UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended July ~~4, 2017~~3, 2018

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-35987

NOODLES & COMPANY

(Exact name of registrant as specified in its charter)



Delaware		84-1303469
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)



520 Zang Street, Suite D
Broomfield, CO		80021
(Address of principal executive offices)		(Zip Code)

(720) 214-1900

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer o		Accelerated filer x

Non-accelerated filer o		Smaller reporting company o
(Do not check if a smaller reporting company)		Emerging growth company x

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.



Class		Outstanding at ~~August 7, 2017~~July 16, 2018
Class A Common Stock, $0.01 par value per share		~~39,588,210 shares~~
~~Class B Common Stock, $0.01 par value per share~~		~~1,522,098~~41,298,464 shares

TABLE OF CONTENTS

PART I

Item 1. Financial Statements

Noodles & Company

Condensed Consolidated Balance Sheets

(in thousands, except share and per share data)


	July 4, 2017			January 3, 2017			July 3, 2018			January 2, 2018
	(unaudited)						(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	3,158		$	1,837		$	3,640		$	3,361
Accounts receivable	2,946			5,438			1,714			2,434
Inventories	10,075			11,285			10,089			9,929
Prepaid expenses and other assets	6,882			6,972			7,511			6,258
Income tax receivable	196			256			122			76
Total current assets	23,257			25,788			23,076			22,058
Property and equipment, net	164,112			173,533			144,607			152,593
Goodwill	6,400			6,400			6,400			6,400
Intangibles, net	1,603			1,715			1,422			1,565
Other assets, net	2,070			2,025			2,548			2,617
Total long-term assets	174,185			183,673			154,977			163,175
Total assets	$	197,442		$	209,461		$	178,053		$	185,233
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	9,350		$	10,601		$	6,345		$	10,929
Accrued payroll and benefits	10,643			10,723			12,482			11,719
Accrued expenses and other current liabilities	22,506			27,709			24,560			21,221
Current portion of long-term debt							656			—
Total current liabilities	42,499			49,033			44,043			43,869
Long-term debt, net	60,888			84,676			62,743			57,624
Deferred rent	38,754			44,929			37,896			38,872
Deferred tax liabilities, net	706			435			165			416
Other long-term liabilities	10,663			4,570			7,037			8,591
Total liabilities	153,510			183,643			151,884			149,372

Convertible Series A preferred stock—$0.01 par value, 50,000 shares authorized and designated as of July 4, 2017; zero shares issued and outstanding as of July 4, 2017 and zero shares designated, issued or outstanding as of January 3, 2017	—			—

Stockholders’ equity:
Preferred stock—$0.01 par value, 950,000 shares authorized and undesignated as of July 4, 2017 and 1,000,000 shares authorized and undesignated as of January 3, 2017; zero shares issued and outstanding as of July 4, 2017 and January 3, 2017	—			—
Common stock—$0.01 par value, authorized 180,000,000 shares as of July 4, 2017 and January 3, 2017; 43,522,430 issued and 41,098,559 outstanding as of July 4, 2017 and 30,300,925 issued and 27,877,054 outstanding as of January 3, 2017	435			303
Treasury stock, at cost, 2,423,871 shares as of July 4, 2017 and January 3, 2017	(35,000		)	(35,000		)
Preferred stock—$0.01 par value, 1,000,000 shares authorized and undesignated as of July 3, 2018 and January 2, 2018; no shares issued or outstanding							—			—
Common stock—$0.01 par value, 180,000,000 shares authorized as of July 3, 2018 and January 2, 2018; 43,690,395 issued and 41,266,524 outstanding as of July 3, 2018 and 43,550,329 issued and 41,126,458 outstanding as of January 2, 2018							437			436
Treasury stock, at cost, 2,423,871 shares as of July 3, 2018 and January 2, 2018							(35,000		)	(35,000		)
Additional paid-in capital	170,923			124,272			172,936			171,613
Accumulated other comprehensive loss	(60		)	(51		)
Accumulated deficit	(92,366		)	(63,706		)	(112,204		)	(101,188		)
Total stockholders’ equity	43,932			25,818			26,169			35,861
Total liabilities and stockholders’ equity	$	197,442		$	209,461		$	178,053		$	185,233

See accompanying notes to condensed consolidated financial statements.

Noodles & Company

Condensed Consolidated Statements of Operations

(in thousands, except share and per share data, unaudited)


	Fiscal Quarter Ended						Two Fiscal Quarters Ended						Fiscal Quarter Ended						Two Fiscal Quarters Ended
	July 4, 2017			June 28, 2016			July 4, 2017			June 28, 2016			July 3, 2018			July 4, 2017			July 3, 2018			July 4, 2017
Revenue:
Restaurant revenue	$	111,628		$	120,204		$	227,155		$	233,069		$	116,451		$	111,628		$	226,064		$	227,155
Franchising royalties and fees	1,164			1,203			2,352			2,324			944			1,164			1,857			2,352
Total revenue	112,792			121,407			229,507			235,393			117,395			112,792			227,921			229,507
Costs and expenses:
Restaurant operating costs (exclusive of depreciation and amortization shown separately below):
Cost of sales	29,598			32,164			61,685			62,353			31,089			29,598			60,345			61,685
Labor	36,430			39,316			76,024			76,750			38,043			36,430			74,615			76,024
Occupancy	12,630			13,688			26,631			27,002			12,357			12,630			25,120			26,631
Other restaurant operating costs	16,194			18,596			33,341			35,488			16,875			16,194			33,773			33,341
General and administrative	9,393			9,840			20,059			19,877			14,813			9,393			25,081			20,059
Depreciation and amortization	6,279			7,071			12,546			13,977			5,797			6,279			11,617			12,546
Pre-opening	246			796			791			1,833			3			246			50			791
Restaurant impairments, closure costs and asset disposals	2,830			11,248			24,884			12,264			2,580			2,830			4,160			24,884
Total costs and expenses	113,600			132,719			255,961			249,544			121,557			113,600			234,761			255,961
Loss from operations	(808		)	(11,312		)	(26,454		)	(14,151		)	(4,162		)	(808		)	(6,840		)	(26,454		)
Loss on extinguishment of debt													626			—			626			—
Interest expense, net	927			598			1,935			1,226			1,154			927			2,292			1,935
Loss before income taxes	(1,735		)	(11,910		)	(28,389		)	(15,377		)	(5,942		)	(1,735		)	(9,758		)	(28,389		)
Provision for income taxes	80			2,177			271			1,083
(Benefit) provision for income taxes													(7		)	80			(248		)	271
Net loss	(1,815		)	(14,087		)	(28,660		)	(16,460		)	(5,935		)	(1,815		)	(9,510		)	(28,660		)
Accretion of preferred stock to redemption value	(7,001		)	—			(7,967		)	—			—			(7,001		)	—			(7,967		)
Net loss attributable to common stockholders	$	(8,816	)	$	(14,087	)	$	(36,627	)	$	(16,460	)	$	(5,935	)	$	(8,816	)	$	(9,510	)	$	(36,627	)
Loss per share of Class A and Class B common stock, combined:
Basic	$	(0.22	)	$	(0.51	)	$	(1.06	)	$	(0.59	)	$	(0.14	)	$	(0.22	)	$	(0.23	)	$	(1.06	)
Diluted	$	(0.22	)	$	(0.51	)	$	(1.06	)	$	(0.59	)	$	(0.14	)	$	(0.22	)	$	(0.23	)	$	(1.06	)
Weighted average shares of Class A and Class B common stock outstanding, combined:
Basic	40,779,277			27,776,094			34,404,222			27,754,615			41,172,924			40,779,277			41,150,698			34,404,222
Diluted	40,779,277			27,776,094			34,404,222			27,754,615			41,172,924			40,779,277			41,150,698			34,404,222

See accompanying notes to condensed consolidated financial statements.

Noodles & Company

Condensed Consolidated Statements of Comprehensive ~~Income (Loss)~~Loss

(in thousands, unaudited)


	Fiscal Quarter Ended						Two Fiscal Quarters Ended						Fiscal Quarter Ended						Two Fiscal Quarters Ended
	July 4, 2017			June 28, 2016			July 4, 2017			June 28, 2016			July 3, 2018			July 4, 2017			July 3, 2018			July 4, 2017
Net loss	$	(1,815	)	$	(14,087	)	$	(28,660	)	$	(16,460	)	$	(5,935	)	$	(1,815	)	$	(9,510	)	$	(28,660	)
Other comprehensive (loss) income:
Other comprehensive loss:
Foreign currency translation adjustments	(9		)	22			(9		)	127			—			(9		)	—			(9		)
Other comprehensive (loss) income	(9		)	22			(9		)	127
Other comprehensive loss													—			(9		)	—			(9		)
Comprehensive loss	$	(1,824	)	$	(14,065	)	$	(28,669	)	$	(16,333	)	$	(5,935	)	$	(1,824	)	$	(9,510	)	$	(28,669	)

See accompanying notes to condensed consolidated financial statements.

Noodles & Company

Condensed Consolidated Statements of Cash Flows

(in thousands, unaudited)


	Two Fiscal Quarters Ended						Two Fiscal Quarters Ended
	July 4, 2017			June 28, 2016			July 3, 2018			July 4, 2017
Operating activities
Net loss	$	(28,660	)	$	(16,460	)	$	(9,510	)	$	(28,660	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization	12,546			13,977			11,617			12,546
Deferred income taxes	271			1,083			(251		)	271
Restaurant impairments, closure costs and asset disposals	19,441			11,889			3,669			19,441
Loss on extinguishment of debt							626			—
Amortization of debt issuance costs	185			58			363			185
Stock-based compensation	945			849			1,592			945
Non-cash gain on litigation settlement	(421		)	—			—			(421		)
Changes in operating assets and liabilities:
Accounts receivable	2,465			(383		)	837			2,465
Inventories	(468		)	(301		)	(751		)	(468		)
Prepaid expenses and other assets	46			4,171			(1,184		)	46
Accounts payable	17			(4,802		)	(2,909		)	17
Deferred rent	1,479			2,835			(975		)	1,479
Income taxes	60			42			(46		)	60
Accrued expenses and other liabilities	(16,137		)	(677		)	(241		)	(16,137		)
Net cash (used in) provided by operating activities	(8,231		)	12,281
Net cash provided by (used in) operating activities							2,837			(8,231		)
Investing activities
Purchases of property and equipment	(12,213		)	(24,016		)	(7,051		)	(12,213		)
Net cash used in investing activities	(12,213		)	(24,016		)	(7,051		)	(12,213		)
Financing activities
Net borrowings from swing line loan	6,947			215
Net (payments) borrowings from swing line loan							(101		)	6,947
Proceeds from issuance of long-term debt	6,757			11,500			73,389			6,757
Payments on long-term debt	(37,015		)	(1,000		)	(66,873		)	(37,015		)
Issuance of preferred stock and common stock warrants, net of transaction expenses (see Note 9)	16,589			—			—			16,589
Issuance of common stock, net of transaction expenses (see Note 9)	29,110			—			—			29,110
Proceeds from exercise of stock options and employee stock purchase plan	37			876			(293		)	37
Debt issuance costs	(662		)	(2		)	(1,629		)	(662		)
Net cash provided by financing activities	21,763			11,589			4,493			21,763
Effect of exchange rate changes on cash	2			127			—			2
Net increase (decrease) in cash and cash equivalents	1,321			(19		)
Net increase in cash and cash equivalents							279			1,321
Cash and cash equivalents
Beginning of period	1,837			1,912			3,361			1,837
End of period	$	3,158		$	1,893		$	3,640		$	3,158

See accompanying notes to condensed consolidated financial statements.

NOODLES & COMPANY

Notes to Condensed Consolidated Financial Statements

(unaudited)

1. Business Summary and Basis of Presentation

Business

Noodles & Company (the “Company”), a Delaware corporation, develops and operates fast casual restaurants that serve globally inspired noodle and pasta dishes, soups, salads and appetizers. As of July ~~4, 2017,~~3, 2018, the Company had ~~413~~404 company-owned restaurants and 7365 franchise restaurants in 3129 states and the District of Columbia. The Company operates its business as one operating and reportable segment.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of Noodles & Company and its subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. The accompanying interim unaudited condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America (“GAAP”) for complete financial statements. In the opinion of the Company, all adjustments considered necessary for the fair presentation of the Company’s results of operations, financial position and cash flows for the periods presented have been included and are of a normal, recurring nature. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The results of operations for any interim period are not necessarily indicative of results for the full year. Certain information and footnote disclosures normally included in the Company’s annual consolidated financial statements on Form 10-K have been condensed or omitted. The condensed consolidated balance sheet as of January ~~3, 2017~~2, 2018 was derived from audited financial statements. These financial statements should be read in conjunction with the audited financial statements and the related notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended January ~~3, 2017.~~2, 2018.

Fiscal Year

The Company operates on a 52- or 53-week fiscal year ending on the Tuesday closest to December 31. Fiscal year ~~2017,~~2018, which ends on January ~~2, 2018, contains 52 weeks,~~1, 2019, and fiscal year ~~2016,~~2017, which ended on January ~~3, 2017, contained 53~~2, 2018, both contain 52 weeks. The Company’s fiscal quarters each contain 13 operating weeks, with the exception of the fourth quarter of a 53-week fiscal year, which contains 14 operating weeks. The Company’s fiscal quarter that ended July 3, 2018 is referred to as the second quarter of 2018, and the fiscal quarter ended July 4, 2017 is referred to as the second quarter of ~~2017, and the fiscal quarter ended June 28, 2016 is referred to as the second quarter of 2016.~~

~~Reclassification~~

As of January 3, 2017, the Company changed its presentation on the Condensed Consolidated Statements of Cash Flows of borrowings and repayments from its swing line loan to a net basis. Certain amounts in the prior period financial statements have been reclassified to conform to the current period presentation, which had no impact on the net change in cash and cash equivalents or the amount of net cash provided by financing activities for the applicable prior period presented. This reclassification had no effect on reported net loss.2017.

Recent Accounting Pronouncements

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” which supersedes the revenue recognition requirements in Accounting Standards Codification (“ASC”) 605, “Revenue Recognition.” This ASU is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. In August 2015, the FASB issued ASU No. 2015-14, which defers the effective date of the new revenue standard by one year, and would allow entities the option to early adopt the new revenue standard as of the original effective date. There have been multiple standards updates amending this guidance or providing corrections or improvements on issues in the guidance. The requirements for these standards relating to Topic 606 will be effective for interim and annual periods beginning after December 15, 2017. Early adoption is permitted for interim and annual periods beginning after December 15, 2016. The Company expects to adopt these standards upon their effective date (the Company’s first quarter of fiscal 2018), using one of two retrospective application methods. The

Company does not believe the new revenue recognition standard will materially impact its recognition of revenue from restaurant operations of company-owned restaurants or its recognition of continuing royalty fees from franchisees. The Company believes adoption of the new revenue recognition standard will impact its accounting for initial fees charged to franchisees. Historically, the Company has recognized revenue from initial franchise fees upon the opening of a franchised restaurant when it performed all of its material obligations and initial services. Upon the adoption of Topic 606, the Company will generally recognize initial franchise fees over the term of a franchise agreement. The Company will be finalizing accounting policies, selecting its transition method, quantifying the impact of adopting this standard, and designing internal controls during the fiscal year ended January 2, 2018. The Company is currently evaluating the impact the adoption of this accounting standard will have on its consolidated financial statements and related disclosures.

In February 2016, the FASB issued ASU No. 2016-02, “Leases.” The pronouncement amends the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheet and making targeted changes to lessor accounting. This pronouncement will be effective for interim and annual periods beginning after December 15, 2018 (the Company’s first quarter of fiscal 2019), with early adoption permitted. The new lease standard 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. The Company believes the adoption of ASU No. 2016-02 will have a significant impact on its consolidated balance sheets by significantly increasing its non-current assets and non-current liabilities in order to record the right of use assets and related lease liabilities for its existing operating leases. The Company is currently evaluating the impact the adoption of this accounting standard will have on its results of operations and cash flows and related disclosures.

Recently Adopted Accounting Pronouncements

In ~~October 2016,~~May 2014, the FASB issued ASU No. ~~2016-16, “Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory.~~2014-09, “Revenue from Contracts with Customers (Topic 606),” which supersedes the revenue recognition requirements in Accounting Standards Codification 605, “Revenue Recognition.” This ASU ~~2016-16 provide guidance~~is based on the ~~income tax consequences of an intra-entity~~principle that revenue is recognized to depict the transfer of goods or services to customers in an ~~asset other than inventory.~~amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. In August 2015, the FASB issued ASU No. 2015-14, which deferred the effective date of the new revenue standard by one year, and allowed entities the option to early adopt the new revenue standard as of the original effective date. There have been multiple standards

updates amending this guidance isor providing corrections or improvements on issues in the guidance. The requirements for these standards relating to Topic 606 are effective for interim and annual periods beginning after December 15, 2017. ~~Early~~This standard permitted adoption ~~is permitted for any entity as~~using one of two transition methods, either the retrospective or modified retrospective transition method.

The Company adopted these standards at the beginning of ~~an annual reporting period for which financial statements (interim or annual) have~~the first quarter of fiscal 2018 using the modified retrospective method. The comparative information has not been ~~issued~~restated and continues to be reported under the accounting standards in effect for those periods. The adoption of these standards did not have a material impact on the Company’s Condensed Consolidated Statements of Operations in the second quarter of 2018 or ~~made available for issuance.~~the first two quarters of 2018. The ~~Company is currently evaluating the~~primary impact of adoption was the ~~guidance, but does not believe it will materially impact~~enhancement of the Company’s ~~financial position or results of operations~~disclosures related to contracts with customers and ~~cash flows.~~revenue recognized from those performance obligations, which includes revenue related to initial fees charged to franchisees and revenue recognized related to gift cards. See disclosure in Note 11, Revenue Recognition.

2. Supplemental Financial Information

Property and equipment, net, consists of the following (in thousands):


	July 4, 2017			January 3, 2017			July 3, 2018			January 2, 2018
Leasehold improvements	$	208,139		$	205,687		$	198,798		$	199,211
Furniture, fixtures and equipment	120,910			120,248			120,587			120,234
Construction in progress	2,060			8,044			2,725			2,592
	331,109			333,979			322,110			322,037
Accumulated depreciation and amortization	(166,997		)	(160,446		)	(177,503		)	(169,444		)
	$	164,112		$	173,533		$	144,607		$	152,593

Accrued expenses and other current liabilities consist of the following (in thousands):


	July 4, 2017		January 3, 2017		July 3, 2018		January 2, 2018
Gift card liability	$	2,987	$	3,857	$	2,766	$	4,078
Occupancy related	5,706		2,069		4,283		3,733
Utilities	1,662		1,753		1,670		1,705
Data breach liabilities	7,605		11,622		11,016		7,605
Legal settlement	—		3,000
Other accrued expenses	4,546		5,408		4,825		4,100
	$	22,506	$	27,709	$	24,560	$	21,221

3. Long-Term Debt

~~The~~2018 Credit Facility

On May 9, 2018, the Company ~~has~~entered into a credit facility ~~consisting~~with U.S. Bank National Association (the “2018 Credit Facility”). The 2018 Credit Facility consists of a term loan facility in an aggregate principal amount of $25.0 million and a revolving line of credit of ~~$100.0~~$65.0 million ~~expiring in June 2020. As of July 4, 2017, the Company had $62.1 million of indebtedness and $3.0 million letters~~(which may be increased to $75.0 million), which includes a letter of credit ~~outstanding~~subfacility in the amount of $15.0 million and a swingline subfacility in the amount of $10.0 million. The 2018 Credit Facility has a four-year term and matures on May 9, 2022.

Borrowings under the ~~revolving line of credit. The Company’s ability to borrow funds pursuant to~~2018 Credit Facility, including the revolving line of credit is further limited by the requirement that it comply with the revolving line of credit’s financial covenants upon the measurement dates specified therein. These financial covenants include a maximum lease-adjusted leverage ratio and a minimum consolidated fixed charge coverage ratio. The credit agreement also contains other customary covenants, including limitations on additional borrowings, acquisitions, dividend payments and lease commitments.

On February 8, 2017, the Company entered into an amendment to its credit facility. Among other things, giving effect to the equity issuances completed during the first quarter of 2017, the amendment (i) increased theterm loan facility, bear interest rate margin applicable at total lease adjusted leverage levels at and above 4.25:1.00 and from the period of the date of amendment to the delivery of the first following quarterly compliance certificate, (ii) increased capital expenditure amounts related to restaurant growth, and (iii) made certain other changes. The Consolidated EBITDA definition, as revised, permits certain costs to be added back into the Consolidated EBITDA calculation, including costs associated with closing underperforming restaurants in 2017 (fees to landlords resulting from the termination of the Company’s leases for such restaurants, the fees to its real estate advisor and brokers related to such terminations and other costs of closing restaurants, such as severance for terminated employees) and liabilities associated with the data security incident that occurred in 2016 (as described in greater detail in Note 11, Commitments and Contingencies). This amendment also revised certain financial covenant levels. Borrowings under this amended and restated agreement bear interest,annually, at the Company’s option, at either (i) LIBOR plus ~~2.00%~~a margin of 2.25% to 3.25%, per annum, based onupon the consolidated total lease-adjusted leverage ratio or (ii) the highest of the following base rates plus ~~zero~~a margin of 1.25% to ~~1.00%:~~2.25% per annum: (a) the federal funds rate plus 0.50%; (b) the U.S. Bank ~~of America~~ prime rate or (c) the ~~one month~~one-month LIBOR plus 1.00%. The ~~credit facility~~2018 Credit Facility includes a commitment fee of 0.30% to 0.50%, per annum, based onupon the consolidated total lease-adjusted leverage ratio, ~~per year~~ on any unused portion of the revolving credit facility.

As of July 3, 2018, the Company had $65.2 million of indebtedness and $3.8 million of letters of credit outstanding under the 2018 Credit Facility. The ~~credit facility~~term loan requires principal payments of $156,250 per quarter starting in the second quarter of 2018 through the first quarter of 2019, $187,500 per quarter through the first quarter of 2020, $375,000 per quarter through the first quarter of 2021, and $531,250 per quarter through maturity in the second quarter of 2022.

Aggregate maturities for debt outstanding as of July 3, 2018 are as follows (in thousands):



Year 1	$	656
Year 2	937
Year 3	1,656
Year 4	61,983
Total	$	65,232

The Company’s outstanding indebtedness bore interest between ~~3.77% and 6.50%~~4.95% to 7.25% during the first two quarters of ~~2017.~~ 2018.

The Company also maintains outstanding letters of credit to secure obligations under its workers’ compensation program and certain lease obligations. The Company was in compliance with all of its debt covenants as of July ~~4, 2017.~~3, 2018.

Prior Credit Facility

Upon execution of the 2018 Credit Facility, the Company repaid in full its outstanding indebtedness with Bank of America, N.A. (the “Prior Credit Facility”) using funds drawn on the 2018 Credit Facility. Upon repayment, the Prior Credit Facility and all related agreements were terminated. A loss on extinguishment of debt in the amount of $0.6 million was recorded during the second quarter of 2018 in connection with this repayment.

4. Fair Value Measurements

The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and all other current liabilities approximate their fair values due to their short-term nature. The carrying amounts of borrowings under the credit facility approximate fair value as the line of credit and term borrowings vary with market interest rates and negotiated terms and conditions are consistent with current market rates. The fair value of the Company’s line of credit and term borrowings isare measured using Level 2 inputs.

Adjustments to the fair value of non-financial assets measured at fair value on a non-recurring basis as of July 3, 2018 and July 4, 2017 ~~and June 28, 2016~~ are discussed in Note 7, Restaurant Impairments, Closure Costs and Asset Disposals.

5. Income Taxes

The following table presents the Company’s (benefit) provision ~~(benefit)~~ for income taxes (in thousands):


	Fiscal Quarter Ended						Two Fiscal Quarters Ended						Fiscal Quarter Ended						Two Fiscal Quarters Ended
	July 4, 2017			June 28, 2016			July 4, 2017			June 28, 2016			July 3, 2018			July 4, 2017			July 3, 2018			July 4, 2017
Provision for income taxes	$	80		$	2,177		$	271		$	1,083
(Benefit) provision for income taxes													$	(7	)	$	80		$	(248	)	$	271
Effective tax rate	(4.6		)%	(18.3		)%	(1.0		)%	(7.0		)%	0.1		%	(4.6		)%	2.5		%	(1.0		)%

~~During the first quarter of 2016, the Company recorded a valuation allowance against Canadian deferred~~The effective tax ~~assets. During~~rates for the second quarter of ~~2016,~~2018 and the first two quarters of 2018, reflect changes made by the Tax Cuts and Jobs Act (“Tax Act”), which was signed into law in December 2017. The primary change from the Tax Act that impacts fiscal 2018 is related to an indefinite carry forward for federal and conforming states’ net operating losses, which enabled the Company ~~determined that it was appropriate~~ to ~~record~~release a portion of the previously recorded valuation ~~allowance against U.S. deferred tax assets. As a result, the effective tax rates for all periods presented reflect the impact of a valuation allowance against U.S. and Canadian deferred tax assets.~~allowance. For the remainder of fiscal ~~2017,~~2018, the Company does not anticipate material income tax expense or benefit as a result of the valuation allowance recorded. The Company will maintain the remaining valuation allowance against deferred tax assets until there is sufficient evidence to support a full or partial reversal. The reversal of a previously recorded valuation allowance will generally result in a benefit ~~to the effective tax rate.~~from income tax.

The Company is applying guidance provided by SEC Staff Accounting Bulletin No. 118, which is codified as Accounting Standards Update 2018-05 - Income Taxes (“ASU 2018-05”), in reporting the tax provision for the second quarter ended 2018. This ASU 2018-05 applies in situations where the Company does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. While the amount recorded for the second quarter of 2018 is provisional, the Company expects that any material changes required by the Tax Act will be offset by the valuation allowance. The Company did not finalize any previously reported provisional impact from the Tax Act and will continue its analysis to determine if any adjustments are required to be made during the measurement period provided by ASU 2018-05.

6. Stock-Based Compensation

The Company’s Stock Incentive Plan, as amended and restated in May of 2013, authorizes the grant of nonqualified stock options, incentive stock options, stock appreciation rights, restricted stock, restricted stock units (“RSUs”) and incentive bonuses to employees, officers, nonemployee directors and other service providers. The number of shares of common stock available for issuance pursuant to awards granted under the Stock Incentive Plan on or after the ~~IPO~~Company’s initial public offering shall not exceed 3,750,500 shares.

The following table shows total stock-based compensation expense (in thousands):


	Fiscal Quarter Ended				Two Fiscal Quarters Ended				Fiscal Quarter Ended				Two Fiscal Quarters Ended
	July 4, 2017		June 28, 2016		July 4, 2017		June 28, 2016		July 3, 2018		July 4, 2017		July 3, 2018		July 4, 2017
Stock-based compensation expense	$	648	$	564	$	945	$	973	$	1,012	$	648	$	1,592	$	945
Capitalized stock-based compensation expense	$	52	$	63	$	102	$	124	$	13	$	52	$	25	$	102

7. Restaurant Impairments, Closure Costs and Asset Disposals

The following table presents restaurant impairments, closure costs and asset disposals (in thousands):


	Fiscal Quarter Ended					Two Fiscal Quarters Ended				Fiscal Quarter Ended					Two Fiscal Quarters Ended
	July 4, 2017			June 28, 2016		July 4, 2017		June 28, 2016		July 3, 2018		July 4, 2017			July 3, 2018		July 4, 2017
Restaurant impairments ⁽¹⁾	$	4,037		$	10,346	$	5,973	$	10,541	$	319	$	4,037		$	917	$	5,973
Closure costs ⁽¹⁾	(1,471		)	538		18,415		1,087		1,519		(1,471		)	2,073		18,415
Loss on disposal of assets and other	264			364		496		636		742		264			1,170		496
	$	2,830		$	11,248	$	24,884	$	12,264	$	2,580	$	2,830		$	4,160	$	24,884

_____________________________


(1)	Restaurant impairments and closure costs in all periods presented above include amounts related to restaurants previously impaired or closed.

During the second quarter of ~~2017, nine~~2018, there were no restaurants ~~were~~ identified as impaired, compared to 11nine restaurant impairments during the second quarter of ~~2016.~~2017. During the first two quarters of ~~2017, 13 restaurants were~~2018, one restaurant was identified as impaired compared to ~~12 restaurants~~13 restaurant impairments during the first two quarters of ~~2016.~~2017. Impairment is based on management’s current assessment of the expected future cash flows of ~~various restaurants~~a restaurant based on recent results and other specific market factors. Impairment expense is a Level 3 fair value measure and ~~was~~is determined by comparing the carrying value of restaurant assets to the estimated fair market value of the restaurant assets at resale value.

