Wingstop Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis of the financial condition and results of operations of Wingstop Inc. (collectively with its direct and indirect subsidiaries on a consolidated basis, “Wingstop,” the “Company,” “we,” “our,” or “us”) should be read in conjunction with the accompanying unaudited consolidated financial statements and related notes in Part I, Item 1 of this Quarterly Report on Form 10-Q (this “Quarterly Report”) and with the audited consolidated financial statements and the related notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 (our “Annual Report”). The statements in this discussion regarding industry outlook, our expectations regarding our future performance, liquidity and capital resources, and other non-historical statements are forward-looking statements. These forward-looking statements are subject to risks and uncertainties, including, but not limited to, the risks and uncertainties described in “Special Note Regarding Forward-Looking Statements,” below and “Risk Factors” beginning on page 11 of our Annual Report. Our actual results may differ materially from those contained in or implied by any forward-looking statements. We operate on a 52- or 53-week fiscal year ending on the last Saturday of each calendar year. Our fiscal quarters are comprised of 13 weeks, with the exception of the fourth quarter of a 53-week year, which contains 14 weeks. Fiscal year 2023 contains 52 weeks, while fiscal year 2022 contains 53 weeks. Overview Wingstop is the largest fast casual chicken wings-focused restaurant chain in the world, with over 1,950 locations worldwide. We are dedicated to serving the world flavor through an unparalleled guest experience and offering of classic wings, boneless wings, tenders, and chicken sandwiches, always cooked to order and hand-sauced-and-tossed in 11 bold, distinctive flavors. The Company is primarily a franchisor, with approximately 98% of Wingstop’s restaurants currently owned and operated by independent franchisees. We believe our asset-light, highly-franchised business model generates strong operating margins and requires low capital expenditures, creating stockholder value through strong and consistent free cash flow and capital-efficient growth. Change in Presentation Beginning in the first quarter of 2023, gains and losses on disposal of assets are no longer presented as an adjustment to EBITDA in our calculation of Adjusted EBITDA. EBITDA and Adjusted EBITDA are both non-GAAP measures and are defined below. Prior period gains and losses on disposal of assets have been excluded from EBITDA adjustments to conform to the current presentation. This reclassification had no impact on operating income, balance sheets or statements of cash flows. First Quarter of 2023 Highlights • System-wide sales increased 30.4% over the prior fiscal first quarter to $821.6 million; • 37 net new openings in the fiscal first quarter 2023 for a total of 1,996 worldwide locations; • Domestic same store sales increased 20.1% over the prior fiscal first quarter; • Company-owned restaurant same store sales increased 10.3% over the prior fiscal first quarter; • Digital sales increased to 65.2%; • Domestic restaurant AUVs increased to $1.7 million for the current fiscal quarter; • Total revenue increased 42.7% to $108.7 million from the prior fiscal first quarter; • Net income increased 80.6% to $15.7 million, or $0.52 per diluted share, compared to net income of $8.7 million, or $0.29 per diluted share in the prior fiscal first quarter; and • Adjusted EBITDA, a non-GAAP measure, increased 59.8% to $34.6 million, compared to adjusted EBITDA of $21.6 million in the prior fiscal first quarter. 12 Key Performance Indicators Key measures that we use in evaluating our restaurants and assessing our business include the following: Number of restaurants. Management reviews the number of new restaurants, the number of closed restaurants, and the number of acquisitions and divestitures of restaurants to assess net new restaurant growth. Thirteen Weeks Ended April 1, 2023 March 26, 2022 Domestic Franchised Activity: Beginning of period 1,678 1,498 Openings 32 56 Closures — (3) Restaurants end of period 1,710 1,551 Domestic Company-Owned Activity: Beginning of period 43 36 Openings — 1 Closures — — Restaurants end of period 43 37 Total Domestic Restaurants 1,753 1,588 International Franchised Activity: Beginning of period 238 197 Openings 8 7 Closures (3) (1) Restaurants end of period 243 203 Total System-wide Restaurants 1,996 1,791 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. Changes in domestic AUV growth are primarily driven by increases in same store sales and are 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 restaurant base. We define the same store restaurant 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 