What changed in this filing

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Item 7. Management’s Discussion and Analysis

2024-02-21 compared with 2023-02-22 · 85 added, 79 removed, 215 unchanged (43% of the section changed)

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Wingstop is the largest fast casual chicken wings-focused restaurant chain in the world and has demonstrated strong, consistent growth.

As of December 31, 2022, we had a total 1,959 restaurants in our system.

As of December 30, 2023, we had a total of 2,214 restaurants in our system.

Our restaurant base is 98% franchised, with 2,165 franchised locations (including 288 international locations) and 49 company-owned restaurants as of December 30, 2023.

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We believe our asset-light, highly-franchised business model generates strong operating margins and requires low capital expenditures, creating shareholder value through strong and consistent operating cash flow and capital-efficient growth.

Highlights for Fiscal Year 2022, which included a 53rd operating week:

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 or Net income in our calculation of Adjusted EBITDA, Adjusted net income, and Adjusted earnings per diluted share.

EBITDA, Adjusted EBITDA, Adjusted net income, and Adjusted earnings per diluted share are non-GAAP measures and are defined below.

Prior period gains and losses on disposal of assets have been excluded from these measures to conform to the current presentation.

This reclassification had no impact on operating income, balance sheets or statements of cash flows.

Highlights for Fiscal Year 2023 Compared to Fiscal Year 2022 (1)

• System-wide sales increased 27.1% over the prior fiscal year to $3.5 billion;

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• Domestic same store sales increased 18.3% over the prior fiscal year;

• Company-owned restaurant same store sales increased 1.0% over the prior fiscal year;

• Digital sales continue to exceed 60% of system-wide sales;

• Domestic AUV of $1.6 million;

• Company-owned domestic same store sales increased 8.2% over the prior fiscal year;

• Digital sales increased to 67.0% of system-wide sales;

• Domestic AUV increased to $1.8 million;

• Total revenue increased 28.7% over the prior fiscal year to $460.1 million;

• Net income increased 32.5% over the prior fiscal year to $70.2 million, or $2.35 per diluted share, compared to $52.9 million, or $1.77 per diluted share in the prior fiscal year;

• Adjusted net income and adjusted earnings per diluted share, both non-GAAP measures, increased 36.0% to $74.1 million, or $2.48 per diluted share, compared to $54.5 million, or $1.82 per diluted share in the prior fiscal year;

• Adjusted EBITDA, a non-GAAP measure, increased 36.1% to $146.5 million, compared to adjusted EBITDA of $107.6 million in the prior fiscal year.

(1) The fiscal year ended December 31, 2022 benefited from a 53 rd week as compared to fiscal 2023.

Key Performance Indicators

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Management reviews the number of new restaurants, the number of closed restaurants, and the number of acquisitions and divestitures of restaurants to assess net new restaurant growth, system-wide sales, royalty and franchise fee revenue, and company-owned restaurant sales.

2022 December 25,

Domestic Franchised Activity:

Beginning of period 1,498 1,327

Domestic Company-owned Domestic Franchised International Franchised (1)

Restaurant count at December 25, 2021 36 1,498 197 1,731

Openings 5 187 45 237

Closures (1) (4) (4) (9)

Acquired by Company (3) (3)

Re-franchised by Company — 6

Restaurants end of period 1,678 1,498

Domestic Company-Owned Activity:

Beginning of period 36 32

Closures (1) —

Acquired from franchisees 3 3

Re-franchised to franchisees — (6)

Restaurants end of period 43 36

Total Domestic Restaurants 1,721 1,534

International Franchised Activity:

Beginning of period 197 179

Net purchase from (sold by) franchisees 3 (3) — —

Restaurant count at December 31, 2022 43 1,678 238 1,959

Openings 4 202 59 265

Closures — (1) (9) (10)

Restaurants end of period 238 197

Total System-wide Restaurants 1,959 1,731

Net purchase from (sold by) franchisees 2 (2) — —

Restaurant count at December 30, 2023 49 1,877 288 2,214

(1) Includes U.S.

System-wide sales.

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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, further adjusted for losses on debt extinguishment and financing transactions, transaction costs, costs and fees associated with investments in our strategic initiatives, gains and losses on the disposal of assets, and stock-based compensation expense.

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 compensation expense.

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, gains and losses on the disposal of assets, 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 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.

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The remainder was generated by franchised restaurants, as reported by our franchisees.