The closure costs of $1.5 million recognized during the second quarter of 2018 and $2.1 million during the first two quarters of 2018 are related to the seven restaurants closed in the second quarter of 2018 and nine restaurants closed in the first two quarters of 2018, most of which were approaching the expiration of their leases, as well as ongoing costs from restaurants closed in previous years. These ongoing costs include adjustments to the liabilities to landlords as lease terminations occur. During the second quarter of 2017, a gain of $3.6 million was recognized related to closures primarily due to adjustments to the liabilities to landlords as lease terminations occurred for 21 of the 55 restaurants closed during the first quarter of 2017, partially offset by $2.0 million of costs related to ~~the~~ restaurants closed in the first quarter of 2017. During the first two quarters of 2017, $18.4 million of closure costs were recognized related to the 55 restaurants closed during the first quarter of 2017, as well as ongoing costs of restaurants closed in the fourth quarter of 2015. The closure costs of $0.5 million recognized during the second quarter of 2016 and $1.1 million during the first two quarters of 2016 are related to the ongoing costs of restaurants closed in the fourth quarter of 2015. These expenses are included in the “Restaurant impairments, closure costs and asset disposals” line in the Condensed Consolidated Statements of Operations.

8. Earnings (Loss) Per Share

Basic earnings (loss) per share (“EPS”) is calculated by dividing net income (loss) available to common stockholders by the weighted-average number of shares of common stock outstanding during each period. Diluted EPS is calculated using net income (loss) available to common stockholders divided by diluted weighted-average shares of common stock outstanding during each period. Potentially dilutive securities include shares of common stock underlying stock options, warrants and ~~restricted common stock.~~RSUs. Diluted EPS considers the impact of potentially dilutive securities except in periods in which there is a loss because the inclusion of the potential common shares would have an anti-dilutive effect.

The following table sets forth the computations of basic and diluted EPS (in thousands, except share and per share data):


	Fiscal Quarter Ended						Two Fiscal Quarters Ended						Fiscal Quarter Ended						Two Fiscal Quarters Ended
	July 4, 2017			June 28, 2016			July 4, 2017			June 28, 2016			July 3, 2018			July 4, 2017			July 3, 2018			July 4, 2017
Net loss attributable to common stockholders	$	(8,816	)	$	(14,087	)	$	(36,627	)	$	(16,460	)	$	(5,935	)	$	(8,816	)	$	(9,510	)	$	(36,627	)
Shares:
Basic weighted average shares outstanding	40,779,277			27,776,094			34,404,222			27,754,615			41,172,924			40,779,277			41,150,698			34,404,222
Effect of dilutive securities	—			—			—			—			—			—			—			—
Diluted weighted average shares outstanding	40,779,277			27,776,094			34,404,222			27,754,615			41,172,924			40,779,277			41,150,698			34,404,222
Loss per share:
Basic loss per share	$	(0.22	)	$	(0.51	)	$	(1.06	)	$	(0.59	)	$	(0.14	)	$	(0.22	)	$	(0.23	)	$	(1.06	)
Diluted loss per share	$	(0.22	)	$	(0.51	)	$	(1.06	)	$	(0.59	)	$	(0.14	)	$	(0.22	)	$	(0.23	)	$	(1.06	)

The Company computes the effect of dilutive securities using the treasury stock method and average market prices during the period. Potential common shares are excluded from the computation of diluted earnings (loss) per share when the effect would be anti-dilutive. All potential common shares are anti-dilutive in periods of net loss. The number of shares issuable on the vesting or exercise of share based awards or exercise of outstanding warrants, and the shares underlying the 18,500 shares of convertible preferred stock outstanding in the first quarter of 2017, excluded from the calculation of diluted loss per share because the effect of their inclusion would have been anti-dilutive totaled ~~3,393,950~~2,630,523 and ~~1,561,256~~3,393,950 for the second quarters of ~~2017~~2018 and ~~2016,~~2017, respectively, and totaled 3,043,387 and 5,631,982 ~~and 1,559,515~~ for the first two quarters of ~~2017~~2018 and ~~2016,~~2017, respectively.

9. Stockholders’ Equity

Securities Purchase Agreement with L Catterton

On February 8, 2017, the Company entered into a securities purchase agreement with L Catterton, pursuant to which the Company agreed, in return for aggregate gross proceeds of $18.5 million, to sell to L Catterton an aggregate of 18,500 shares of preferred stock convertible into 4,252,873 shares of the Company’s Class A common stock, par value $0.01 per share, at a price per share of $1,000, plus warrants exercisable for five years beginning six months following their issuance for the purchase of 1,913,793 shares of the Company’s Class A common stock, at a price per share of $4.35 (such transactions, collectively, the “private placement”). The proceeds have been, and will continue to be used, in conjunction with cash flow from the Company’s operations and the proceeds received from the transaction with Mill Road (see below), to satisfy existing and anticipated liabilities and to fund, in part, certain capital expenditures related to business initiatives in its company-owned restaurants. Any remaining proceeds are expected to be used for general corporate purposes. The funding of the private placement occurred on February 9, 2017 and the net proceeds from the transaction were $16.6 million during the first two quarters of 2017, after $1.9 million of transaction expenses.

The Company determined that the preferred stock was more akin to ana temporary equity security than ~~debt~~permanent equity primarily because the preferred stock was contingently redeemable upon the occurrence of an event that was outside of the Company’s control. The proceeds were allocated between the three features of the private placement: the warrants, the embedded beneficial conversion feature in the preferred stock, and the preferred stock itself. The fair values of the warrants of $3.1 million and the embedded beneficial conversion feature of $3.1 million were recorded as a discount against the stated value of the preferred stock on the date of issuance. The fair value of the warrants was estimated using a Black-Scholes option pricing model which is a Level 2 estimate of fair value. This discount is amortized, using the interest method, and treated as a deemed dividend through the date of conversion, which results in the accretion of the preferred stock to its full redemption value.

On April 5, 2017, the Company delivered a notice to L Catterton of its election to exercise the conversion option with respect to the Series A Convertible Preferred Stock. The terms of the preferred stock provided that the Company could, at its option upon the satisfaction of certain conditions, cause all outstanding shares of preferred stock to be automatically converted into the Company’s Class A common stock. The conversion of the preferred stock into 4,252,873 shares of the Company’s Class A Common Stock occurred on April 12, 2017. The discount was amortized, using the interest method, and treated as a deemed dividend through

the date of conversion, which resulted in the accretion of the preferred stock to its full redemption value. After the conversion, no shares of preferred stock are outstanding.

At the conversion date, all unamortized discounts were recognized immediately as a deemed dividend, which increased the net loss attributable to common ~~stockholders.~~stockholders in the second quarter of 2017. The amortized discount, which ~~has been~~was treated in the same manner as dividends, was $7.0 million for the second quarter of 2017 and $8.0 million for the first two quarters of 2017.

Securities Purchase Agreement with Mill Road Capital

On March 13, 2017, the Company entered into a securities purchase agreement with Mill Road Capital II, L.P. (“Mill Road”), pursuant to which the Company agreed, in return for aggregate gross proceeds of $31.5 million, to issue to Mill Road an aggregate of 8,873,240 shares of its Class A common stock, par value $0.01 per share, at a price per share of $3.55, which was equal to the closing sale price for the Company’s Class A common stock on March 10, 2017. On April 3, 2017, such shares were issued and the funding of the private placement occurred. The net proceeds from the transaction were $29.1 million during the first two quarters of 2017, after $2.4 million of transaction ~~expenses paid.~~expenses.

Conversion of Argentia Class B Common Stock

On May 24, 2018, Argentia Private Investments Inc. (“Argentia”) converted 1,522,098 shares of the Company’s Class B common stock, par value $0.01, it owned into the same number of shares of the Company’s Class A common stock, par value $0.01. The rights of the holders of the Company’s Class A common stock and Class B common stock are identical in all respects, except that Class B common stock does not vote on the election or removal of directors. No shares of the Company’s Class B common stock were outstanding as of July 3, 2018.

10. Supplemental Disclosures to Condensed Consolidated Statements of Cash Flows

The following table presents the supplemental disclosures to the Condensed Consolidated Statements of Cash Flows for the two quarters ended July 3, 2018 and July 4, 2017 ~~and June 28, 2016~~ (in thousands):


	July 4, 2017			June 28, 2016			July 3, 2018			July 4, 2017
Interest paid (net of amounts capitalized)	$	2,216		$	860		$	1,973		$	2,216
Income taxes refunded	(60		)	(42		)
Income taxes paid (refunded)							49			(60		)
Changes in purchases of property and equipment accrued in accounts payable, net	(1,417		)	873			(1,580		)	(1,417		)
Conversion of Series A convertible preferred stock to common stock	18,500			—			—			18,500

11. Revenue Recognition

Revenue

Revenue consists of sales from restaurant operations and franchise royalties and fees. Revenue from the operation of company-owned restaurants are recognized when sales occur. The Company reports revenue net of sales and use taxes collected from customers and remitted to governmental taxing authorities.

The Company adopted the revenue recognition standards under Topic 606 at the beginning of the first quarter of fiscal 2018 using the modified retrospective method. The adoption of these standards did not have an impact on the Company’s recognition of revenue from company-owned restaurants or its recognition of continuing royalty fees from franchisees, which are based on a percentage of restaurant revenues and are recognized in the period the related franchised restaurants’ sales occur.

Gift Cards

The Company sells gift cards which do not have an expiration date, and it does not deduct non-usage fees from outstanding gift card balances. The Company recognizes revenue from gift cards when the gift card is redeemed by the customer or the Company determines the likelihood of the gift card being redeemed by the customer is remote (“gift card breakage”). The determination of the gift card breakage rate is based upon Company-specific historical redemption patterns. The Company has determined that approximately 8% of gift cards will not be redeemed, which is recognized ratably over the estimated redemption period of the gift card, approximately 18 months. Gift card liability balances are typically highest at the end of each calendar year following increased gift card purchases during the holiday season. The adoption of Topic 606 did not have an impact on the Company’s recognition of revenue from gift cards, including the recognition of gift card breakage, as the new standard requires the use of the “proportionate” method for recognizing breakage, which the Company has historically utilized.

As of July 3, 2018 and January 2, 2018, the current portion of the gift card liability, $2.8 million and $4.1 million, respectively, is included in accrued expenses and other current liabilities, and the long-term portion, $0.3 million and $0.4 million, respectively, is included in other long-term liabilities in the Consolidated Balance Sheets.

Revenue recognized in the Condensed Consolidated Statements of Operations for the redemption of gift cards that were included in the gift card liability balances at the beginning of each fiscal year was $3.4 million and $3.1 million for the first two quarters of 2018 and 2017, respectively.

The revenue recognized from gift cards for the first two quarters of 2018 includes $0.3 million of gift card breakage that resulted from a change in the estimate for gift card unredeemed balances for the years 2014 and after. This change in estimate was a result of the Delaware Gift Card Litigation settlement in the second quarter of 2018 (see Note 12, Commitments and Contingencies).

Franchise Fees

Royalties from franchise restaurants are based on a percentage of restaurant revenues and are recognized in the period the related franchised restaurants’ sales occur. Development fees and franchise fees, portions of which are collected in advance, are nonrefundable and are recognized in income ratably over the term of the related franchise agreement or recognized upon the termination of the agreement between the Company and the franchisee. The adoption of Topic 606 did impact the Company’s accounting for initial fees charged to franchisees. In the past, the Company recognized initial franchise fees when all material services or conditions relating to the sale of the franchise had been substantially performed or satisfied by the Company, which was generally when a new franchise restaurant opened. In accordance with the new guidance, the Company has determined that the initial franchise services are not distinct from the continuing rights or services offered during the term of the franchise agreement and should be treated as a single performance obligation. Therefore, initial fees received from franchisees will be recognized as revenue over the term of each respective franchise agreement, which is typically 20 years.

An adjustment to beginning retained earnings and a corresponding contract liability of $1.5 million was established on the date of adoption, at the beginning of the first quarter of 2018, associated with the initial fees received through January 2, 2018 that would have been deferred and recognized over the term of each respective franchise agreement if the new guidance had been applied in the past.

The Company recognized revenue of $0.1 million during the first two quarters of 2018 related to initial fees from franchisees that were included in the contract liability balance at the beginning of the year. This amount included fees recognized upon the termination of one franchise restaurant agreement in the first quarter of 2018. The Company expects to recognize approximately $0.1 million each fiscal year through fiscal 2022 and approximately $0.9 million thereafter related to performance obligations that are unsatisfied as of July 3, 2018.

12. Commitments and Contingencies

Data Security Incident

Overview

On June 28, 2016, the Company announced that a data security incident compromised the security of the payment information of some customers who used debit or credit cards at certain Noodles & Company locations between January 31, 2016 and June 2, 2016. The malware involved in the incident has been removed, and the Company believes that it no longer poses a risk to credit or debit cards currently being used at affected locations. The Company ~~continues to implement~~has implemented additional security procedures to further secure customers’ debit and credit card information.

Card Company Assessments

In the fourth quarter of 2016, the Company recorded a charge of $10.6 million for estimated losses, net of $1.0 million of insurance coverage, at the low end of an estimated range, associated with claims and anticipated claims by payment card companies for non-ordinary course operating expenses, card issuer losses and card replacement costs for which it ~~expects~~expected to be liable (the “Data Breach Liabilities”). ~~However,~~The Company also previously disclosed in prior reports filed with the ~~Company~~SEC that it may ultimately be subject to Data Breach Liabilities that are up to $5.5 million greater than that amount. ~~The~~In 2017, the Company ~~has used and intends to use a portion~~made payments of ~~the net proceeds of the private placement transactions entered into with~~ L ~~Catterton and Mill Road (both discussed in Note 9, Stockholders’ Equity) to fund~~$4.0 million for the Data Breach Liabilities.

~~Data Security Litigation~~

~~In addition to claims by~~ On June 7, 2018, the Company received the final assessment from the third of the three payment card companies to which it expected to owe Data Breach Liabilities. This assessment was $11.0 million. In the second quarter of 2018, when the final assessment was received, the Company’s recorded a charge of $3.4 million to increase its accrual to cover this final assessment amount (which was within the range disclosed in prior reports filed with ~~respect to~~ the ~~data security incident, the Company~~SEC). The assessment was ~~a defendant in a purported class action lawsuit~~paid early in the ~~United States District Court for the District~~third quarter of Colorado (the “Court”), Selco Community Credit Union vs. Noodles & Company, alleging that the Company negligently failed to provide adequate security to protect the payment card information of customers of the plaintiffs and those of other similarly situated credit unions, banks and other financial institutions alleged to be part of the putative class, causing those institutions to suffer financial losses (the “Selco Litigation”). The complaint in the Selco Litigation also claimed the Company was negligent per se based on alleged violations of Section 5 of the Federal Trade Commission Act, and sought monetary damages, injunctive relief and attorneys’ fees. On July 21, 2017, the Court granted a Motion to Dismiss in the Selco Litigation in favor of the Company, which is subject to appeal by the plaintiffs. Any appeal must be filed on or before August 21, 2017.2018.

