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 ~~October~~July 2, ~~2018~~2019

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,

80021

(Address of principal executive offices)

(Zip Code)

~~(720)~~ (720) 214-1900

(Registrant’s telephone number, including area code)

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

Securities registered pursuant to Section 12(b) of the Act.



Title of each class	Trading Symbol	Name of each exchange on which registered
Class A Common Stock, $0.01 par value per share	NDLS	Nasdaq Global Select Market

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~~ xYes☒ No o☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).

Yesx☒ 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 filero	☐	Accelerated ~~filer~~ x Filer	☒

Non-accelerated filer o	☐	Smaller reporting companyo	☒
		Emerging growth companyx	☐

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 ~~October 19, 2018~~August 2, 2019
Class A Common Stock, $0.01 par value per share		~~43,922,066~~44,111,347 shares

TABLE OF CONTENTS



			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)~~Stockholders’ Equity	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	1618
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	2932
	Item 4.	Controls and Procedures	3033
PART II
	Item 1.	Legal Proceedings	3134
	Item 1A.	Risk Factors	3134
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	3134
	Item 3.	Defaults Upon Senior Securities	3134
	Item 4.	Mine Safety Disclosures	3134
	Item 5.	Other Information	3134
	Item 6.	Exhibits	3235
SIGNATURES			3336

PART I

Item 1. Financial Statements

Noodles & Company

Condensed Consolidated Balance Sheets

(in thousands, except share and per share data)


	October 2, 2018			January 2, 2018			July 2, 2019			January 1, 2019
	(unaudited)						(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	1,918		$	3,361		$	3,338		$	4,655
Accounts receivable	1,959			2,434			2,544			2,391
Inventories	9,897			9,929			9,860			9,646
Prepaid expenses and other assets	6,704			6,258			4,797			6,474
Income tax receivable	122			76			191			185
Total current assets	20,600			22,058			20,730			23,351
Property and equipment, net	141,375			152,593			134,692			138,774
Operating lease assets, net							215,347			—
Goodwill	6,400			6,400			7,154			6,400
Intangibles, net	1,384			1,565			1,057			1,291
Other assets, net	2,573			2,617			2,376			2,216
Total long-term assets	151,732			163,175			360,626			148,681
Total assets	$	172,332		$	185,233		$	381,356		$	172,032
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	7,294		$	10,929		$	7,567		$	7,854
Accrued payroll and benefits	9,851			11,719			13,027			13,391
Accrued expenses and other current liabilities	12,292			21,221			8,530			11,183
Current operating lease liabilities							21,781			—
Current portion of long-term debt	688			—			938			719
Total current liabilities	30,125			43,869			51,843			33,147
Long-term debt, net	47,097			57,624			43,714			44,183
Long-term operating lease liabilities, net							233,902			—
Deferred rent	37,592			38,872			—			37,334
Deferred tax liabilities, net	153			416			133			133
Other long-term liabilities	5,390			8,591			4,861			4,554
Total liabilities	120,357			149,372			334,453			119,351

Stockholders’ equity:
Preferred stock—$0.01 par value, 1,000,000 shares authorized and undesignated as of October 2, 2018 and January 2, 2018; no shares issued or outstanding	—			—
Common stock—$0.01 par value, 180,000,000 shares authorized as of October 2, 2018 and January 2, 2018; 46,340,013 issued and 43,916,142 outstanding as of October 2, 2018 and 43,550,329 issued and 41,126,458 outstanding as of January 2, 2018	463			436
Treasury stock, at cost, 2,423,871 shares as of October 2, 2018 and January 2, 2018	(35,000		)	(35,000		)
Preferred stock—$0.01 par value, 1,000,000 shares authorized and undesignated as of July 2, 2019 and January 1, 2019; no shares issued or outstanding							—			—
Common stock—$0.01 par value, 180,000,000 shares authorized as of July 2, 2019 and January 1, 2019; 46,508,586 issued and 44,084,715 outstanding as of July 2, 2019 and 46,353,309 issued and 43,929,438 outstanding as of January 1, 2019							465			464
Treasury stock, at cost, 2,423,871 shares as of July 2, 2019 and January 1, 2019							(35,000		)	(35,000		)
Additional paid-in capital	197,666			171,613			199,978			198,352
Accumulated deficit	(111,154		)	(101,188		)	(118,540		)	(111,135		)
Total stockholders’ equity	51,975			35,861			46,903			52,681
Total liabilities and stockholders’ equity	$	172,332		$	185,233		$	381,356		$	172,032

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						Three Fiscal Quarters Ended						Fiscal Quarter Ended					Two Fiscal Quarters Ended
	October 2, 2018			October 3, 2017			October 2, 2018			October 3, 2017			July 2, 2019		July 3, 2018			July 2, 2019			July 3, 2018
Revenue:
Restaurant revenue	$	115,552		$	113,020		$	341,616		$	340,175		$	118,858	$	116,451		$	227,623		$	226,064
Franchising royalties and fees	1,175			1,191			3,032			3,543
Franchising royalties and fees, and other													1,332		944			2,613			1,857
Total revenue	116,727			114,211			344,648			343,718			120,190		117,395			230,236			227,921
Costs and expenses:
Restaurant operating costs (exclusive of depreciation and amortization shown separately below):
Cost of sales	30,617			29,955			90,962			91,640			30,448		31,089			59,539			60,345
Labor	37,738			36,897			112,353			112,921			38,877		38,043			75,969			74,615
Occupancy	12,035			12,709			37,155			39,340			12,311		12,357			24,741			25,120
Other restaurant operating costs	16,224			15,811			49,997			49,152			16,858		16,875			33,314			33,773
General and administrative	10,399			9,807			35,480			29,866			11,848		14,813			21,988			25,081
Depreciation and amortization	5,790			6,183			17,407			18,729			5,661		5,797			11,168			11,617
Pre-opening	—			69			50			860			65		3			65			50
Restaurant impairments, closure costs and asset disposals	1,792			10,263			5,952			35,147			2,884		2,580			3,304			4,160
Total costs and expenses	114,595			121,694			349,356			377,655			118,952		121,557			230,088			234,761
Income (loss) from operations	2,132			(7,483		)	(4,708		)	(33,937		)	1,238		(4,162		)	148			(6,840		)
Loss on extinguishment of debt	—			—			626			—			—		626			—			626
Interest expense, net	1,093			893			3,385			2,828			800		1,154			1,561			2,292
Income (loss) before income taxes	1,039			(8,376		)	(8,719		)	(36,765		)	438		(5,942		)	(1,413		)	(9,758		)
(Benefit) provision for income taxes	(11		)	(41		)	(259		)	230
Net income (loss)	1,050			(8,335		)	(8,460		)	(36,995		)
Accretion of preferred stock to redemption value	—			—			—			(7,967		)
Net income (loss) attributable to common stockholders	$	1,050		$	(8,335	)	$	(8,460	)	$	(44,962	)
Provision (benefit) for income taxes													—		(7		)	—			(248		)
Net income (loss) and comprehensive income (loss)													$	438	$	(5,935	)	$	(1,413	)	$	(9,510	)
Earnings (loss) per share of Class A and Class B common stock, combined:
Basic	$	0.02		$	(0.20	)	$	(0.20	)	$	(1.23	)	$	0.01	$	(0.14	)	$	(0.03	)	$	(0.23	)
Diluted	$	0.02		$	(0.20	)	$	(0.20	)	$	(1.23	)	$	0.01	$	(0.14	)	$	(0.03	)	$	(0.23	)
Weighted average shares of Class A and Class B common stock outstanding, combined:
Basic	43,094,524			41,109,827			41,798,640			36,639,382			43,964,175		41,172,924			43,955,580			41,150,698
Diluted	44,829,363			41,109,827			41,798,640			36,639,382			45,075,888		41,172,924			43,955,580			41,150,698

See accompanying notes to condensed consolidated financial statements.

Noodles & Company

Condensed Consolidated Statements of ~~Comprehensive Income (Loss)~~Stockholders’ Equity

(in thousands, except share data, unaudited)

Fiscal Quarter Ended Three Fiscal Quarters Ended
October 2,
2018 October 3,
2017 October 2,
2018 October 3,
2017
Net income (loss) $ 1,050
$ (8,335 ) $ (8,460 ) $ (36,995 )
Other comprehensive loss:
Foreign currency translation adjustments —
(11 ) —
(20 )
Other comprehensive loss —
(11 ) —
(20 )
Comprehensive income (loss) $ 1,050
$ (8,346 ) $ (8,460 ) $ (37,015 )



	Fiscal Quarter Ended
	Common Stock^{(1) (2)}			Treasury				Additional Paid-In Capital			Accumulated Deficit			Total Stockholders’ Equity
	Shares	Amount		Shares	Amount			Additional Paid-In Capital			Accumulated Deficit			Total Stockholders’ Equity
Balance—April 2, 2019	46,370,951	$	464	2,423,871	$	(35,000	)	$	199,110		$	(118,978	)	$	45,596
Stock plan transactions and other	137,635	1		—	—			(257		)	—			(256		)
Stock-based compensation expense	—	—		—	—			1,125			—			1,125
Net income	—	—		—	—			—			438			438
Balance—July 2, 2019	46,508,586	$	465	2,423,871	$	(35,000	)	$	199,978		$	(118,540	)	$	46,903

Balance—April 3, 2018	43,559,312	$	436	2,423,871	$	(35,000	)	$	172,240		$	(106,269	)	$	31,407
Stock plan transactions and other	131,083	1		—	—			(329		)	—			(328		)
Stock-based compensation expense	—	—		—	—			1,025			—			1,025
Net loss	—	—		—	—			—			(5,935		)	(5,935		)
Balance—July 3, 2018	43,690,395	$	437	2,423,871	$	(35,000	)	$	172,936		$	(112,204	)	$	26,169

	Two Fiscal Quarters Ended
	Common Stock^{(1) (2)}			Treasury				Additional Paid-In Capital			Accumulated Deficit			Total Stockholders’ Equity
	Shares	Amount		Shares	Amount			Additional Paid-In Capital			Accumulated Deficit			Total Stockholders’ Equity
Balance—January 1, 2019	46,353,309	$	464	2,423,871	$	(35,000	)	$	198,352		$	(111,135	)	$	52,681
Stock plan transactions and other	155,277	1		—	—			(236		)	$	—		(235		)
Stock-based compensation expense	—	—		—	—			1,862			$	—		1,862
Adoption of ASU No. 2016-02, Leases (Topic 842)	—	—		—	—			—			$	(5,992	)	(5,992		)
Net loss	—	—		—	—			—			$	(1,413	)	(1,413		)
Balance—July 2, 2019	46,508,586	$	465	2,423,871	$	(35,000	)	$	199,978		$	(118,540	)	$	46,903

Balance—January 2, 2018	43,550,329	$	436	2,423,871	$	(35,000	)	$	171,613		$	(101,188	)	$	35,861
Stock plan transactions and other	140,066	1		—	—			(294		)	$	—		(293		)
Stock-based compensation expense	—	—		—	—			1,617			$	—		1,617
Adoption of ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606)	—	—		—	—			—			$	(1,506	)	(1,506		)
Net loss	—	—		—	—			—			$	(9,510	)	(9,510		)
Balance—July 3, 2018	43,690,395	$	437	2,423,871	$	(35,000	)	$	172,936		$	(112,204	)	$	26,169

_____________


(1)	Unless otherwise noted, activity relates to Class A common stock.


