943 7,518 5,484 Deferred income taxes 2,953 ( 4 ) ( 426 ) Stock-based compensation expense 9,631 8,558 6,974 Gain on disposal of assets ( 3,497 ) ( 3,093 ) — Loss on debt extinguishment and refinancing transactions — 13,665 — Amortization of debt issuance costs 1,401 1,567 1,586 Changes in operating assets and liabilities: Accounts receivable ( 2,135 ) 246 496 Prepaid expenses and other assets ( 2,659 ) 1,089 323 Advertising fund assets and liabilities, net ( 10,723 ) 10,061 ( 449 ) Accounts payable and other current liabilities ( 268 ) 1,507 3,086 Deferred revenue 3,386 3,198 881 Other non-current liabilities 188 ( 2,088 ) 152 Cash provided by operating activities 48,878 65,530 38,583 Investing activities Purchases of property and equipment ( 28,021 ) ( 6,052 ) ( 22,486 ) Acquisitions of restaurants from franchisees ( 4,876 ) ( 6,735 ) ( 1,245 ) Proceeds from sales of assets 7,207 4,800 — Payments for investments (Note 10) ( 4,163 ) — — Cash used in investing activities ( 29,853 ) ( 7,987 ) ( 23,731 ) Financing activities Proceeds from exercise of stock options 748 925 689 Borrowings of long-term debt — 496,000 5,000 Repayments of long-term debt ( 2,400 ) ( 333,600 ) ( 7,400 ) Payment of deferred financing costs and other debt-related costs — ( 18,641 ) ( 15 ) Tax payments for restricted stock upon vesting ( 1,915 ) ( 340 ) ( 1,149 ) Dividends paid ( 19,822 ) ( 163,792 ) ( 11,742 ) Cash used in financing activities ( 23,389 ) ( 19,448 ) ( 14,617 ) Net increase (decrease) in cash, cash equivalents, and restricted cash ( 4,364 ) 38,095 235 Cash, cash equivalents, and restricted cash at beginning of period 59,270 21,175 20,940 Cash, cash equivalents, and restricted cash at end of period $ 54,906 $ 59,270 $ 21,175 Supplemental information: Accrued capital expenditures $ 5,074 $ — $ — Cash paid for interest $ 15,035 $ 14,549 $ 16,929 Cash paid for taxes $ 10,423 $ 7,262 $ 5,407 See accompanying notes to consolidated financial statements. F-7 WINGSTOP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (1) Basis of Presentation and Summary of Significant Accounting Policies Overview Wingstop Inc., together with its consolidated subsidiaries (collectively, “Wingstop” or the “Company”), is in the business of franchising and operating Wingstop restaurants. As of December 25, 2021, the Company had a total of 1,731 restaurants in its system. The Company's restaurant base is 98 % franchised, with 1,695 franchised locations (including 197 international locations) and 36 company-owned restaurants as of December 25, 2021. The Company operates as a single segment for reporting purposes. Summary of Significant Accounting Policies (a) Principles of Consolidation The accompanying consolidated financial statements include the accounts of Wingstop Inc. and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. (b) Fiscal Year End The Company uses a 52/53-week fiscal year that ends on the last Saturday of the calendar year. Fiscal years 2021, 2020, and 2019 each consisted of 52 weeks. (c) Use of Estimates The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions, primarily related to long-lived asset valuation, indefinite and finite lived intangible asset valuation, income taxes, investments, leases, stock-based compensation, contingencies, and common stock equity valuations. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the period. Although management bases its estimates on historical experience and assumptions that are believed to be reasonable under the circumstances, actual results could differ from those estimates. (d) Cash, Cash Equivalents, and Restricted Cash The Company continually monitors its positions with, and the credit quality of, the financial institutions in which it maintains its deposits and investments. As of December 25, 2021 and December 26, 2020, the Company maintained balances in various cash accounts in excess of federally insured limits. All highly liquid instruments purchased with an original maturity of three months or less are considered cash equivalents. Restricted cash includes cash and cash equivalents held for future principal and interest payments as required by the Company's debt agreements (see Note 11). The Company also has Advertising fund restricted cash, which can only be used for activities that promote the Wingstop brand. F-8 Cash, cash equivalents, and restricted cash within the Consolidated Balance Sheets that are included in the Consolidated Statements of Cash Flows as of December 25, 2021 and December 26, 2020 were as follows (in thousands): December 25, 2021 December 26, 2020 Cash and cash equivalents $ 48,583 $ 40,858 Restricted cash 3,448 4,815 Restricted cash, included in Advertising fund assets, restricted 2,875 13,597 Total cash, cash equivalents, and restricted cash $ 54,906 $ 59,270 (e) Accounts Receivable Accounts receivable, net of allowance for doubtful accounts, consists primarily of accrued royalty fee receivables, collected weekly in arrears, and vendor rebates. Management determines the allowance for doubtful accounts based on historical losses and current economic conditions. On a continuing basis, management analyzes delinquent receivables, which are charged off against the existing allowance account when determined to be uncollectible. (f) Inventories Inventories, which consist of food and beverage products, paper goods, and supplies, are valued at the lower of cost (first-in, first-out) or market. (g) Property and Equipment Property and equipment is recorded at cost less accumulated depreciation. Property and equipment is depreciated based on the straight-line method over the following estimated useful lives: Property and Equipment Estimated Useful Lives Building 40 years Leasehold and other improvements Lesser of 7 to 10 years or the expected lease term Equipment, furniture and fixtures 3 to 7 years Computer software 3 years At the time property and equipment are retired, the asset and