~~Fees and Costs~~

The Company has incurred fees and costs associated with this data security incident, including legal fees, investigative fees, other professional fees and costs of communications with customers, all of which to date have been paid or reimbursed by its data security liability insurer. The Company expects to continue to incur significant fees and costs associated with the data security incident in future periods. Fees and costs related to the data security incident may also include other liabilities to payment card networks, liabilities from future litigation, governmental investigations and enforcement proceedings and capital investments for remediation activities, among others. The aggregate amount of such fees and costs cannot be reasonably estimated by the Company at present, but these fees and costs may be more than the limit that the data security liability insurer will pay or reimburse, in which case the Company will bear these fees and costs.

~~Insurance Coverage~~

As discussed above, to limit its exposure to losses arising from matters such as the data security incident, the Company maintained at the time of the incident and continues to maintain data privacy liability insurance coverage. This coverage, and certain other customary business insurance coverage, has reduced the Company’s exposure related to the data security incident. The Company will pursue the maximum recoveries available under these policies.

~~General~~

It is possible that losses associated with the data security incident could have a material adverse effect on the Company’s results of operations in future periods. The Company will continue to evaluate information as it becomes known and will record an estimate for additional losses at the time or times when it is probable that an additional loss, if any, will be incurred and the amount of any such loss is reasonably estimable.

Delaware Gift Card Litigation

As previously disclosed in prior reports filed with the SEC, the Company iswas named as a defendant in an action filed in the Superior Court of Delaware in New Castle County (the “Court”), entitled The State of Delaware, William French v. Card Compliant, LLC, et. al. The ~~case was filed under seal in June 2013 and was unsealed on March 26, 2014. The~~ complaint in this case ~~alleges~~alleged that a number of large retailers and restaurant companies, including the Company, knowingly refused to fulfill obligations under Delaware’s Abandoned Property Law by failing to report and deliver “unclaimed gift card funds” to the State of Delaware, and knowingly made, used or caused to be made or used, false statements and records to conceal, avoid or decrease an obligation to pay or transmit money to Delaware in violation of the Delaware False Claims and Reporting Act. The complaint ~~seeks~~sought an order that the Company cease and desist from violating the Delaware Abandoned Property Law, monetary damages (including treble damages under the False Claims and Reporting Act), penalties and attorneys’ fees and costs. On November 23, 2015, the Court ruled on a motion to dismiss the complaint. While the Court granted the motion to dismiss with respect to a claim alleging that the defendants intended to defraud the government or willfully concealed property owed to the government and for which a certificate or receipt was provided, it did not dismiss the other claims alleging that the defendants knowingly made false statements to avoid transmitting money to the government. The defendants have filed a motion for summary judgment in the case. The trial date with respect to this matter is set for May 21, 2018. In 2015 the Company recorded a loss contingency accrual based on a reasonable estimate of the probable losses that might arise from this matter; this loss contingency accrual did not have a material effect on our results of operations. ~~However, the Company may ultimately be~~On July 3, 2018, a settlement was reached in this matter, subject to ~~greater losses resulting from~~execution of a definitive settlement agreement, which will dispose of all pending claims included in the litigation. The ~~Company intends to continue to vigorously defend this action.~~

~~Litigation Regarding Classification~~Company’s results of ~~Assistant General Managers~~

In the third quarter of 2016, the Company recorded a charge of $3.0 million to establish a reserve related to the settlement of a purported collective and class action lawsuit against the Company alleging violations of the Fair Labor Standards Act and certain state laws in connections with the Company’s classification of assistant general managers as exempt employees. Inoperations for the second quarter of ~~2017,~~2018 include a charge of $0.3 million for the Company’s liability under this settlement. The Company also recorded a ~~gain~~loss contingency accrual based on a reasonable estimate of ~~$0.4 million related to such settlement because~~ the ~~final amount determined to be owed by~~probable losses that may arise under Delaware’s Abandoned Property Law in resolving claims for unclaimed gift card funds for the ~~Company under~~years 2011, 2012 and 2013, which were not included as part of the ~~settlement agreement was $0.4 million less than the amount reserved.~~litigation.

Other Matters

In the normal course of business, the Company is subject to other proceedings, lawsuits and claims. Such matters are subject to many uncertainties, and outcomes are not predictable with assurance. Consequently, the Company is unable to ascertain the ultimate aggregate amount of monetary liability or financial impact with respect to these matters as of July ~~4, 2017.~~3, 2018. These matters could affect the operating results of any one financial reporting period when resolved in future periods. The Company believes that an unfavorable outcome with respect to these matters is remote or a potential range of loss is not material to its consolidated financial statements. Significant increases in the number of these claims, or one or more successful claims that result in greater liabilities

than the Company currently anticipates, could materially and adversely affect its business, financial condition, results of operations or cash flows.

NOODLES & COMPANY

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Noodles & Company is a Delaware corporation that was organized in 2002. Noodles & Company and its subsidiaries are sometimes referred to as “we,” “us,” “our” and the “Company” in this report. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and related notes in Item 1 and with the audited consolidated financial statements and the related notes included in our Annual Report on Form 10-K for our fiscal year ended January ~~3, 2017.~~2, 2018. We operate on a 52- or 53-week fiscal year ending on the Tuesday closest to December 31. Our fiscal quarters each contain 13 operating weeks, with the exception of the fourth quarter of a 53-week fiscal year, which contains 14 operating weeks. Fiscal ~~year~~years 2018 and 2017 ~~contains~~each contain 52 ~~weeks and fiscal year 2016 contained 53~~ weeks.

Cautionary Note Regarding Forward-Looking Statements

In addition to historical information, this discussion and analysis contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties such as the number of restaurants we intend to open, projected capital expenditures and estimates of our effective tax rates. In some cases, you can identify forward-looking statements by terms such as “may,” “might,” “will,” “objective,” “intend,” “should,” “could,” “can,” “would,” “expect,” “believe,” “design,” “estimate,” “predict,” “potential,” “plan” or the negative of these terms and similar expressions intended to identify forward-looking statements. These statements reflect our current views with respect to future events and are based on currently available operating, financial and competitive information. Examples of forward-looking statements include all matters that are not historical facts, such as statements regarding estimated costs associated with our closure of underperforming restaurants, the implementation and results of strategic initiatives and our future financial performance. Our actual results may differ materially from those anticipated in these forward-looking statements due to reasons including, but not limited to, our ability to ~~execute our strategy to refranchise restaurants in certain of our markets; our ability to~~ achieve and maintain increases in comparable restaurant sales and to successfully execute our business strategy, including new restaurant initiatives and operational strategies to improve the performance of our restaurant portfolio; our ability to maintain compliance with debt covenants and continue to access financing necessary to execute our business strategy; costs associated

with our data security incident, including ~~legal fees, investigative fees, other professional fees and the cost of communications with customers, as well as potential~~ losses associated with settling payment card networks’ expected ~~claims and litigation associated with the data security breach;~~claims; the success of our marketing efforts; our ability to open new restaurants on schedule; current economic conditions; price and availability of commodities; our ability to adequately staff our restaurants; changes in labor costs; consumer confidence and spending patterns; consumer reaction to industry related public health issues and perceptions of food safety; seasonal factors; weather; and those discussed in “Special Note Regarding Forward-Looking Statements” and “Risk Factors” as filed in our Annual Report on Form 10-K for our fiscal year ended January ~~3, 2017.~~2, 2018.

Key Measures We Use to Evaluate Our Performance

To evaluate the performance of our business, we utilize a variety of financial and performance measures. These key measures include revenue, average unit volumes (“AUVs”), comparable restaurant sales, restaurant contribution, restaurant contribution margin, EBITDA and adjusted EBITDA.

Revenue

Restaurant revenue represents sales of food and beverages in company-owned restaurants. Several factors affect our restaurant revenue in any period, including the number of restaurants in operation and per-restaurant sales.

Franchise royalties and fees represent royalty income and initial franchise fees. While we expect that the majority of our revenue and net income growth will be driven by company-owned restaurants, our franchise restaurants remain an important factor impacting our revenue and financial performance.

Seasonal factors cause our revenue to fluctuate from quarter to quarter. Our revenue per restaurant is typically lower in the first and fourth quarters, due to reduced winter and holiday traffic, and is higher in the second and third quarters. As a result of these factors, our quarterly and annual operating results and comparable restaurant sales may fluctuate significantly.

Average Unit Volumes ~~(“AUVs”)~~

AUVs consist of the average annualized sales of all company-owned restaurants for the trailing 12 periods. AUVs are calculated by dividing restaurant revenue by the number of operating days within each time period and multiplying by ~~361, which is~~ the number of operating days we have in a typical year. This measurement allows management to assess changes in consumer traffic and ~~per-person~~per person spending patterns at our restaurants.

Comparable Restaurant Sales

Comparable restaurant sales refer to year-over-year sales comparisons for the comparable restaurant base. We define the comparable restaurant base to include restaurants open for at least 18 full periods. This measure highlights performance of existing restaurants, as the impact of new restaurant openings is excluded. Changes in comparable restaurant sales are generated by changes in traffic, which we calculate as the number of entrées sold, or changes in per-person spend, calculated as sales divided by traffic. Per-person spend can be influenced by changes in menu prices and the mix and number of items sold per person.

Measuring our comparable restaurant sales allows us to evaluate the performance of our existing restaurant base. Various factors impact comparable restaurant sales, including:

consumer recognition of our brand and our ability to respond to changing consumer preferences;

overall economic trends, particularly those related to consumer spending;

our ability to operate restaurants effectively and efficiently to meet consumer expectations;

pricing;

the number of restaurant transactions, per-person spend and average check amount;

marketing and promotional efforts;

weather;

food safety and foodborne illness concerns;

local competition;

trade area dynamics;

introduction of new and seasonal menu items and limited time offerings; and

opening new restaurants in the vicinity of existing locations.

Consistent with common industry practice, we present comparable restaurant sales on a calendar-adjusted basis that aligns current year sales weeks with comparable periods in the prior year, regardless of whether they belong to the same fiscal period or not. Since opening new company-owned and franchise restaurants is a part of our growth strategy and we anticipate new restaurants will be a component of our revenue growth (albeit to a lesser extent in future periods, as discussed below), comparable restaurant sales ~~are~~is only one measure of how we evaluate our performance.

Restaurant Contribution and Restaurant Contribution Margin

Restaurant contribution ~~is defined as~~represents restaurant revenue less restaurant operating costs which are cost of sales, labor, occupancy and other restaurant operating costs. ~~Fluctuations~~Restaurant contribution margin represents restaurant contribution as a percentage of restaurant revenue. We expect restaurant contribution to increase in proportion to the number of new restaurants we open and our comparable restaurant sales growth.

We believe that restaurant contribution and restaurant contribution margin ~~can~~are important tools for investors and other interested parties because they are widely-used metrics within the restaurant industry to evaluate restaurant-level productivity, efficiency and performance. We also ~~be attributed~~use restaurant contribution and restaurant contribution margin as metrics to ~~those factors discussed above for~~evaluate the ~~components~~profitability of incremental sales at our restaurants, restaurant performance across periods and restaurant financial performance compared with competitors. Restaurant contribution and restaurant contribution margin are supplemental measures of the operating ~~costs.~~performance of our restaurants and are not reflective of the underlying performance of our business because corporate-level expenses are excluded from these measures.

EBITDA and Adjusted EBITDA

We define EBITDA as net income (loss) before interest expense, provision (benefit) for income taxes and depreciation and amortization. We define adjusted EBITDA as net income (loss) before interest expense, provision (benefit) for income taxes, depreciation and amortization, restaurant impairments, closure costs and asset disposals, certain litigation settlements, non-recurring registration and related transaction costs, loss on extinguishment of debt, severance costs and stock-based compensation.

Management believes that EBITDA and adjusted EBITDA provide clear pictures of our operating results by eliminating certain non-recurring and non-cash expenses that may vary widely from period to period and are not reflective of the underlying business performance.

The presentation of ~~this financial information~~restaurant contribution, restaurant contribution margin, EBITDA and adjusted EBITDA is not intended to be considered in isolation or as a substitute for, or to be superior to,

the financial information prepared and presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”). We use these non-GAAP financial measures for financial and operational decision making and as a means to evaluate period-to-period comparisons. We believe that they provide useful information to management and investors about operating results, enhance the overall understanding of past financial performance and future prospects and allow for greater transparency with respect to key metrics used by management in its financial and operational decision making.

Recent Trends, Risks and Uncertainties

~~Restaurant Development.~~ In 2016, we significantly reduced our rate of company-owned restaurant unit growth, which we anticipate will result in our revenue growing at a slower rate than would be expected if our unit growth rate continued at the historical rate. In 2017, we plan to open 13 company-owned restaurants; 11 openings occurred in the first two quarters of 2017. We do not intend to open restaurants in new markets in 2017, and most of our openings will be in well-established markets where we maintain strong brand awareness and restaurant-level financial performance that exceeds company averages. We believe this more moderate growth strategy will enhance our ability to focus on improving restaurant operations and profitability. We will continue to evaluate our company-owned restaurant growth rate based on our operational and financial performance, capital resources and real estate opportunities. Furthermore, we anticipate pre-opening costs to decrease as a result of the more moderate anticipated growth rate.

~~Certain Restaurant Closures.~~ We closed 55 restaurants in the first quarter of 2017. These restaurants significantly underperformed our restaurant averages, as measured by AUVs, restaurant contribution margin and cash flow. Many of these restaurants were opened in the last two to three years in newer markets where brand awareness of our restaurants is not as strong and where it has been more difficult to adequately staff our restaurants. We believe closing these restaurants will favorably affect our future restaurant contribution, restaurant contribution margin, adjusted EBITDA, adjusted EBITDA margin and net income.

Comparable Restaurant ~~Sales and Restaurant Contribution Margin.~~Sales. In the second quarter of ~~2017,~~2018, comparable restaurant sales ~~decreased 3.4%~~increased 5.4% system-wide, decreased 3.9% for company-owned restaurants, and decreased 0.4% for franchise restaurants. During the first two quarters of 2017, comparable restaurant sales decreased 2.7% system-wide, decreased 3.2%increased 5.0% for company-owned restaurants, and increased ~~0.3%~~8.0% for franchise restaurants. Comparable ~~restaurant~~ sales ~~represent year-over-year sales comparisons for restaurants open for at least 18 full periods. Our comparable restaurant sales decreased~~growth was driven primarily by an increase in traffic related to successful implementation of recent operational and brand initiatives, as well as a ~~result~~modest price increase. Comparable sales in the quarter also benefited from the impact of ~~underperformance at company-owned restaurants.~~the shift in the timing of the Easter and 4th of July holidays by approximately 100 basis points (“bps”).

Increased Labor Costs. Similar to much of the restaurant industry, our labor costs have risen in recent periods and we expect that labor costs will continue to rise in future periods as wage rates and benefit costs increase. Some jurisdictions, including some of those in which we operate, have recently increased their minimum wage by a significant amount, and other jurisdictions are considering similar actions. Significant additional government-imposed increases could materially affect our labor costs.

Restaurant Development. We continue to reduce our rate of company-owned restaurant unit growth, which we anticipate will result in our revenue growing at a slower rate than would be expected if our unit growth rate continued at the historical rate. New restaurants have historically contributed substantially to our revenue growth. In the first two quarters of 2018, we opened one

company-owned restaurant. As of July 3, 2018, we had 404 company-owned restaurants and 65 franchise restaurants in 29 states and the District of Columbia.

We currently do not intend to open any additional restaurants in 2018. We believe that this remains consistent with our moderate growth strategy and is an approach that will enhance our ability to continue focusing on improving restaurant operations and profitability at existing locations. We will continue to evaluate our company-owned restaurant growth rate based on our operational and financial performance, capital resources and real estate opportunities.

Certain Restaurant Closures. We closed 55 restaurants in the first quarter of 2017. These restaurants significantly underperformed our restaurant averages, as measured by AUVs, restaurant contribution margin and cash flow. Closing these restaurants has favorably affected our restaurant contribution, restaurant contribution margin, adjusted EBITDA, adjusted EBITDA margin and net income. Additionally, we closed nine company-owned restaurants in the first two quarters of 2018, most of which were approaching the expiration of their leases. We currently do not anticipate significant restaurant closures for the foreseeable future; however, we may continue to close restaurants at, or near, the expiration of their leases.

Results of Operations

The following table presents a reconciliation of net loss to EBITDA and adjusted EBITDA:


	Fiscal Quarter Ended						Two Fiscal Quarters Ended						Fiscal Quarter Ended						Two Fiscal Quarters Ended
	July 4, 2017			June 28, 2016			July 4, 2017			June 28, 2016			July 3, 2018			July 4, 2017			July 3, 2018			July 4, 2017
	(in thousands, unaudited)												(in thousands, unaudited)
Net loss	$	(1,815	)	$	(14,087	)	$	(28,660	)	$	(16,460	)	$	(5,935	)	$	(1,815	)	$	(9,510	)	$	(28,660	)
Depreciation and amortization	6,279			7,071			12,546			13,977			5,797			6,279			11,617			12,546
Interest expense, net	927			598			1,935			1,226			1,154			927			2,292			1,935
Provision for income taxes	80			2,177			271			1,083
(Benefit) provision for income taxes													(7		)	80			(248		)	271
EBITDA	$	5,471		$	(4,241	)	$	(13,908	)	$	(174	)	$	1,009		$	5,471		$	4,151		$	(13,908	)
Restaurant impairments, closure costs and asset disposals ⁽¹⁾	2,830			11,248			24,884			12,264			2,580			2,830			4,160			24,884
Litigation settlement ⁽²⁾	(421		)	—			(421		)	—			3,796			(421		)	3,796			(421		)
Fees and costs related to the registration statement and related transactions ⁽³⁾	40			—			679			—
Severance costs ⁽⁴⁾	129			—			332			—
Fees and costs related to registration statements and related transactions ⁽³⁾													53			40			53			679
Loss on extinguishment of debt ⁽⁴⁾													626			—			626			—
Severance costs ⁽⁵⁾													—			129			278			332
Stock-based compensation expense	647			501			945			849			1,012			647			1,592			945
Adjusted EBITDA	$	8,696		$	7,508		$	12,511		$	12,939		$	9,076		$	8,696		$	14,656		$	12,511

_____________________

(1)

~~The~~Restaurant impairments and closure costs in all periods presented above include amounts related to restaurants previously impaired or closed. Additionally, the first two quarters of 2018 includes closure costs of the nine restaurants closed in the first two quarters of 2018, most of which were approaching the expiration of their leases, and the impairment of one restaurant, and the first two quarters of 2017 ~~include~~includes the closure costs related to the 55 restaurants closed in the first quarter of 2017 and the impairment of 13 restaurants. ~~The first two quarters of 2016 include the impairment of 12 restaurants. All periods include the ongoing closure costs of restaurants closed in the fourth quarter of 2015.~~ See Note 7, Restaurant Impairments, Closure Costs and Asset Disposals.


(2)	The second quarter of 2018 includes a charge of $3.4 million for the final assessment related to data breach liabilities, and a $0.3 million charge for a litigation settlement related to the Delaware gift card matter. The second quarter of 2017 includes a gain on an employment-related litigation settlement due to final settlement being less than what the Company had previously accrued.


(3)	The second quarter of 2018 includes expenses related to the registration statement the Company filed in the second quarter of 2018. The first two quarters of 2017 ~~include~~includes expenses related to the registration statement the Company filed in the first quarter of 2017, which registration statement was later withdrawn.


(4)	The second quarter of 2018 includes the loss on extinguishment of debt which resulted from writing off the remaining unamortized balance of debt issuance costs related to the prior credit facility when it was repaid in full in the second quarter of 2018.


(5)	The first two quarters of 2018 and 2017 include severance costs ~~related to the departure of our Chief Operations Officer and department~~from departmental structural changes.

Restaurant Openings, Closures and Relocations

The following table shows restaurants opened or closed during the periods indicated:


	Fiscal Quarter Ended				Two Fiscal Quarters Ended				Fiscal Quarter Ended				Two Fiscal Quarters Ended
	July 4, 2017		June 28, 2016		July 4, 2017		June 28, 2016		July 3, 2018		July 4, 2017		July 3, 2018		July 4, 2017
Company-Owned Restaurant Activity
Beginning of period	409		436		457		422		411		409		412		457
Openings	4		8		11		22		—		4		1		11
Closures	—		(1	)	(55	)	(1	)	(7	)	—		(9	)	(55	)
Restaurants at end of period	413		443		413		443		404		413		404		413
Franchise Restaurant Activity
Beginning of period	73		71		75		70		65		73		66		75
Openings	1		1		2		2		—		1		—		2
Closures	(1	)	(1	)	(4	)	(1	)	—		(1	)	(1	)	(4	)
Restaurants at end of period	73		71		73		71		65		73		65		73
Total restaurants	486		514		486		514		469		486		469		486

Statement of Operations as a Percentage of Revenue

The following table summarizes key components of our results of operations for the periods indicated as a percentage of our total revenue, except for the components of restaurant operating costs, which are expressed as a percentage of restaurant revenue.



	Fiscal Quarter Ended				Two Fiscal Quarters Ended
	July 3, 2018		July 4, 2017		July 3, 2018		July 4, 2017
Revenue:
Restaurant revenue	99.2	%	99.0	%	99.2	%	99.0	%
Franchising royalties and fees	0.8	%	1.0	%	0.8	%	1.0	%
Total revenue	100.0	%	100.0	%	100.0	%	100.0	%
Costs and expenses:
Restaurant operating costs (exclusive of depreciation and amortization shown separately below): ⁽¹⁾
Cost of sales	26.7	%	26.5	%	26.7	%	27.2	%
Labor	32.7	%	32.6	%	33.0	%	33.5	%
Occupancy	10.6	%	11.3	%	11.1	%	11.7	%
Other restaurant operating costs	14.5	%	14.5	%	14.9	%	14.7	%
General and administrative	12.6	%	8.3	%	11.0	%	8.7	%
Depreciation and amortization	4.9	%	5.6	%	5.1	%	5.5	%
Pre-opening	—	%	0.2	%	—	%	0.3	%
Restaurant impairments, closure costs and asset disposals	2.2	%	2.5	%	1.8	%	10.8	%
Total costs and expenses	103.5	%	100.7	%	103.0	%	111.5	%
Loss from operations	(3.5	)%	(0.7	)%	(3.0	)%	(11.5	)%
Loss on extinguishment of debt	0.5	%	—	%	0.3	%	—	%
Interest expense, net	1.0	%	0.8	%	1.0	%	0.8	%
Loss before income taxes	(5.1	)%	(1.5	)%	(4.3	)%	(12.4	)%
(Benefit) provision for income taxes	—	%	0.1	%	(0.1	)%	0.1	%
Net loss	(5.1	)%	(1.6	)%	(4.2	)%	(12.5	)%

_____________________________

Fiscal Quarter Ended Two Fiscal Quarters Ended
July 4,
2017 June 28,
2016 July 4,
2017 June 28,
2016
Revenue:
Restaurant revenue 99.0 % 99.0 % 99.0 % 99.0 %
Franchising royalties and fees 1.0 % 1.0 % 1.0 % 1.0 %
Total revenue 100.0 % 100.0 % 100.0 % 100.0 %
Costs and expenses:
Restaurant operating costs (exclusive of depreciation and amortization shown separately below): ⁽¹⁾

Cost of sales 26.5 % 26.8 % 27.2 % 26.8 %
Labor 32.6 % 32.7 % 33.5 % 32.9 %
Occupancy 11.3 % 11.4 % 11.7 % 11.6 %
Other restaurant operating costs 14.5 % 15.5 % 14.7 % 15.2 %
General and administrative 8.3 % 8.1 % 8.7 % 8.4 %
Depreciation and amortization 5.6 % 5.8 % 5.5 % 5.9 %
Pre-opening 0.2 % 0.7 % 0.3 % 0.8 %
Restaurant impairments, closure costs and asset disposals 2.5 % 9.3 % 10.8 % 5.2 %
Total costs and expenses 100.7 % 109.3 % 111.5 % 106.0 %
Loss from operations (0.7 )% (9.3 )% (11.5 )% (6.0 )%
Interest expense, net 0.8 % 0.5 % 0.8 % 0.5 %
Loss before income taxes (1.5 )% (9.8 )% (12.4 )% (6.5 )%
Provision for income taxes 0.1 % 1.8 % 0.1 % 0.5 %
Net loss (1.6 )% (11.6 )% (12.5 )% (7.0 )%


(1)	As a percentage of restaurant revenue.

Second Quarter Ended July ~~4, 2017~~3, 2018 Compared to Second Quarter Ended ~~June 28, 2016~~July 4, 2017

The table below presents our unaudited operating results for the second quarters of ~~2017~~2018 and ~~2016,~~2017, and the related quarter-over-quarter changes.


	Fiscal Quarter Ended						Increase / (Decrease)					Fiscal Quarter Ended						Increase / (Decrease)
	July 4, 2017			June 28, 2016			$			%		July 3, 2018			July 4, 2017			$			%
							$			%		July 3, 2018			July 4, 2017			$			%
	July 4, 2017		(in thousands)											(in thousands)
Revenue:				June 28, 2016
Restaurant revenue	$	111,628		$	120,204		$	(8,576	)	(7.1	)%	$	116,451		$	111,628		$	4,823		4.3	%
Franchising royalties and fees	1,164			1,203			(39		)	(3.2	)%	944			1,164			(220		)	(18.9	)%
Total revenue	112,792			121,407			(8,615		)	(7.1	)%	117,395			112,792			4,603			4.1	%
Costs and expenses:
Restaurant operating costs (exclusive of depreciation and amortization shown separately below):
Cost of sales	29,598			32,164			(2,566		)	(8.0	)%	31,089			29,598			1,491			5.0	%
Labor	36,430			39,316			(2,886		)	(7.3	)%	38,043			36,430			1,613			4.4	%
Occupancy	12,630			13,688			(1,058		)	(7.7	)%	12,357			12,630			(273		)	(2.2	)%
Other restaurant operating costs	16,194			18,596			(2,402		)	(12.9	)%	16,875			16,194			681			4.2	%
General and administrative	9,393			9,840			(447		)	(4.5	)%	14,813			9,393			5,420			57.7	%
Depreciation and amortization	6,279			7,071			(792		)	(11.2	)%	5,797			6,279			(482		)	(7.7	)%
Pre-opening	246			796			(550		)	(69.1	)%	3			246			(243		)	(98.8	)%
Restaurant impairments, asset disposals and closure costs	2,830			11,248			(8,418		)	(74.8	)%	2,580			2,830			(250		)	(8.8	)%
Total costs and expenses	113,600			132,719			(19,119		)	(14.4	)%	121,557			113,600			7,957			7.0	%
Loss from operations	(808		)	(11,312		)	10,504			92.9	%	(4,162		)	(808		)	(3,354		)	*
Loss on extinguishment of debt												626			—			626			100.0	%
Interest expense, net	927			598			329			55.0	%	1,154			927			227			24.5	%
Loss before income taxes	(1,735		)	(11,910		)	10,175			85.4	%	(5,942		)	(1,735		)	(4,207		)	*
Provision for income taxes	80			2,177			(2,097		)	(96.3	)%
(Benefit) provision for income taxes												(7		)	80			(87		)	*
Net loss	$	(1,815	)	$	(14,087	)	$	12,272		87.1	%	$	(5,935	)	$	(1,815	)	$	(4,120	)	*
Company-owned:
Average unit volumes	$	1,065		$	1,092		$	(27	)	(2.5	)%	$	1,092		$	1,065		$	27		2.5	%
Comparable restaurant sales	(3.9		)%	(0.9		)%						5.0		%	(3.9		)%

________________


*	Not meaningful.

Revenue

Total revenue ~~decreased $8.6~~increased $4.6 million in the second quarter of ~~2017,~~2018, or ~~7.1%~~4.1%, to ~~$112.8~~$117.4 million, compared to ~~$121.4~~$112.8 million in the second quarter of ~~2016.~~2017. This ~~decrease~~increase was primarily due to the increase in comparable restaurant sales, partially offset by the impact of ~~closing 55 company-owned~~ restaurants inclosed since the ~~first~~second quarter of ~~2017. Additionally,~~ 2017, most of which were approaching the expiration of their leases.

AUVs ~~decreased~~increased $27,000 compared to the prior year. ~~AUV’s~~AUVs for the trailing twelve months were ~~$1,065,000.~~$1,092,000.

Comparable restaurant sales ~~decreased~~increased by ~~3.9%~~5.0% at company-owned restaurants, ~~decreased~~increased by ~~0.4%~~8.0% at franchise-owned restaurants and ~~decreased~~increased by ~~3.4%~~5.4% system-wide in the second quarter of ~~2017.~~2018. Comparable sales growth was driven primarily by an increase in traffic related to successful implementation of recent operational and brand initiatives, as well as a modest price increase. Comparable sales in the quarter also benefited from the impact of the shift in the timing of the Easter and 4th of July holidays by approximately 100 bps.

Cost of Sales

Cost of sales ~~decreased~~increased by $~~2.6~~1.5 million, or ~~8.0%~~5.0%, in the second quarter of ~~2017~~2018 compared to the same period of ~~2016,~~2017, due primarily to the ~~decrease~~increase in restaurant revenue in the second quarter of ~~2017.~~2018. As a percentage of restaurant revenue, cost of sales ~~decreased~~increased to 26.7% in the second quarter of 2018 from 26.5% in the second quarter of ~~2017 from 26.8% in second quarter of 2016.~~2017. The ~~decrease~~increase as a percentage of restaurant revenue was primarily due to ~~less promotional activity.~~the nationwide launch of zucchini noodles, which have a higher cost of goods sold than the balance of our menu offerings.

Labor Costs

Labor costs ~~decreased~~increased by ~~$2.9~~$1.6 million, or ~~7.3%~~4.4%, in the second quarter of ~~2017~~2018 compared to the same period of ~~2016,~~2017, due primarily to the ~~decrease~~increase in restaurant revenue in the second quarter of ~~2017.~~2018. As a percentage of restaurant revenue, labor costs increased to 32.7% in the second quarter of 2018 from 32.6% in the second quarter of 2017. The nominal increase as a percentage of restaurant revenue was driven by wage inflation, almost completely offset by the benefit of labor savings initiatives and leverage on higher AUVs.

Occupancy Costs

Occupancy costs decreased by $0.3 million, or 2.2%, in the second quarter of 2018 compared to the second quarter of 2017, due primarily to the impact of restaurants closed since the second quarter of 2017, most of which were approaching the expiration of their leases. As a percentage of revenue, occupancy costs decreased to 10.6% in the second quarter of ~~32.6%~~2018, compared to 11.3% in the second quarter of 2017 ~~from 32.7% in the~~ ~~second~~ ~~quarter of 2016. The decrease as a percentage of restaurant revenue was driven by labor savings initiatives.~~

~~Occupancy Costs~~

~~Occupancy costs decreased by~~ ~~$1.1 million, or 7.7%, in the~~ ~~second~~ ~~quarter of~~ ~~2017~~ ~~compared~~due to ~~the second quarter of 2016. As a percentage of revenue, occupancy costs decreased to~~ ~~11.3%~~ ~~in the~~ ~~second~~ ~~quarter of~~ ~~2017, compared to 11.4% in the~~ ~~second~~ ~~quarter of~~ ~~2016. The decrease was due primarily to the closure of restaurants during the latter part of the first quarter of 2017.~~leverage on higher AUVs.

Other Restaurant Operating Costs

Other restaurant operating costs ~~decreased~~increased by ~~$2.4~~$0.7 million, or ~~12.9%~~4.2%, in the second quarter of ~~2017~~2018 compared to the second quarter of ~~2016,~~2017, due primarily to ~~decreased restaurant revenue in the second quarter of 2017~~expenses associated with marketing, culinary and ~~lower marketing expense.~~off-premise initiatives. As a percentage of restaurant revenue, other restaurant operating costs ~~decreased to~~was 14.5% in both the second ~~quarter~~quarters of 2018 and 2017, ~~from 15.5%~~as expenses associated with marketing and initial investments in ~~the second quarter of 2016, due primarily to a reduction in marketing spend.~~culinary and off-premise initiatives were offset by leverage on higher AUV’s.

General and Administrative Expense

General and administrative expense ~~decreased~~increased by ~~$0.4~~$5.4 million, or ~~4.5%~~57.7%, in the second quarter of ~~2017~~2018 compared to the second quarter of ~~2016,~~2017, primarily ~~attributable~~due to a $3.4 million charge for the final assessment related to the data breach liabilities and a $0.3 million charge for a litigation settlement related to the Delaware gift card matter disclosed under Part II, Item 1 of this report. Additionally, the second quarter of 2017 included a $0.4 million gain recognized on the employment-related litigation settlement, which was settled in 2016, due to final settlement being less than what the Company had previously accrued. As a percentage of revenue, general and administrative expense increased to 12.6% in the second quarter of 2018 from 8.3% in the second quarter of ~~2017 from 8.1% in the second quarter of 2016.~~2017.

Depreciation and Amortization

Depreciation and amortization decreased by ~~$0.8~~$0.5 million, or ~~11.2%~~7.7%, in the second quarter of ~~2017~~2018 compared to the second quarter of ~~2016~~.2017, due primarily to restaurants closed or impaired in prior quarters. As a percentage of revenue, depreciation and amortization decreased to ~~5.6%~~4.9% in the second quarter of ~~2017~~2018 from ~~5.8%~~5.6% in the second quarter of ~~2016, due primarily to restaurants impaired or closed in prior quarters.~~2017.

Pre-Opening Costs

Pre-opening costs decreased by ~~$0.6~~$0.2 million, or ~~69.1%~~98.8%, in the second quarter of ~~2017~~2018 compared to the second quarter of ~~2016. As a percentage of revenue, pre-opening costs decreased to 0.2% in the second quarter of 2017 from 0.7% in the second quarter of 2016.~~2017. The decrease in pre-opening costs was due to ~~fewer~~no restaurants under construction ~~compared to~~during the ~~comparable period in the prior year.~~second quarter of 2018.

Restaurant Impairments, Closure Costs and Asset Disposals

Restaurant impairments, closure costs and asset disposals decreased by ~~$8.4~~$0.3 million in the second quarter of ~~2017~~2018 compared to the second quarter of ~~2016. The decrease was primarily due~~2017. Restaurant impairments, closure costs and asset disposals include closure costs related to ~~a net gain recognized during~~the seven restaurants closed in the second quarter of 2018, most of which were approaching the expiration of their leases, as well as ongoing costs from restaurants closed in previous years. There were no restaurants impaired in the second quarter of 2018.

Restaurant impairments, closure costs and asset disposals in the second quarter of 2017 ~~for~~included a gain of $3.6 million related to closures ~~related~~primarily due to adjustments to the liabilities to landlords as lease terminations occurred ~~partially offset by ongoing costs~~for 21 of the 55 restaurants closed during the first quarter of 2017, partially offset by $2.0 million of costs related to the restaurants closed in the first quarter of 2017. Additionally, nine restaurants were impaired in the second quarter of ~~2017 includes the impairment of nine restaurants, compared to 11 restaurants impaired during the second quarter of 2016.~~2017.

Each quarter we evaluate possible impairment of fixed assets at the restaurant level and record an impairment loss whenever we determine that the fair value of these assets is less than their carrying value. There can be no assurance that such evaluations will not result in additional impairment costs in future periods.

Loss on Extinguishment of Debt

In May 2018, we entered into a credit facility with U.S. Bank National Association (the “2018 Credit Facility”) and repaid in full our outstanding indebtedness with Bank of America, N.A. (the “Prior Credit Facility”) using funds drawn on the 2018 Credit Facility. Upon repayment, the Prior Credit Facility and all related agreements were terminated. As a result, we wrote off the remaining unamortized balance of debt issuance costs related to the Prior Credit Facility and recognized a loss on extinguishment of debt in the amount of $0.6 million in the second quarter of 2018.

Interest Expense

Interest expense increased by ~~$0.3~~$0.2 million ~~or 55.0%,~~ in the second quarter of ~~2017~~2018 compared to the second quarter of ~~2016.~~2017. The increase was the result of an increase in the average interest rate on our credit facility and higher amortization of debt issuance costs in the second quarter of ~~2017~~2018 compared to the second quarter of ~~2016 and higher amortization of debt issuance costs.~~2017.

(Benefit) Provision ~~(Benefit)~~ for Income Taxes

InThe effective tax rate was 0.1% for the second quarter of ~~2017, we had a provision for income taxes of $0.1 million~~2018 compared to a provision for income taxes of $2.2 million in the second quarter of 2016. During the first quarter of 2016, the Company recorded a valuation allowance against Canadian deferred tax assets. During the second quarter of 2016, the Company determined that it was appropriate to record a valuation allowance against U.S. deferred tax assets. As a result, the effective tax rate for both the second quarter of 2017 and 2016, reflects the impact of a valuation allowance against U.S. and Canadian deferred tax assets. The provision for income taxes in the second quarter of 2016 was related to the establishment of a valuation allowance against U.S. deferred tax assets. As of July 4, 2017, we continued to maintain a full valuation allowance on our U.S. and Canadian deferred tax assets due to uncertainty regarding the realizability of future tax benefits. As a result, the effective tax rate decreased to (4.6)% for the second quarter of ~~2017 compared to (18.3)%~~2017. The effective tax rate for the second quarter of ~~2016.~~2018 reflects changes made by the Tax Cuts and Jobs Act (“Tax Act”), which enabled us to release a portion of the previously recorded valuation allowance as a benefit from income tax. The effective tax rate for the second quarter of 2017 was primarily related to disallowed tax amortization on indefinite-lived intangibles. For the remainder of fiscal ~~2017~~2018, we do not anticipate material income tax expense or benefit ~~because~~as a result of the valuation allowance recorded. We will maintain the remaining valuation allowance against deferred tax assets until there is sufficient evidence to support a full or partial reversal. The reversal of a previously recorded valuation allowance will generally result in a benefit from income tax.

Two Quarters Ended July ~~4, 2017~~3, 2018 Compared to Two Quarters Ended ~~June 28, 2016~~July 4, 2017

The table below presents our unaudited operating results for the first two quarters of ~~2017~~2018 and ~~2016,~~2017, and the related period-over-period changes.


	Two Fiscal Quarters Ended						Increase / (Decrease)					Two Fiscal Quarters Ended						Increase / (Decrease)
	July 4, 2017			June 28, 2016			$			%		July 3, 2018			July 4, 2017			$			%
							$			%		July 3, 2018			July 4, 2017			$			%
	July 4, 2017		(in thousands, except percentages)											(in thousands, except percentages)
Revenue:				June 28, 2016
Restaurant revenue	$	227,155		$	233,069		$	(5,914	)	(2.5	)%	$	226,064		$	227,155		$	(1,091	)	(0.5	)%
Franchising royalties and fees	2,352			2,324			28			1.2	%	1,857			2,352			(495		)	(21.0	)%
Total revenue	229,507			235,393			(5,886		)	(2.5	)%	227,921			229,507			(1,586		)	(0.7	)%
Costs and expenses:
Restaurant operating costs (exclusive of depreciation and amortization shown separately below):
Cost of sales	61,685			62,353			(668		)	(1.1	)%	60,345			61,685			(1,340		)	(2.2	)%
Labor	76,024			76,750			(726		)	(0.9	)%	74,615			76,024			(1,409		)	(1.9	)%
Occupancy	26,631			27,002			(371		)	(1.4	)%	25,120			26,631			(1,511		)	(5.7	)%
Other restaurant operating costs	33,341			35,488			(2,147		)	(6.0	)%	33,773			33,341			432			1.3	%
General and administrative	20,059			19,877			182			0.9	%	25,081			20,059			5,022			25.0	%
Depreciation and amortization	12,546			13,977			(1,431		)	(10.2	)%	11,617			12,546			(929		)	(7.4	)%
Pre-opening	791			1,833			(1,042		)	(56.8	)%	50			791			(741		)	(93.7	)%
Restaurant impairments, asset disposals and closure costs	24,884			12,264			12,620			*		4,160			24,884			(20,724		)	(83.3	)%
Total costs and expenses	255,961			249,544			6,417			2.6	%	234,761			255,961			(21,200		)	(8.3	)%
Loss from operations	(26,454		)	(14,151		)	(12,303		)	(86.9	)%	(6,840		)	(26,454		)	19,614			74.1	%
Loss on extinguishment of debt												626			—			626			100.0	%
Interest expense, net	1,935			1,226			709			57.8	%	2,292			1,935			357			18.4	%
Loss before income taxes	(28,389		)	(15,377		)	(13,012		)	(84.6	)%	(9,758		)	(28,389		)	19,257			65.6	%
Provision for income taxes	271			1,083			(812		)	(75.0	)%
(Benefit) provision for income taxes												(248		)	271			(519		)	*
Net loss	$	(28,660	)	$	(16,460	)	$	(12,200	)	(74.1	)%	$	(9,510	)	$	(28,660	)	$	19,150		66.8	%
Company owned:
Company-owned:
Average unit volumes	$	1,065		$	1,092		$	(27	)	(2.5	)%	$	1,092		$	1,065		$	27		2.5	%
Comparable restaurant sales	(3.2		)%	(0.4		)%						2.4		%	(3.2		)%

~~__________________~~________________


*	Not meaningful.

Revenue

Total revenue decreased by ~~$5.9~~$1.6 million, or ~~2.5%~~0.7%, in the first two quarters of ~~2017,~~2018, to ~~$229.5~~$227.9 million compared to ~~$235.4~~$229.5 million in the same period of ~~2016.~~2017. This decrease was ~~primarily~~ due to ~~the impact of~~ closing 55 company-owned restaurants in the first quarter of 2017 and restaurants closed since the second quarter of 2017, most of which were approaching the expiration of their leases, partially offset by the increase in comparable restaurant sales and additional restaurant openings since the beginning of 2017.

Comparable restaurant sales ~~decreased~~increased by ~~3.2%~~2.4% at company-owned restaurants, increased by ~~0.3%~~4.5% at franchise-owned restaurants and ~~decreased~~increased by 2.7% system-wide in the ~~second quarter~~first two quarters of ~~2017.~~2018.

Cost of Sales

Cost of sales decreased by ~~$0.7~~$1.3 million, or ~~1.1%~~2.2%, in the first two quarters of ~~2017~~2018 compared to the same period of ~~2016,~~2017, due primarily to the decrease in restaurant revenue in the first two quarters of 2018 driven by restaurant closures in the first quarter of 2017. As a percentage of restaurant revenue, cost of sales ~~increased~~decreased to 26.7% in the first two quarters of 2018 from 27.2% in the first two quarters of ~~2017 from 26.8% in the first two quarters of 2016.~~2017. The ~~increase in cost of sales~~decrease as a percentage of restaurant revenue was primarily due to favorable commodity pricing, partially offset by the ~~result~~nationwide launch of ~~modest commodity inflation and increased waste as~~zucchini noodles in the second quarter of 2018, which have a ~~result~~higher cost of goods sold than the ~~elimination~~balance of ~~certain~~our menu ~~items and introduction of new items.~~offerings.

Labor Costs

Labor costs decreased by ~~$0.7~~$1.4 million, or ~~0.9%~~1.9%, in the first two quarters of ~~2017~~2018 compared to the same period of ~~2016,~~2017, due primarily to the decrease in restaurant revenue in the first two quarters of 2018 driven by restaurant closures in the first quarter of 2017. As a percentage of restaurant revenue, labor costs ~~increased~~decreased to 33.0% in the first two quarters of 2018 from 33.5% in the first two quarters of ~~2017 from 32.9%~~2017. The decrease as a percentage of restaurant revenue was driven by the benefit of closing underperforming restaurants in the first ~~two quarters~~quarter of ~~2016, due to increases in~~2017, labor savings initiatives and leverage on higher AUVs, partially offset by wage ~~rates and deleverage on lower AUVs.~~inflation.

Occupancy Costs

Occupancy costs decreased by ~~$0.4~~$1.5 million, or ~~1.4%~~5.7%, in the first two quarters of ~~2017~~2018 compared to the first two quarters of ~~2016,~~2017, due primarily to the ~~closure~~favorable impact of ~~restaurants~~restaurant closures during ~~the latter part of~~ the first quarter of 2017. As a percentage of revenue, occupancy costs ~~increased~~decreased to ~~11.7%~~11.1% in first two quarters of ~~2017,~~2018, compared to ~~11.6%~~11.7% in the first two quarters of ~~2016,~~2017, due to ~~deleverage~~leverage on ~~lower AUVs, partially offset by the closure of restaurants during the latter part of the first quarter of 2017.~~higher AUVs.

Other Restaurant Operating Costs

Other restaurant operating costs ~~decreased~~increased by ~~$2.1~~$0.4 million, or ~~6.0%~~1.3%, in the first two quarters of ~~2017~~2018 compared to the first two quarters of ~~2016,~~2017. As a percentage of restaurant revenue, other restaurant operating costs increased to 14.9% in the first two quarters of 2018, compared to 14.7% in the first two quarters of 2017, due primarily to decreased restaurant revenue in the first two quarters of ~~2017 and lower marketing expense. As a percentage of~~2018, driven by restaurant ~~revenue, other restaurant operating costs decreased to 14.7%~~closures in the first ~~two quarters~~quarter of 2017, ~~compared to 15.2%~~expenses associated with marketing and initial investments in ~~the first two quarters of 2016, due primarily to a reduction in marketing spend.~~culinary and off-premise initiatives.

General and Administrative Expense

General and administrative expense increased by ~~$0.2~~$5.0 million, or ~~0.9%~~25.0%, in the first two quarters of ~~2017~~2018 compared to the first two quarters of ~~2016.~~2017, primarily due to a $3.4 million charge for the final assessment related to the Data Breach Liabilities and a $0.3 million charge for a litigation settlement related to the Delaware gift card matter described under Part II, Item 1 of this report. Additionally, the first two quarters of 2017 included a $0.4 million gain recognized on the employment-related litigation settlement, which was settled in 2016, due to final settlement being less than what the Company had previously accrued. As a percentage of revenue, general and administrative expense increased to 11.0% in the first two quarters of 2018 compared to 8.7% in the first two quarters of 2017 compared to 8.4% in the first two quarters of 2016. This increase was primarily attributable to professional fees related to the registration statement we filed in the first quarter of 2017, which registration statement was later withdrawn, and severance expenses, partially offset by a gain recognized on the employment-related litigation settlement.2017.

Depreciation and Amortization

Depreciation and amortization decreased by ~~$1.4~~$0.9 million, or ~~10.2%~~7.4%, in the first two quarters of ~~2017~~2018 compared to the first two quarters of ~~2016.~~2017, due primarily to restaurants impaired or closed in prior quarters. As a percentage of revenue, depreciation and amortization decreased to 5.1% in the first two quarters of 2018, compared to 5.5% in the first two quarters of ~~2017, compared to 5.9% in the first two quarters of 2016, due to restaurants impaired or closed in prior quarters.~~2017.

Pre-Opening Costs

Pre-opening costs decreased by ~~$1.0~~$0.7 million, or ~~56.8%~~93.7%, in the first two quarters of ~~2017~~2018 compared to the first two quarters of ~~2016. As a percentage of revenue, pre-opening costs decreased to 0.3% in the first two quarters of 2017 compared to 0.8% in the first two quarters of 2016.~~2017. The decrease in pre-opening costs was due to fewer restaurants under construction compared to the comparable period in the prior year. As a percentage of revenue, pre-opening costs was flat in the first two quarters of 2018 and 2017.

Restaurant Impairments, Closure Costs and Asset Disposals

Restaurant impairments, closure costs and asset disposals ~~increased~~decreased by ~~$12.6~~$20.7 million in the first two quarters of ~~2017~~2018 compared to the first two quarters of ~~2016.~~2017. The ~~increase~~decrease was primarily due to the ~~closures~~closure of 55 restaurants in the first quarter of 2017 and the impairment of 13 restaurants during the first two quarters of 2017, partially offset by ~~a net gain recognized during the second quarter~~$2.1 million of ~~2017 for closures~~closure costs related to ~~adjustments to~~ the ~~liabilities to landlords as lease terminations occurred. The~~nine restaurants closed in the first two quarters

of ~~2016 included~~2018, most of which were approaching the expiration of their leases, and the impairment of ~~twelve restaurants.~~one restaurant in the first two quarters of 2018. Both periods include ongoing costs of restaurants closed in previous years.

Loss on Extinguishment of Debt

In May 2018, we entered into the ~~fourth~~2018 Credit Facility and repaid in full our outstanding indebtedness under the Prior Credit Facility using funds drawn on the 2018 Credit Facility. As a result, we wrote off the remaining unamortized balance of debt issuance costs related to the Prior Credit Facility and recognized a loss on extinguishment of debt in the amount of $0.6 million in the second quarter of ~~2015.~~2018.

Interest Expense

Interest expense increased by ~~$0.7~~$0.4 million ~~or 57.8%,~~ in the first two quarters of ~~2017~~2018 compared to the same period of ~~2016.~~2017. The increase was the result of an increase in the average interest rate on our credit facility and higher amortization of debt issuance costs in the first two quarters of ~~2017~~2018 compared to the first two quarters of ~~2016, and higher amortization of debt issuance costs.~~2017.

(Benefit) Provision for Income Taxes

~~In the first two quarters 2017, we had a provision~~The effective tax rate was 2.5% for ~~income taxes of $0.3 million compared to a provision for income taxes of $1.1 million in~~ the first two quarters of ~~2016. During~~2018 compared to (1.0)% for the first ~~quarter~~two quarters of ~~2016,~~2017. The effective tax rate for the first two quarters of 2018 reflects changes made by the Tax Act, which enabled the Company to release a portion of the previously recorded a valuation allowance ~~against Canadian deferred tax assets. During the second quarter of 2016, the Company determined that it was appropriate to record~~as a ~~valuation allowance against U.S. deferred tax assets. As a result, the~~benefit from income tax. The effective tax rate for the first two quarters of 2017 ~~and the first two quarters of 2016 reflects the impact of a valuation allowance against U.S. and Canadian deferred tax assets. The provision for income tax for the first two quarters of 2016 was~~is primarily related to ~~the establishment of a valuation allowance against U.S. deferred~~disallowed tax ~~assets. As of July 4, 2017, we continued to maintain a full valuation allowance~~amortization on our U.S. and Canadian deferred tax assets due to uncertainty regarding the realizability of future tax benefits. As a result, the effective tax rate decreased to (1.0)% for the first two quarters of 2017 compared to (7.0)% for the first two quarters of 2016.indefinite-lived intangibles. For the remainder of fiscal ~~2017~~2018, we do not anticipate material income tax expense or benefit ~~because~~as a result of the valuation allowance recorded. We will maintain the valuation allowance against deferred tax assets until there is sufficient evidence to support a full or partial reversal. The reversal of a previously recorded valuation allowance will generally result in a benefit from income tax.

Liquidity and Capital Resources

Summary of Cash Flows

Historically, our primary sources of liquidity and cash flows were operating cash flows and borrowings on our revolving line of credit. In the first quarter of 2017 we determined that we needed additional sources of liquidity in order to pursue our operational strategies and fund obligations such as the liabilities to landlords from the termination of our leases for the restaurants closed in the first quarter of 2017, fees to be paid to our real estate advisor and brokers related to such terminations and other costs of closing restaurants, ~~such as~~including severance for terminated employees (“Restaurant Closing Liabilities”) and ~~the Data~~estimated losses associated with claims and anticipated claims by payment card companies for non-ordinary course operating expenses, card issuer losses and card replacement costs for which we expected to be liable (the “Data Breach ~~Liabilities, we determined that we needed additional sources of liquidity.~~Liabilities”). We ~~executed the following transactions to provide us with additional liquidity: (i) we~~ completed two private placement transactions for aggregate gross proceeds to us of $50.0 million ~~and (ii) we also amended our credit agreement~~in the first quarter of 2017 to ~~increase our flexibility under the credit facility.~~provide us with additional liquidity.

We have historically used cash to fund capital expenditures for new restaurant openings, reinvest in our existing restaurants, invest in infrastructure and information technology and maintain working capital; however, due to our anticipated modest unit growth, cash required for new restaurant openings has been correspondingly reduced. Our working capital position benefits from the fact that we generally collect cash from sales to customers the same day, or in the case of credit or debit card transactions, within several days of the related sale, and we typically have ~~at least~~up to 30 days to pay our vendors. We believe that expected cash flow from operations ~~the proceeds received from the private placement transactions~~ and existing borrowing capacity under our credit facility are adequate to fund debt service requirements, operating lease obligations, capital expenditures, the remaining estimated Restaurant Closing ~~Liabilities, the Data Breach~~ Liabilities and working capital obligations for the remainder of fiscal year ~~2017.~~2018. There are no material changes in the Company’s contractual obligations that are outside the ordinary course of business.

Cash flows from operating, investing and financing activities are shown in the following table (in thousands):


	Two Fiscal Quarters Ended						Two Fiscal Quarters Ended
	July 4, 2017			June 28, 2016			July 3, 2018			July 4, 2017
Net cash (used in) provided by operating activities	$	(8,231	)	$	12,281
Net cash provided by (used in) operating activities							$	2,837		$	(8,231	)
Net cash used in investing activities	(12,213		)	(24,016		)	(7,051		)	(12,213		)
Net cash provided by financing activities	21,763			11,589			4,493			21,763
Effect of exchange rate changes on cash	2			127			$	—		$	2
Net increase (decrease) in cash and cash equivalents	$	1,321		$	(19	)
Net increase in cash and cash equivalents							$	279		$	1,321

Operating Activities

Net cash provided by operating activities was $2.8 million for the first two quarters of 2018, as compared to net cash used in operating activities ~~was~~of $8.2 million for the first two quarters of ~~2017, as compared to net~~2017. The improvement in operating cash ~~provided by operating activities of $12.3 million for the first two quarters of 2016. The decrease~~flows resulted primarily from the ~~higher~~lower net loss during the first two quarters of ~~2017~~2018 as compared to the first two quarters of ~~2016, adjusted for non-cash items such as depreciation and amortization, restaurant impairments, closure costs and asset disposals and stock-based compensation expense. Additionally,~~2017, payments made in the first two quarters of 2017 ~~included payments~~for the termination of leases related to ~~landlords for lease terminations~~closed restaurants of $7.1 million, a litigation settlement ~~payment~~ of $2.6 million and ~~a payment~~ for the ~~data breach liabilities~~Data Breach Liabilities of $4.0 million, as well as other working capital changes due to timing. Payments for the termination of leases related to closed restaurants in the first two quarters of 2018 were $2.1 million.

Investing Activities

Net cash flows used in investing activities ~~decreased to $12.2 million for~~in the first two quarters of ~~2017 from $24.0~~2018 decreased $5.2 million ~~for~~compared to the first two quarters of ~~2016,~~2017, primarily due to the reduction in new restaurant development during the first two quarters of 2018 compared to the same period of 2017. Both periods include reinvestment in existing restaurants and investments in technology.

Financing Activities

Net cash provided by financing activities ~~was $21.8 million and $11.6 million for first~~in the two quarters of ~~2017 and 2016, respectively.~~2018 decreased $17.3 million compared to the two quarters of 2017. The ~~increase~~decrease in net cash provided by financing activities is primarily due to the net proceeds received from the private placement transactions that occurred during the first two quarters of 2017, net of repayments on long-term debt.

Capital Resources

Future Capital Expenditure Requirements. Our capital expenditure requirements are primarily dependent upon the pace of our real estate development program and resulting new restaurants opened. We anticipate our real estate development growth to be reduced in upcoming quarters, compared to our historical rates. Our real estate development program is dependent upon many factors, including economic conditions, real estate markets, site locations and the nature of lease agreements. Our capital expenditure outlays are also dependent onrestaurant openings, costs for maintenance and remodeling of our existing restaurants, as well as information technology expenses and other general corporate capital expenditures. As mentioned above, our real estate development growth has been and will continue to be reduced in upcoming quarters, compared to our historical rates.

We estimate capital expenditures for the remainder of ~~2017~~2018 to be ~~in the range of~~ approximately ~~$8.0~~$6.0 million to ~~$12.0~~$9.0 million for a total of ~~$19.0~~approximately $13.0 million to ~~$23.0~~$16.0 million for the fiscal year, of which $7.0 million to $9.0 million relates to our construction of new restaurants before any reductions for landlord reimbursements, and the remainder relates primarily to reinvestment in existing restaurants and investments in technology.year. We expect such capital expenditures to be funded by a combination of cash from operations ~~funding received from the two private placements that occurred during the first two quarters of 2017,~~ and borrowings under our revolving credit facility.

Current Resources. Our operations have not required significant working capital and, like many restaurant companies, we operate with negative working capital. Restaurant sales are primarily paid for in cash or by credit or debit card, and restaurant operations do not require significant inventories or receivables. In addition, we receive trade credit for the purchase of food, beverages and supplies, therefore reducing the need for incremental working capital to support growth.

Liquidity. We believe that our current cash and cash equivalents, the expected cash flows from company-owned restaurant operations, the expected franchise fees and royalties and borrowings under the credit facility will be sufficient to fund our cash requirements for working capital needs and capital improvements and maintenance of existing restaurants for the next twelve months. ~~Additionally, we~~We expect ~~a significant use of cash in 2017~~ to ~~be the funding of the Restaurant Closing Liabilities, which we anticipate will total~~pay approximately ~~$18.0~~$5.0 million to ~~$23.0~~$8.0 million ~~including (i) $17.0 million to $22.0 million relating to~~for the termination of leases related to closed restaurants, including related fees and ~~expenses. We have paid approximately $8.0 million to date and the remainder of approximately $10.0 million to $15.0 million is expected to be paid out~~expenses over the next ~~nine~~three to 15six months. Additionally, the final assessment for Data Breach Liabilities in the amount of $11.0 million, was paid early in the third quarter of 2018.

Credit Facility

~~We maintain~~On May 9, 2018, we entered into the 2018 Credit Facility which consists of a ~~$100.0~~term loan facility in an aggregate principal amount of $25.0 million and a revolving line of credit of $65.0 million (which may be increased to $75.0 million), which includes a letter of credit subfacility in the amount of $15.0 million and a swingline subfacility in the amount of $10.0 million. The 2018 Credit Facility has a four-year term and matures on May 9, 2022.

Upon execution of the 2018 Credit Facility, we repaid in full our outstanding indebtedness under our ~~credit facility. The revolving line of credit includes a swing line loan of $10.0 million used to fund working capital requirements. The credit facility matures in June 2020.~~

~~On February 8, 2017, we entered into an amendment to~~Prior Credit Facility using funds drawn on our ~~credit facility, which amendment, giving effect to~~2018 Credit Facility. Upon repayment, the ~~equity issuances completed during the first quarter of 2017, (i) increased the interest rate margin applicable at total lease adjusted leverage levels at~~Prior Credit Facility and ~~above 4.25:1.00 and from the period of the date of the Amendment to the delivery of the first following quarterly compliance certificate, (ii) increased capital expenditure amounts~~all related to restaurant growth, and (iii) made certain other changes. The Consolidated EBITDA definition, as revised, permits certain costs to be added back into the Consolidated EBITDA calculation, including the costs associated with the Restaurant Closing Liabilities and the Data Breach Liabilities. The amendment also revised certain financial covenant levels.

agreements were terminated.

As of July ~~4, 2017,~~3, 2018, we had ~~$62.1~~$65.2 million of indebtedness and ~~$3.0~~$3.8 million of letters of credit outstanding under our ~~revolving line~~2018 Credit Facility. The term loan requires principal payments of ~~credit.~~$156,250 per quarter starting in the second quarter of 2018 through the first quarter of 2019, $187,500 per quarter through the first quarter of 2020, $375,000 per quarter through the first quarter of 2021, and $531,250 per quarter through maturity in the second quarter of 2022.

The material terms of the 2018 Credit Facility also include, among other things, the following financial covenants: (i) a maximum consolidated total lease-adjusted leverage ratio covenant; (ii) a minimum consolidated fixed charge coverage ratio covenant; and (iii) a covenant limiting the total capital expenditures by us in any fiscal year. Borrowings under ~~our most recent amended and restated credit facility~~the 2018 Credit Facility bear interest, at our option, at either (i) LIBOR plus ~~2.00%~~a margin of 2.25% to 3.25%, per annum, based onupon the consolidated total lease-adjusted leverage ratio or (ii) the highest of the following base rates plus ~~zero~~a margin of 1.25% to ~~1.00%:~~2.25% per annum: (a) the federal funds rate plus 0.50%; (b) the U.S. Bank ~~of America~~ prime rate or (c) the ~~one month~~one-month LIBOR plus 1.00%. The ~~credit facility~~2018 Credit Facility includes a commitment fee of 0.30% to 0.50%, per annum, based onupon the consolidated total lease-adjusted leverage ratio, ~~per year~~ on any unused portion of the ~~facility. We also maintain outstanding letters of~~revolving credit ~~to secure obligations under our workers’ compensation program and certain lease obligations.~~facility.

Availability of borrowings under the ~~revolving line of credit~~2018 Credit Facility is conditioned onupon our compliance with ~~specified~~the terms of the 2018 Credit Facility, including the financial covenants ~~including a maximum lease-adjusted leverage ratio~~ and ~~a minimum consolidated fixed charge coverage ratio. We are subject to a number of~~ other customary affirmative and negative covenants, ~~including~~such as limitations on additional borrowings, acquisitions, dividend payments and lease ~~commitments. As of July 4, 2017, we were in compliance with all of our debt covenants.~~commitments, and customary representations and warranties.

We expect that we will meet all applicable financial covenants in our ~~credit facility,~~2018 Credit Facility, including the maximum consolidated total lease-adjusted leverage ratio, throughout the fiscal year ending January ~~2, 2018.~~1, 2019. However, there can be no assurance we will meet such financial covenants. If such covenants are not met, we would be required to seek a waiver or amendment from the banks participating in the credit facility. There can be no assurance that such waiver or amendment would be granted, which could have a material adverse impact on our liquidity.

Our ~~credit facility~~2018 Credit Facility is secured by a pledge of stock of substantially all of our subsidiaries and a lien on substantially all of our and our subsidiaries’ personal property assets.

Off-Balance Sheet Arrangements

We had no off-balance sheet arrangements or obligations as of July ~~4, 2017.~~3, 2018.

Critical Accounting Policies and Estimates

Our condensed 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. Our significant accounting policies are described in our Annual Report on Form 10-K for the year ended January ~~3, 2017.~~2, 2018. 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 estimates are identified and described in our annual consolidated financial statements and the related notes included in our Annual Report on Form 10-K for our fiscal year ended January ~~3, 2017.~~2, 2018.

JOBS Act

We qualify as an “emerging growth company” pursuant to the provisions of the Jumpstart our Business Startups (“JOBS”) Act. For as long as we are an “emerging growth company,” we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies,” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, exemptions from the requirements of holding advisory “say-on-pay” votes on executive compensation and shareholder advisory votes on golden parachute compensation. We ~~could~~will cease to be an “emerging growth company” ~~until~~at the end of ~~our 2018~~this fiscal year.

In addition, Section 107 of the JOBS Act also provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. An “emerging growth company” can therefore delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. However, we ~~have chosen to “opt~~“opted out” of such extended transition period and, as a result, we ~~will~~ comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised accounting standards iswas irrevocable.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk

We are exposed to market risk from changes in interest rates on debt. Our exposure to interest rate fluctuations is limited to our outstanding bank debt, which bears interest at variable rates. As of July ~~4, 2017,~~3, 2018, we had ~~$62.1~~$65.2 million of indebtedness under our revolving line of ~~credit.~~credit and term loan. An increase or decrease of 1.0% in the effective interest rate applied on this loan would have resulted in a pre-tax interest expense fluctuation of approximately ~~$0.6~~$0.7 million on an annualized basis.

Commodity Price Risk

We purchase certain products that are affected by commodity prices and are, therefore, subject to price volatility caused by weather, market conditions and other factors which are not considered predictable or within our control. Although these products are subject to changes in commodity prices, certain purchasing contracts or pricing arrangements contain risk management techniques designed to minimize price volatility. The purchasing contracts and pricing arrangements we use may result in unconditional purchase obligations, which are not reflected in our consolidated balance sheets. Typically, we use these types of purchasing techniques to control costs as an alternative to directly managing financial instruments to hedge commodity prices. In many cases, we believe we will be able to address material commodity cost increases by adjusting our menu pricing or changing our product delivery strategy. However, increases in commodity prices, without adjustments to our menu prices, could increase restaurant operating costs as a percentage of company-owned restaurant revenue.

Inflation

The primary inflationary factors affecting our operations are food, labor costs, energy costs and materials used in the construction of new restaurants. Increases in the minimum wage requirements directly affect our labor costs. Many of our leases require us to pay taxes, maintenance, repairs, insurance and utilities, all of which are generally subject to inflationary increases. Finally, the cost of constructing our restaurants is subject to inflationary increases in the costs of labor and material. Over the past five years, inflation has not significantly affected our operating results with the exception of increased wage inflation that has affected our results from 2015 through the ~~second quarter~~first two quarters of ~~2017.~~2018. We expect wage inflation to continue to affect our results in the near future.

Item 4. Controls and Procedures

Our management carried out an evaluation, under the supervision and with the participation of our chief executive officer and ~~interim chief~~principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of July ~~4, 2017,~~3, 2018, pursuant to Rule 13a-15 under the Exchange Act. 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 ~~interim chief~~principal financial officer concluded that our disclosure controls and procedures are effective 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 ~~interim chief~~principal 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 recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II

Item 1. Legal Proceedings

~~Data Security Litigation~~

On June 28, 2016, we announced that a data security incident compromised the security of the payment information of some customers who used debit or credit cards at certain Noodles & Company locations between January 31, 2016 and June 2, 2016. In addition to claims by payment card companies with respect to the data security incident, we were a defendant in a purported class action lawsuit in the United States District Court for the District of Colorado (the “Court”), Selco Community Credit Union vs. Noodles & Company, alleging that we negligently failed to provide adequate security to protect the payment card information of customers of the plaintiffs and those of other similarly situated credit unions, banks and other financial institutions alleged to be part of the putative class, causing those institutions to suffer financial losses (the “Selco Litigation”). The complaint in the Selco Litigation also claimed we were negligent per se based on alleged violations of Section 5 of the Federal Trade Commission Act, and it sought monetary damages, injunctive relief and attorneys’ fees. On July 21, 2017, the Court granted a Motion to Dismiss in the Selco Litigation in favor of us, which is subject to appeal by the plaintiffs. Any appeal must be filed on or before August 21, 2017.

Delaware Gift Card Litigation

As previously disclosed in prior reports filed with the SEC, ~~the Company is~~we were named as a defendant in an action filed in the Superior Court of Delaware in New Castle County (the “Court”), entitled The State of Delaware, William French v. Card Compliant, LLC, et. ~~al.~~al. The case was filed under seal in June 2013 and was unsealed on March 26, 2014. The complaint in this case ~~alleges~~alleged that a number of large retailers and restaurant companies, including ~~the Company,~~us, knowingly refused to fulfill obligations under Delaware’s Abandoned Property Law by failing to report and deliver “unclaimed gift card funds” to the State of Delaware, and knowingly made, used or caused to be made or used, false statements and records to conceal, avoid or decrease an obligation to pay or transmit money to Delaware in violation of the Delaware False Claims and Reporting Act. The complaint ~~seeks~~sought an order that wethe Company cease and desist from violating the Delaware Abandoned Property Law, monetary damages (including treble damages under the False Claims and Reporting Act), penalties and attorneys’ fees and costs. On November 23, 2015, the Court ruled on a motion to dismiss the complaint. While the Court granted the motion to dismiss with respect to a claim alleging that the defendants intended to defraud the government or willfully concealed property owed to the government and for which a certificate or receipt was provided, it did not dismiss the other claims alleging that the defendants knowingly made false statements to avoid transmitting money to the government. The defendants have filed a motion for summary judgment in the case. The trial date with respect to this matter is set for May 21, 2018. In 2015 we recorded a loss contingency accrual based on a reasonable estimate of the probable losses that might arise from this matter; this loss contingency accrual did not have a material effect on our results of operations. ~~However, we may ultimately be~~On July 3, 2018, a settlement was reached in this matter, subject to ~~greater losses resulting from~~execution of a definitive settlement agreement, which will dispose of all pending claims included in the litigation. ~~We intend to continue to vigorously defend this action.~~

~~Litigation Regarding Classification~~Our results of ~~Assistant General Managers~~

In the third quarter of 2016, we recorded a charge of $3.0 million to establish a reserve related to the settlement of a purported collective and class action lawsuit against us alleging violations of the Fair Labor Standards Act and certain state laws in connections with our classification of assistant general managers as exempt employees. Inoperations for the second quarter of ~~2017, we~~2018 include a charge of $0.3 million for our liability under this settlement. We also recorded a ~~gain~~loss contingency accrual based on a reasonable estimate of ~~$0.4 million related to such settlement because~~ the ~~final amount determined to be owed by us~~probable losses that may arise under Delaware’s Abandoned Property Law in resolving claims for unclaimed gift card funds for the ~~settlement agreement was $0.4 million less than~~years 2011, 2012 and 2013, which were not included as part of the ~~amount reserved.~~litigation.

Other Matters

In the normal course of business, we are subject to other proceedings, lawsuits and claims. Such matters are subject to many uncertainties, and outcomes are not predictable with assurance. Consequently, we are unable to ascertain the ultimate aggregate amount of monetary liability or financial impact with respect to these matters as of July ~~4, 2017.~~3, 2018. These matters could affect the operating results of any one financial reporting period when resolved in future periods. We believe that an unfavorable outcome with respect to these matters is remote or a potential range of loss is not material to our consolidated financial statements. Significant increases in the number of these claims, or one or more successful claims that result in greater liabilities than we currently anticipate, could materially adversely affect our business, financial condition, results of operations or cash flows.

Item 1A. Risk Factors

A description of the risk factors associated with our business is contained in the “Risk Factors” section of our Annual Report on Form 10-K for our fiscal year ended January ~~3, 2017.~~2, 2018. There have been no material changes to our Risk Factors as previously reported.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibit Index



Exhibit Number			Description of Exhibit
10.1			~~Noodles & Company Compensation Plan for Non-Employee Directors Amended and Restated July 26, 2017~~
~~10.2~~			~~Interim Chief Financial Officer Letter~~Form of Performance Restricted Stock Unit Agreement ~~dated June 13, 2017, between Noodles & Company and Susan Daggett~~
~~10.3~~			~~Employment Agreement, dated June 13, 2017, between Noodles & Company and Paul Murphy~~
31.1			Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of ~~2002.~~2002
32.1			Certification of Chief Executive Officer and ~~Chief~~Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of ~~2002.~~2002 (furnished herewith)
101.INS			XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
101.SCH			XBRL Taxonomy Extension Schema Document
101.CAL			XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF			XBRL Taxonomy Extension Definition Linkbase Document
101.LAB			XBRL Taxonomy Extension Label Linkbase Document
101.PRE			XBRL Taxonomy Extension Presentation Linkbase Document

SIGNATURES

Pursuant to the requirements of the Securities Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



NOODLES & COMPANY
By:	/s/ DAVE BOENNIGHAUSEN
	Dave Boennighausen Chief Executive Officer and Principal Financial Officer
Date	~~August 11, 2017~~July 19, 2018

3130



			Page
PART I
	Item 1.	Financial Statements (unaudited)	2
		Condensed Consolidated Balance Sheets	2
		Condensed Consolidated Statements of Operations	3
		Condensed Consolidated Statements of Comprehensive ~~Income (Loss)~~Loss	4
		Condensed Consolidated Statements of Cash Flows	5
		Notes to Condensed Consolidated Financial Statements	6
	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	13
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	2526
	Item 4.	Controls and Procedures	2627
PART II
	Item 1.	Legal Proceedings	2728
	Item 1A.	Risk Factors	28
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	28
	Item 3.	Defaults Upon Senior Securities	28
	Item 4.	Mine Safety Disclosures	28
	Item 5.	Other Information	2928
	Item 6.	Exhibits	3029
SIGNATURES			3130