(2)	On May 24, 2018, 1,522,098 shares of Class B common stock were converted into the same number of the Company’s Class A common stock. As a result of the conversion, no shares of the Company’s Class B common stock were outstanding as of July 3, 2018.

See accompanying notes to condensed consolidated financial statements.

Noodles & Company

Condensed Consolidated Statements of Cash Flows

(in thousands, unaudited)


	Three Fiscal Quarters Ended						Two Fiscal Quarters Ended
	October 2, 2018			October 3, 2017			July 2, 2019			July 3, 2018
Operating activities
Net loss	$	(8,460	)	$	(36,995	)	$	(1,413	)	$	(9,510	)
Adjustments to reconcile net loss to net cash used in operating activities:
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization	17,407			18,729			11,168			11,617
Deferred income taxes	(263		)	230			—			(251		)
Restaurant impairments, closure costs and asset disposals	5,289			28,867			2,784			3,669
Loss on extinguishment of debt	626			—			—			626
Amortization of debt issuance costs	484			288			250			363
Stock-based compensation	2,232			1,193			1,841			1,592
Gain on insurance proceeds received for property damage	(373		)	—
Changes in operating assets and liabilities:
Accounts receivable	489			3,142			(143		)	837
Inventories	(647		)	(358		)	(347		)	(751		)
Prepaid expenses and other assets	(402		)	(460		)	(904		)	(1,184		)
Accounts payable	(2,172		)	(1,093		)	(1,332		)	(2,909		)
Deferred rent	(1,278		)	1,517			—			(975		)
Income taxes	(46		)	158			(6		)	(46		)
Operating lease assets and liabilities							(407		)	—
Accrued expenses and other liabilities	(17,754		)	(22,147		)	(2,483		)	(241		)
Net cash used in operating activities	(4,868		)	(6,929		)
Net cash provided by operating activities							9,008			2,837
Investing activities
Purchases of property and equipment	(9,937		)	(17,468		)	(8,217		)	(7,051		)
Insurance proceeds received for property damage	500			—
Proceeds from disposal of property and equipment							352			—
Franchise restaurant acquisition, net of cash acquired							(1,387		)	—
Net cash used in investing activities	(9,437		)	(17,468		)	(9,252		)	(7,051		)
Financing activities
Net (payments) borrowings from swing line loan	(101		)	6,042
Net payments from swing line loan							—			(101		)
Proceeds from issuance of long-term debt	74,889			10,532			—			73,389
Payments on long-term debt	(84,030		)	(37,015		)	(500		)	(66,873		)
Issuance of preferred stock and common stock warrants, net of transaction expenses (see Note 9)	—			16,589
Issuance of common stock, net of transaction expenses (see Note 9)	23,157			29,110
Proceeds from exercise of stock options and employee stock purchase plan	654			56
Payments on finance leases							(338		)	—
Stock plan transactions and tax withholding on share based compensation awards							(235		)	(293		)
Debt issuance costs	(1,707		)	(662		)	—			(1,629		)
Net cash provided by financing activities	12,862			24,652
Effect of exchange rate changes on cash	—			(4		)
Net cash (used in) provided by financing activities							(1,073		)	4,493
Net (decrease) increase in cash and cash equivalents	(1,443		)	251			(1,317		)	279
Cash and cash equivalents
Beginning of period	3,361			1,837			4,655			3,361
End of period	$	1,918		$	2,088		$	3,338		$	3,640

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 ~~October~~July 2, ~~2018,~~2019, the Company had ~~401~~395 company-owned restaurants and 6562 franchise restaurants in 29 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 ~~2, 2018~~1, 2019 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 ~~2, 2018.~~1, 2019.

Fiscal Year

The Company operates on a 52- or 53-week fiscal year ending on the Tuesday closest to December 31. ~~Fiscal year 2018, which ends on January 1, 2019, and fiscal year 2017, which ended on January 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. Fiscal year 2019, which ends on December 31, 2019, and fiscal year 2018, which ended on January 1, 2019, both contain 52 weeks. The Company’s fiscal quarter that ended ~~October~~July 2, 2019 is referred to as the second quarter of 2019, and the fiscal quarter ended July 3, 2018 is referred to as the ~~third~~second quarter of ~~2018, and the fiscal quarter ended October 3, 2017 is referred to as the third quarter of 2017.~~2018.

Recent Accounting Pronouncements

~~In February 2016,~~The Company reviewed recently issued accounting pronouncements and concluded that they were either not applicable or not expected to have a material impact on the ~~FASB issued~~Company’s financial position or results of operations and cash flows.

Recently Adopted Accounting Pronouncements

On January 2, 2019, the Company adopted ASU ~~No.~~ 2016-02, “Leases (Topic 842).,” along with related clarifications and improvements. This pronouncement requires a lessee to recognize ~~on the balance sheet~~ a liability for lease obligations, which represents the discounted obligation to make future lease payments, and a corresponding right-of-use ~~asset. Additionally,~~asset on the new lease guidance requires a dual approach for lessee accounting under which a lessee would account for leases as finance leases or operating leases. Both finance leases and operating leases will result in the lessee recognizing a right-of-use asset and a corresponding lease liability. For finance leases, the lessee would recognize interest expense and amortization of the right-of-use asset, while for operating leases, the lessee would recognize a straight-line total lease expense.balance sheet. The guidance also requires certain qualitative and quantitative disclosures about the amount, timing and uncertainty of cash flows arising from leases. This pronouncement will be effective for interim and annual periods beginning after December 15, 2018 (the Company’s first quarter of fiscal 2019). There have been multiple standards updates amending this guidance or providing corrections or improvements on issues in the guidance. In July 2018, the FASB issued ASU 2018-11 which provided either a modified retrospective transition approach with application in all comparative periods presented, or an alternative transition method, which permits a company to use its effective date as the date of initial application without restating comparative period financial statements. The Company ~~anticipates implementing the standard by taking advantage of~~elected the alternative transition method ~~and will~~to apply the ~~transition approach~~standard as of the beginning of the period of ~~adoption and will~~adoption; therefore, the Company has not ~~be restating~~applied the standard to the comparative ~~periods.~~periods presented on its condensed consolidated financial statements.

The ~~Company believes the~~ adoption of this lease guidance ~~will~~did have a ~~significant~~material impact on ~~its consolidated balance sheets~~the Company’s Consolidated Balance Sheets by ~~significantly~~materially increasing its non-current assets and current and non-current liabilities ~~in order~~due to ~~record~~ the ~~right~~recognition of ~~use~~the right-of-use assets and related lease liabilities primarily related to the Company’s restaurant operating leases and corporate office space. Upon adoption, the right-of-use assets were based upon the operating lease liabilities adjusted for ~~its existing operating leases.~~prepaid and deferred rent, liabilities associated with lease termination costs and impairment of right-of-use assets. The ~~Company is assessing the impact~~impairment of right-of-use assets upon adoption was recognized in retained earnings as of January 2, 2019.

The adoption of the standard ~~to our accounting policies, processes, and internal control over financial reporting and we are implementing necessary upgrades to our existing lease system. The~~

~~Company is still 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 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 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 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 or 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. This standard permitted adoption using one of two transition methods, either the retrospective or the modified retrospective transition method.

The Company adopted these standards at the beginning of the first quarter of fiscal 2018 using the modified retrospective method. The comparative information has not been 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 ~~third~~second quarter of ~~2018~~2019 or the first ~~three~~two quarters of ~~2018.~~2019. The ~~primary impact of~~ adoption ~~was~~also included the enhancement of the Company’s disclosures related to ~~contracts with customers and revenue recognized from those performance obligations, which includes revenue related to initial fees charged to franchisees and revenue recognized related to gift cards.~~leases. See disclosure in Note ~~11, Revenue Recognition.~~9, Leases.

The impact on the Condensed Consolidated Balance Sheet on the date of adoption was as follows:



	January 1, 2019			Adjustments Due to the Adoption of Topic 842 (unaudited)			January 2, 2019 (unaudited)
Assets
Current assets:
Cash and cash equivalents	$	4,655		$	—		$	4,655
Accounts receivable	2,391			225			2,616
Inventories	9,646			—			9,646
Prepaid expenses and other assets	6,474			(3,243		)	3,231
Income tax receivable	185			—			185
Total current assets	23,351			(3,018		)	20,333
Property and equipment, net	138,774			844			139,618
Operating lease assets, net	—			219,883			219,883
Goodwill	6,400			—			6,400
Intangibles, net	1,291			(67		)	1,224
Other assets, net	2,216			—			2,216
Total long-term assets	148,681			220,660			369,341
Total assets	$	172,032		$	217,642		$	389,674
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	7,854		$	—		$	7,854
Accrued payroll and benefits	13,391			—			13,391
Accrued expenses and other current liabilities	11,183			(553		)	10,630
Current operating lease liabilities	—			—			—
Current portion of long-term debt	719			—			719
Total current liabilities	33,147			(553		)	32,594
Long-term debt, net	44,183			—			44,183
Long-term operating lease liabilities, net	—			260,931			260,931
Deferred rent	37,334			(37,186		)	148
Deferred tax liabilities, net	133			—			133
Other long-term liabilities	4,554			442			4,996
Total liabilities	119,351			223,634			342,985

Stockholders’ equity:
Preferred stock—$0.01 par value, 1,000,000 shares authorized and undesignated as of January 1, 2019; no shares issued or outstanding	—			—			—
Common stock—$0.01 par value, 180,000,000 shares authorized as of January 1, 2019; 46,353,309 issued and 43,929,438 outstanding as of January 1, 2019	464			—			464
Treasury stock, at cost, 2,423,871 shares as of January 1, 2019	(35,000		)	—			(35,000		)
Additional paid-in capital	198,352			—			198,352
Accumulated deficit	(111,135		)	(5,992		)	(117,127		)
Total stockholders’ equity	52,681			(5,992		)	46,689
Total liabilities and stockholders’ equity	$	172,032		$	217,642		$	389,674

2. Supplemental Financial Information

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


	October 2, 2018			January 2, 2018			July 2, 2019			January 1, 2019
Leasehold improvements	$	199,056		$	199,211		$	196,237		$	197,571
Furniture, fixtures and equipment	122,036			120,234			122,107			121,479
Construction in progress	2,024			2,592			6,953			3,620
	323,116			322,037			325,297			322,670
Accumulated depreciation and amortization	(181,741		)	(169,444		)	(190,605		)	(183,896		)
	$	141,375		$	152,593		$	134,692		$	138,774

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


	October 2, 2018		January 2, 2018		July 2, 2019		January 1, 2019
Gift card liability	$	2,520	$	4,078	$	1,647	$	3,284
Occupancy related	3,993		3,733
Occupancy related - other					1,337		2,600
Utilities	1,603		1,705		1,487		1,582
Data breach liabilities	—		7,605
Other accrued expenses	4,176		4,100		4,059		3,717
	$	12,292	$	21,221	$	8,530	$	11,183

3. Long-Term Debt

~~2018 Credit Facility~~

On May 9, 2018, the Company entered into a credit facility 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 $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.