permanent closures. We review same store sales for 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 (benefit), and depreciation and amortization. We define Adjusted EBITDA as net income before interest expense, net, income tax expense (benefit), and depreciation and amortization, with further adjustments for losses on debt extinguishment and financing transactions, transaction costs, costs and fees associated with investments in our strategic initiatives, and stock-based 13 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 financing transactions, transaction costs, costs and fees associated with investments in our strategic initiatives, and related tax adjustments that management believes are not indicative of the Company’s core operating results or business outlook over the long term. 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 thirteen weeks ended April 1, 2023 and March 26, 2022 (in thousands, except unit data): Thirteen Weeks Ended April 1, 2023 March 26, 2022 Number of system-wide restaurants open at end of period 1,996 1,791 System-wide sales (1) $ 821,632 $ 630,007 Domestic restaurant AUV $ 1,662 $ 1,602 Domestic same store sales growth 20.1 % 1.2 % Company-owned domestic same store sales growth 10.3 % 2.1 % Total revenue $ 108,721 $ 76,205 Net income $ 15,669 $ 8,676 Adjusted EBITDA (2) $ 34,584 $ 21,645 Adjusted net income (3) $ 17,771 $ 9,815 (1) The percentage of system-wide sales attributable to company-owned restaurants was 2.8% and 3.0% for the thirteen weeks ended April 1, 2023 and March 26, 2022, 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, 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 flow 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. Management uses EBITDA and Adjusted EBITDA: • as a measurement of operating performance because we believe 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; 14 • 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. 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 as performance measures and supplementally. As noted in the table below, Adjusted EBITDA includes adjustments for losses on debt extinguishment and financing transactions, transaction costs, costs and fees associated with investments in our strategic initiatives, and stock-based compensation expense. We believe these adjustments are appropriate because the amounts recognized can vary significantly from period to period, do not directly relate to the ongoing operations of our restaurants, and complicate comparisons of our internal operating results and operating results of other restaurant companies over time. Each of the normal recurring adjustments and other adjustments described in this paragraph and in the reconciliation table below help management measure our core operating performance over time by removing items that are not related to day-to-day operations. The following table reconciles net income to EBITDA and Adjusted EBITDA for the thirteen weeks ended April 1, 2023 and March 26, 2022 (in thousands): Thirteen Weeks Ended April 1, 2023 March 26, 2022 Net income $ 15,669 $ 8,676 Interest expense, net 4,573 4,192 Income tax expense 5,242 2,860 Depreciation and amortization 2,989 2,227 EBITDA $ 28,473 $ 17,955 Additional adjustments: Loss on debt extinguishment and financing transaction costs (a) — 1,124 Consulting fees (b) 2,766 375 Stock-based compensation expense (c) 3,345 2,191 Adjusted EBITDA $ 34,584 $ 21,645 (a) Represents costs and expenses related to our 2022 securitized financing facility and payment of a special dividend, as well as the extinguishment of our 2020 variable funding note facility; all transaction costs are included in Loss on debt extinguishment during the thirteen weeks ended March 26, 2022, with the exception of $310,000 that is included in Selling, general and administrative on the Consolidated Statements of Comprehensive Income. 15 (b) Represents costs and expenses related to a consulting project to support the Company's strategic initiatives, which are included in Selling, general and administrative on the Consolidated Statements of Comprehensive Income. (c) Includes non-cash, stock-based compensation, net of forfeitures. (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 of 1933, as amended (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. 