Basis of Presentation

Wingstop Inc., through its primary operating subsidiary, Wingstop Restaurants Inc. (“WRI”), collectively referred to as “Wingstop” or the “Company,” is in the business of franchising and operating Wingstop restaurants. As of June 30, 2018, 1,040 franchised restaurants were in operation domestically, and 122 international franchised restaurants were in operation across nine countries. As of June 30, 2018, the Company owned and operated 26 restaurants.

The accompanying unaudited consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial information. Consequently, financial information and disclosures normally included in financial statements prepared annually in accordance with accounting principles generally accepted in the United States have been condensed or omitted. Balance sheet amounts are as of June 30, 2018 and December 30, 2017 and operating results are for the thirteen and twenty-six weeks ended June 30, 2018 and July 1, 2017.

In the Company’s opinion, all necessary adjustments have been made for the fair presentation of the results of the interim periods presented. The results of operations for such interim periods are not necessarily indicative of the results to be expected for the full year. The accompanying interim unaudited consolidated financial statements should be read in conjunction with the audited financial statements and the related notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 30, 2017.

The Company uses a 52/53-week fiscal year that ends on the last Saturday of the calendar year. Fiscal years 2018 and 2017 have 52 weeks.

The Company has reclassified certain prior period amounts due to the adoption of ASU 2014-09 and ASU 2016-18, as defined below.

Advertising Fund

The Company administers the Wingstop Restaurants Advertising Fund (“Ad Fund”), which is used for various forms of advertising for the Wingstop brand. Advertising fund contributions and expenditures are reported on a gross basis in the Consolidated Statements of Operations, which are largely offsetting and therefore do not significantly impact our reported net income. Advertising expenses incurred by company-owned restaurants are included within cost of sales in the Consolidated Statements of Operations. Administrative support services and compensation expenses of employees that provide services directly to the Ad Fund, are included in selling, general and administrative expenses (“SG&A”) in the Consolidated Statements of Operations.

The Ad Fund contribution collected from Wingstop restaurant franchisees and company-owned and operated restaurants is equal to 3% of gross sales. For the twenty-six weeks ended June 30, 2018 and July 1, 2017, the Company contributed $1.9 million and $3.8 million, respectively, for the purpose of supplementing the national advertising campaign, which were included in Advertising expenses in the Consolidated Statements of Operations.

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, other liabilities and any cumulative surplus related to the Ad Fund. Under the Company’s franchise agreements, contributions to the Ad Fund are 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 which are directly associated with administering the Ad Fund, as outlined in the provisions of the applicable franchise agreements. Total cash balances related to the Ad Fund as of June 30, 2018 and December 30, 2017 were $2.5 million and $2.3 million, respectively.

Recently Issued Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2016-02, Leases (Topic 842). ASU 2016-02 amends the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets and making targeted changes to lessor accounting. ASU 2016-02 will be effective beginning in the first quarter of fiscal year 2019. Early adoption of ASU 2016-02 as of its issuance is permitted. This new guidance requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. We anticipate implementing the standard by taking advantage of the practical expedient option. The discounted minimum remaining rental payments will be the starting point for determining the right-of-use asset and lease liability. We expect that adoption of the new guidance will have a material impact on the consolidated balance sheets due to the recognition of the right-of-use asset and lease liability related to our current operating leases. The process of evaluating the full impact of the new guidance on our consolidated financial statements and disclosures is ongoing, but we anticipate the initial evaluation of the impact will be completed in fiscal 2018.

In March 2018, the FASB issued ASU 2018-05, Income Taxes (Topic 740). ASU 2018-05 provides guidance on accounting for the income tax effects of the Tax Cuts and Jobs Act of 2017 (the “Act”), which impacts U.S. corporate tax rates, business-related exclusions, and deductions and credits. The Act also has tax consequences for many companies that operate internationally. The Company recognized the income tax effects of the Act in its 2017 financial statements in accordance with Staff Accounting Bulletin No. 118, which provides SEC staff guidance for the application of Accounting Standards Codification (“ASC”) Topic 740, "Income Taxes," in the reporting period in which the Act was signed into law. As such, the Company’s financial results reflect the income tax effects of the Act for which the accounting under ASC Topic 740 is complete and provisional amounts for those specific income tax effects of the Act for which the accounting under ASC Topic 740 is incomplete but a reasonable estimate could be determined.