Borrowings under the 2018 Credit Facility, including the term loan facility, bear interest annually, at the Company’s option, at either (i) LIBOR plus a margin of 2.25% to 3.25% per annum, based upon the consolidated total lease-adjusted leverage ratio or (ii) the highest of the following base rates plus a margin of 1.25% to 2.25% per annum: (a) the federal funds rate plus 0.50%; (b) the U.S. Bank prime rate or (c) the one-month LIBOR plus 1.00%. The 2018 Credit Facility includes a commitment fee of 0.30% to 0.50% per annum, based upon the consolidated total lease-adjusted leverage ratio, on any unused portion of the revolving credit facility.

As of ~~October~~July 2, ~~2018,~~2019, the Company had ~~$49.6~~$46.1 million of indebtedness (excluding $1.4 million of unamortized debt issuance costs) and ~~$3.8~~$3.2 million of letters of credit outstanding under the 2018 Credit Facility. The 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 ~~October~~July 2, ~~2018~~2019 are as follows (in thousands):


Year 1	$	688	$	938
Year 2	1,125		1,656
Year 3	1,813		1,594
Year 4	45,951		41,888
Total	$	49,577	$	46,076

The Company’s outstanding indebtedness bore interest at rates between ~~4.95%~~5.34% to 7.25% during the first ~~three~~two quarters of ~~2018.~~2019.

Upon execution of the 2018 Credit Facility, the Company repaid in full its outstanding indebtedness under its prior credit facility using funds drawn on its 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.

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 ~~October~~July 2, ~~2018.~~2019.

~~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 loan~~ borrowings ~~are~~is measured using Level 2 inputs.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

Assets recognized or disclosed at fair value in the consolidated financial statements on a non-recurring basis include items such as leasehold improvements, property and equipment, operating lease assets, goodwill and other intangible assets. These assets are measured at fair value if determined to be impaired or when acquired.

Adjustments to the fair value of ~~non-financial~~ assets measured at fair value on a non-recurring basis as of ~~October~~July 2, ~~2018~~2019 and ~~October~~July 3, ~~2017~~2018 are discussed in Note 7, Restaurant Impairments, Closure Costs and Asset Disposals.

5. Income Taxes

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


	Fiscal Quarter Ended						Three Fiscal Quarters Ended						Fiscal Quarter Ended						Two Fiscal Quarters Ended
	October 2, 2018			October 3, 2017			October 2, 2018			October 3, 2017			July 2, 2019			July 3, 2018			July 2, 2019			July 3, 2018
(Benefit) provision for income taxes	$	(11	)	$	(41	)	$	(259	)	$	230
Provision (benefit) for income taxes													$	—		$	(7	)	$	—		$	(248	)
Effective tax rate	(1.1		)%	0.5		%	3.0		%	(0.6		)%	—		%	0.1		%	—		%	2.5		%

The effective tax ~~rates~~rate for the ~~third~~second quarter of ~~2018~~2019 and the first ~~three~~two quarters of ~~2018~~2019 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 to release a portionimpact of the previously recorded valuation allowance. For the remainder of fiscal ~~2018,~~2019, 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 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~~effective tax ~~provision~~rates for the third quarter of 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 thirdsecond quarter of 2018 ~~is provisional,~~and the ~~Company expects that any material~~first two quarters of 2018 reflected changes ~~required~~made by the Tax Cuts and Jobs 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.~~Act”), which was signed into law in December 2017.

6. Stock-Based Compensation

The Company’s Stock Incentive Plan (the “Plan”), as amended and restated in May of 2013, authorizes the grant of ~~nonqualified~~non-qualified stock options, incentive stock options, stock appreciation rights, restricted stock, restricted stock units (“RSUs”) and incentive bonuses to employees, officers, ~~nonemployee~~non-employee directors and other service providers. ~~The number~~As of ~~shares of common stock~~July 2, 2019, approximately 3.1 million share-based awards were available ~~for issuance pursuant~~ to ~~awards~~be granted under the ~~Stock Incentive Plan on or after the Company’s initial public offering shall not exceed 3,750,500 shares.~~Plan.

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


	Fiscal Quarter Ended				Three Fiscal Quarters Ended				Fiscal Quarter Ended				Two Fiscal Quarters Ended
	October 2, 2018		October 3, 2017		October 2, 2018		October 3, 2017		July 2, 2019		July 3, 2018		July 2, 2019		July 3, 2018
Stock-based compensation expense	$	640	$	248	$	2,232	$	1,193	$	1,155	$	1,012	$	1,881	$	1,592
Capitalized stock-based compensation expense	$	12	$	44	$	37	$	145	$	10	$	13	$	21	$	25

7. Restaurant Impairments, Closure Costs and Asset Disposals

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


	Fiscal Quarter Ended					Three Fiscal Quarters Ended				Fiscal Quarter Ended				Two Fiscal Quarters Ended
	October 2, 2018			October 3, 2017		October 2, 2018		October 3, 2017		July 2, 2019		July 3, 2018		July 2, 2019		July 3, 2018
Restaurant impairments ⁽¹⁾	$	314		$	9,080	$	1,231	$	15,053	$	2,276	$	319	$	2,465	$	917
Closure costs ⁽¹⁾	1,488			779		3,561		19,194		173		1,519		134		2,073
(Gain) loss on disposal of assets and other ⁽²⁾	(10		)	404		1,160		900
Loss on disposal of assets and other										435		742		705		1,170
	$	1,792		$	10,263	$	5,952	$	35,147	$	2,884	$	2,580	$	3,304	$	4,160

_____________________________


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


~~(2)~~	~~The third quarter of 2018 and the first three quarters of 2018 include a $0.4 million gain from insurance proceeds received for property damage in excess of the loss recognized.~~

~~During~~As a result of downward pressure on the ~~third~~operating results of two of our restaurants, we identified these restaurants as impaired during the second quarter of ~~2018, there~~2019, and as a result, recorded an impairment charge of $2.2 million. There were no restaurants identified as impaired, compared to 18 restaurant impairments during the third quarter of 2017. During the first three quarters of 2018, one restaurant was identified as impaired compared to 31 restaurant impairments during the first ~~three~~quarter of 2019. There were no restaurant impairments during the second quarter of 2018 and one restaurant impairment during the first two quarters of ~~2017.~~2018. Both periods include ongoing equipment costs for restaurants previously impaired. Impairment is based on management’s current assessment of the expected future cash flows of a restaurant based on recent results and other specific market factors. Impairment expense is a Level 3 fair value measure and is determined by comparing the carrying value of restaurant assets to the estimated fair market value of the restaurant assets at resale ~~value.~~value and the right-of-use asset based on a discounted cash flow analysis utilizing market lease rates.

Closure costs of $0.2 million in the second quarter of 2019 and $0.1 million during the first two quarters of 2019 include ongoing costs of restaurants closed in previous years, partially offset by a gain of $0.1 million and $0.4 million, respectively, relating to changes in the Company’s assessment of remaining operating lease terms. The closure costs of $1.5 million recognized during the ~~third~~second quarter of 2018 and ~~$3.6~~$2.1 million recognized during the first ~~three~~two quarters of 2018 are related to the ~~three~~seven restaurants closed in the ~~third~~second quarter of 2018 and 12nine restaurants closed in the first ~~three~~two quarters of 2018, most of which were approaching the expiration of their leases, as well as ongoing costs ~~from~~of restaurants closed in previous years. These ongoing costs include adjustments to the liabilities to landlords as lease terminations occur. The closure costs of $0.8 million recognized during the third quarter of 2017 and $19.2 million during the first three quarters of 2017 are 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. Additionally, the $19.2 million of closure costs recognized during the first three quarters of 2017 is net of a gain of $3.6 million which was primarily due to adjustments to the liabilities to landlords as lease terminations occurred for 27 of the 55 restaurants closed during the first quarter of 2017.

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 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					Three Fiscal Quarters Ended						Fiscal Quarter Ended					Two Fiscal Quarters Ended
	October 2, 2018		October 3, 2017			October 2, 2018			October 3, 2017			July 2, 2019		July 3, 2018			July 2, 2019			July 3, 2018
Net income (loss) attributable to common stockholders	$	1,050	$	(8,335	)	$	(8,460	)	$	(44,962	)
Net income (loss)												$	438	$	(5,935	)	$	(1,413	)	$	(9,510	)
Shares:
Basic weighted average shares outstanding	43,094,524		41,109,827			41,798,640			36,639,382			43,964,175		41,172,924			43,955,580			41,150,698
Effect of dilutive securities	1,734,839		—			—			—			1,111,713		—			—			—
Diluted weighted average shares outstanding	44,829,363		41,109,827			41,798,640			36,639,382			45,075,888		41,172,924			43,955,580			41,150,698
Earnings (loss) per share:
Basic earnings (loss) per share	$	0.02	$	(0.20	)	$	(0.20	)	$	(1.23	)	$	0.01	$	(0.14	)	$	(0.03	)	$	(0.23	)
Diluted earnings (loss) per share	$	0.02	$	(0.20	)	$	(0.20	)	$	(1.23	)	$	0.01	$	(0.14	)	$	(0.03	)	$	(0.23	)

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~~The shares ~~are anti-dilutive in periods of net loss. Shares~~ issuable on the vesting or exercise of ~~share based~~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,~~that were excluded from the calculation of diluted loss per share because the effect of their inclusion would have been ~~anti-dilutive. The number of such shares~~anti-dilutive totaled ~~176,325~~1,297,255 and ~~4,575,537~~2,630,523 for the ~~third quarters~~second quarter of ~~2018~~2019 and ~~2017,~~2018, respectively, and totaled ~~2,758,848~~3,229,030 and ~~7,031,639~~3,043,387 for the first ~~three~~two quarters of ~~2018~~2019 and ~~2017,~~2018, respectively.

9. ~~Stockholders’ Equity~~Leases

~~Public Offering of Class A Common Stock~~

On July 31, 2018, the Company sold 2,500,000 shares of its Class A common stock at a public offering price of $10.00 per share. The shares offered were registered pursuant to a registration statement that the Company filed with the Securities and Exchange Commission (the “SEC”). The Company ~~received net proceeds~~leases restaurant facilities, office space and certain equipment that expire on various dates through September 2034. Lease terms for restaurants in traditional shopping centers generally include a base term of ~~$23.8 million, after deducting~~10 years, with options to extend these leases for additional periods of five to 15 years. Leases with an initial term of 12 months or less are not recorded on the ~~underwriting discounts and commissions.~~balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term.