(2) For fiscal 2022, same store sales percentages were calculated excluding the 53rd week.

(2) Fiscal 2022 included a 53 rd week;

same store sales percentages were calculated excluding the 53 rd week.

(3) EBITDA and Adjusted EBITDA are supplemental measures of our performance that are not required by, or presented in accordance with, accounting principles generally accepted in the United States (“GAAP”).

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We compensate for these limitations by relying primarily on our GAAP results and using these non-GAAP measures only as performance measures and only 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, gains and losses on the disposal of assets, 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.

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Loss on debt extinguishment and financing transactions (a)

Loss (gain) on disposal of assets (b)

1,164 (3,497)

Consulting fees (c)

Stock-based compensation expense (d)

Consulting fees (b)

Stock-based compensation expense (c)

Adjusted EBITDA $ 146,484 $ 107,644

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all transaction costs are included in Loss on debt extinguishment and financing transactions during the year ended December 31, 2022, with the exception of $310,000 that is included in Selling, general and administrative on the Consolidated Statements of Comprehensive Income.

(b) Represents a loss (gain) resulting from the sale of assets to a franchisee.

The loss (gain) is included in Loss (gain) on disposal of assets on the Consolidated Statements of Comprehensive Income.

(c) Represents costs and expenses related to consulting projects to support the Company's strategic initiatives, which are included in Selling, general and administrative on the Consolidated Statements of Comprehensive Income.

(d) Includes non-cash, stock-based compensation, net of forfeitures.

(b) Represents non-recurring consulting fees that are not part of our ongoing operations and are incurred to execute discrete, project-based strategic initiatives, which are included in Selling, general and administrative on the Consolidated Statements of Comprehensive Income.

Fiscal year 2022 includes approximately $0.5 million of third-party consulting fees incurred relating to a strategic initiative to consider the development of a business plan and financial model for potential vertical integration of a poultry complex, which review was completed in fiscal year 2022.

Fiscal years 2023 and 2022 include approximately $5.2 million and $0.4 million, respectively, in consulting fees relating to a comprehensive review of our long-term growth strategy for our domestic business to explore potential future initiatives, and which review was completed in fiscal year 2023.

Given the magnitude and scope of these two strategic review initiatives that are not expected to recur in the

foreseeable future, the Company considers the incremental consulting fees incurred with respect to the initiatives not reflective of the ongoing costs to operate its business.

(4) 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.

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Loss on debt extinguishment and financing transactions (a)

Loss (gain) on disposal of assets (b)

Consulting fees (b)

Tax effect of adjustments (c)

(1,236) (480)

Consulting fees (c)

Tax effect of adjustments (d)

Adjusted net income $ 74,089 $ 54,466

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(b) Represents a loss (gain) resulting from the sale of assets to a franchisee.

This loss (gain) is included in Loss (gain) on disposal of assets in the Consolidated Statements of Comprehensive Income.

(c) Represents costs and expenses related to a consulting project to support the Company's strategic initiatives, which are included in Selling, general and administrative on the Consolidated Statements of Comprehensive Income.

(d) Represents the tax effect of the aforementioned adjustments to reflect corporate income taxes at an assumed effective tax rate of 24% for the periods ended December 31, 2022 and December 25, 2021, which includes provisions for U.S.

Given the magnitude and scope of these two strategic review initiatives that are not expected to recur in the foreseeable future, the Company considers the incremental consulting fees incurred with respect to the initiatives not reflective of the ongoing costs to operate its business.

(c) Represents the tax effect of the aforementioned adjustments to reflect corporate income taxes at an assumed effective tax rate of 24% for the periods ended December 30, 2023 and December 31, 2022, which includes provisions for U.S.

federal income taxes, and assumes the respective statutory rates for applicable state and local jurisdictions.

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Depreciation and amortization 13,239 10,899 2,340 21.5 %

Loss (gain) on disposal of assets 1,164 (3,497) 4,661 (133.3) %

Loss on disposal of assets 95 1,164 (1,069) (91.8) %

Total costs and expenses 347,461 265,588 81,873 30.8 %

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Net income $ 70,175 $ 52,947 $ 17,228 32.5 %

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.

Cost of sales includes all operating expenses of company-owned restaurants, including advertising expenses, but excludes depreciation and amortization, which are presented separately.