accumulated depreciation are removed from the accounts, and any resulting gain or loss is included in earnings. The Company expenses repair and maintenance costs that maintain the appearance and functionality of the restaurant but do not extend the useful life of any restaurant asset. Improvements to leased properties are depreciated over the shorter of their useful life or the lease term, which includes a fixed, non-cancelable lease term plus any reasonably assured renewal periods. (h) Impairment or Disposal of Long-Lived Assets Property and equipment and finite-life intangible assets are reviewed for impairment periodically and whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. The Company’s assessment of recoverability of property and equipment and finite-lived intangible assets is performed at the component level, which is generally an individual restaurant and requires judgment and an estimate of future restaurant generated cash flows. The Company’s estimates of fair values are based on the best information available and require the use of estimates, judgments, and projections. The Company did no t record any impairment losses on long-lived assets in fiscal years 2021, 2020, or 2019. (i) Goodwill and Indefinite-Lived Intangible Assets The Company’s indefinite-lived intangible assets consist of goodwill and trademarks, which are not subject to amortization. On an annual basis (October 1 st of each fiscal year) and whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable, the Company reviews the recoverability of goodwill and indefinite-lived intangible assets. No indications of impairment were identified during fiscal years 2021, 2020, or 2019. F-9 It is possible that changes in circumstances or changes in management’s judgments, assumptions, and estimates could result in an impairment charge of a portion or all of its goodwill or other intangible assets. (j) Foreign Currency Translation The foreign currency translation adjustment included in the Consolidated Statements of Comprehensive Income represents the unrealized impact of translating our foreign investment. This amount is not included in Net income and would only be realized upon disposition of our investment. The related Accumulated other comprehensive loss is presented in the Consolidated Balance Sheets. (k) Revenue Recognition Revenues consist primarily of royalties, national advertising fund (the "Ad Fund") contributions, initial and renewal franchise fees, and upfront fees from development agreements and international territory agreements. The Company's performance obligations under its 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 contributions, 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 the Company's intellectual property over the term of each franchise agreement. Franchise fee, development fee and international territory fee payments received by the Company before the restaurant opens are recorded as deferred revenue in the Consolidated Balance Sheets. 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. The Company's franchise agreement royalties, inclusive of Ad Fund contributions, represent sales-based royalties that are related entirely to the Company's performance obligation under the franchise agreement and are recognized as franchised restaurant 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 Company's 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 apportioned to each franchised restaurant opened and accounted for as an initial franchise fee. The Company records food and beverage revenues from company-owned restaurants upon sale to the customer. The Company collects and remits sales, food and beverage, alcoholic beverage, and hospitality taxes on transactions with customers and reports such amounts under the net method in its Consolidated Statements of Comprehensive Income. Accordingly, these taxes are not included in gross revenue. The Company records a liability in the period in which a gift card is sold. As gift cards are redeemed, the liability is reduced. When gift cards are redeemed at a franchisee-operated restaurant, the revenue and related administrative costs are recognized by the franchisee. The Company recognizes revenue and related administrative costs when gift cards are redeemed at company-owned restaurants. (l) Consideration from Vendors The Company has entered into food and beverage supply agreements with certain major vendors. Pursuant to the terms of these arrangements, rebates are provided to the Company from the vendors based upon the dollar volume of purchases for company-owned restaurants and franchised restaurants. These incentives are recognized as earned throughout the year and are classified as a reduction in Cost of sales with any consideration received in excess of the total expense of the vendor’s products included within Royalty revenue, franchise fees and other within the Consolidated Statements of Comprehensive Income. The incentives recognized were approximately $ 8.7 million, $ 7.9 million, and $ 10.6 million, during fiscal years 2021, 2020, and 2019, respectively, of which $ 1.6 million, $ 1.3 million, and $ 1.6 million was classified as a reduction in Cost of sales during fiscal years 2021, 2020, and 2019, respectively. (m) Advertising Expenses The Company administers the Ad Fund, for which a percentage of gross sales is collected from domestic restaurant franchisees and company-owned restaurants to be used for various forms of advertising for the Wingstop brand. Under this program, domestic franchisees contributed 4 % of gross sales for fiscal years 2021, 2020, and 2019. F-10 The Company administers and directs the development of all advertising and promotion programs in the Ad Fund for which it collects advertising contributions in accordance with the provisions of its franchise agreements. The Company has a contractual obligation with regard to these advertising contributions. The Company