The Company’s leases typically contain rent escalations over the lease term. The Company ~~also incurred $0.6 million of transaction expenses~~recognizes expense for these leases on a straight-line basis over the lease term. Additionally, tenant incentives used to fund leasehold improvements are recognized when earned and reduce the right-of-use asset related to the ~~public offering. The proceeds~~lease. These are amortized through the right-of-use asset as reductions of expense over the ~~offering were used by the Company to pay down borrowings under the 2018 Credit Facility and fund working capital obligations.~~lease term.

~~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~~Some of the Company’s ~~Class A common stock, par~~leases include rent escalations based on inflation indexes and fair market value ~~$0.01 per share (“Class A common stock”),~~adjustments. Certain leases contain contingent rental provisions that include a fixed base rent plus an additional percentage of the restaurant’s sales in excess of stipulated amounts. Operating lease liabilities are calculated using the prevailing index or rate at lease commencement. Subsequent escalations in the index or rate and contingent rental payments are recognized as variable lease expenses. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.

The Company elected the practical expedient to account for lease and non-lease components as a ~~price per share of $1,000, plus warrants exercisable~~single component for ~~five years beginning six months following their issuance for the purchase of 1,913,793 shares~~substantially all lease types.

As most of the Company’s ~~Class A common stock,~~leases do not provide an implicit rate, the Company used its incremental borrowing rate based on the information available at ~~a price per share~~commencement date in determining the present value of ~~$4.35 (such transactions, collectively,~~lease payments.

Supplemental balance sheet information related to leases is as follows (in thousands):



Classification		July 2, 2019
Assets
Operating	Operating lease assets, net	$	215,347
Finance	Finance lease assets, net ⁽¹⁾	1,057
Total leased assets		$	216,404
Liabilities
Current lease liabilities
Operating	Current operating lease liabilities	$	21,781
Finance	Current finance lease liabilities ⁽²⁾	820
Long-term lease liabilities
Operating	Long-term operating lease liabilities	233,902
Finance	Long-term finance lease liabilities ⁽²⁾	300
Total lease liabilities		$	256,803

_____________________


(1)	The finance lease assets are included in property and equipment, net in the Consolidated Balance Sheets.


(2)	The current portion of the finance lease liabilities is included in accrued expenses and other current liabilities, and the long-term portion is included in other long-term liabilities in the Consolidated Balance Sheets.

The components of lease costs are as follows (in thousands):



		Fiscal Quarter Ended			Two Fiscal Quarters Ended
Classification		July 2, 2019			July 2, 2019
Operating lease cost	Occupancy, other restaurant operating costs, and general and administrative expenses	$	10,188		$	20,332
Finance lease cost
Amortization of lease assets	Depreciation and amortization	179			350
Interest on lease liabilities	Interest expense, net	20			40
		10,387			20,722
Sublease income	Franchising royalties and fees, and other	(88		)	(200		)
Total lease cost, net		$	10,299		$	20,522

Future minimum lease payments required under existing leases as of July 2, 2019 are as follows (in thousands):



	Operating Leases		Finance Leases		Total
Remainder of 2019	$	21,533	$	382	$	21,915
2020	42,799		538		43,337
2021	42,316		216		42,532
2022	42,167		44		42,211
2023	40,832		14		40,846
Thereafter	187,239		9		187,248
Total lease payments	376,886		1,203		378,089
Less: Imputed interest	121,203		83		121,286
Present value of lease liabilities	$	255,683	$	1,120	$	256,803

Operating lease payments include $89.0 million related to options to extend lease terms that are reasonably certain of being exercised over the ~~“private placement”). The funding~~next five years and also include $72.5 million related to operating lease payments during the option period for leases expiring beyond five years, and exclude $6.5 million of legally binding minimum lease payments for leases signed but not yet commenced.

Lease term and discount rate as of the ~~private placement occurred on February 9, 2017~~July 2, 2019 are as follows:



	July 2, 2019
Weighted average remaining lease term (years):
Operating	9.4
Finance	2.1
Weighted average discount rate:
Operating	8.68	%
Finance	7.16	%

Supplemental disclosures of cash flow information related to leases for the second quarter and the ~~net proceeds from the transaction were $16.6 million during the~~ first ~~three~~two quarters ~~of 2017, after $1.9 million of transaction expenses.~~ended July 2, 2019 are as follows (in thousands):



	Fiscal Quarter Ended		Two Fiscal Quarters Ended
	July 2, 2019		July 2, 2019
Cash paid for lease liabilities:
Operating leases	$	10,813	$	21,506
Finance leases	160		377
	$	10,973	$	21,883
Right-of-use assets obtained in exchange for new lease liabilities:
Operating leases	$	2,049	$	5,210
Finance leases	179		229
	$	2,228	$	5,439

The Company determined that the preferred stock was more akin to a temporary equity security than 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.

~~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. The amortized discount, which was treated in the same manner as dividends, was $8.0 million for the first three 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 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 three quarters of 2017, after $2.4 million of transaction 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. 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. As a result of the conversion, no shares of the Company’s Class B common stock are outstanding.

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 ~~three~~two quarters ended ~~October~~July 2, ~~2018~~2019 and ~~October~~July 3, ~~2017~~2018 (in thousands):


	October 2, 2018			October 3, 2017			July 2, 2019		July 3, 2018
Interest paid (net of amounts capitalized)	$	3,006		$	3,028		$	1,382	$	1,973
Income taxes paid (refunded)	49			(158		)
Income taxes paid							6		49
Changes in purchases of property and equipment accrued in accounts payable, net	(1,346		)	(2,144		)	1,054		(1,580		)
Conversion of Series A convertible preferred stock to common stock	—			18,500

11. Revenue Recognition

Revenue

Revenue consists of sales from restaurant operations, ~~and~~ franchise royalties and ~~fees.~~fees, and sublease income. 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%9% of gift cards will not be redeemed and recognizes gift card breakage ratably over the estimated redemption period of the gift card, which is approximately 1824 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 ~~October~~July 2, ~~2018~~2019 and January ~~2, 2018,~~1, 2019, the current portion of the gift card liability, ~~$2.5~~$1.6 million and ~~$4.1~~$3.3 million, respectively, is included in accrued expenses and other current liabilities, and the long-term portion, ~~$0.3~~$0.7 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 was ~~$4.4~~$3.2 million and ~~$4.1~~$3.4 million for the first ~~three~~two quarters of 2019 and 2018, ~~and 2017,~~ respectively.

The revenue recognized from gift cards for the first ~~three~~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).~~2018.

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 impacted 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,~~obligation; therefore, initial fees received from franchisees ~~will be~~are 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 three 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 October 2, 2018.

12. Commitments and Contingencies

~~Data Security Incident~~

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. 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 expected to be liable (the “Data Breach Liabilities”). 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. During the first three quarters 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 the SEC). The assessment was paid early in the third quarter of 2018 and there are no further obligations for Data Breach Liabilities outstanding.

~~Delaware Gift Card Litigation~~

~~As previously disclosed in prior reports filed with the SEC, the Company was named as a defendant in an action filed in the Superior Court of Delaware in New Castle County, entitled~~ ~~The State of Delaware, William French v. Card Compliant, LLC, et. al~~. The complaint in this case 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 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. 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 the Company’s results of operations. On July 3, 2018, a settlement was reached in this matter and a definitive settlement agreement was subsequently executed, disposing of all pending claims included in the litigation. The Company’s results of operations for the first three quarters of 2018 included a charge of $0.3 million for the Company’s liability under this settlement. The settlement was paid in the third quarter of 2018. The Company also recorded a loss contingency accrual based on a reasonable estimate of the probable losses that may arise under Delaware’s Abandoned Property Law in resolving claims for unclaimed gift card funds for the years 2011, 2012 and 2013, which were not included as part of the 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 ~~October~~July 2, ~~2018.~~2019. 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 ~~2, 2018.~~1, 2019. 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 years ~~2018~~2019 and ~~2017~~2018 each contain 52 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 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; 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 1, 2019.

Recent Trends, Risks and Uncertainties

Comparable Restaurant Sales. In the second quarter of 2019, system-wide comparable restaurant sales increased 4.6%, comprised of a 4.8% increase for company-owned restaurants and a 3.7% increase for franchise restaurants. Our ability to continue to increase comparable restaurant sales depends in part on our ability to successfully implement our operational strategies and initiatives.

Increased Labor Costs. Similar to much of the restaurant industry, our base labor costs have risen in recent periods. In the second quarter of 2019, we were able to mitigate the impact of increased base labor costs through labor efficiencies; however, we expect that labor costs will continue to rise as wage rates and benefit costs increase. Some jurisdictions 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.

Certain Restaurant Closures. We closed 19 company-owned restaurants in 2018, most of which were at or approaching the expiration of their leases, and did not close any restaurants in the first two quarters of 2019. We currently do not anticipate significant restaurant closures for the foreseeable future; however, we may from time to time close certain restaurants, including closures at, or near, the expiration of their leases.

Restaurant Development. In the first two quarters of 2019, we did not open any new company-owned restaurants but did acquire one franchise restaurant. As of July 2, ~~2018.~~2019, we had 395 company-owned restaurants and 62 franchise restaurants in 29 states and the District of Columbia. Given recent improvement in performance, operating effectiveness and liquidity, we are currently pursuing a disciplined development pipeline to execute a modest new unit growth rate in the near term. In 2019, we plan to open between four and six company-owned restaurants.

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~~volume (“~~AUVs”~~AUV”), 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~~Volume

~~AUVs consist~~AUV consists of the average annualized sales of all company-owned restaurants for the trailing 12 periods. ~~AUVs are~~AUV is calculated by dividing restaurant revenue by the number of operating days within each time period and multiplying by the number of operating

days we have in a typical year. This measurement allows management to assess changes in consumer traffic and 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;~~abnormal weather patterns;

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 is only one measure of how we evaluate our performance.

Restaurant Contribution and Restaurant Contribution Margin

Restaurant contribution represents restaurant revenue less restaurant operating costs which are cost of sales, labor, occupancy and other restaurant operating costs. 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 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 use restaurant contribution and restaurant contribution margin as metrics to evaluate the 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 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, data breach assessments, non-recurring registration and related transaction~~acquisition costs, ~~loss on extinguishment of debt,~~ severance costs and stock-based ~~compensation.~~compensation expense.