During fiscal year 2023, total revenue was $460.1 million, an increase of $102.5 million, or 28.7%, compared to $357.5 million in the prior fiscal year.

Royalty revenue, franchise fees and other increased $27.9 million, of which $8.2 million was due to 221 net franchise restaurant openings since December 25, 2021, $12.3 million was due to domestic same store sales growth of 3.4%, and approximately $3.0 million was due to additional royalties from the 53rd week.

Royalty revenue, franchise fees and other increased $48.5 million, of which $25.6 million was due to domestic same store sales growth of 18.3%, and $16.5 million was due to net new franchise development since December 31, 2022.

Other revenue increased by $4.2 million primarily due to an increase in vendor rebates.

Advertising fees increased $37.5 million, of which $17.0 million was due to a 16.8% increase in system-wide sales during fiscal year 2022, $10.9 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, and approximately $2.7 million was due to additional advertising fees from the 53rd week.

Additionally, during the prior year fiscal period, a $6.9 million non-recurring rebate of advertising surplus was returned to franchisees, reducing the revenue recognized.

Company-owned restaurant sales increased $9.6 million, primarily due to an increase of $7.7 million related to the increase in the number of company-owned restaurants compared to the prior year comparable period.

Also contributing to the increase was company-owned same store sales growth of 1.0%, which was driven by an increase in average ticket, and approximately $1.5 million of additional sales from the 53rd week.

These increases were partially offset by approximately $3.0 million in royalties from the 53 rd week in the prior fiscal year.

Advertising fees increased $38.1 million, of which $34.6 million was due to a 27.1% increase in system-wide sales during fiscal year 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.

These increases were partially offset by approximately $2.7 million in advertising fees from the 53 rd week in the prior fiscal year.

Company-owned restaurant sales increased $15.9 million primarily due to an increase of $10.3 million related to the increase in the number of company-owned restaurants as compared to the prior fiscal year, as well as an increase of $7.1 million related to company-owned same store sales growth of 8.2%, which was driven by an increase in transactions.

These increases were partially offset by approximately $1.5 million in sales from the 53 rd week in the prior fiscal year.

Cost of sales

During fiscal year 2022, cost of sales was $63.4 million, an increase of $6.0 million, or 10.4%, compared to $57.4 million in fiscal 2021.

Cost of sales as a percentage of company-owned restaurant sales was 79.3% in the current year fiscal period, compared to 81.7% in the prior year fiscal period.

The table below presents the major components of Cost of sales (in thousands, except for percentages):

Year ended As a % of company-owned restaurant sales Year ended As a % of company-owned restaurant sales

2023 December 31,

Cost of sales:

Food, beverage and packaging costs $ 31,697 33.1 % $ 30,579 38.3 %

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Total cost of sales $ 70,646 73.7 % $ 63,395 79.3 %

Pre-opening expenses (1)

935 1.2 % 484 0.7 %

Cost of sales (excluding pre-opening expenses) $ 62,460 78.2 % $ 56,932 81.0 %

Pre-opening expenses are incurred in conjunction with the opening of a new restaurant and are included within Other restaurant operating expenses in the table above.

Food, beverage and packaging costs as a percentage of company-owned restaurant sales were 33.1% in fiscal year 2023 compared to 38.3% in the prior fiscal year.

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Labor costs as a percentage of company-owned restaurant sales were 24.0% in fiscal year 2023 compared to 24.1% in the prior fiscal year.

The increase as a percentage of company-owned restaurant sales was primarily due to higher wage rates in the restaurants recently opened in New York City, as well as increases in company-owned restaurant wages, hiring and training costs as a result of the ongoing competitive labor market during the current year fiscal period.

The decrease is primarily due to sales leverage related to the company-owned domestic same store sales increase of 8.2%, offset by an increase in company-owned restaurant wages.

Other restaurant operating expenses as a percentage of company-owned restaurant sales were 19.1% in fiscal year 2023 compared to 19.3% in the prior fiscal year.

The increase as a percentage of company-owned restaurant sales was primarily a result of higher rent and occupancy costs associated with the opening of company-owned restaurants in New York City during the current year fiscal period.

Pre-opening expenses as a percentage of company-owned restaurant sales were 1.2% in fiscal year 2022 driven by our development of the New York City market.

The decrease is primarily related to a decrease in pre-opening expenses as compared to the prior year fiscal period, offset by an increase in the national advertising fund contribution rate to 5% from 4% effective the first day of the fiscal second quarter 2022.