consolidates and reports all assets and liabilities of the Ad Fund as restricted assets of the Ad Fund and liabilities of the Ad Fund within current assets and current liabilities, respectively, in the Consolidated Balance Sheets. The assets and liabilities of the Ad Fund consist primarily of cash, receivables, accrued expenses, and other liabilities. Pursuant to the Company’s franchise agreements, use of Ad Fund contributions is restricted to advertising, public relations, merchandising, similar activities, and administrative expenses to increase sales and further enhance the public reputation of the Wingstop brand. The aforementioned administrative expenses may also include personnel expenses and allocated costs incurred by the Company that are directly associated with administering the Ad Fund, as outlined in the provisions of the applicable franchise agreements. The Company expenses the production costs of advertising in the period in which the advertising first occurs. All other advertising and promotional costs are expensed in the period incurred. When contributions to the Ad Fund exceed the related advertising expenses, advertising costs are accrued up to the amount of the related contributions. Ad Fund contributions and expenditures are reported on a gross basis on the Consolidated Statements of Comprehensive Income, which are largely offsetting and therefore do not impact the Company's reported net income in years when contributions to the Ad Fund exceed advertising expenses incurred. Beginning in the first quarter of 2021, headcount-related expenses for employees that provide services directly to the Ad Fund are presented within Advertising expenses on the Consolidated Statements of Comprehensive Income. Prior to the first quarter of 2021, these expenses were presented within Selling, general and administrative. Prior period amounts have been reclassified to conform to the current presentation. This reclassification had no impact on operating income, balance sheets, or statements of cash flows. Headcount-related expenses associated with the Ad Fund were $ 8.6 million, $ 7.9 million, and $ 7.1 million in fiscal years 2021, 2020, and 2019, respectively. Advertising expenses incurred by company-owned restaurants are included within Cost of sales in the Consolidated Statements of Comprehensive Income. Company-owned restaurants incurred advertising expenses of $ 3.3 million, $ 3.3 million, and $ 2.9 million in fiscal years 2021, 2020, and 2019, respectively. (n) Leases The Company determines whether an arrangement is a lease at inception and leases restaurants and office space under operating leases. Most lease agreements contain tenant improvement allowances, rent holidays, rent escalation clauses, and/or contingent rent provisions. For leases with renewal periods at the Company’s option, the Company determines the expected lease period based on whether the renewal of any options are reasonably certain at the inception of the lease. For purposes of measurement and amortization of the right-of-use asset and associated lease liability over the terms of the leases, the Company uses the date it takes possession of the leased space for construction purposes at the beginning of the lease term, which is generally two to three months prior to a restaurant’s opening date. As most leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available on the commencement date in determining the present value of lease payments. The Company has lease agreements that contain both lease and non-lease components which are not separated. Certain leases require the Company to pay a portion of real estate taxes, utilities, building operating expenses, insurance, and other charges in addition to rent. (o) Stock-Based Compensation The Company measures stock-based compensation cost at fair value on the date of grant for all share-based awards and recognizes compensation expense over the service period that the awards are expected to vest. The Company has elected to recognize compensation cost for graded-vesting awards subject only to a service condition over the requisite service period of the entire award. For performance awards, the Company recognizes expense in the period in which vesting becomes probable. The Company accounts for forfeitures as they occur. (p) Income Taxes Income taxes are accounted for under the asset and liability method. Under this method, a deferred tax asset or liability is recognized for the estimated future tax effects attributable to temporary differences between the financial statement basis and the tax basis of assets and liabilities as well as tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period of the change. The Company files a consolidated federal income tax return including all of its subsidiaries. F-11 Judgment is required in evaluating the Company’s uncertain tax positions and determining the Company’s income tax expense. The Company assesses the income tax position and records the liabilities for all years subject to examination based upon management’s evaluation of the facts, circumstances, and information available at the reporting date. (q) Recent Accounting Pronouncements We reviewed all recently issued accounting pronouncements and concluded that they were either not applicable or not expected to have a significant impact on our consolidated financial statements. (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, determined using the treasury stock method. Basic weighted average shares outstanding is reconciled to diluted weighted average shares outstanding as follows (in thousands): Fiscal Year December 25, 2021 December 26, 2020 December 28, 2019 Basic weighted average shares outstanding 29,769 29,601 29,415 Dilutive shares 175 203 255 Diluted weighted average shares outstanding 29,944 29,804 29,670 We had approximately 3,000 , 1,000 , and 3,000 equity awards outstanding at December 25, 2021, December 26, 2020, and December 28, 2019, respectively, that were excluded from the dilutive earnings per share calculation because the effect would have been anti-dilutive. (3) Dividends In connection with the Company's regular dividend program, the Company declared and paid dividends of $ 18.5 million, or $ 0.62 per common share, in fiscal year 2021, $ 14.8 million, or $ 0.50 per common share in fiscal year 2020, and $ 11.7 million, or $ 0.40 per common share in fiscal year 2019. Subsequent to the end of fiscal year 2021, on February 15, 2022, the Company’s board of directors declared a quarterly dividend of $ 0.17 per share of common stock, to be paid on March 25, 2022 to stockholders of record as of March 11, 2022, totaling approximately $ 5.1 million. Separate from the Company's regular dividend program, the Company declared and paid special dividends of $ 148.4 million, or $ 5.00 per share of common stock, in fiscal year 2020. No special dividends were declared or paid during fiscal years 2021 and 2019. (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. F-12 Level 3 - Unobservable inputs reflecting management’s estimates and assumptions. The carrying values of cash and cash equivalents, accounts receivable and accounts payable approximate fair value due to their short-term nature. Fair value of debt is determined on a non-recurring basis, which results are summarized as follows (in thousands): Fair Value Hierarchy December 25, 2021 December 26, 2020 Carrying Value Fair Value Carrying Value Fair Value Securitized Financing Facility: 2020-1 Class A-2 Senior Secured Notes (1) Level 2 $ 477,600 $ 480,676 $ 480,000 $ 483,365 Investments (Note 10) (2) Level 3 $ 4,151 $ 4,151 $ — $ — (1) The fair value of long-term debt was estimated using available market information. (2) The fair values of our investments were not significant and were based on our review of information provided by the investment managers or investees. (5) Accounts Receivable, net Accounts receivable, net, consist of the following (in thousands): December 25, 2021 December 26, 2020 Vendor rebates receivable $ 2,319 $ 1,944 Royalties receivable (net of allowance for doubtful accounts of $ 0 and $ 1,053 , respectively) 2,758 2,097 Other receivables, net 1,916 888 Accounts receivable, net $ 6,993 $ 4,929 (6) Property and Equipment Property and equipment, net, consisted of the following (in thousands): December 25, 2021 December 26, 2020 Building 15,769 15,405 Construction in progress 12,989 2,853 Equipment, furniture and fixtures 27,674 14,633 Leasehold and other improvements 18,047 9,876 Land 2,828 2,828 Property and equipment, gross 77,307 45,595 Less: accumulated depreciation ( 22,804 ) ( 17,647 ) Property and equipment, net $ 54,503 $ 27,948 Depreciation expense was $ 5.6 million, $ 5.2 million, and $ 3.1 million for the fiscal years ended December 25, 2021, December 26, 2020, and December 28, 2019, respectively. F-13 (7) Intangible Assets and Goodwill The Company’s goodwill and other intangible assets arose from Wingstop’s acquisition of the equity interests of Wingstop Holdings, Inc. in April 2010, as well as the acquisition of restaurants from franchisees. Goodwill represents the excess of purchase consideration transferred for the respective reporting unit over the fair value of the business at the time of the acquisition. The following is a summary of goodwill balances and activity (in thousands): December 25, 2021 December 26, 2020 Balance, beginning of period $ 53,690 $ 50,188 Acquisition of restaurants, net 3,187 3,502 Balance, end of period $ 56,877 $ 53,690 Intangible assets, excluding goodwill, consisted of the following (in thousands): December 25, 2021 December 26, 2020 Weighted Average Amortization Period (in years) Intangible assets: Trademarks $ 32,700 $ 32,700 Indefinite-lived assets 32,700 32,700 Customer relationships 26,300 26,300 20.0 Franchise rights (1) 7,038 8,121 6.5 Proprietary software (1) 115 115 5.0 Noncompete agreements (1) 250 250 2.8 Less: accumulated amortization ( 20,160 ) ( 18,155 ) Definite-lived assets 13,543 16,631 17.0 Intangible assets, net $ 46,243 $ 49,331 (1) Included within Other non-current assets net of associated accumulated amortization within the Consolidated Balance Sheets. Amortization expense for definite-lived intangibles was $ 2.3 million, in fiscal years 2021 and 2020, and $ 2.4 million in fiscal year 2019. Estimated amortization expense, principally related to customer relationships, for the five succeeding fiscal years and the aggregate thereafter is (in thousands): Fiscal year 2022 $ 2,087 Fiscal year 2023 1,973 Fiscal year 2024 1,807 Fiscal year 2025 1,696 Fiscal year 2026 1,560 Thereafter 4,420 Total $ 13,543 F-14 (8) Prepaid Expenses and Other Current Assets and Other Current Liabilities Prepaid expenses and other current assets consisted of the following (in thousands): December 25, 2021 December 26, 2020 Prepaid expenses $ 2,533 $ 1,534 Federal income tax receivable 1,117 3,602 Inventories 484 396 Other current assets 794 — Total $ 4,928 $ 5,532 Other current liabilities consisted of the following (in thousands): December 25, 2021 December 26, 2020 Accrued payroll and incentive compensation $ 9,965 $ 11,175 Current portion of deferred revenues 3,664 3,221 Short term lease liability 2,443 2,385 Accrued interest 810 2,222 Gift card liability 1,342 1,363 Other accrued liabilities 9,846 6,363 Total $ 28,070 $ 26,729 (9) Income Taxes Income tax expense for the fiscal years 2021, 2020, and 2019 consisted of the following (in thousands): Fiscal Year December 25, 2021 December 26, 2020 December 28, 2019 Current expense Federal $ 10,432 $ 2,454 $ 4,286 State 2,601 996 1,170 Foreign 263 191 259 Deferred expense (benefit) Federal 2,994 42 ( 579 ) State ( 41 ) ( 46 ) 153 Income tax expense $ 16,249 $ 3,637 $ 5,289 F-15 A reconciliation of income tax at the U.S. federal statutory tax rate (using a statutory tax rate of 21 %) to income tax expense for fiscal years 2021, 2020, and 2019 in dollars is as follows (in thousands): Fiscal Year December 25, 2021 December 26, 2020 December 28, 2019 Expected income tax expense at statutory rate $ 12,370 $ 5,658 $ 5,411 Excess tax benefits from equity compensation ( 591 ) ( 3,963 ) ( 1,777 ) Non-deductible expenses 1,880 690 942 State tax expense, net of federal benefit 2,091 620 985 Foreign tax expense 263 191 259 Foreign tax credits ( 263 ) ( 191 ) ( 259 ) Increase (decrease) in unrecognized tax benefit 296 102 ( 128 ) Other 203 530 ( 144 ) Income tax expense $ 16,249 $ 3,637 $ 5,289 The components of deferred tax assets (liabilities) were as follows (in thousands): December 25, 2021 December 26, 2020 Deferred tax assets: Deferred revenue $ 5,644 $ 4,873 Accrued incentive compensation 834 1,089 Stock based compensation 921 738 Lease liabilities 3,747 1,798 Intangible assets 87 82 Other 452 628 Net operating loss carryforwards and credits 1,082 987 Valuation allowance ( 577 ) ( 577 ) 12,190 9,618 Deferred tax liabilities: Intangible assets ( 10,518 ) ( 10,599 ) Right of use assets ( 3,411 ) ( 1,440 ) Property and equipment ( 5,693 ) ( 2,059 ) ( 19,622 ) ( 14,098 ) Net deferred tax liability $ ( 7,432 ) $ ( 4,480 ) The Company had a state net operating loss carry-forward of $ 23.3 million at December 25, 2021 and December 26, 2020. The state net operating loss carry forwards begin to expire in 2030. The Company had a valuation allowance of $ 577,000 against its deferred tax assets as of December 25, 2021 and December 26, 2020. In assessing whether a deferred tax asset will be realized, the Company considers whether it is more likely than not that either some portion or all of the deferred tax assets will not be realized. The Company considers the reversal of existing taxable temporary differences, projected future taxable income and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, the Company believes it is more likely than not that it will realize a portion of the benefits of the federal and state deductible differences. The Company files income tax returns, which are periodically audited by various federal and state jurisdictions. The Company's income tax returns prior to tax year 2018 are generally considered closed to examination by the applicable tax authorities. F-16 A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands): Balance as of December 29, 2018 $ 913 Additions for tax positions of prior years 187 Subtractions for tax positions of prior years ( 330 ) Additions for tax positions of current year 929 Subtractions for tax positions of current year — Balance as of December 28, 2019 1,699 Additions for tax positions of prior years — Subtractions for tax positions of prior years ( 959 ) Additions for tax positions of current year 54 Subtractions for tax positions of current year — Balance as of December 26, 2020 794 Additions for tax positions of prior years — Subtractions for tax positions of prior years ( 34 ) Additions for tax positions of current year 295 Subtractions for tax positions of current year — Balance as of December 25, 2021 $ 1,055 As of December 25, 2021 and December 26, 2020, the accrued interest and penalties on the unrecognized tax benefits were $ 429,000 and $ 325,000 , respectively, excluding any related income tax benefits. The Company recorded accrued interest related to the unrecognized tax benefits and penalties as a component of the provision for income taxes recognized in the Consolidated Statement of Comprehensive Income. At December 25, 2021 and December 26, 2020, the amount of unrecognized tax benefits was $ 1,055,000 and $ 794,000 , respectively, which, if ultimately recognized, would reduce the Company’s effective tax rate. (10) Investments In the second quarter of 2021, a wholly-owned subsidiary of the Company acquired a 20 % non-controlling interest in Wingstop’s United Kingdom master franchisee, Lemon Pepper Holdings Ltd., (“LPH”) for an aggregate amount of $ 4.2 million. Substantially all of the investment consisted of bonds issued by a subsidiary of LPH, which are recorded on an amortized cost basis. The fair value of the bonds approximates the current carrying value and was determined using Level 3 inputs. In addition, the Company received 20 % of the outstanding stock, which will be accounted for using the equity method of accounting, under which the Company’s share of the income of the investee will be recorded in Other income on the Consolidated Statements of Comprehensive Income. The company recorded adjustments of $ 12,000 to the carrying amount in 2021. (11) Debt Obligations Long-term debt consisted of the following components (in thousands): December 25, 2021 December 26, 2020 2020-1 Class A-2 Senior Secured Notes $ 477,600 $ 480,000 Debt issuance costs, net of amortization ( 8,206 ) ( 9,467 ) Less: current portion of debt — ( 3,600 ) Long-term debt, net $ 469,394 $ 466,933 As of December 25, 2021 the Company’s leverage ratio under the Class A-2 Notes was less than 5.0 x. Per the terms of the Company’s debt agreements, principal payments can be suspended at the borrower’s election until the repayment date as long as the Company maintains a leverage ratio of less than 5.0 x. Accordingly, the Company has elected to suspend payments following the principal payment made in the third quarter of 2021, and the entire outstanding balance of $ 477.6 million of the Class A-2 notes has been classified as long-term debt due after fiscal year 2026. F-17 Fiscal year 2022 $ — Fiscal year 2023 — Fiscal year 2024 — Fiscal year 2025 — Fiscal year 2026 — Thereafter 477,600 Total $ 477,600 Securitized Financing Facility In October 2020, the Company completed a transaction to refinance its previous securitized financing facility with a new securitized financing facility, pursuant to which the Issuer issued $ 480.0 million of its Series 2020-1 2.84 % Fixed Rate Senior Notes, Class A-2 (the “2020 Class A-2 Notes”) with an anticipated term of seven years . 