~~Management believes~~We believe 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 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~~

~~Comparable Restaurant Sales.~~ In the third quarter of 2018, comparable restaurant sales increased 5.5% system-wide, increased 5.2% for company-owned restaurants, and increased 7.6% for franchise restaurants. Comparable restaurant 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 across our product offering, partially offset by the shift in the timing of the 4th of July holiday based on our fiscal quarter, which shift resulted in a reduction in comparable restaurant sales of approximately 50 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 have reduced our rate of company-owned restaurant unit growth, this resulted 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 three quarters of 2018, we opened one company-owned restaurant. We currently do not intend to open any additional restaurants in 2018. As of October 2, 2018, we had 401 company-owned restaurants and 65 franchise restaurants in 29 states and the District of Columbia.

~~Given recent improvement in performance, we are currently pursuing a disciplined development pipeline to execute a modest new unit growth rate in 2019 and 2020.~~

~~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 12 company-owned restaurants in the first three 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 certain restaurants at, or near, the expiration of their leases.

Results of Operations

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


	Fiscal Quarter Ended						Three Fiscal Quarters Ended						Fiscal Quarter Ended					Two Fiscal Quarters Ended
	October 2, 2018			October 3, 2017			October 2, 2018			October 3, 2017			July 2, 2019		July 3, 2018			July 2, 2019			July 3, 2018
	(in thousands, unaudited)												(in thousands, unaudited)
Net income (loss)	$	1,050		$	(8,335	)	$	(8,460	)	$	(36,995	)	$	438	$	(5,935	)	$	(1,413	)	$	(9,510	)
Depreciation and amortization	5,790			6,183			17,407			18,729			5,661		5,797			11,168			11,617
Interest expense, net	1,093			893			3,385			2,828			800		1,154			1,561			2,292
(Benefit) provision for income taxes	(11		)	(41		)	(259		)	230
Provision (benefit) for income taxes													—		(7		)	—			(248		)
EBITDA	$	7,922		$	(1,300	)	$	12,073		$	(15,208	)	$	6,899	$	1,009		$	11,316		$	4,151
Restaurant impairments, closure costs and asset disposals ⁽¹⁾	1,792			10,263			5,952			35,147			2,884		2,580			3,304			4,160
Litigation settlements and data breach assessments ⁽²⁾	—			—			3,796			(421		)
Fees and costs related to registration statements and related transactions ⁽³⁾	—			—			53			679
Acquisition costs ⁽²⁾													—		—			36			—
Stock-based compensation expense													1,155		1,012			1,881			1,592
Litigation settlement ⁽³⁾													—		3,796			—			3,796
Loss on extinguishment of debt ⁽⁴⁾	—			—			626			—			—		626			—			626
Severance costs ⁽⁵⁾	—			248			278			580
Stock-based compensation expense	640			248			2,232			1,193
Fees and costs related to registration statements and related transactions ⁽⁵⁾													—		53			—			53
Severance costs ⁽⁶⁾													—		—			—			278
Adjusted EBITDA	$	10,354		$	9,459		$	25,010		$	21,970		$	10,938	$	9,076		$	16,537		$	14,656

_____________________

(1)

~~Restaurant impairments and closure costs in all periods presented above~~The first two quarters of 2019 include ~~amounts related~~the impairment of two restaurants compared to ~~restaurants previously impaired or closed.~~one restaurant during the same period of 2018. Additionally, the first ~~three~~two quarters of 2018 ~~includes~~included closure costs of the 12nine restaurants closed in the first ~~three~~two quarters of 2018, ~~and~~most of which were approaching the ~~impairment~~expiration of one restaurant, and the first three quarters of 2017 includes the closure costs related to the 55 restaurants closed in the first quarter of 2017 and the impairment of 31 restaurants. The third quarter of 2018 and the first three quarters of 2018 also include a $0.4 million gain from insurance proceeds received for property damage in excess of the loss recognized.their leases. See Note 7, Restaurant Impairments, Closure Costs and Asset Disposals.


(2)	The first ~~three~~two quarters of 2019 includes acquisition costs related to the acquisition of one franchise restaurant.


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


(4)	The ~~first three quarters~~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 second quarter of 2018 includes expenses related to the registration statement the Company filed in the second quarter of 2018.


(6)	The first ~~three~~two quarters of 2018 ~~and 2017 include~~includes severance costs from departmental structural changes.

Restaurant Openings, Closures and Relocations

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


	Fiscal Quarter Ended				Three Fiscal Quarters Ended				Fiscal Quarter Ended				Two Fiscal Quarters Ended
	October 2, 2018		October 3, 2017		October 2, 2018		October 3, 2017		July 2, 2019		July 3, 2018		July 2, 2019		July 3, 2018
Company-Owned Restaurant Activity
Beginning of period	404		413		412		457		395		411		394		412
Openings	—		—		1		11		—		—		—		1
Acquisition ⁽¹⁾									—		—		1		—
Closures	(3	)	—		(12	)	(55	)	—		(7	)	—		(9	)
Restaurants at end of period	401		413		401		413		395		404		395		404
Franchise Restaurant Activity
Beginning of period	65		73		66		75		64		65		65		66
Openings	—		1		—		3		—		—		—		—
Divestiture ⁽¹⁾									—		—		(1	)	—
Closures	—		(8	)	(1	)	(12	)	(2	)	—		(2	)	(1	)
Restaurants at end of period	65		66		65		66		62		65		62		65
Total restaurants	466		479		466		479		457		469		457		469

_____________________________


(1)	Represents one franchise restaurant acquired by us.

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 Three Fiscal Quarters Ended
October 2,
2018 October 3,
2017 October 2,
2018 October 3,
2017
Revenue:
Restaurant revenue 99.0 % 99.0 % 99.1 % 99.0 %
Franchising royalties and fees 1.0 % 1.0 % 0.9 % 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 % 26.5 % 26.6 % 26.9 %
Labor 32.7 % 32.6 % 32.9 % 33.2 %
Occupancy 10.4 % 11.2 % 10.9 % 11.6 %
Other restaurant operating costs 14.0 % 14.0 % 14.6 % 14.4 %
General and administrative 8.9 % 8.6 % 10.3 % 8.7 %
Depreciation and amortization 5.0 % 5.4 % 5.1 % 5.4 %
Pre-opening — % 0.1 % — % 0.3 %
Restaurant impairments, closure costs and asset disposals 1.5 % 9.0 % 1.7 % 10.2 %
Total costs and expenses 98.2 % 106.6 % 101.4 % 109.9 %
Income (loss) from operations 1.8 % (6.6 )% (1.4 )% (9.9 )%
Loss on extinguishment of debt — % — % 0.2 % — %
Interest expense, net 0.9 % 0.8 % 1.0 % 0.8 %
Income (loss) before income taxes 0.9 % (7.3 )% (2.5 )% (10.7 )%
(Benefit) provision for income taxes — % — % (0.1 )% 0.1 %
Net income (loss) 0.9 % (7.3 )% (2.5 )% (10.8 )%

~~_____________________________~~


~~(1)~~	~~As a percentage of restaurant revenue.~~



	Fiscal Quarter Ended				Two Fiscal Quarters Ended
	July 2, 2019		July 3, 2018		July 2, 2019		July 3, 2018
	(unaudited)
Revenue:
Restaurant revenue	98.9	%	99.2	%	98.9	%	99.2	%
Franchising royalties and fees, and other	1.1	%	0.8	%	1.1	%	0.8	%
Total revenue	100.0	%	100.0	%	100.0	%	100.0	%
Costs and expenses:
Restaurant operating costs (exclusive of depreciation and amortization shown separately below):
Cost of sales	25.6	%	26.7	%	26.2	%	26.7	%
Labor	32.7	%	32.7	%	33.4	%	33.0	%
Occupancy	10.4	%	10.6	%	10.9	%	11.1	%
Other restaurant operating costs	14.2	%	14.5	%	14.6	%	14.9	%
General and administrative	9.9	%	12.6	%	9.6	%	11.0	%
Depreciation and amortization	4.7	%	4.9	%	4.9	%	5.1	%
Pre-opening	0.1	%	—	%	—	%	—	%
Restaurant impairments, closure costs and asset disposals	2.4	%	2.2	%	1.4	%	1.8	%
Total costs and expenses	99.0	%	103.5	%	99.9	%	103.0	%
Income (loss) from operations	1.0	%	(3.5	)%	0.1	%	(3.0	)%
Loss on extinguishment of debt	—	%	0.5	%	—	%	0.3	%
Interest expense, net	0.7	%	1.0	%	0.7	%	1.0	%
Income (loss) before income taxes	0.4	%	(5.1	)%	(0.6	)%	(4.3	)%
Provision (benefit) for income taxes	—	%	—	%	—	%	(0.1	)%
Net income (loss)	0.4	%	(5.1	)%	(0.6	)%	(4.2	)%

~~Third~~Second Quarter Ended ~~October~~July 2, ~~2018~~2019 Compared to ~~Third~~Second Quarter Ended ~~October~~July 3, ~~2017~~2018

The table below presents our unaudited operating results for the ~~third~~second quarters of ~~2018~~2019 and ~~2017,~~2018, and the related quarter-over-quarter changes.


	Fiscal Quarter Ended						Increase / (Decrease)					Fiscal Quarter Ended						Increase / (Decrease)
	October 2, 2018			October 3, 2017			$			%		July 2, 2019			July 3, 2018			$			%
							$			%		July 2, 2019			July 3, 2018			$			%
	October 2, 2018		(in thousands)											(in thousands, unaudited)
Revenue:				October 3, 2017
Restaurant revenue	$	115,552		$	113,020		$	2,532		2.2	%	$	118,858		$	116,451		$	2,407		2.1	%
Franchising royalties and fees	1,175			1,191			(16		)	(1.3	)%
Franchising royalties and fees, and other												1,332			944			388			41.1	%
Total revenue	116,727			114,211			2,516			2.2	%	120,190			117,395			2,795			2.4	%
Costs and expenses:
Restaurant operating costs (exclusive of depreciation and amortization shown separately below):
Cost of sales	30,617			29,955			662			2.2	%	30,448			31,089			(641		)	(2.1	)%
Labor	37,738			36,897			841			2.3	%	38,877			38,043			834			2.2	%
Occupancy	12,035			12,709			(674		)	(5.3	)%	12,311			12,357			(46		)	(0.4	)%
Other restaurant operating costs	16,224			15,811			413			2.6	%	16,858			16,875			(17		)	(0.1	)%
General and administrative	10,399			9,807			592			6.0	%	11,848			14,813			(2,965		)	(20.0	)%
Depreciation and amortization	5,790			6,183			(393		)	(6.4	)%	5,661			5,797			(136		)	(2.3	)%
Pre-opening	—			69			(69		)	(100.0	)%	65			3			62			*
Restaurant impairments, asset disposals and closure costs	1,792			10,263			(8,471		)	(82.5	)%	2,884			2,580			304			11.8	%
Total costs and expenses	114,595			121,694			(7,099		)	(5.8	)%	118,952			121,557			(2,605		)	(2.1	)%
Income (loss) from operations	2,132			(7,483		)	9,615			*		1,238			(4,162		)	5,400			*
Loss on extinguishment of debt												—			626			(626		)	*
Interest expense, net	1,093			893			200			22.4	%	800			1,154			(354		)	(30.7	)%
Income (loss) before income taxes	1,039			(8,376		)	9,415			*		438			(5,942		)	6,380			*
Benefit from income taxes	(11		)	(41		)	30			(73.2	)%
Provision (benefit) from income taxes												—			(7		)	7			*
Net income (loss)	$	1,050		$	(8,335	)	$	9,385		*		$	438		$	(5,935	)	$	6,373		*
Company-owned:
Average unit volumes	$	1,107		$	1,066		$	41		3.8	%
Average unit volume												$	1,148		$	1,092		$	56		5.1	%
Comparable restaurant sales	5.2		%	(3.8		)%						4.8		%	5.0		%

________________


*	Not meaningful.

Revenue

Total revenue increased ~~$2.5~~$2.8 million in the ~~third~~second quarter of ~~2018,~~2019, or ~~2.2%~~2.4%, to ~~$116.7~~$120.2 million, compared to ~~$114.2~~$117.4 million in the ~~third~~second quarter of ~~2017.~~2018. This increase was primarily due to the increase in comparable restaurant sales, partially offset by the impact of restaurants closed since the ~~third~~beginning of second quarter of ~~2017,~~2018, most of which were approaching the expiration of their leases.

~~AUVs~~AUV increased ~~$41,000~~$56,000 compared to the prior year. ~~AUVs~~AUV for the trailing twelve months ~~were $1,107,000.~~was $1,148,000.

~~Comparable~~System-wide comparable restaurant sales ~~increased by 5.2%~~growth was 4.6% in the second quarter of 2019, comprised of a 4.8% increase at company-owned restaurants ~~increased by 7.6%~~and a 3.7% increase at franchise-owned ~~restaurants and increased by 5.5% system-wide in the third quarter of 2018.~~restaurants. Comparable restaurant sales growth in the second quarter of 2019 was driven primarily by ~~an increase in traffic related to successful implementation of recent operational~~increased off-premise sales, a new menu pricing structure and ~~brand initiatives, as well as a modest price increase across our product offering,~~corresponding mix shift benefits, partially offset by the shift in the timing of the ~~4th of July~~Easter holiday, ~~based on our fiscal quarter,~~ which shift resulted in a reduction in comparable restaurant sales of approximately 50 bps.

Cost of Sales

Cost of sales ~~increased~~decreased by $~~0.7~~0.6 million, or ~~2.2%~~2.1%, in the ~~third~~second quarter of ~~2018~~2019 compared to the same period of ~~2017,~~2018, due primarily to ~~the increase in restaurant revenue~~ongoing supply chain savings initiatives in the ~~third~~second quarter of ~~2018.~~2019. As a percentage of restaurant revenue, cost of sales ~~remained flat at 26.5%~~decreased to 25.6% in the ~~third~~second quarter of 2019 compared to 26.7% in second quarter of 2018 ~~compared~~due to ~~the third quarter of 2017 as~~leverage on higher AUVs, primarily due to increased ~~promotional activity~~menu price and ~~the nationwide launch of zucchini noodles, which have a higher cost of goods sold than the balance of our menu offerings, were offset by~~lower expenses resulting from ongoing supply chain initiatives.

Labor Costs

Labor costs increased by $0.8 million, or ~~2.3%~~2.2%, commensurate with the growth in sales in the ~~third~~second quarter of ~~2018~~2019 compared to the same period ~~of 2017, due primarily to the increase in restaurant revenue in the third quarter~~ of 2018. As a percentage of restaurant revenue, labor costs ~~increased to~~were flat at 32.7% in both the ~~third~~second ~~quarter~~quarters of ~~2018~~2019 ~~from 32.6% in the~~ ~~third~~ ~~quarter of 2017. The nominal increase as a percentage of restaurant revenue was driven by wage inflation~~ and ~~increased incentive compensation, almost completely offset by the benefit of labor savings initiatives and leverage on higher AUVs.~~2018.

Occupancy Costs

Occupancy costs ~~decreased by~~ ~~$0.7 million, or 5.3%,~~were flat in the ~~third quarter~~second quarters of ~~2018 compared to the third quarter of 2017, due primarily to the impact of restaurants closed since the third quarter of 2017.~~2019 and 2018. As a percentage of revenue, occupancy costs decreased to 10.4% in the ~~third~~second quarter of ~~2018~~2019, compared to ~~11.2%~~10.6% in the ~~third~~second quarter of ~~2017~~2018 due to leverage on higher ~~AUVs.~~AUV.

Other Restaurant Operating Costs

Other restaurant operating costs ~~increased by $0.4 million, or 2.6%, in the third~~were flat quarter ~~of 2018 compared to the third~~over quarter, ~~of 2017,~~ due primarily to ~~expenses~~lower marketing spend and utilities costs, offset by increased third-party delivery fees associated with ~~marketing, culinary and off-premise initiatives.~~higher delivery revenues. As a percentage of restaurant revenue, other restaurant operating costs ~~were 14.0%~~decreased to 14.2% in ~~both~~ the ~~third quarters~~second quarter of ~~2018 and 2017, as expenses associated with~~2019 compared to 14.5% in the ~~above mentioned initiatives were offset by leverage on higher AUVs.~~second quarter of 2018.

General and Administrative Expense

General and administrative expense ~~increased~~decreased by ~~$0.6~~$3.0 million ~~or 6.0%,~~ in the ~~third~~second quarter of ~~2018~~2019 compared to the ~~third~~second quarter of ~~2017,~~2018, primarily due to a ~~higher incentive compensation.~~$3.4 million charge for the final assessment related to data breach liabilities incurred during the second quarter of 2018. As a percentage of revenue, general and administrative expense ~~increased~~decreased to ~~8.9%~~9.9% in the ~~third~~second quarter of ~~2018~~2019 from ~~8.6%~~12.6% in the ~~third~~second quarter of ~~2017.~~2018.

Depreciation and Amortization

Depreciation and amortization decreased by ~~$0.4~~$0.1 million, or ~~6.4%~~2.3%, in the ~~third~~second quarter of ~~2018~~2019 compared to the ~~third~~second quarter of ~~2017,~~2018, due primarily to restaurants closed or impaired ~~in prior quarters.~~since the beginning of the second quarter of 2018. As a percentage of revenue, depreciation and amortization decreased to ~~5.0%~~4.7% in the ~~third~~second quarter of ~~2018~~2019 from ~~5.4%~~4.9% in the ~~third~~second quarter of ~~2017.~~2018.

~~Pre-Opening Costs~~

Pre-opening costs decreased by $0.1 million in the third quarter of 2018 compared to the third quarter of 2017. The decrease in pre-opening costs were due to no restaurants being under construction during the third quarter of 2018.

Restaurant Impairments, Closure Costs and Asset Disposals

Restaurant impairments, closure costs and asset disposals decreased by $8.5 million in the third quarter of 2018 compared to the third quarter of 2017, due primarily to the impairment of 18 restaurants in the third quarter of 2017 and no restaurants being impaired in the third quarter of 2018. Additionally, the third quarter of 2018 includes a gain of $0.4 million from the insurance proceeds received for property damage in excess of the loss recognized.

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.

~~Interest Expense~~

~~Interest expense~~ increased by ~~$0.2~~$0.3 million in the third quarter of 2018 compared to the third quarter of 2017. The increase was the result of an increase in the average interest rate on our credit facility and lower capitalized interest in the third quarter of 2018 compared to the third quarter of 2017.

~~Benefit from Income Taxes~~

The effective tax rate was (1.1)% for the third quarter of 2018 compared to 0.5% for the third quarter of 2017. The effective tax rate for the third quarter of 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 third quarter of 2017 was primarily related to disallowed tax amortization on indefinite-lived intangibles. For the remainder of fiscal 2018, we do not anticipate material income tax expense or benefit 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.

~~Three Quarters Ended October 2, 2018 Compared to Three Quarters Ended October 3, 2017~~

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

Three Fiscal Quarters Ended Increase / (Decrease)
October 2,
2018 October 3,
2017 $ %

(in thousands, except percentages)
Revenue:
Restaurant revenue $ 341,616
$ 340,175
$ 1,441
0.4 %
Franchising royalties and fees 3,032
3,543
(511 ) (14.4 )%
Total revenue 344,648
343,718
930
0.3 %
Costs and expenses:
Restaurant operating costs (exclusive of depreciation and amortization shown separately below):
Cost of sales 90,962
91,640
(678 ) (0.7 )%
Labor 112,353
112,921
(568 ) (0.5 )%
Occupancy 37,155
39,340
(2,185 ) (5.6 )%
Other restaurant operating costs 49,997
49,152
845
1.7 %
General and administrative 35,480
29,866
5,614
18.8 %
Depreciation and amortization 17,407
18,729
(1,322 ) (7.1 )%
Pre-opening 50
860
(810 ) (94.2 )%
Restaurant impairments, asset disposals and closure costs 5,952
35,147
(29,195 ) (83.1 )%
Total costs and expenses 349,356
377,655
(28,299 ) (7.5 )%
Loss from operations (4,708 ) (33,937 ) 29,229
86.1 %
Loss on extinguishment of debt 626
—
626
100.0 %
Interest expense, net 3,385
2,828
557
19.7 %
Loss before income taxes (8,719 ) (36,765 ) 28,046
76.3 %
(Benefit) provision for income taxes (259 ) 230
(489 ) *
Net loss $ (8,460 ) $ (36,995 ) $ 28,535
77.1 %
Company-owned:
Average unit volumes $ 1,107
$ 1,066
$ 41
3.8 %
Comparable restaurant sales 3.3 % (3.4 )%

~~________________~~


*	~~Not meaningful.~~

~~Revenue~~

Total revenue increased by $0.9 million, or 0.3%, in the first three quarters of 2018, to $344.6 million compared to $343.7 million in the same period of 2017. This increase was primarily due to the increase in comparable restaurant sales and additional restaurant openings since the beginning of 2017, partially offset by restaurants closed since the beginning of 2017, including the closing of 55 restaurants in the first quarter of 2017.

~~Comparable restaurant sales increased by 3.3% at company-owned restaurants, increased by 5.6% at franchise-owned restaurants and increased by 3.6% system-wide in the first three quarters of 2018.~~

~~Cost of Sales~~

Cost of sales decreased by $0.7 million, or 0.7%, in the first three quarters of 2018 compared to the same period of 2017. As a percentage of restaurant revenue, cost of sales decreased to 26.6% in the first three quarters of 2018 from 26.9% in the first three quarters of 2017. The decrease as a percentage of restaurant revenue was primarily due to favorable commodity pricing, partially offset by the nationwide launch of zucchini noodles in the second quarter of ~~2018, which have a higher cost of goods sold than the balance of our menu offerings.~~

~~Labor Costs~~

~~Labor costs decreased by $0.6 million, or 0.5%, in the first three quarters of 2018~~2019 compared to the same period of 2017. As a percentage of restaurant revenue, labor costs decreased to 32.9% in the first three quarters of 2018 from 33.2% in the first three quarters of 2017. The decrease as a percentage of restaurant revenue was driven by the benefit of closing underperforming restaurants in the firstsecond quarter of ~~2017, labor savings initiatives~~2018. In the second quarter of 2019, the Company recorded a $2.2 million impairment charge for two restaurants and ~~leverage on higher AUVs,~~incurred $0.6 million which was comprised of ongoing costs for restaurants closed in previous years, partially offset by ~~wage inflation.~~

~~Occupancy Costs~~

~~Occupancy costs decreased by $2.2 million, or 5.6%, in~~gains related to lease re-measurements, and loss on disposal of assets. In the ~~first three quarters~~second quarter of 2018, compared to the first three quarters of 2017, due primarily to the favorable impact of restaurant closures since the beginning of 2017. As a percentage of revenue, occupancy costs decreased to 10.9% in first three quarters of 2018, compared to 11.6% in the first three quarters of 2017, due to leverage on higher AUVs.

~~Other Restaurant Operating Costs~~

Other restaurant operating costs increased by $0.8 million, or 1.7%, in the first three quarters of 2018 compared to the first three quarters of 2017 due to expenses associated with marketing, culinary,we did not impair any restaurants and off-premise initiatives. As a percentage of restaurant revenue, other restaurant operating costs increased to 14.6% in the first three quarters of 2018, compared to 14.4% in the first three quarters of 2017, due primarily to expenses associated with the above mentioned initiatives, partially offset by leverage on higher AUVs.

~~General and Administrative Expense~~

General and administrative expense increased by $5.6 million, or 18.8%, in the first three quarters of 2018 compared to the first three quarters of 2017, primarily due to a $3.4 million charge for the final assessment related to the Data Breach Liabilities, a $0.3 million charge for a litigation settlement related to the Delaware gift card matter and increased incentive compensation. Additionally, the first three 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 we had previously accrued. As a percentage of revenue, general and administrative expense increased to 10.3% in the first three quarters of 2018 compared to 8.7% in the first three quarters of 2017.

~~Depreciation and Amortization~~

Depreciation and amortization decreased by $1.3 million, or 7.1%, in the first three quarters of 2018 compared to the first three quarters of 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 three quarters of 2018, compared to 5.4% in the first three quarters of 2017.

~~Pre-Opening Costs~~

Pre-opening costs decreased by $0.8 million, or 94.2%, in the first three quarters of 2018 compared to the first three quarters of 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 were flat in the first three quarters of 2018 compared to the first three quarters of 2017.

~~Restaurant Impairments, Closure Costs and Asset Disposals~~

Restaurant impairments, closure costs and asset disposals decreased by $29.2 million in the first three quarters of 2018 compared to the first three quarters of 2017. The decrease was primarily due to the closure of 55 restaurants in the first quarter of 2017 and the impairment of 31 restaurants during the first three quarters of 2017, partially offset by $3.6$1.5 million of closure costs, $0.9 million related to ~~the 12~~ restaurants closed in2018, most of which were approaching the ~~first three quarters~~expiration of ~~2018~~their leases, and ~~the impairment of one restaurant in the first three quarters of 2018. Both periods include ongoing costs of~~$0.6 million related to restaurants closed in previous ~~years.~~years, and we incurred $1.1 million comprised of costs related to previously impaired restaurants and loss on disposal of assets.

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 ~~first three quarters~~second quarter of 2018.

Interest Expense

Interest expense ~~increased~~decreased by ~~$0.6~~$0.4 million in the ~~first three quarters~~second quarter of ~~2018~~2019 compared to the ~~same period~~second quarter of ~~2017.~~2018. The ~~increase~~decrease was ~~the result of an increase in the~~due to lower average borrowings partially offset by a higher average interest rate ~~on our credit facility, higher amortization~~during the second quarter of ~~debt issuance costs and lower capitalized interest in the first three quarters of 2018~~2019 compared to the ~~first three quarters~~second quarter of ~~2017.~~2018.

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

The effective tax rate was ~~3.0%~~0.0% for the ~~first three quarters~~second quarter of ~~2018~~2019 compared to ~~(0.6)%~~0.1% for the ~~first three quarters~~second quarter of ~~2017.~~2018. The effective tax rate for the ~~first three quarters~~second quarter of ~~2018~~2019 reflects ~~changes made by~~ the ~~Tax Act, which enabled us to release a portion~~impact of the previously recorded valuation ~~allowance as a benefit from income tax.~~allowance. The effective tax rate for the ~~first three quarters~~second quarter of ~~2017 is~~2018 was primarily related to ~~disallowed tax amortization on indefinite-lived intangibles.~~a benefit from a reduction to the valuation allowance. For the remainder of fiscal ~~2018,~~2019, we do not anticipate material income tax expense or benefit as a result of the valuation allowance recorded. We will maintain a 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 2, 2019 Compared to Two Quarters Ended July 3, 2018

The table below presents our unaudited operating results for the first two quarters of 2019 and 2018, and the related period-over-period changes.



	Two Fiscal Quarters Ended						Increase / (Decrease)
	July 2, 2019			July 3, 2018			$			%
	July 2, 2019			July 3, 2018			$			%
	(in thousands, except percentages)
Revenue:
Restaurant revenue	$	227,623		$	226,064		$	1,559		0.7	%
Franchising royalties and fees	2,613			1,857			756			40.7	%
Total revenue	230,236			227,921			2,315			1.0	%
Costs and expenses:
Restaurant operating costs (exclusive of depreciation and amortization shown separately below):
Cost of sales	59,539			60,345			(806		)	(1.3	)%
Labor	75,969			74,615			1,354			1.8	%
Occupancy	24,741			25,120			(379		)	(1.5	)%
Other restaurant operating costs	33,314			33,773			(459		)	(1.4	)%
General and administrative	21,988			25,081			(3,093		)	(12.3	)%
Depreciation and amortization	11,168			11,617			(449		)	(3.9	)%
Pre-opening	65			50			15			30.0	%
Restaurant impairments, asset disposals and closure costs	3,304			4,160			(856		)	(20.6	)%
Total costs and expenses	230,088			234,761			(4,673		)	(2.0	)%
Income (loss) from operations	148			(6,840		)	6,988			*
Loss on extinguishment of debt	—			626			(626		)	*
Interest expense, net	1,561			2,292			(731		)	(31.9	)%
Loss before income taxes	(1,413		)	(9,758		)	8,345			*
Provision (benefit) for income taxes	—			(248		)	248			*
Net loss	$	(1,413	)	$	(9,510	)	$	8,097		*
Company-owned:
Average unit volumes	$	1,148		$	1,092		$	56		5.1	%
Comparable restaurant sales	3.9		%	2.4		%

________________


*	Not meaningful.

Revenue

Total revenue increased by $2.3 million, or 1.0%, in the first two quarters of 2019, to $230.2 million compared to $227.9 million in the same period of 2018. This increase was due to the increase in comparable restaurant sales, partially offset by the impact of restaurants closed since the beginning of the second quarter of 2018, most of which were approaching the expiration of their leases.

Comparable restaurant sales increased by 3.9% at company-owned restaurants, increased by 3.2% at franchise-owned restaurants and increased by 3.8% system-wide in the first two quarters of 2019.

Cost of Sales

Cost of sales decreased by $0.8 million, or 1.3%, in the first two quarters of 2019 compared to the same period of 2018, due primarily to ongoing supply chain savings initiatives. As a percentage of restaurant revenue, cost of sales decreased to 26.2% in the first two quarters of 2019 compared to 26.7% in the first two quarters of 2018 primarily due to reduced discounting.

Labor Costs

Labor costs increased by $1.4 million, or 1.8%, in the first two quarters of 2019 compared to the same period of 2018, due primarily to the increase in restaurant revenue in the first two quarters of 2019. As a percentage of restaurant revenue, labor costs increased to 33.4% in the first two quarters of 2019 compared to 33.0% in the first two quarters of 2018. The increase as a percentage of restaurant revenue was driven by wage inflation and training investments, partially offset by labor efficiencies.

Occupancy Costs

Occupancy costs decreased by $0.4 million, or 1.5%, in the first two quarters of 2019 compared to the first two quarters of 2018. As a percentage of revenue, occupancy costs decreased to 10.9% in first two quarters of 2019, compared to 11.1% in the first two quarters of 2018, primarily due to leverage on higher AUV.

Other Restaurant Operating Costs

Other restaurant operating costs decreased by $0.5 million, or 1.4%, in the first two quarters of 2019 compared to the first two quarters of 2018, due primarily to lower marketing spend and utilities costs partially offset by off-premise investments. As a percentage of restaurant revenue, other restaurant operating costs decreased to 14.6% in the first two quarters of 2019, compared to 14.9% in the first two quarters of 2018.

General and Administrative Expense

General and administrative expense decreased by $3.1 million, or 12.3%, in the first two quarters of 2019 compared to the first two quarters of 2018, due primarily to the recognition of a $3.4 million charge for the final settlement related to the data breach liabilities in the second quarter of 2018, partially offset by an increase in wages primarily related to key executive positions in the first two quarters of 2019. As a percentage of revenue, general and administrative expense decreased to 9.6% in the first two quarters of 2019 compared to 11.0% in the first two quarters of 2018.

Depreciation and Amortization

Depreciation and amortization decreased by $0.4 million, or 3.9%, in the first two quarters of 2019 compared to the first two quarters of 2018. As a percentage of revenue, depreciation and amortization decreased to 4.9% in the first two quarters of 2019, compared to 5.1% in the first two quarters of 2018, due to restaurants impaired or closed in prior quarters.

Pre-Opening Costs

Pre-opening costs remained modest and flat in the first two quarters of 2019 and 2018.

Restaurant Impairments, Closure Costs and Asset Disposals

Restaurant impairments, closure costs and asset disposals decreased by $0.9 million in the first two quarters of 2019 compared to the first two quarters of 2018. In the first two quarters of 2019, the Company recorded a $2.2 million impairment charge for two restaurants and incurred $0.8 million which was comprised of ongoing costs for restaurants closed in previous years, partially offset by gains related to lease re-measurements, and loss on disposal of assets. In the first two quarters of 2018, we impaired one restaurant and recognized $2.1 million of closure costs, $0.9 million related to restaurants closed 2018, most of which were approaching the expiration of their leases, and $1.2 million related to restaurants closed in previous years, and we incurred $1.2 million loss on disposal of assets.

Loss on Extinguishment of Debt

In May 2018, we entered into the 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 2018.

Interest Expense

Interest expense decreased by $0.7 million in the first two quarters of 2019 compared to the same period of 2018. The decrease was largely due to the lower average borrowings partially offset by a higher average interest rate in the first two quarters of 2019 compared to the first two quarters of 2018, and higher amortization of debt issuance costs.

Provision for Income Taxes

The effective tax rate was 0.0% for the first two quarters of 2019 compared to 2.5% for the first two quarters of 2018. The effective tax rate for the first two quarters of 2019 reflects the impact of the previously recorded valuation allowance. 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 valuation allowance as a benefit from income tax. For the remainder of fiscal 2019, we do not anticipate material income tax expense or benefit as a result of the valuation allowance recorded. We will maintain a 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,~~As of July 2, 2019, our ~~primary sources of liquidity~~available cash and cash ~~flows were operating cash flows~~equivalents balance was $3.3 million 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$39.9 million was available 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, including severance for terminated employees (“Restaurant Closing Liabilities”) and 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 completed two private placement transactions for aggregate gross proceeds to us of $50.0 million in the first quarter of 2017 to provide us with additional liquidity. In the third quarter of 2018, we sold shares of our Class A common stock in a public offering to pay downfuture borrowings under ~~the~~our 2018 Credit Facility and fund working capital obligations, including the payment of the final assessment for Data Breach Liabilities. The net proceeds from the public offering were $23.2 million, after deducting the underwriting discounts and commissions, and net of transaction expenses incurred.Facility.

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 up to 30 days to pay our vendors.

We believe that ~~expected~~we have sufficient sources of cash ~~flow~~to meet our liquidity needs and capital resource requirements for the next twelve months, primarily through currently available cash and cash equivalents, cash flows from operations and ~~existing borrowing~~undrawn capacity under our revolving credit facility are adequate to fund debt service requirements, operating lease obligations, capital expenditures, the remaining estimated Restaurant Closing Liabilities and working capital obligations for the remainder of fiscal year 2018. There are no material changes in the Company’s contractual obligations that are outside the ordinary course of business.line.

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

Three Fiscal Quarters Ended
October 2,
2018 October 3,
2017
Net cash used in operating activities $ (4,868 ) $ (6,929 )
Net cash used in investing activities (9,437 ) (17,468 )
Net cash provided by financing activities 12,862
24,652
Effect of exchange rate changes on cash $ —
$ (4 )
Net (decrease) increase in cash and cash equivalents $ (1,443 ) $ 251



	Two Fiscal Quarters Ended
	July 2, 2019			July 3, 2018
Net cash provided by operating activities	$	9,008		$	2,837
Net cash used in investing activities	(9,252		)	(7,051		)
Net cash (used in) provided by financing activities	(1,073		)	4,493
Net (decrease) increase in cash and cash equivalents	$	(1,317	)	$	279

Operating Activities

Net cash ~~used in~~provided by operating activities increased to $9.0 million in the first ~~three~~two quarters of ~~2018 improved $2.1~~2019 from $2.8 million ~~compared to~~in the ~~first three~~two quarters of ~~2017.~~2018. The improvement in operating cash flows resulted primarily from ~~lower net loss~~better operating results during the first ~~three~~two quarters of ~~2018 as~~2019 compared to the ~~first three quarters of 2017,~~prior comparable period, adjusted for non-cash items such as depreciation and amortization, restaurant impairments, closure costs and asset ~~disposals. Additionally, during the first three quarters of 2018 we~~disposals, a decrease in payments made ~~payments for the final assessment for Data Breach Liabilities in the amount of $11.0 million, for the~~on lease termination ~~of leases~~settlements related to closed restaurants, ~~of $4.2 million~~ and ~~for the settlement of the Delaware gift card litigation of $0.4 million. In the first three quarters of 2017, payments included the termination of leases related~~changes in working capital due to ~~closed restaurants of $8.5 million, a litigation settlement of $2.6 million and for the Data Breach Liabilities of $4.0 million.~~timing.

Investing Activities

Net cash ~~flows~~ used in investing activities increased $2.2 million in the first ~~three~~two quarters of ~~2018 decreased $8.0~~2019 from $7.1 million ~~compared to~~in the first ~~three~~two quarters of ~~2017, primarily~~2018. This increase is due to ~~the reduction in~~construction activities on new restaurant development ~~during~~and the ~~first three quarters~~purchase of ~~2018 compared to the same period of 2017 and insurance proceeds received for property damage during the first three quarters of 2018.~~one franchise restaurant. Both periods include ~~reinvestment~~reinvestments in existing restaurants and investments in technology.

Financing Activities

Net cash ~~provided by~~used in financing activities was $1.1 million in the first ~~three~~two quarters of 2019 largely related to repayments of long-term debt. The first two quarters of 2018 ~~decreased $11.8 million compared to the first three quarters of 2017. The decrease in net cash provided by financing activities is primarily due to the~~included net proceeds received from borrowings made from the ~~private placement transactions that occurred during the first three quarters of 2017,~~new credit facility, net of repayments ~~on long-term debt, partially offset by~~to extinguish the ~~public offering transaction that occurred during the third quarter of 2018, net of repayments on long-term debt.~~prior credit facility.

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 restaurant 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 ~~2018~~2019 to be approximately ~~$3.0~~$6.0 million to ~~$6.0~~$11.0 million for a total of approximately ~~$13.0~~$14.5 million to ~~$16.0~~$19.0 million for the fiscal ~~year.~~year, of which $4.0 million to $7.0 million relates to our construction of new restaurants before any reductions for landlord reimbursements. We expect such capital expenditures to be funded by a combination of cash from operations 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. We expect to pay approximately $3.0 million to $6.0 million for the termination of leases related to closed restaurants, including related fees and expenses over the next three to six 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

On May 9, 2018, we entered into the 2018 Credit Facility which consists of a 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, wethe Company repaid in full ~~our~~its outstanding indebtedness under ~~our Prior Credit Facility~~its prior credit facility using funds drawn on ~~our~~its 2018 Credit Facility. Upon repayment, the ~~Prior Credit Facility~~prior credit facility and all related agreements were terminated.

As of ~~October~~July 2, ~~2018,~~2019, we had ~~$49.6~~$46.1 million of indebtedness (excluding $1.4 million of unamortized debt issuance costs) and ~~$3.8~~$3.2 million of letters of credit outstanding under ~~our~~the 2018 Credit Facility. The 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.

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 the 2018 Credit Facility bear interest, at our option, at either (i) LIBOR plus a margin of 2.25% to 3.25% per annum, based upon the consolidated total lease-adjusted leverage ratio or (ii) the highest of the following base rates plus a margin of 1.25% to 2.25% per annum: (a) the federal funds rate plus 0.50%; (b) the U.S. Bank prime rate or (c) the one-month LIBOR plus 1.00%. The 2018 Credit Facility includes a commitment fee of 0.30% to 0.50% per annum, based upon the consolidated total lease-adjusted leverage ratio, on any unused portion of the revolving credit facility.

Availability of borrowings under the 2018 Credit Facility is conditioned upon our compliance with the terms of the 2018 Credit Facility, including the financial covenants and other customary affirmative and negative covenants, such as limitations on additional borrowings, acquisitions, dividend payments and lease commitments, and customary representations and warranties.

We expect that we will meet all applicable financial covenants in our 2018 Credit Facility, including the maximum consolidated total lease-adjusted leverage ratio, through at least the fiscal year ending ~~January 1,~~December 31, 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 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 ~~October~~July 2, ~~2018.~~2019.

Critical Accounting Policies and Estimates

With the adoption of ASU 2016-02, “Leases (Topic 842),” the right-of-use assets in our operating and finance leases are subject to the impairment guidance in ASC 360, “Property, Plant, and Equipment.” The operating and finance lease assets are long-lived non-financial assets and are accounted for similar to our other long-lived non-financial assets, such as property and equipment and intangibles, subject to amortization. Therefore, we will review operating and finance lease assets for impairment when events or circumstances indicate the carrying value of the assets may not be recoverable.

In performing our impairment testing, we forecast our future undiscounted cash flows by looking at recent restaurant level performance, restaurant level operating plans, sales trends and cost trends for cost of sales, labor and operating expenses. We believe that this combination of information gives us a fair benchmark to estimate future undiscounted cash flows. We compare this cash flow forecast to the asset’s carrying value at the restaurant. Based on this analysis, if the carrying amount of the assets

is greater than the estimated future undiscounted cash flows, an impairment charge is recognized, measured as the amount by which the carrying amount exceeds the fair value of the asset.

When determining the fair value of our right-of-use assets, we will consider what market participants would pay to lease the asset (i.e., what a market participant would pay up front in one payment for the right-of-use asset, assuming no additional lease payments would be due) for its highest and best use, even if that use differs from the current or intended use by us.

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 ~~2, 2018.~~1, 2019. 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 ~~2, 2018.~~1, 2019.

~~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 will cease to be an “emerging growth company” at the end of 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 “opted out” of such extended transition period and, as a result, we 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 was 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 ~~October~~July 2, ~~2018,~~2019, we had ~~$49.6~~$46.1 million of ~~indebtedness~~outstanding borrowings under our ~~revolving line of~~ credit ~~and term loan.~~facility. An increase or decrease of 1.0% in the effective interest rate applied on ~~this loan~~these loans would have resulted in a pre-tax interest expense fluctuation of approximately $0.5 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 first ~~three~~two quarters of ~~2018.~~2019. 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 ~~principal~~chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of ~~October~~July 2, ~~2018,~~2019, 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 ~~principal~~chief 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 ~~principal~~chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during our most 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

~~Delaware Gift Card Litigation~~

~~As previously disclosed in prior reports filed with the SEC, we were named as a defendant in an action filed in the Superior Court of Delaware in New Castle County, entitled~~ ~~The State of Delaware, William French v. Card Compliant, LLC, et. al~~. The complaint in this case alleged that a number of large retailers and restaurant companies, including 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 sought an order that we 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. 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. On July 3, 2018, a settlement was reached in this matter and a definitive settlement agreement was subsequently executed, disposing of all pending claims included in the litigation. Our results of operations for the first three quarters of 2018 included a charge of $0.3 million for our liability under this settlement. The settlement was paid in the third quarter of 2018. We also recorded a loss contingency accrual based on a reasonable estimate of the probable losses that may arise under Delaware’s Abandoned Property Law in resolving claims for unclaimed gift card funds for the years 2011, 2012 and 2013, which were not included as part of the 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 ~~October~~July 2, ~~2018.~~2019. 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 ~~2, 2018.~~1, 2019. 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~~			~~Offer letter, dated September 28, 2018, between Noodles & Company and Ken Kuick~~
31.1			Certification of Principal Executive Officer ~~and~~pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2			Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1			Certification of ~~Chief~~Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 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~~KEN KUICK
	~~Dave Boennighausen~~Ken Kuick Chief ~~Executive~~Financial Officer (principal financial officer and ~~Principal Financial Officer~~duly authorized signatory for the registrant)
Date	~~October 23, 2018~~August 6, 2019

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