16 The following table reconciles net income to Adjusted net income and calculates adjusted earnings per diluted share for the thirteen weeks ended April 1, 2023 and March 26, 2022 (in thousands): Thirteen Weeks Ended April 1, 2023 March 26, 2022 Numerator: Net income $ 15,669 $ 8,676 Adjustments: Loss on debt extinguishment and financing transactions (a) — 1,124 Consulting fees (b) 2,766 375 Tax effect of adjustments (c) (664) (360) Adjusted net income $ 17,771 $ 9,815 Denominator: Weighted-average shares outstanding - diluted 30,031 29,974 Adjusted earnings per diluted share $ 0.59 $ 0.33 (a) Represents costs and expenses related to our 2022 securitized financing facility and payment of a special dividend, as well as the extinguishment of our 2020 variable funding note facility; all transaction costs are included in Loss on debt extinguishment during the thirteen weeks ended March 26, 2022, with the exception of $310,000 that is included in Selling, general and administrative on the Consolidated Statements of Comprehensive Income. (b) Represents costs and expenses related to a consulting project to support the Company’s strategic initiatives, which are included in Selling, general and administrative on the Consolidated Statements of Comprehensive Income. (c) Represents the tax effect of the aforementioned adjustments to reflect corporate income taxes at an assumed effective tax rate of 24% for the thirteen weeks ended April 1, 2023 and March 26, 2022, which includes provisions for U.S. federal income taxes, and assumes the respective statutory rates for applicable state and local jurisdictions. 17 Results of Operations Thirteen Weeks Ended April 1, 2023 compared to Thirteen Weeks Ended March 26, 2022 The following table sets forth our results of operations for the thirteen weeks ended April 1, 2023 and March 26, 2022 (dollars in thousands): Thirteen Weeks Ended Increase / (Decrease) April 1, 2023 March 26, 2022 $ % Revenue: Royalty revenue, franchise fees and other $ 48,188 $ 35,070 $ 13,118 37.4 % Advertising fees 37,463 22,539 14,924 66.2 % Company-owned restaurant sales 23,070 18,596 4,474 24.1 % Total revenue 108,721 76,205 32,516 42.7 % Costs and expenses: Cost of sales (1) 16,695 15,674 1,021 6.5 % Advertising expenses 39,643 23,167 16,476 71.1 % Selling, general and administrative 23,645 18,086 5,559 30.7 % Depreciation and amortization 2,989 2,227 762 34.2 % Loss on disposal of assets 77 444 (367) (82.7) % Total costs and expenses 83,049 59,598 23,451 39.3 % Operating income 25,672 16,607 9,065 54.6 % Interest expense, net 4,573 4,192 381 9.1 % Loss on debt extinguishment — 814 (814) (100.0) % Other expense 188 65 123 189.2 % Income before income tax expense 20,911 11,536 9,375 81.3 % Income tax expense 5,242 2,860 2,382 83.3 % Net income $ 15,669 $ 8,676 $ 6,993 80.6 % (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. During the thirteen weeks ended April 1, 2023, total revenue was $108.7 million, an increase of $32.5 million, or 42.7%, compared to $76.2 million in the comparable period in 2022. Royalty revenue, franchise fees and other increased $13.1 million, of which $3.6 million was due to 199 net franchise restaurant openings since March 26, 2022, and $7.8 million was due to domestic same store sales growth of 20.1%. Other revenue increased by $1.7 million primarily due to an increase in vendor rebates. Advertising fees increased $14.9 million, of which $8.7 million was due to a 30.4% increase in system-wide sales during the fiscal first quarter 2023, and $6.2 million was due to an increase in the national advertising fund contribution rate to 5% from 4% effective the first day of the fiscal second quarter 2022. Company-owned restaurant sales increased $4.5 million, due to an increase of $2.9 million related to the addition of six net new company-owned restaurants since the prior year fiscal quarter. The remainder of the increase was due to company-owned same store sales growth of 10.3%, which was driven by an increase in transactions. Cost of sales. During the thirteen weeks ended April 1, 2023, cost of sales was $16.7 million, an increase of $1.0 million, or 6.5%, compared to $15.7 million in the comparable period in 2022. Cost of sales as a percentage of company-owned restaurant sales was 72.4% in the thirteen weeks ended April 1, 2023, compared to 84.3% in the comparable period in 2022. 18 The table below presents the major components of cost of sales (dollars in thousands): Thirteen Weeks Ended April 1, 2023 March 26, 2022 In dollars As a % of company-owned restaurant sales In dollars As a % of company-owned restaurant sales Cost of sales: Food, beverage and packaging costs $ 7,486 32.4 % $ 7,967 42.8 % Labor costs 5,517 23.9 % 4,807 25.8 % Other restaurant operating expenses 4,226 18.3 % 3,307 17.8 % Vendor rebates (534) (2.3) % (407) (2.2) % Total cost of sales $ 16,695 72.4 % $ 15,674 84.3 % Food, beverage and packaging costs as a percentage of company-owned restaurant sales were 32.4% in the thirteen weeks ended April 1, 2023, compared to 42.8% in the comparable period in 2022. This improvement was primarily due to a 52.8% decrease in the cost of bone-in chicken wings as compared to the prior year period, partially offset by inflation in other food costs since the prior fiscal first quarter 2022. Labor costs as a percentage