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 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 principal outstanding on the previous securitized financing facility and to pay related transaction fees and expenses. The additional net proceeds were used to strengthen the Company's liquidity position and for general corporate purposes, which included a return of capital to the Company’s stockholders in 2020. No borrowings were outstanding under the 2020 Variable Funding Notes as of December 25, 2021. The 2020 Notes were issued in a securitization transaction, which is guaranteed by certain limited-purpose, bankruptcy-remote, wholly-owned indirect subsidiaries of the Company and secured by a security interest in substantially all of their assets, including certain domestic and foreign revenue-generating assets, consisting principally of franchise-related agreements and intellectual property. The 2020 Notes were issued pursuant to a base indenture and related supplemental indentures (collectively, the “Indenture”). Interest and principal payments on the 2020 Class A-2 Notes are payable on a quarterly basis. The requirement to make such quarterly principal payments on the 2020 Class A-2 Notes is subject to certain financial conditions set forth in the Indenture. The legal final maturity date of the 2020 Notes is in December of 2050, but, unless earlier prepaid to the extent permitted under the Indenture, the anticipated repayment date of the 2020 Class A-2 Notes is December 2027. If the Issuer has not repaid or refinanced the 2020 Class A-2 Notes prior to the anticipated repayment date, additional interest will accrue on the Notes. The 2020 Variable Funding Notes accrue interest at a variable rate based on (i) the prime rate, (ii) the Eurodollar rate for U.S. Dollars (or a benchmark replacement), or (iii) 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 2020 Variable Funding Note Purchase Agreement, dated October 30, 2020. There is a commitment fee on the unused portion of the 2020 Variable Funding Notes facility, which is 30 basis points based on the utilization under the 2020 Variable Funding Notes facility. As of December 25, 2021, $ 3.5 million of letters of credit were outstanding against the 2020 Variable Funding Notes, which relate primarily to interest reserves required under the indenture. There were no amounts drawn down on the letters of credit as of December 25, 2021. During the fourth quarter of 2020, as a result of the repayment of the remaining $ 332.8 million of principal outstanding on the previous securitized financing facility, the Company recorded a loss on debt extinguishment of $ 13.7 million, consisting of a $ 5.4 million write-off of previously capitalized financing costs associated and $ 8.2 million of make-whole interest premium costs associated with the early repayment of the previous securitized financing facility. Total debt issuance costs incurred and capitalized in connection with the issuance of the 2020 Notes were $ 10.4 million. The 2020 Notes are subject to a series of covenants and restrictions customary for transactions of this type, including (i) that the Issuer maintains specified reserve accounts to be used to make required payments in respect of the 2020 Notes, (ii) provisions relating to optional and mandatory prepayments and the related payment of specified amounts, including specified make-whole payments in the case of the 2020 Class A-2 Notes under certain circumstances, (iii) certain indemnification payments in the event, among other things, that the assets pledged as collateral for the 2020 Notes are in stated ways defective or ineffective, and (iv) covenants relating to recordkeeping, access to information, and similar matters. The 2020 Notes are also subject to customary rapid amortization events provided for in the indenture, including events tied to failure to maintain stated debt service coverage ratios, the sum of global gross sales for specified restaurants being below certain levels on certain measurement dates, certain change of control and manager termination events, an event of default, and the failure to repay or F-18 refinance the 2020 Class A-2 Notes on the applicable scheduled maturity date. The 2020 Notes are also subject to certain customary events of default, including events relating to non-payment of required interest, principal or other amounts due on or with respect to the 2020 Notes, failure to comply with covenants within certain time frames, certain bankruptcy events, breaches of specified representations and warranties, failure of security interests to be effective, and certain judgments. As of December 25, 2021, the Company was in compliance with all financial covenants. (12) 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. The Company's leases have remaining terms of 0.5 years to 10.4 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. The Company's lease agreements do not contain any material residual value guarantees or material restrictive covenants. As most of the Company's leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available on the commencement date in determining the present value of lease payments. The Company has lease agreements that contain both lease and non-lease components. For real estate leases, the Company accounts for lease components together with non-lease components (e.g., common-area maintenance). Components of lease expense were as follows (in thousands): Year Ended December 25, 2021 December 26, 2020 Operating lease cost (1) $ 2,294 $ 2,439 Variable lease cost (2) 529 609 Total lease cost $ 2,823 $ 3,048 (1) Includes short-term leases, which are immaterial. (2) Primarily related to adjustments for inflation, common area maintenance, and property tax. Supplemental cash flow information related to leases is as follows (in thousands): Year Ended December 25, 2021 December 26, 2020 Operating cash flow information: Cash paid for amounts included in the measurement of lease liabilities $ 2,923 $ 2,426 Non-cash activity: Right-of-use assets obtained in exchange for new operating lease liabilities $ 12,107 $ 3,011 Supplemental balance sheet information related to our operating leases is as follows (in thousands): Year Ended Balance Sheet Classification December 25, 2021 December 26, 2020 Right-of-use assets Other non-current assets $ 15,032 $ 6,294 Current lease liabilities Other current liabilities 2,443 2,385 Non-current lease liabilities Other non-current liabilities 13,786 5,476 F-19 Weighted average lease term and discount rate information related to leases was as follows: Year Ended December 25, 2021 December 26, 2020 Weighted average remaining lease term of operating leases 7.4 years 4.0 years Weighted average discount rate of operating leases 3.81 % 3.58 % Maturities of lease liabilities by fiscal year are as follows (in thousands): Fiscal year 2022 $ 2,957 Fiscal year 2023 3,097 Fiscal year 2024 2,250 Fiscal year 2025 1,979 Fiscal year 2026 1,671 Thereafter 5,455 Total future minimum lease payments 17,408 Less: imputed interest ( 1,179 ) Total lease liabilities $ 16,229 (13) Commitments and Contingencies The Company is subject to legal proceedings, claims, and liabilities, such as employment-related claims and other 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 those actions should not have a material adverse impact on financial position, results of operations, or cash flows. The Company’s use of any forward pricing arrangements varies substantially from time to time and these arrangements tend to cover relatively short periods (i.e., typically 12 months or less). Such contracts are used in the normal purchases of our food products and not for speculative purposes. The Company does not enter into futures contracts or other derivative instruments. (14) Employee Benefit Plan The Company sponsors a 401(k) profit sharing plan for all employees who are eligible based upon age and length of service. The Company made matching contributions of approximately $ 670,000 , $ 735,000 , and $ 594,000 for fiscal years 2021, 2020, and 2019, respectively. (15) Stock-Based Compensation The Wingstop Inc. 2015 Omnibus Equity Incentive Plan (the "2015 Plan"), was adopted in June 2015 and is the only plan under which the Company currently grants awards. The 2015 Plan provides for the grant or award of stock options, stock appreciation rights, restricted stock awards, restricted stock units, performance unit awards, performance share awards, cash-based awards and other stock-based awards to employees, directors, and other eligible persons. Awards issued under the 2015 Plan expire ten years from the date of the grant. As of December 25, 2021, there were approximately 1.5 million shares available for future grants under the 2015 Plan. In the event of a change in control of the Company (as defined in the 2015 Plan and unless otherwise determined by the board of directors or the Compensation Committee of the board of directors), each outstanding award will become fully vested immediately prior to the change in control and shall be exchanged for cash. Stock-based compensation is measured at the grant date, based on the fair value of the award, and is recognized as an expense over the requisite employee service period. The Company recognized approximately $ 9.6 million, $ 8.6 million, and $ 7.0 million in stock compensation expense for fiscal years 2021, 2020, and 2019, respectively, with a corresponding increase to F-20 additional paid-in-capital. Stock compensation expense is included in Selling, general and administrative in the Consolidated Statements of Comprehensive Income. Assumptions made regarding forfeitures in determining the remaining unamortized share-based compensation are re-evaluated periodically. Stock Options The following table summarizes stock option activity: Number of Shares (in thousands) Weighted Average Exercise Price Aggregate Intrinsic Value (in thousands) Weighted Average Remaining Term (in years) Stock options outstanding at December 26, 2020 69 $ 78.40 $ 4,291 9.1 Options granted 42 $ 129.11 Options exercised ( 6 ) $ 66.94 Options forfeited ( 11 ) $ 104.99 Stock options outstanding at December 25, 2021 94 $ 98.87 $ 6,997 8.6 Stock options exercisable at December 25, 2021 18 $ 79.57 $ 1,678 8.2 The total intrinsic value of stock options exercised was $ 0.6 million, $ 15.8 million, and $ 6.7 million for fiscal years 2021, 2020, and 2019, respectively. As of December 25, 2021, there was $ 1.8 million of total unrecognized stock compensation expense related to non-vested stock options, which will be recognized over a weighted average period of approximately 1.7 years. The estimated fair value of each option granted is determined using the Black-Scholes option-pricing model. Expected volatilities are based on volatilities from publicly traded companies operating in the Company’s industry. The expected life of options granted is management’s best estimate using recent and expected transactions. The Company used the simplified method for determining the expected life of the options. The risk-free rate for periods within the expected life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The weighted-average assumptions used in the model were as follows: 2021 2020 Risk-free interest 0.6 % 0.7 % Expected life 4.2 years 4.2 years Expected dividend yield 0.4 % 0.5 % Expected volatility 41.8 % 34.4 % Weighted-average grant date fair value $ 42.51 $ 22.99 Restricted Stock Units Restricted stock units are granted to employees and vest in equal annual amounts over a three year period. The fair value of restricted stock units is based on the closing price on the date of grant. The following table summarizes activity related to restricted stock units: Number of Shares (in thousands) Weighted Average Grant Date Fair Value Nonvested restricted stock units at December 26, 2020 54 $ 76.27 Units granted 26 138.38 Units vested ( 28 ) 67.23 Units forfeited ( 11 ) 109.43 Nonvested restricted stock units at December 25, 2021 41 $ 111.52 As of December 25, 2021, total unrecognized compensation expense related to unvested restricted stock units was $ 3.2 million, which is expected to be recognized over a weighted-average period of 1.6 years. The weighted-average grant date fair value of restricted stock units granted was $ 138.38 , $ 94.12 , and $ 68.40 in fiscal years 2021, 2020, and 2019, respectively. The F-21 total fair value of restricted stock units that vested in fiscal years 2021, 2020, and 2019 was $ 1.9 million, $ 1.8 million, and $ 1.8 million, respectively. During fiscal year 2019, there was a modification to certain awards resulting in additional compensation expense of $ 0.7 million over the remaining term of the awards. Performance Stock Units Performance stock units (“PSUs”) represent a right to receive a certain number of shares of common stock based on the achievement of company performance goals and continued employment during the vesting period. Performance stock units cliff-vest at the end of a three year service period or vest in equal annual amounts over a three year period. Vested amounts may range from 0 % to a maximum of 500 % of targeted amounts depending on the achievement of performance measures at the end of each vesting period. Such performance measures are based on the Company meeting certain Adjusted EBITDA profitability targets, return on incremental investment targets, or sales targets for the vesting period. The fair value of PSUs is based on the closing price on the date of grant. 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. Certain of the PSUs granted in fiscal year 2020 are subject to a service condition and a market 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. These PSUs were valued based on a Monte Carlo simulation model to reflect the impact of the total stockholder return market condition. The probability of satisfying a market condition is considered in the estimation of the grant-date fair value, and the compensation cost is not reversed if the market condition is not achieved, provided the requisite service has been provided. The following table summarizes activity related to performance stock units: Number of Shares (in thousands) Weighted Average Grant Date Fair Value Nonvested performance stock units at December 26, 2020 153 $ 69.08 Units granted (a) 114 $ 96.16 Units vested (a) ( 121 ) $ 54.83 Units forfeited ( 10 ) $ 104.27 Nonvested performance stock units at December 25, 2021 136 $ 101.77 (a) Includes 61,000 incremental PSUs granted in fiscal year 2018 that vested in fiscal year 2021 at greater than 100% of target based on performance. As of December 25, 2021, total unrecognized compensation expense related to unvested PSUs was $ 10.4 million, which is expected to be recognized over a weighted average period of 2.0 years. The weighted-average grant date fair value of performance stock units granted was $ 96.16 , $ 86.03 , and $ 71.22 in fiscal years 2021, 2020, and 2019, respectively. The total fair value of performance stock units that vested in fiscal years 2021, 2020, and 2019 was $ 6.6 million, $ 2.2 million, and $ 1.2 million, respectively. F-22 (16) Restaurant Transactions During fiscal year 2021, the Company completed the sale of six company-owned restaurants in the Colorado market to one existing franchisee for aggregate proceeds of $ 7.2 million. In connection with the sale of the restaurants, the Company recorded a $ 3.5 million pre-tax gain on the sale of the related assets and liabilities, which was net of a $ 80,000 reduction in goodwill. The net gain on these restaurant sales was recorded in Gain on sale of restaurants and other expense, net in the Consolidated Statements of Comprehensive Income as of December 25, 2021. The Company acquired three restaurants from franchisees during the fiscal year ended December 25, 2021, six restaurants during the fiscal year ended December 26, 2020 and one restaurant during the fiscal year ended December 28, 2019. The total purchase prices are reflected in the table below and were all funded by cash flows from operations. The following table summarizes the allocations of the purchase prices to the estimated fair values of assets acquired and liabilities assumed as a result of these acquisitions (in thousands): Fiscal Year December 25, 2021 December 26, 2020 December 28, 2019 Working capital $ 61 $ 40 $ — Property and equipment 148 652 90 Reacquired franchise rights 1,400 2,483 610 Goodwill 3,267 3,560 533 Total purchase price $ 4,876 $ 6,735 $ 1,233 The results of operations of these locations are included in the Consolidated Statements of Comprehensive Income since the date of acquisition. The acquisitions were accounted for as business combinations. 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 growth opportunities. All of the goodwill from the acquisitions 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 restaurants 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. (17) Revenue from Contracts with Customers The following table represents a disaggregation of revenue from contracts with customers for the fiscal years 2021, 2020, and 2019 (in thousands): Fiscal Year December 25, 2021 December 26, 2020 December 28, 2019 Royalty revenue $ 119,396 $ 98,554 $ 75,106 Advertising fees 81,529 74,930 55,932 Franchise fees 4,020 3,656 4,087 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 current fiscal year was included in the deferred revenue balance as of December 25, 2021. Approximately $ 10.4 million and $ 9.8 million of deferred revenue as F-23 of December 25, 2021 and December 26, 2020, 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 did not have any material contract assets as of December 25, 2021. F-24