Advertising expenses

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SG&A was $96.9 million in fiscal year 2023, an increase of $29.8 million, or 44.5%, compared to $67.1 million in the prior fiscal year.

The increase in SG&A was primarily due to an increase of $4.0 million in headcount-related expenses to support the growth in our business, an increase of $2.3 million in professional fees to support the Company’s strategic initiatives, an increase of $0.5 million in travel expenses, and approximately $1.0 million related to the 53rd week.

These increases were partially offset by a decrease of $5.4 million in stock-based compensation expense primarily related to stock awards forfeited in fiscal year 2022.

The prior fiscal year was impacted by the benefit of $5.4 million in forfeited stock awards, offset by additional expenses of approximately $1.0 million in expenses related to the 53 rd week.

In fiscal year 2023, incentive compensation and performance-based stock compensation expense increased $9.3 million primarily related to the Company’s current fiscal year performance, professional and consulting fees increased $7.2 million associated with the Company’s strategic initiatives, and headcount related expenses increased $4.1 million to support the growth in our business.

Depreciation and amortization

Depreciation and amortization was $13.2 million in fiscal year 2023, an increase of $2.3 million, or 21.5%, compared to $10.9 million in the prior fiscal year.

The increase in depreciation and amortization was primarily due to capital expenditures related to our technology investments, as well as an estimated $0.3 million related to the 53rd week.

The increase in depreciation and amortization was primarily due to capital expenditures related to our technology investments, partially offset by an estimated $0.3 million related to the 53 rd week in the prior fiscal year.

Interest expense, net

Interest expense, net was $21.2 million in fiscal year 2022, an increase of $6.2 million, or 41.7%, compared to $15.0 million in the prior fiscal year.

The increase was due to the securitized financing transaction completed on March 9, 2022, which increased our outstanding debt by $250 million, as well as an estimated $0.4 million related to the 53rd week.

Interest expense, net was $18.2 million in fiscal year 2023, a decrease of $3.0 million, or 14.1%, compared to $21.2 million in the prior fiscal year.

The decrease was due to $3.9 million of additional interest income earned during fiscal year 2023, as well as approximately $0.4 million in interest expense related to the 53 rd week in the prior fiscal year.

These decreases were partially

offset by an increase in interest expense related to the securitized financing transaction completed on March 9, 2022, which increased our outstanding debt by $250 million.

Loss on debt extinguishment and financing transactions

Loss on debt extinguishment and financing transactions was $0.8 million during fiscal year 2022 due to costs and fees associated with the extinguishment of our 2020 Variable Funding Note on March 9, 2022.

Loss on debt extinguishment and financing transactions was $0.8 million during fiscal year 2022 due to costs and fees associated with the extinguishment of our 2020 variable funding note facility on March 9, 2022.

Income tax expense

Income tax expense was $16.4 million in fiscal year 2022, yielding an effective tax rate of 23.6%, compared to an effective tax rate of 27.6% in the prior fiscal year.

The decrease in the effective tax rate was primarily due to the impact of tax benefits associated with stock awards forfeited during fiscal year 2022.

The effective tax rate in fiscal year 2023 was 25.6%, compared to an effective tax rate of 23.6% in the prior fiscal year.

The increase in the effective tax rate was primarily due to the impact of tax benefits associated with stock awards forfeited during fiscal year 2022 .

Liquidity and Capital Resources

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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 (defined below).

As of December 31, 2022, the Company had $205.7 million of cash and restricted cash on its balance sheet.

As of December 30, 2023, the Company had $119.7 million of cash and cash equivalents on its balance sheet, including advertising fund cash and cash equivalents.

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.

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Investing activities .

Our net cash used in investing activities was $28.7 million in fiscal year 2022, a decrease of $1.2 million, from $29.9 million in fiscal year 2021.

The decrease in cash used in investing activities was primarily due to an investment in our United Kingdom franchisee made during fiscal year 2021, as well as a decrease in purchases of property and equipment during the current fiscal year, partially offset by changes in cash related to restaurant acquisition and asset disposal transactions as compared to the prior fiscal year.

Our net cash used in investing activities was $52.2 million in fiscal year 2023, an increase of $23.5 million, from $28.7 million in fiscal year 2022.

The increase in cash used in investing activities was primarily due to an increase in purchases of property and equipment during the current fiscal year, as well as an increase in restaurant acquisition costs as compared to the prior fiscal year.