of company-owned restaurant sales were 23.9% for the thirteen weeks ended April 1, 2023, compared to 25.8% in the comparable period in 2022. The decrease as a percentage of company-owned restaurant sales was primarily due to our ability to leverage costs due to the company-owned domestic same store sales increase of 10.3%. This was partially offset by increases in company-owned restaurant wages during the thirteen weeks ended April 1, 2023. Other restaurant operating expenses as a percentage of company-owned restaurant sales were 18.3% for the thirteen weeks ended April 1, 2023, compared to 17.8% in the comparable period in 2022. The increase as a percentage of company-owned restaurant sales were primarily a result of the increase in the national advertising fund contribution rate to 5% from 4% effective the first day of the fiscal second quarter 2022. This increase was partially offset by a decline in pre-opening expenses of $0.4 million related to company-owned restaurants opened in Manhattan, NY in the prior fiscal first quarter. Advertising expenses. During the thirteen weeks ended April 1, 2023, advertising expenses were $39.6 million, an increase of $16.5 million compared to $23.2 million in the comparable period in 2022. 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). During the thirteen weeks ended April 1, 2023, SG&A expense was $23.6 million, an increase of $5.6 million compared to $18.1 million in the comparable period in 2022. The increase in SG&A expense was due to an increase of $2.8 million related to consulting fees associated with the Company’s strategic initiatives, a $1.6 million increase in incentive compensation and performance-based stock compensation expense recognized related to the Company’s performance, and a $0.6 million increase in headcount related expenses to support the growth in our business. Depreciation and amortization. During the thirteen weeks ended April 1, 2023, depreciation expense was $3.0 million, an increase of $0.8 million compared to $2.2 million in the comparable period in 2022. The increase in depreciation and amortization was primarily due to capital expenditures related to our technology investments. Interest expense, net. During the thirteen weeks ended April 1, 2023, interest expense, net was $4.6 million, an increase of $0.4 million compared to $4.2 million of interest expense, net in the comparable period in 2022. The increase was due to an additional $1.8 million in interest expense relating to the securitized financing transaction completed on March 9, 2022, which increased our outstanding debt by $250 million. This was partially offset by an increase of $1.4 million in interest income earned on our cash balances during the thirteen weeks ended April 1, 2023. Loss on debt extinguishment. Loss on debt extinguishment in the prior fiscal first quarter was $0.8 million due to costs and fees associated with the extinguishment of our 2020 variable funding note facility on March 9, 2022. Income tax expense. During the thirteen weeks ended April 1, 2023, we recognized income tax expense of $5.2 million yielding an effective tax rate of 25.1%, which is comparable to the effective tax rate of 24.8% in the prior year period. 19 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 borrowings available under our securitized financing facility. Our primary requirements for liquidity and capital are working capital, general corporate needs, capital expenditures, income tax payments, debt service requirements, and dividend payments. Historically, we have operated with minimal positive working capital or with negative working capital. We generally utilize available cash flows from operations to invest in our business, service our debt obligations, and pay dividends. Our primary sources of short-term and long-term liquidity are expected to be cash flows from operations and available borrowings under our 2022 Variable Funding Notes (as defined below). As of April 1, 2023, the Company had $227.0 million of cash and restricted cash on its balance sheet. Based upon current levels of operations and anticipated growth, we expect that cash flows from operations, combined with our securitized financing facility including our 2022 Variable Funding Notes, will be sufficient to meet our capital expenditure, working capital and debt service requirements for at least the next twelve months and the foreseeable future. The following table shows summary cash flows information for the thirteen weeks ended April 1, 2023 and March 26, 2022 (in thousands): Thirteen Weeks Ended April 1, 2023 March 26, 2022 Net cash provided by (used in): Operating activities $ 35,698 $ 20,366 Investing activities (4,319) (4,814) Financing activities (10,087) 239,091 Net change in cash and cash equivalents $ 21,292 $ 254,643 Operating activities . Our cash flow 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 flow from operating activities. Net cash provided by operating activities was $35.7 million in the thirteen weeks ended April 1, 2023, an increase of $15.3 million from cash provided by operating activities of $20.4 million in the thirteen weeks ended March 26, 2022. The increase is the result of increased operating income associated with the increased sales over the prior period, as well as the timing of changes in working capital. Investing activities . Our net cash used in investing activities was $4.3 million in the thirteen weeks ended April 1, 2023, a decrease of $0.5 million from cash used in investing activities of $4.8 million in the thirteen weeks ended March 26, 2022. The decrease in cash used in investing activities was primarily due to a decrease in capital expenditures related to our investments in technology. Financing activities . Our net cash used in financing activities was $10.1 million in the thirteen weeks ended April 1, 2023, a change of $249.2 million from cash provided by financing activities of $239.1 million in the thirteen weeks ended March 26, 2022. The change was primarily due to the net cash provided by additional borrowings under our 2022 Class A-2 Notes (as defined below) of $250 million in the first quarter of 2022. 20 Securitized financing facility . On March 9, 2022, the Company completed a securitized financing transaction, pursuant to which Wingstop Funding LLC (the “Issuer”), a limited purpose, bankruptcy-remote, indirect wholly-owned subsidiary of the Company, issued $250 million of its Series 2022-1 3.734% Fixed Rate Senior Secured Notes, Class A-2 (the "2022 Class A-2 Notes"). The Issuer also entered into a revolving financing facility of Series 2022-1 Variable Funding Senior Notes, Class A-1 (the “2022 Variable Funding Notes,” and together with the 2022 Class A-2 Notes, the “2022 Notes”), which permits borrowings of up to a maximum principal amount of $200 million, subject to certain borrowing conditions, a portion of which may be used to issue letters of credit. The proceeds from the securitized financing transaction were used to pay related transaction fees and expenses, strengthen the Company's liquidity position and for general corporate purposes, which included a return of capital to the Company’s stockholders. In addition to the 2022 Notes, the Company’s outstanding debt consists of its existing Series 2020-1 2.84% Fixed Rate Senior Secured Notes, Class A-2 (the “2020 Class A-2 Notes”). No borrowings were outstanding under the 2022 Variable Funding Notes as of April 1, 2023. Dividends. We paid a quarterly cash dividend of $0.19 per share of common stock, aggregating $5.7 million in the first quarter of 2023. On May 2, 2023 the Company’s Board of Directors approved a dividend of $0.19 per share, to be paid on June 9, 2023 to stockholders of record as of May 19, 2023, totaling approximately $5.7 million We do not currently expect the restrictions in our debt instruments to impact our ability to make regular quarterly dividends pursuant to our quarterly dividend program. However, any future declarations of dividends, as well as the amount and timing of such dividends, are 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 the Company and our stockholders. Critical Accounting Policies and Estimates Our consolidated financial statements and accompanying notes are prepared in accordance with GAAP. Preparing consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. These estimates and assumptions are affected by the application of our accounting policies. Critical accounting estimates are those that require application of management’s most difficult, subjective, or complex judgments, often as a result of matters that are inherently uncertain and may change in subsequent periods. While we apply our judgment based on assumptions believed to be reasonable under the circumstances, actual results could vary from these assumptions. It is possible that materially different amounts would be reported using different assumptions. Our critical accounting policies and estimates are identified and described in our annual consolidated financial statements and the related notes included in our Annual Report, and there have been no material changes since the filing of our Annual Report. Recent Accounting Pronouncements The Company has reviewed all recently issued, but not yet effective, accounting pronouncements and does not believe the future adoption of any such pronouncements may be expected to cause a material impact on its financial condition or the results of its operations. Special Note Regarding Forward-Looking Statements This report includes statements of our expectations, intentions, plans and beliefs that constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and are intended to come within the safe harbor protection provided by those sections. These statements, which involve risks and uncertainties, relate to the discussion of our business strategies and our expectations concerning future operations, margins, profitability, trends, liquidity and capital resources and to analyses and other information that are based on forecasts of future results and estimates of amounts not yet determinable. These forward-looking statements can generally be identified by the use of forward-looking terminology, including the terms “may,” “will,” “should,” “expect,” “intend,” “plan,” “outlook,” “anticipate,” “believe,” “think,” “estimate,” “seek,” “predict,” “could,” “project,” “potential” or, in each case, their negative or other variations or comparable terminology, although not all forward-looking statements are accompanied by such terms. These forward-looking statements are made based on expectations and beliefs concerning future events affecting us and are subject to uncertainties, risks, and factors relating to our operations and business environments, all of which are difficult to predict and many of which are beyond our control, that could cause our actual results to differ materially from those matters expressed or implied by these forward-looking statements. 21 Such risks and other factors include those listed below and elsewhere in this report and our Annual Report, that could cause actual results or outcomes to differ from the results expressed or implied by forward-looking statements: • our ability to effectively implement our growth strategy; • our relationships with, and the performance of, our franchisees, as well as actions by franchisees that could harm our business; • our ability to identify, recruit and contract with a sufficient number of qualified franchisees; • risks associated with food safety, food-borne illness and other health concerns; • risks associated with changes in food and supply costs; • our ability to successfully expand into new markets; • our ability to effectively compete within our industry; • risks associated with interruptions in our supply chain, including availability of food products; • risks associated with the availability and cost of labor; • risks associated with our future performance and operating results falling below the expectations of securities analysts and investors; • risks associated with data privacy, cyber security and the use and implementation of information technology; • risks associated with our increasing dependence on digital commerce platforms and third-party delivery service providers; • uncertainty in the law with respect to the assignment or allocation of liabilities in the franchise business model; • risks associated with litigation against us or our franchisees; • our ability to successfully advertise and market our business; • risks associated with changes in customer preferences, perceptions and eating habits; • risks associated with the geographic concentration of our business; • the impact on our business from a pandemic, epidemic or outbreak, such as COVID-19; • our ability to comply with laws and government regulations relating to food products and franchising, including increased costs associated with new or changing regulations; • our ability to maintain adequate insurance coverage for our business; • risks associated with damage to our reputation or lack of acceptance of our brand in existing or new markets; • risks associated with our expansion into international markets and foreign government restrictions on operations; • our ability to comply with the terms of our securitized debt financing and generate sufficient cash flows to satisfy our significant debt service obligations thereunder; • our ability to attract and retain our executive officers and other key employees; and • our ability to protect our intellectual property, including trademarks and trade secrets. 22 The above list of factors is not exhaustive. Some of these and other factors are discussed in more detail under “Risk Factors” in our Annual Report. When considering forward-looking statements in this report or that we make in other reports or statements, you should keep in mind the cautionary statements in this report and future reports we file with the SEC. Any forward-looking statements made in this report speak only as of the date of the report, unless specified otherwise. New risks and uncertainties arise from time to time, and we cannot predict when they may arise or how they may affect us. Except as required by law, we assume no obligation to update or revise any forward-looking statements for any reason, or to update the reasons actual results could differ materially from those anticipated in any forward-looking statements, even if new information becomes available in the future. 23