The Company will continue to analyze additional information and guidance related to the Act as supplemental legislation, regulatory guidance, or evolving technical interpretations become available. The final impacts may differ from the recorded amounts as of June 30, 2018, and we will continue to refine such amounts within the measurement period provided by Staff Accounting Bulletin No. 118. We expect to complete our analysis no later than the fourth quarter of 2018.

Recently Adopted Accounting Pronouncements

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which superseded nearly all existing revenue recognition guidance. The new guidance provided a single framework in which revenue is required to be recognized to depict the transfer of goods or services to customers in amounts that reflect the consideration to which a company expects to be entitled in exchange for those goods or services.

The Company adopted this new guidance effective the first day of fiscal year 2018, using the full retrospective transition method, which resulted in adjusting each prior reporting period presented and a cumulative effect adjustment, which was recorded as of the first day of 2016. The adoption changed the timing of recognition of initial franchise fees, development fees, territory fees for our international business and renewal and transfer fees, as well as the reporting of Ad Fund contributions and related expenditures. See Note 11 for further discussion.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (“ASU 2016-18”), which requires that restricted cash and cash equivalents be included as components of total cash and cash equivalents as presented on the statement of cash flows. ASU 2016-18 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017 and a retrospective transition method is required. The Company adopted this new guidance effective the first day of fiscal year 2018, using the full retrospective transition method, which resulted in adjusting the Statement of Cash Flows for each prior period presented.

The following table presents the effect of the adoption of ASU 2014-09 on our consolidated balance sheets as of December 30, 2017 (in thousands):



	As reported			Adjustments for adoption of ASU 2014-09			As Adjusted
Assets
Current assets
Cash and cash equivalents	$	4,063		$	—		$	4,063
Accounts receivable, net	4,567			—			4,567
Prepaid expenses and other current assets	4,334			—			4,334
Advertising fund assets, restricted	2,944			—			2,944
Total current assets	15,908			—			15,908
Property and equipment, net	5,826			—			5,826
Goodwill	46,557			—			46,557
Trademarks	32,700			—			32,700
Customer relationships, net	15,567			—			15,567
Other non-current assets	3,278			—			3,278
Total assets	$	119,836		$	—		$	119,836
Liabilities and stockholders' deficit
Current liabilities
Accounts payable	$	1,752		$	—		$	1,752
Other current liabilities	10,683			246			10,929
Current portion of debt	3,500			—			3,500
Advertising fund liabilities	2,944			—			2,944
Total current liabilities	18,879			246			19,125
Long-term debt, net	129,841			—			129,841
Deferred revenues, net of current	8,427			12,799			21,226
Deferred income tax liabilities, net	8,799			(2,879		)	5,920
Other non-current liabilities	2,142			—			2,142
Total liabilities	168,088			10,166			178,254
Stockholders' deficit
Common stock	291			—			291
Additional paid-in-capital	262			—			262
Accumulated deficit	(48,805		)	(10,166		)	(58,971		)
Total stockholders' deficit	(48,252		)	(10,166		)	(58,418		)
Total liabilities and stockholders' deficit	$	119,836		$	—		$	119,836

The following table presents the effect of the adoption of ASU 2014-09 on our consolidated statements of operations for the thirteen weeks ended July 1, 2017 (in thousands, except per share amounts):



			Adjustments for adoption of ASU 2014-09
	As reported		Franchise Fees			Advertising			As Adjusted
Revenue:
Royalty revenue, franchise fees and other	$	15,827	$	(560	)	$	—		$	15,267
Advertising fees and related income	—		—			7,466			7,466
Company-owned restaurant sales	8,845		—			—			8,845
Total revenue	24,672		(560		)	7,466			31,578
Costs and expenses:
Cost of sales ⁽¹⁾	6,867		—			—			6,867
Advertising expenses	—		—			7,574			7,574
Selling, general and administrative	8,288		—			(108		)	8,180
Depreciation and amortization	771		—			—			771
Total costs and expenses	15,926		—			7,466			23,392
Operating income	8,746		(560		)	—			8,186
Interest expense, net	1,307		—			—			1,307
Income before income tax expense	7,439		(560		)	—			6,879
Income tax expense	2,174		(202		)	—			1,972
Net income	$	5,265	$	(358	)	$	—		$	4,907

Earnings per share
Basic	$	0.18	$	(0.01	)	$	—		$	0.17
Diluted	$	0.18	$	(0.01	)	$	—		$	0.17

⁽¹⁾ Cost of sales excludes depreciation and amortization, which are presented separately, and includes advertising expenses incurred at company-owned restaurants.

The following table presents the effect of the adoption of ASU 2014-09 on our consolidated statements of operations for the twenty-six weeks ended July 1, 2017 (in thousands, except per share amounts):



			Adjustments for adoption of ASU 2014-09
	As reported		Franchise Fees			Advertising			As Adjusted
Revenue:
Royalty revenue, franchise fees and other	$	33,850	$	(987	)	$	—		$	32,863
Advertising fees and related income	—		—			14,734			14,734
Company-owned restaurant sales	17,391		—			—			17,391
Total revenue	51,241		(987		)	14,734			64,988
Costs and expenses:
Cost of sales ⁽¹⁾	13,467		—			—			13,467
Advertising expenses	—		—			16,857			16,857
Selling, general and administrative	18,550		—			(2,123		)	16,427
Depreciation and amortization	1,526		—			—			1,526
Total costs and expenses	33,543		—			14,734			48,277
Operating income	17,698		(987		)	—			16,711
Interest expense, net	2,606		—			—			2,606
Income before income tax expense	15,092		(987		)	—			14,105
Income tax expense	3,297		(356		)	—			2,941
Net income	$	11,795	$	(631	)	$	—		$	11,164

Earnings per share
Basic	$	0.41	$	(0.02	)	$	—		$	0.39
Diluted	$	0.40	$	(0.02	)	$	—		$	0.38

⁽¹⁾ Cost of sales excludes depreciation and amortization, which are presented separately, and includes advertising expenses incurred at company-owned restaurants.

The following table presents the effect of the adoption of ASU 2014-09 and ASU 2016-18 on our consolidated statements of cash flows for the twenty-six weeks ended July 1, 2017 (in thousands):



	As reported			Adjustments for adoption of ASU 2014-09			Adjustments for adoption of ASU 2016-18			As adjusted
Operating activities
Net income	$	11,795		$	(631	)	$	—		$	11,164
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization	1,526			—			—			1,526
Deferred income taxes	(149		)	(357		)	—			(506		)
Stock-based compensation expense	541			—			—			541
Amortization of debt issuance costs	146			—			—			146
Changes in operating assets and liabilities:
Accounts receivable	(619		)	—			—			(619		)
Prepaid expenses and other assets	(568		)	—			—			(568		)
Advertising fund assets and liabilities, net	—			—			(121		)	(121		)
Accounts payable and other current liabilities	(2,281		)	—			—			(2,281		)
Deferred revenue	378			988			—			1,366
Other non-current liabilities	(83		)	—			—			(83		)
Cash provided by operating activities	10,686			—			(121		)	10,565

Investing activities
Purchases of property and equipment	(1,301		)	—			—			(1,301		)
Cash used in investing activities	(1,301		)	—			—			(1,301		)

Financing activities
Proceeds from exercise of stock options	1,062			—			—			1,062
Repayments of long-term debt	(9,750		)	—			—			(9,750		)
Cash used in financing activities	(8,688		)	—			—			(8,688		)

Net change in cash, cash equivalents, and restricted cash	697			—			(121		)	576
Cash, cash equivalents, and restricted cash at beginning of period	3,750						1,943			5,693
Cash, cash equivalents, and restricted cash at end of period	$	4,447					$	1,822		$	6,269