Financing activities .

Our net cash provided by financing activities was $103.3 million in fiscal year 2022, a change of $126.6 million, from cash used in financing activities of $23.4 million in fiscal year 2021.

The change was primarily due to additional borrowings under our 2022 Class A-2 Notes (as defined below) of $250 million, partially offset by the payment of a special dividend in connection with the securitized financing transaction totaling $119.5 million, as well as deferred financing and other debt related costs incurred of $5.4 million in fiscal year 2022.

The change was also driven by an increase in the regular quarterly dividend, which totaled $21.5 million in fiscal year 2022, compared to $18.5 million in fiscal year 2021.

Our net cash used in financing activities was $155.5 million in fiscal year 2023, primarily related to the repurchase of $125.0 million in common stock under our ASR Agreement, dividend payments of $24.9 million, and repayment of long-term debt of $3.7 million.

Cash provided by financing activities of $103.3 million in fiscal year 2022 was primarily

related to the net cash provided by additional borrowings under our 2022 Class A-2 Notes (as defined below) of $250 million, partially offset by the payment of a special dividend in connection with the securitized financing transaction totaling $119.5 million, as well as deferred financing and other debt related costs incurred of $5.4 million.

Securitized financing facility .

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No borrowings were outstanding under the 2022 Variable Funding Notes as of December 30, 2023.

We paid quarterly cash dividends of $0.17 per share of common stock in each of the first two quarters of 2022, and quarterly cash dividends of $0.19 per share of common stock in both the third and fourth quarters of 2022, resulting in aggregate dividend payments of $21.5 million in fiscal year 2022.

We paid quarterly cash dividends of $0.19 per share of common stock in each of the first two quarters of 2023, and quarterly cash dividends of $0.22 per share of common stock in both the third and fourth quarters of 2023, resulting in aggregate quarterly dividend payments of $24.4 million in fiscal year 2023.

On February 20, 2024, the Company’s board of directors approved a dividend of $0.22 per share, to be paid on March 29, 2024 to stockholders of record as of March 8, 2024, totaling approximately $6.5 million.

We do not currently expect the restrictions in our debt instruments to impact our ability to make regularly quarterly dividends pursuant to our quarterly dividend program.

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, is subject to capital availability and the discretion of our board of directors, which must evaluate, among other things, whether cash dividends are in the best interest of our stockholders.

Share Repurchase Program.

On August 16, 2023, the Company’s Board of Directors approved a new share repurchase program with authorization to purchase up to $250.0 million of its outstanding shares of common stock (the “Share Repurchase Authorization”).

On August 23, 2023, the Company entered into the ASR Agreement with a third-party financial institution to repurchase $125.0 million of the Company’s common stock as part of the Share Repurchase Authorization.

Under the ASR Agreement, the Company paid the financial institution $125.0 million in cash and received and retired a total of 645,952 shares of common stock at an average share price of $193.51.

Final settlement of the ASR Agreement occurred on December 21, 2023.

The total number of shares repurchased under the ASR Agreement was based on a daily volume-weighted average share price during the valuation period specified in the ASR Agreement, less a discount and subject to adjustments.

As of December 30, 2023, $125.0 million remained available under the Share Repurchase Authorization.

Contractual Obligations

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The preparation of financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses.

These estimates 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.

These estimates may require application of management’s most difficult, subjective or complex judgments, often as a result of matters that are inherently uncertain and may change in subsequent periods.

While we apply our judgment based on assumptions believed to be reasonable under the circumstances, actual results could vary from these assumptions.

It is possible that materially different amounts would be reported using different assumptions.

Our critical accounting policies and estimates are more fully described in “Note 1 - Basis of Presentation and Summary of Significant Accounting Policies” of the Notes to the Consolidated Financial Statements.

Our most significant accounting policies and estimates are more fully described in “Note 1 - Basis of Presentation and Summary of Significant Accounting Policies” of the Notes to the Consolidated Financial Statements.

However, we believe the accounting policies described below are particularly important to the portrayal and understanding of our financial position and results of operations.

Revenue Recognition

Revenues consist primarily of royalties, national advertising 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 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.

The recognition of this revenue is dependent upon the franchise restaurant sales reported by the franchisee through the point of sale system and can require us to make estimates and assumptions.

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, payable weekly.

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.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis