UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

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

For the quarterly period ended ~~October 1, 2019~~June 30, 2020

☐ 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) 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 ☒ No ☐

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).

Yes ☒ No ☐

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



Large accelerated filer	☐	Accelerated Filer	☒

Non-accelerated filer	☐	Smaller reporting company	☒
		Emerging growth company	☐

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. ☐

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

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 ~~November 1, 2019~~August 3, 2020
Class A Common Stock, $0.01 par value per share		~~44,122,121~~44,354,811 shares

TABLE OF CONTENTS

PART I

Item 1. Financial Statements

Noodles & Company

Condensed Consolidated Balance Sheets

(in thousands, except share and per share data)


	October 1, 2019			January 1, 2019			June 30, 2020			December 31, 2019
	(unaudited)						(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	3,086		$	4,655		$	62,076		$	10,459
Accounts receivable	2,279			2,391			2,406			3,503
Inventories	9,875			9,646			9,510			9,871
Prepaid expenses and other assets	4,291			6,474			3,562			5,386
Income tax receivable	191			185			180			103
Total current assets	19,722			23,351			77,734			29,322
Property and equipment, net	134,682			138,774			124,640			128,867
Operating lease assets, net	212,760			—			209,445			209,717
Goodwill	7,154			6,400			7,154			7,154
Intangibles, net	963			1,291			855			883
Other assets, net	2,346			2,216			2,567			2,576
Total long-term assets	357,905			148,681			344,661			349,197
Total assets	$	377,627		$	172,032		$	422,395		$	378,519
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	8,145		$	7,854		$	11,380		$	9,351
Accrued payroll and benefits	9,725			13,391			10,222			13,479
Accrued expenses and other current liabilities	9,563			11,183			12,478			11,679
Current operating lease liabilities	22,431			—			26,144			22,775
Current portion of long-term debt	1,125			719			750			750
Total current liabilities	50,989			33,147			60,974			58,034
Long-term debt, net	41,963			44,183			93,040			40,497
Long-term operating lease liabilities, net	229,157			—			229,196			225,014
Deferred rent	—			37,334
Deferred tax liabilities, net	197			133			247			200
Other long-term liabilities	4,275			4,554			6,662			4,203
Total liabilities	326,581			119,351			390,119			327,948

Stockholders’ equity:
Preferred stock—$0.01 par value, 1,000,000 shares authorized and undesignated as of October 1, 2019 and January 1, 2019; no shares issued or outstanding	—			—
Common stock—$0.01 par value, 180,000,000 shares authorized as of October 1, 2019 and January 1, 2019; 46,545,992 issued and 44,122,121 outstanding as of October 1, 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 October 1, 2019 and January 1, 2019	(35,000		)	(35,000		)
Preferred stock—$0.01 par value, 1,000,000 shares authorized and undesignated as of June 30, 2020 and December 31, 2019; no shares issued or outstanding							—			—
Common stock—$0.01 par value, 180,000,000 shares authorized as of June 30, 2020 and December 31, 2019; 46,778,682 issued and 44,354,811 outstanding as of June 30, 2020 and 46,557,934 issued and 44,134,063 outstanding as of December 31, 2019							468			466
Treasury stock, at cost, 2,423,871 shares as of June 30, 2020 and December 31, 2019							(35,000		)	(35,000		)
Additional paid-in capital	199,878			198,352			201,601			200,585
Accumulated deficit	(114,297		)	(111,135		)	(134,793		)	(115,480		)
Total stockholders’ equity	51,046			52,681			32,276			50,571
Total liabilities and stockholders’ equity	$	377,627		$	172,032		$	422,395		$	378,519

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 1, 2019		October 2, 2018			October 1, 2019		October 2, 2018			June 30, 2020			July 2, 2019		June 30, 2020			July 2, 2019
Revenue:
Restaurant revenue	$	116,759	$	115,552		$	344,382	$	341,616		$	80,021		$	118,858	$	178,737		$	227,623
Franchising royalties and fees, and other	1,545		1,175			4,158		3,032			136			1,332		1,768			2,613
Total revenue	118,304		116,727			348,540		344,648			80,157			120,190		180,505			230,236
Costs and expenses:
Restaurant operating costs (exclusive of depreciation and amortization shown separately below):
Cost of sales	29,544		30,617			89,083		90,962			20,020			30,448		45,224			59,539
Labor	37,951		37,738			113,920		112,353			27,137			38,877		61,368			75,969
Occupancy	12,108		12,035			36,849		37,155			11,676			12,311		23,736			24,741
Other restaurant operating costs	17,161		16,224			50,475		49,997			15,789			16,858		32,478			33,314
General and administrative	10,436		10,399			32,424		35,480			10,034			11,848		20,588			21,988
Depreciation and amortization	5,458		5,790			16,626		17,407			5,397			5,661		10,732			11,168
Pre-opening	266		—			331		50			71			65		144			65
Restaurant impairments, closure costs and asset disposals	336		1,792			3,640		5,952			2,558			2,884		3,614			3,304
Total costs and expenses	113,260		114,595			343,348		349,356			92,682			118,952		197,884			230,088
Income (loss) from operations	5,044		2,132			5,192		(4,708		)
Loss on extinguishment of debt	—		—			—		626
(Loss) income from operations											(12,525		)	1,238		(17,379		)	148
Interest expense, net	737		1,093			2,298		3,385			920			800		1,888			1,561
Income (loss) before income taxes	4,307		1,039			2,894		(8,719		)
Provision (benefit) for income taxes	64		(11		)	64		(259		)
Net income (loss) and comprehensive income (loss)	$	4,243	$	1,050		$	2,830	$	(8,460	)
Earnings (loss) per share of Class A and Class B common stock, combined:
(Loss) income before taxes											(13,445		)	438		(19,267		)	(1,413		)
Provision for income taxes											33			—		46			—
Net (loss) income and comprehensive (loss) income											$	(13,478	)	$	438	$	(19,313	)	$	(1,413	)
(Loss) earnings per Class A and Class B common stock, combined
Basic	$	0.10	$	0.02		$	0.06	$	(0.20	)	$	(0.30	)	$	0.01	$	(0.44	)	$	(0.03	)
Diluted	$	0.09	$	0.02		$	0.06	$	(0.20	)	$	(0.30	)	$	0.01	$	(0.44	)	$	(0.03	)
Weighted average shares of Class A and Class B common stock outstanding, combined:
Basic	43,990,049		43,094,524			44,007,345		41,798,640			44,212,751			43,964,175		44,177,648			43,955,580
Diluted	44,899,176		44,829,363			45,078,539		41,798,640			44,212,751			45,075,888		44,177,648			43,955,580

See accompanying notes to condensed consolidated financial statements.

Noodles & Company

Condensed Consolidated Statements of Stockholders’ Equity

(in thousands, except share data, unaudited)


	Fiscal Quarter Ended																Fiscal Quarter Ended
	Common Stock^{(1) (2)}			Treasury				Additional Paid-In Capital			Accumulated Deficit			Total Stockholders’ Equity			Common Stock⁽¹⁾			Treasury				Additional Paid-In Capital			Accumulated Deficit			Total Stockholders’ Equity
	Shares	Amount		Shares	Amount			Additional Paid-In Capital			Accumulated Deficit			Total Stockholders’ Equity			Shares	Amount		Shares	Amount			Additional Paid-In Capital			Accumulated Deficit			Total Stockholders’ Equity
Balance—July 2, 2019	46,508,586	$	465	2,423,871	$	(35,000	)	$	199,978		$	(118,540	)	$	46,903
Balance—April 1, 2020																	46,583,879	$	466	2,423,871	$	(35,000	)	$	200,755		$	(121,315	)	$	44,906
Stock plan transactions and other																	194,803	2		—	—			(273		)	—			(271		)
Stock-based compensation expense																	—	—		—	—			1,119			—			1,119
Net loss																	—	—		—	—			—			(13,478		)	(13,478		)
Balance—June 30, 2020																	46,778,682	$	468	2,423,871	$	(35,000	)	$	201,601		$	(134,793	)	$	32,276

Balance—April 2, 2019																	46,370,951	$	464	2,423,871	$	(35,000	)	$	199,110		$	(118,978	)	$	45,596
Stock plan transactions and other	37,406	—		—	—			(49		)	—			(49		)	137,635	1		—	—			(257		)	—			(256		)
Stock-based compensation expense	—	—		—	—			(51		)	—			(51		)	—	—		—	—			1,125			—			1,125
Net income	—	—		—	—			—			4,243			4,243			—	—		—	—			—			438			438
Balance—October 1, 2019	46,545,992	$	465	2,423,871	$	(35,000	)	$	199,878		$	(114,297	)	$	51,046

Balance—July 3, 2018	43,690,395	$	437	2,423,871	$	(35,000	)	$	172,936		$	(112,204	)	$	26,169
Issuance of common stock in connection with a public offering, net of transaction expenses	2,500,000	25		—	—			23,132			—			23,157
Stock plan transactions and other	149,618	1		—	—			946			—			947
Stock-based compensation expense	—	—		—	—			652			—			652
Net income	—	—		—	—			—			1,050			1,050
Balance—October 2, 2018	46,340,013	$	463	2,423,871	$	(35,000	)	$	197,666		$	(111,154	)	$	51,975
Balance—July 2, 2019																	46,508,586	$	465	2,423,871	$	(35,000	)	$	199,978		$	(118,540	)	$	46,903

	Three Fiscal Quarters Ended																Two Fiscal Quarters Ended
	Common Stock^{(1) (2)}			Treasury				Additional Paid-In Capital			Accumulated Deficit			Total Stockholders’ Equity			Common Stock⁽¹⁾			Treasury				Additional Paid-In Capital			Accumulated Deficit			Total Stockholders’ Equity
								Additional Paid-In Capital			Accumulated Deficit			Total Stockholders’ Equity			Shares	Amount		Shares	Amount			Additional Paid-In Capital			Accumulated Deficit			Total Stockholders’ Equity
Balance—December 31, 2019																	46,557,934	$	466	2,423,871	$	(35,000	)	$	200,585		$	(115,480	)	$	50,571
Stock plan transactions and other																	220,748	2		—	—			(274		)	—			(272		)
Stock-based compensation expense																	—	—		—	—			1,290			—			1,290
Net loss																	—	—		—	—			—			(19,313		)	(19,313		)
Balance—June 30, 2020																	46,778,682	$	468	2,423,871	$	(35,000	)	$	201,601		$	(134,793	)	$	32,276
	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	)	Additional Paid-In Capital			Accumulated Deficit			Total Stockholders’ Equity			46,353,309	$	464	2,423,871	$	(35,000	)	$	198,352		$	(111,135	)	$	52,681
Stock plan transactions and other	192,683	1		—	—			(285		)	—			(284		)	155,277	1		—	—			(236		)	—			(235		)
Stock-based compensation expense	—	—		—	—			1,811			—			1,811			—	—		—	—			1,862			—			1,862
Adoption of ASU No. 2016-02, Leases (Topic 842)	—	—		—	—			—			(5,992		)	(5,992		)	—	—		—	—			—			(5,992		)	(5,992		)
Net income	—	—		—	—			—			2,830			2,830
Balance—October 1, 2019	46,545,992	$	465	2,423,871	$	(35,000	)	$	199,878		$	(114,297	)	$	51,046

Balance—January 2, 2018	43,550,329	$	436	2,423,871	$	(35,000	)	$	171,613		$	(101,188	)	$	35,861
Issuance of common stock in connection with a public offering, net of transaction expenses	2,500,000	25		—	—			23,132			—			23,157
Stock plan transactions and other	289,684	2		—	—			652			—			654
Stock-based compensation expense	—	—		—	—			2,269			—			2,269
Adoption of ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606)	—	—		—	—			—			(1,506		)	(1,506		)
Net loss	—	—		—	—			—			(8,460		)	(8,460		)	—	—		—	—			—			(1,413		)	(1,413		)
Balance—October 2, 2018	46,340,013	$	463	2,423,871	$	(35,000	)	$	197,666		$	(111,154	)	$	51,975
Balance—July 2, 2019																	46,508,586	$	465	2,423,871	$	(35,000	)	$	199,978		$	(118,540	)	$	46,903

_____________


(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 October 2, 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 1, 2019			October 2, 2018			June 30, 2020			July 2, 2019
Operating activities
Net income (loss)	$	2,830		$	(8,460	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Net loss							$	(19,313	)	$	(1,413	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization	16,626			17,407			10,732			11,168
Deferred income taxes	64			(263		)	47			—
Restaurant impairments, closure costs and asset disposals	3,647			5,289			3,029			2,784
Loss on extinguishment of debt	—			626
Amortization of debt issuance costs	374			484			149			250
Stock-based compensation	1,780			2,232			1,253			1,841
Gain on insurance proceeds received for property damage	—			(373		)
Changes in operating assets and liabilities:
Accounts receivable	122			489			1,190			(143		)
Inventories	(349		)	(647		)	306			(347		)
Prepaid expenses and other assets	(1,062		)	(402		)	87			(904		)
Accounts payable	(864		)	(2,172		)	2,722			(1,332		)
Deferred rent	—			(1,278		)
Income taxes	(6		)	(46		)	(77		)	(6		)
Operating lease assets and liabilities	(1,749		)	—			7,507			(407		)
Accrued expenses and other liabilities	(5,144		)	(17,754		)	(925		)	(2,483		)
Net cash provided by (used in) operating activities	16,269			(4,868		)
Net cash provided by operating activities							6,707			9,008
Investing activities
Purchases of property and equipment	(13,788		)	(9,937		)	(6,810		)	(8,217		)
Insurance proceeds received for property damage	—			500
Proceeds from disposal of property and equipment	352			—			—			352
Franchise restaurant acquisition, net of cash acquired	(1,387		)	—			—			(1,387		)
Net cash used in investing activities	(14,823		)	(9,437		)	(6,810		)	(9,252		)
Financing activities
Net payments from swing line loan	—			(101		)
Proceeds from issuance of long-term debt	—			74,889			55,500			—
Payments on long-term debt	(2,188		)	(84,030		)	(2,375		)	(500		)
Issuance of common stock, net of transaction expenses	—			23,157
Payments on finance leases	(543		)	—			(402		)	(338		)
Debt issuance costs							(731		)	—
Stock plan transactions and tax withholding on share-based compensation awards	(284		)	654			(272		)	(235		)
Debt issuance costs	—			(1,707		)
Net cash (used in) provided by financing activities	(3,015		)	12,862
Net decrease in cash and cash equivalents	(1,569		)	(1,443		)
Net cash provided by (used in) financing activities							51,720			(1,073		)
Net increase (decrease) in cash and cash equivalents							51,617			(1,317		)
Cash and cash equivalents
Beginning of period	4,655			3,361			10,459			4,655
End of period	$	3,086		$	1,918		$	62,076		$	3,338

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 1, 2019,~~June 30, 2020, the Company had ~~391~~380 company-owned restaurants and 6776 franchise restaurants in 29 states and the District of Columbia. The Company operates its business as ~~one~~1 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 1,~~December 31, 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 1,~~December 31, 2019.

Fiscal Year

The Company operates on a 52- or 53-week fiscal year ending on the Tuesday closest to December 31. 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,~~2020, which ends on December ~~31, 2019,~~29, 2020, and fiscal year ~~2018,~~2019, which ended on ~~January 1,~~December 31, 2019, both contain 52 weeks. The Company’s fiscal quarter that ended ~~October 1,~~June 30, 2020 is referred to as the second quarter of 2020, and the fiscal quarter ended July 2, 2019 is referred to as the ~~third~~second quarter of ~~2019,~~2019.

Risks and Uncertainties

We are subject to risks and uncertainties as a result of the ~~fiscal quarter ended October 2, 2018~~COVID-19 pandemic. The extent of the impact of the COVID-19 pandemic on the Company’s business is ~~referred~~uncertain and difficult to aspredict. Our operational and financial performance will depend on future developments, including the ~~third quarter~~duration of ~~2018.~~the outbreak, limitations imposed by federal, state and local governments with respect to reduced seating capacity in our restaurants and other social distancing measures, and our customers’ future willingness to eat at restaurants. Furthermore, capital and financial markets have been negatively impacted by the COVID-19 pandemic, and it is possible that it could cause an extended economic recession. All of the effects of the COVID-19 pandemic could have a material adverse effect on our business. Although the ultimate severity of the COVID-19 pandemic is uncertain at this time, we have implemented several new initiatives to adapt our operations to the current environment, including direct delivery and curbside pickup, to further bolster our existing off premise capabilities.

Recent Accounting Pronouncements

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 Company’s financial position or results of operations and cash flows.

~~Recently Adopted Accounting Pronouncements~~

~~On January 2,~~In December 2019, the ~~Company adopted~~FASB issued ASU ~~2016-02, “Leases~~No. 2019-12, Income Taxes (Topic ~~842),” along with related clarifications~~740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”). ASU 2019-12 was issued as a means to reduce the complexity of accounting for income taxes for those entities that fall within the scope of the accounting standard. This guidance is effective for public companies for annual reporting periods beginning after December 15, 2020 and improvements. This pronouncement requires a lessee to recognize a liability for lease obligations, which represents the discounted obligation to make future lease payments, and a corresponding right-of-use asset on the balance sheet.interim periods within those reporting periods. Interim period adoption is permitted. The guidance ~~also requires certain qualitative and quantitative disclosures about the amount, timing and uncertainty of cash flows arising from leases. The Company elected the alternative transition~~is to be applied using a prospective method, excluding amendments related to ~~apply the standard~~franchise taxes, which should be applied

on either a retrospective basis for all periods presented or a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the ~~period~~fiscal year of ~~adoption; therefore,~~adoption. We are currently evaluating the ~~Company has not applied~~impacts of adoption of the ~~standard~~new guidance to ~~the comparative periods presented on its condensed~~our consolidated financial statements.

In March 2020, the FASB issued ASU No. 2020-04, Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The ASU is intended to provide temporary optional expedients and exceptions to the U.S. GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens related to the expected market transition from the London Interbank Offered Rate (LIBOR) and other interbank offered rates to alternative reference rates. The Company may elect to apply the amendments prospectively through December 31, 2022. The Company is currently evaluating the impact this guidance may have on its consolidated financial statements and related disclosures.

Recently Adopted Accounting Pronouncements

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, followed by other related ASUs that provided targeted improvements (collectively “ASU 2016-13”). ASU 2016-13 provides financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The guidance is to be applied using a modified retrospective method and is effective for fiscal years beginning after December 15, 2022 for smaller reporting companies, with early adoption permitted. The Company early adopted ASU 2016-13 on January 1, 2020. The adoption of ~~this lease guidance~~ASU 2016-13 did ~~have a material~~not result in any impact on the Company’s Condensed Consolidated Balance Sheets by materially increasing its non-current assets and current and non-current liabilities due to the recognition of 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 prepaid and deferred rent, liabilities associated with lease termination costs and impairment of right-of-use assets. The impairment of right-of-use assets upon adoption was recognized in retained earnings as of January 2, 2019.

~~The adoption of the standard did not have a material impact on the Company’s Condensed Consolidated Statements of Operations in the third quarter of 2019~~consolidated financial statements or ~~the first three quarters of 2019. The adoption also included the enhancement of the Company’s disclosures related to leases. See disclosure in Note 9, Leases.~~disclosures.

~~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

Accounts receivable consist of the following (in thousands):



	June 30, 2020		December 31, 2019
Insurance receivable	$	96	$	744
Vendor rebate receivables	281		788
Franchise and other receivables	2,029		1,971
	$	2,406	$	3,503

Prepaid expenses and other assets consist of the following (in thousands):



	June 30, 2020		December 31, 2019
Prepaid occupancy related costs	$	608	$	834
Other prepaid expenses	2,948		2,799
Other current assets ⁽¹⁾	6		1,753
	$	3,562	$	5,386

_____________________________


(1)	Other current assets as of December 31, 2019 included assets held in connection with the divestiture of nine company-owned restaurants to a franchisee (“RCRG Sale”) which closed in January 2020.

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


	October 1, 2019			January 1, 2019			June 30, 2020			December 31, 2019
Leasehold improvements	$	200,790		$	197,571		$	197,859		$	200,580
Furniture, fixtures and equipment	123,641			121,479			124,587			122,752
Construction in progress	5,606			3,620			5,899			2,890
	330,037			322,670			328,345			326,222
Accumulated depreciation and amortization	(195,355		)	(183,896		)	(203,705		)	(197,355		)
Property and equipment, net	$	134,682		$	138,774		$	124,640		$	128,867

Accrued payroll and benefits consist of the following (in thousands):



	June 30, 2020		December 31, 2019
Accrued payroll and related liabilities	$	5,634	$	6,364
Accrued bonus	848		3,505
Insurance liabilities	3,740		3,610
	$	10,222	$	13,479

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


	October 1, 2019		January 1, 2019		June 30, 2020		December 31, 2019
Gift card liability	$	1,446	$	3,284	$	1,900	$	2,398
Occupancy related	1,699		2,600		1,695		1,458
Utilities	1,391		1,582		1,221		1,379
Deferred revenue					1,690		555
Current portion of finance lease liability					998		510
Other accrued expenses	5,027		3,717		4,974		5,379
Accrued expenses and other current liabilities	$	9,563	$	11,183	$	12,478	$	11,679

3. Long-Term Debt

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 facility 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.

On November 20, 2019, the Company amended its 2018 Credit Facility by entering into the First Amendment to the Credit Facility (the “Amendment” or “First Amended Credit Facility”). Among other things, the Amendment: (i) extended the maturity date to November 20, 2024; (ii) increased the revolving credit facility from $65.0 million to $75.0 million; (iii) delayed step downs of the Company’s leverage covenant; and (iv) increased the limit on capital expenditures to $37.0 million in 2020 and to $45.0 million in 2021 and each fiscal year thereafter.

Borrowings under the ~~2018~~First Amended 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%~~2.00% to ~~3.25%~~2.75% 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%~~1.00% to ~~2.25%~~1.75% 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~~Amendment includes a commitment fee of ~~0.30%~~0.20% to ~~0.50%~~0.35% per annum, based upon the consolidated total lease-adjusted leverage ratio, on any unused portion of the revolving credit facility.

On June 16, 2020 (the “Effective Date”), the Company amended its 2018 Credit Facility by entering into the Second Amendment to the Credit Facility (the “Second Amendment” or the “Second Amended Credit Facility”). Beginning on the Effective Date and through the third quarter of 2021 (the “Amendment Period”), borrowings under the Second Amended Credit Facility, including the term loan facility (“Borrowings”), will bear interest at LIBOR plus 3.25% per annum. Following the Amendment Period, borrowings will bear interest at LIBOR plus a margin of 2.00% to 3.00% per annum, based upon the consolidated total lease-adjusted leverage ratio. Among other things, the Second Amendment (i) waives the lease-adjusted leverage ratio and fixed charge ratio covenants through the first quarter of 2021; (ii) amends the Company’s lease-adjusted leverage ratio and fixed coverage ratio covenant thresholds beginning in the second quarter of 2021 through the third quarter of 2022 and the first quarter of 2022, respectively and (iii) limits capital expenditures to $12.0 million in 2020, $12.0 million plus a liquidity-based performance basket up to an additional $12.0 million in 2021, $34.0 million in 2022, $37.0 million in 2023 and $45.0 million annually thereafter.

As of ~~October 1, 2019,~~June 30, 2020, the Company had ~~$44.4~~$95.7 million of indebtedness (excluding ~~$1.3~~$2.0 million of unamortized debt issuance costs) and $3.2 million of letters of credit outstanding under the ~~2018~~Second Amended Credit Facility. As of June 30, 2020, the Company had cash on hand of $62.1 million.

The term loan requires principal payments of ~~$156,250 per quarter through the first quarter of 2019,~~ $187,500 per quarter through the ~~first~~third quarter of ~~2020,~~2021, $375,000 per quarter through the ~~first~~third quarter of ~~2021,~~2022, and $531,250 per quarter through ~~maturity in~~ the ~~second~~third quarter of ~~2022.~~2023 and $625,000 per quarter thereafter through maturity.

Aggregate maturities for debt outstanding as of ~~October 1, 2019~~June 30, 2020 are as follows (in thousands):


Year 1	$	1,125	$	750
Year 2	1,813		1,313
Year 3	41,451		1,969
Year 4			2,406
Year 5			89,305
Total	$	44,389	$	95,743

The Company’s outstanding indebtedness bore interest at rates between ~~5.34%~~3.07% to ~~7.25%~~6.25% during the first ~~three~~two quarters of ~~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.~~2020.

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 1, 2019.~~

June 30, 2020.

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 approximate fair value as the line of credit and term borrowings vary with market interest rates and negotiated terms and conditions are consistent with current market rates. The fair value of the Company’s line of credit and term borrowings isare measured using Level 2 inputs.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

Assets recognized or disclosed at fair value in the condensed 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.

During the second quarter of 2020, the Company performed an interim qualitative impairment assessment of goodwill, due to the impact of the COVID-19 pandemic on its operating results. Based on the qualitative assessment performed, management determined that the Company’s goodwill has not been impaired as of June 30, 2020 and, as a result, no impairment charge was recorded in the second quarter of 2020 or in the first two quarters of 2020.

Adjustments to the fair value of assets measured at fair value on a non-recurring basis as of ~~October 1,~~June 30, 2020 and July 2, 2019 ~~and October 2, 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)~~ for income taxes (in thousands):


	Fiscal Quarter Ended						Three Fiscal Quarters Ended						Fiscal Quarter Ended						Two Fiscal Quarters Ended
	October 1, 2019			October 2, 2018			October 1, 2019			October 2, 2018			June 30, 2020			July 2, 2019			June 30, 2020			July 2, 2019
Provision (benefit) for income taxes	$	64		$	(11	)	$	64		$	(259	)
Provision for income taxes													$	33		$	—		$	46		$	—
Effective tax rate	1.5		%	(1.1		)%	2.2		%	3.0		%	(0.2		)%	—		%	(0.2		)%	—		%

The effective tax rate for the ~~third~~second quarter of ~~2019~~2020 and the ~~first three quarters~~second quarter of 2019 reflect the impact of the previously recorded valuation allowance. For the remainder of fiscal ~~2019,~~2020, the Company does not anticipate material income tax expense or benefit

as a result of the valuation allowance recorded. The Company will maintain the valuation allowance against deferred tax assets until there is sufficient evidence to support a full or partial reversal. The reversal of a previously recorded valuation allowance will generally result in a benefit from income tax. ~~The effective tax rates for~~

On March 27, 2020, the ~~third quarter of 2018~~Coronavirus Aid, Relief and ~~the first three quarters of 2018 reflected changes made by the Tax Cuts and Jobs~~Economic Security Act (“~~Tax~~CARES Act”), which provides economic relief in response to the COVID-19 pandemic, was signed into ~~law~~law. The CARES Act includes provisions that permit refunds of alternative minimum tax credits, temporary modifications to the limitations placed on the tax deductibility of net interest expenses, and technical amendments for qualified improvement property (“QIP”). We do not expect that the provisions in ~~December 2017.~~the CARES Act will have a material impact to our tax rate or expense during 2020.

6. Stock-Based Compensation

The Company’s Stock Incentive Plan (the “Plan”), as amended and restated in May of 2013, authorizes the grant of non-qualified stock options, incentive stock options, stock appreciation rights, restricted stock, restricted stock units (“RSUs”), performance share units (“PSUs”) and incentive bonuses to employees, officers, non-employee directors and other service providers. As of ~~October 1, 2019,~~June 30, 2020, approximately ~~3.5~~2.8 million share-based awards were available to be granted under the 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 1, 2019			October 2, 2018		October 1, 2019		October 2, 2018		June 30, 2020		July 2, 2019		June 30, 2020		July 2, 2019
Stock-based compensation expense	$	(61	)	$	640	$	1,820	$	2,232	$	1,094	$	1,155	$	1,253	$	1,881
Capitalized stock-based compensation expense	$	11		$	12	$	32	$	37	$	25	$	10	$	37	$	21

~~Included in stock-based compensation expense for the third quarter and first three quarters of 2019 is a credit due to the departure of our former Executive Chairman.~~

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 1, 2019			October 2, 2018			October 1, 2019			October 2, 2018		June 30, 2020		July 2, 2019		June 30, 2020		July 2, 2019
Restaurant impairments ⁽¹⁾	$	89		$	314		$	2,554		$	1,231	$	2,135	$	2,276	$	2,262	$	2,465
Closure costs ⁽¹⁾	(643		)	1,488			(112		)	3,561		299		173		512		134
Loss (gain) on disposal of assets and other	890			(10		)	1,198			1,160
Loss on disposal of assets and other												124		435		840		705
	$	336		$	1,792		$	3,640		$	5,952	$	2,558	$	2,884	$	3,614	$	3,304

_____________________________


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

~~There~~

During the second quarter of 2020, 5 restaurants were ~~0 restaurant impairments during~~identified as impaired for which the ~~third~~Company recorded an impairment charge of $2.1 million. In the second quarter of 2019, ~~and~~ 2 ~~restaurant impairments during the first three quarters~~restaurants were impaired for a total impairment charge of 2019. There were 0 restaurant impairments during the third quarter of 2018 and 1 restaurant impairment during the first three quarters of 2018. Each of these periods include ongoing equipment costs for restaurants previously impaired.$2.2 million. 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 and the right-of-use asset based on a discounted cash flow analysis utilizing market lease rates. The Company will continue to monitor the impact from the COVID-19 pandemic as it relates to recoverability of long-lived assets. Although we have seen an improvement in sales, we are unable to predict how long these conditions will persist, what additional measures may be introduced by governments or what effect any such additional measures may have on restaurants and our business. Any measure that encourages consumers to stay in their homes, engage in social distancing or avoid larger gatherings of people for an extended period of time is highly likely to be harmful to the restaurant industry in general.

Closure costs in each of the ~~third~~second quarter and first ~~three~~two quarters of 2020 and 2019 include ongoing costs related to restaurants closed in previous years as well as one company-owned restaurant closed during the second quarter of 2020 that was near the end of its lease term. In addition, closure costs in the second quarter and first ~~three~~two quarters of 2019 ~~as well as ongoing costs~~were partially offset by a gain of $0.1 million and ~~adjustments to the liabilities to landlords as lease terminations occur. The closure costs of $1.5~~$0.4 million, recognized during the third quarter of 2018 and $3.6 million recognized during the first three quarters of 2018 are related to the 3 restaurants closed in the third quarter of 2018 and 12 restaurants closed in the first three quarters of 2018, most of which were approaching the expiration of their leases, as well as ongoing costs of restaurants closed in previous years. These ongoing costs includerespectively, from adjustments to liabilities as lease terminations occur.

Loss on disposal of assets and other includes expenses recognized during the ~~third quarter and~~ first ~~three~~two quarters of ~~2019~~2020 related to the divestiture of ~~five~~ company-owned restaurants to a ~~franchisee, offset by adjustments related to changes in the Company’s assessment of remaining operating lease terms, partially offset by ongoing costs of restaurants closed in previous years.~~franchisee.

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 1, 2019		October 2, 2018		October 1, 2019		October 2, 2018			June 30, 2020			July 2, 2019		June 30, 2020			July 2, 2019
Net income (loss)	$	4,243	$	1,050	$	2,830	$	(8,460	)
Net (loss) income										$	(13,478	)	$	438	$	(19,313	)	$	(1,413	)
Shares:
Basic weighted average shares outstanding	43,990,049		43,094,524		44,007,345		41,798,640			44,212,751			43,964,175		44,177,648			43,955,580
Effect of dilutive securities	909,127		1,734,839		1,071,194		—			—			1,111,713		—			—
Diluted weighted average shares outstanding	44,899,176		44,829,363		45,078,539		41,798,640			44,212,751			45,075,888		44,177,648			43,955,580
Earnings (loss) per share:
Basic earnings (loss) per share	$	0.10	$	0.02	$	0.06	$	(0.20	)
Diluted earnings (loss) per share	$	0.09	$	0.02	$	0.06	$	(0.20	)
(Loss) earnings per share:
Basic (loss) earnings per share										$	(0.30	)	$	0.01	$	(0.44	)	$	(0.03	)
Diluted (loss) earnings per share										$	(0.30	)	$	0.01	$	(0.44	)	$	(0.03	)

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 per share when the effect would be anti-dilutive. The shares issuable on the vesting or exercise of share-based awards or exercise of outstanding warrants that were excluded from the calculation of diluted earnings (loss) per share because the effect of their inclusion would have been anti-dilutive totaled ~~1,748,444~~4,142,754 and ~~176,325~~1,297,255 for the ~~third~~second quarter of ~~2019~~2020 and ~~2018,~~2019, respectively, and totaled ~~1,490,202~~3,309,278 and ~~2,758,848~~3,229,030 for the first ~~three~~two quarters of 2020 and 2019, ~~and 2018,~~ respectively.

9. Leases

~~The Company leases restaurant facilities, office space~~

As discussed in Note 1, Business Summary and ~~certain equipment that expire on various dates through January 2035. Lease terms for restaurants~~Basis of Presentation, the COVID-19 pandemic impacted us significantly, including causing us to close all of our dining rooms starting in ~~traditional shopping centers generally include~~March 2020. We commenced reopening a ~~base term~~portion of ~~10 years,~~our dining rooms in June of 2020. During the second quarter of 2020, we were able to negotiate with ~~options~~the majority of our landlords to obtain rent abatements, defer rent amounts due during the second quarter, or in some cases, extend ~~these leases for additional periods~~the period of ~~5 to 15 years. Leases with an initial term of 12 months or less are not recorded on~~ the ~~balance sheet; we recognize~~respective lease ~~expense for these leases on a straight-line basis over~~term. In the case where the lease ~~term.~~term was extended, we remeasured the remaining consideration in the contract. The total rent that was deferred for lease amendments that have been executed through June 30, 2020 was $4.0 million.

~~The Company’s leases typically contain rent escalations over~~Further, for certain of our restaurants, the ~~lease term. The Company recognizes expense for these leases~~COVID-19 pandemic had a significant impact to the underlying asset values. Based on ~~a straight-line basis over~~an impairment analysis performed during the ~~lease term. Additionally, tenant incentives used~~quarter ended June 30, 2020, we recorded asset impairment charges of $0.3 million to ~~fund leasehold improvements are recognized when earned and~~ reduce the ~~right-of-use asset related to the lease. These are amortized through the right-of-use asset as reductions~~carrying value of ~~expense over the lease term.~~

Some of the Company’s leases include rent escalations based on inflation indexes and fair market value 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. Lease expense associated with rent escalation and contingent rental provisions is not material and is included withincertain operating lease cost. 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~~assets to ~~account for lease and non-lease components as a single component for substantially all lease types.~~

As most of the Company’s leases do not provide an implicit rate, the Company used its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments.

their respective estimated fair value.

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


Classification	Classification	October 1, 2019		Classification	June 30, 2020		December 31, 2019
Assets
Operating	Operating lease assets, net	$	212,760	Operating lease assets, net	$	209,445	$	209,717
Finance	Finance lease assets, net ⁽¹⁾	896		Finance lease assets, net ⁽¹⁾	3,086		771
Total leased assets		$	213,656		$	212,531	$	210,488
Liabilities
Current lease liabilities
Operating	Current operating lease liabilities	$	22,431	Current operating lease liabilities	$	26,144	$	22,775
Finance	Current finance lease liabilities ⁽²⁾	756		Current finance lease liabilities ⁽²⁾	998		510
Long-term lease liabilities
Operating	Long-term operating lease liabilities	229,157		Long-term operating lease liabilities	229,196		225,014
Finance	Long-term finance lease liabilities ⁽²⁾	158		Long-term finance lease liabilities ⁽²⁾	2,127		281
Total lease liabilities		$	252,502		$	258,465	$	248,580

_____________________


(1)	The finance lease assets are included in property and equipment, net in the Condensed 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 was included in other long-term liabilities in the Condensed Consolidated Balance Sheets.

~~The components~~Sublease income recognized in the Condensed Consolidated Statements of ~~lease costs~~Operations was $0.1 million and $0.1 million for the for the second quarter of 2020 and 2019, and $0.5 million and $0.2 million first two quarters of 2020 and 2019, respectively.

Supplemental disclosures of cash flow information related to leases are as follows (in thousands):

Fiscal Quarter Ended Three Fiscal Quarters Ended
Classification October 1,
2019 October 1,
2019
Operating lease cost Occupancy, other restaurant operating costs, and general and administrative expenses $ 10,251
$ 30,583
Finance lease cost
Amortization of lease assets Depreciation and amortization 161
511
Interest on lease liabilities Interest expense, net 18
58
10,430
31,152
Sublease income Franchising royalties and fees, and other (184 ) (384 )
Total lease cost, net $ 10,246
$ 30,768



	Fiscal Quarter Ended				Two Fiscal Quarters Ended
	June 30, 2020		July 2, 2019		June 30, 2020		July 2, 2019
Cash paid for lease liabilities:
Operating leases	$	6,066	$	10,813	$	13,574	$	21,506
Finance leases	270		160		452		377
	$	6,336	$	10,973	$	14,026	$	21,883
Right-of-use assets obtained in exchange for lease liabilities:
Operating leases	$	4,557	$	2,049	$	10,281	$	5,210
Finance leases	1,238		179		2,842		229
	$	5,795	$	2,228	$	13,123	$	5,439

Future minimum lease payments required under existing leases as of ~~October 1, 2019~~June 30, 2020 are as follows (in thousands):


	Operating Leases		Finance Leases		Total		Operating Leases		Finance Leases		Total
Remainder of 2019	$	10,815	$	158	$	10,973
2020	43,172		539		43,711
Remainder of 2020							$	22,747	$	599	$	23,346
2021	42,375		216		42,591		44,433		978		45,411
2022	42,184		44		42,228		43,604		836		44,440
2023	40,831		14		40,845		42,514		682		43,196
2024							40,982		218		41,200
Thereafter	189,439		9		189,448		170,200		37		170,237
Total lease payments	368,816		980		369,796		364,480		3,350		367,830
Less: Imputed interest	117,228		66		117,294		109,140		225		109,365
Present value of lease liabilities	$	251,588	$	914	$	252,502	$	255,340	$	3,125	$	258,465

Operating lease payments include $158.2 million related to options to extend lease terms that are reasonably certain of being exercised and exclude $3.4 million of legally binding minimum lease payments for leases signed but not yet commenced.

~~Lease term and discount rate as of October 1, 2019 are as follows:~~



	October 1, 2019
~~Weighted average remaining lease term (years):~~
~~Operating~~	~~9.5~~
~~Finance~~	~~2.0~~
~~Weighted average discount rate:~~
~~Operating~~	~~8.69~~	%
~~Finance~~	~~7.20~~	%

~~Supplemental disclosures of cash flow information related to leases for the third quarter and the first three quarters ended October 1, 2019 are as follows (in thousands):~~

Fiscal Quarter Ended Three Fiscal Quarters Ended
October 1,
2019 October 1,
2019
Cash paid for lease liabilities:
Operating leases $ 10,795
$ 32,301
Finance leases 223
600
$ 11,018
$ 32,901
Right-of-use assets obtained in exchange for new lease liabilities:
Operating leases $ 2,646
$ 7,856
Finance leases —
229
$ 2,646
$ 8,085

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 ~~first three~~two quarters ended ~~October 1,~~June 30, 2020 and July 2, 2019 ~~and October 2, 2018~~ (in thousands):


	October 1, 2019		October 2, 2018			June 30, 2020		July 2, 2019
Interest paid (net of amounts capitalized)	$	1,972	$	3,006		$	1,666	$	1,382
Income taxes paid	6		49			25		6
Changes in purchases of property and equipment accrued in accounts payable, net	1,200		(1,346		)
Purchases of property and equipment accrued in accounts payable						1,793		2,392

11. Revenue Recognition

Revenue

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

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 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 24 months. Gift card liability balances are typically highest at the end of each calendar year following increased gift card purchases during the holiday season.

As of ~~October 1, 2019~~June 30, 2020 and ~~January 1,~~December 31, 2019, the current portion of the gift card liability, ~~$1.4~~$1.9 million and ~~$3.3~~$2.4 million, respectively, was included in accrued expenses and other current liabilities, and the long-term portion, ~~$0.7~~$0.6 million and ~~$0.4~~$0.9 million, respectively, was included in other long-term liabilities in the Condensed Consolidated Balance Sheets.

Revenue recognized in the Condensed Consolidated Statements of Operations for the redemption of gift cards was ~~$4.1~~$2.1 million and ~~$4.4~~$3.2 million for the first ~~three~~two quarters of 2020 and 2019, ~~and 2018,~~ respectively. The revenue recognized from gift cards for the first three quarters of 2018 included $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 a litigation settlement in the second quarter of 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. In the second quarter of 2020, we forgave the franchise royalties due for the quarter due to the impact of the COVID-19 pandemic. In the third quarter, we will resume recognizing franchise royalty revenue and cash collection. 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 Company has determined that the initial franchise services are not distinct from the continuing rights or services offered during the term of the franchise agreement and should be treated as a single performance obligation; therefore, initial fees received from franchisees are recognized as revenue over the term of each respective franchise agreement, which is typically 20 years.

Loyalty Program

Customers who register on the Noodles App are automatically enrolled in the Noodles Rewards program, which is primarily a spend-based loyalty program. With each purchase, Noodles Rewards members earn loyalty points that can be redeemed for rewards, including free products. Using an estimate of the value of reward redemptions, we defer revenue associated with points earned, net of estimated points that will not be redeemed. Points generally expire after six months. Revenue is recognized in a future period when the reward points are redeemed. As of June 30, 2020 and December 31, 2019, the deferred revenue related to the rewards was $1.7 million and $0.6 million, respectively, and was included in accrued expenses and other current liabilities in the Condensed Consolidated Balance Sheets.

12. Commitments and Contingencies

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 1, 2019.~~June 30, 2020. 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 1,~~December 31, 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 ~~2019~~2020 and ~~2018~~2019 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 our ability to navigate the COVID-19 pandemic, projected capital expenditures, the revenue and balance sheet impact of the COVID-19 pandemic, 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, the extent, duration and severity of the COVID-19 pandemic; governmental and customer response to the COVID-19 pandemic; other conditions beyond our control such as weather, natural disasters, disease outbreaks, epidemics or pandemics impacting our customers or food supplies; consumer reaction to industry related public health issues and health pandemics and perceptions of food safety, 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.~~December 31, 2019 and in our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2020..

Impact of COVID-19 Pandemic on Our Business

The COVID-19 pandemic has resulted, and is likely to continue to result, in significant economic disruption and has and will likely continue to adversely affect our business. As of the date of this filing, significant uncertainty exists concerning the magnitude of the impact and the duration of the COVID-19 pandemic. As of the date of this filing, while substantially all of our restaurants continue to operate, public access to our dining rooms has been restricted in many of our restaurants, which negatively impacted sales during the quarter and may negatively impact sales until the COVID-19 pandemic moderates. While we cannot predict the extent to which the COVID-19 pandemic will impact our business, comparable sales have meaningfully and progressively improved since the beginning of the pandemic and recent sales levels have approached the sales levels for the same periods of the prior year, as our business was well-positioned for the transition to largely off-premise dining that has resulted from the outbreak. The shifting demand pattern towards our off-premise offerings, including delivery, has caused a reduction in our restaurant level margins due primarily to higher delivery fees.

We intend to continue to actively monitor the evolving situation and may take further actions that alter our business operations as may be required by federal, state or local authorities or that we determine are in the best interests of our team members, customers, suppliers and shareholders. While we are unable to determine or predict the nature, duration or scope of the impact that the COVID-19 pandemic will have on our business, results of operations, liquidity or capital resources, we have sought to describe where our company stands today, how our response to the COVID-19 pandemic is progressing and our expectations regarding

how our operations and financial condition may change as the response and ultimate recovery against the COVID-19 pandemic progresses.

Recent Trends, Risks and Uncertainties

Comparable Restaurant Sales. In the ~~third~~second quarter of ~~2019,~~2020, system-wide comparable restaurant sales ~~increased 2.1%~~decreased 30.9%, comprised of a ~~2.2% increase~~30.1% decrease for company-owned restaurants and a ~~1.6% increase~~35.4% decrease for franchise restaurants.

The cadence of comparable restaurant sales and average unit volumes during the second quarter and third quarter to-date are as set forth below. Company-owned restaurants were closed July 4th and 5th 2020 in appreciation of our teams’ efforts during the pandemic. All restaurants were open during that time frame in 2019, negatively impacting comparable restaurant sales during same period in 2020:



Comparable Restaurant Sales	4 Weeks Ended April 28, 2020	4 Weeks Ended May 26, 2020	5 Weeks Ended June 30, 2020	2 Weeks Ended July 14, 2020 ⁽¹⁾	2 Weeks Ended July 28, 2020
Company-owned	(47.0)%	(28.9)%	(17.7)%	(13.9)%	(3.8)%
Franchise	(55.5)%	(37.3)%	(18.1)%	(7.5)%	(7.8)%
System-wide	(48.2)%	(30.1)%	(17.8)%	(13.0)%	(4.4)%
Average Unit Volumes (000’s)	$685	$901	$1,044	$1,168	$1,181

_________________

(1) Company-owned restaurants were closed July 4 and July 5, 2020.

Our ability to ~~continue~~return to ~~increase~~positive comparable restaurant sales depends, among other reasons, on (i) the duration of the COVID-19 pandemic, (ii) limitations imposed by federal, state and local governments with respect to reduced seating capacity in ~~part on~~ our ~~ability~~restaurants and other social distancing measures, (iii) our customers’ future willingness to ~~successfully implement~~eat at restaurants and (iv) macroeconomic conditions and the length of time required for the national and local economies to achieve economic recovery following the crisis.

Cost of Sales. As a result of the COVID-19 pandemic, we have and expect to continue to incur incremental costs of sales, including the use of additional packaging supplies to support the continued increase in to go and off premise orders. Despite the increased packaging costs, we have continued to work with our ~~operational strategies~~suppliers for ongoing supply chain savings resulting in lower cost of sales. To date, there has been minimal disruption to our supply chain network, including the supply of our ingredients, packaging or other sourced materials, though it is possible that more significant disruptions could occur if the COVID-19 pandemic continues to impact the markets in which we operate. We are working closely with our distributors and ~~initiatives.~~contract manufacturers as the situation evolves. We intend to continue to actively monitor the situation, including the status of our supply chain, to determine the appropriate actions to minimize any supply chain interruptions.

~~Increased~~ Labor Costs. ~~Similar to much of the restaurant industry, our base labor costs have risen in recent periods.~~ In the ~~third quarter~~first two quarters of ~~2019,~~2020, we were able to mitigate the impact of increased base labor costs through labor ~~efficiencies; however,~~efficiencies such as our procedures around optimizing food preparation times. Additionally, during the first two quarters of 2020, we ~~expect that~~modified our labor ~~costs will continue~~model to ~~rise as wage rates and benefit costs increase.~~reduce the number of staffing hours in our restaurants. 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 permanently closed 19one company-owned ~~restaurants in 2018 and two company-owned restaurants~~restaurant in the first ~~three~~two quarters of ~~2019, most~~2020. From the last half of ~~which~~March through June 2020, nearly all of our dining rooms were ~~at or approaching~~closed due to the ~~expiration of their leases.~~COVID-19 pandemic. We have begun reopening dining rooms in certain restaurants and will continue to open the remaining dining rooms as appropriate. We currently do not anticipate a significant number of permanent restaurant closures ~~for~~in the foreseeable future; however, we may from time to time permanently close certain restaurants, including permanent closures at, or near, the expiration of ~~their leases.~~the leases for these restaurants.

Restaurant Development. In the first ~~three~~two quarters of ~~2019,~~2020, we opened ~~three~~one new company-owned ~~restaurants, acquired one franchise~~ restaurant and sold ~~five~~nine restaurants to a franchisee. As of ~~October 1, 2019,~~June 30, 2020, we had ~~391~~380 company-owned restaurants and 6776 franchise restaurants in 29 states and the District of Columbia. ~~Given recent improvement~~In response to the onset of the COVID-19 pandemic and to preserve cash, we substantively halted capital investment in ~~performance, operating effectiveness and liquidity, we are currently pursuing a disciplined development pipeline to execute a modest~~ new unit development during the second quarter. Given the Company’s sales recovery in recent months, as well as an anticipated increase in favorable real estate availability, we expect to incorporate increased unit development into our strategic growth ~~rate in the near term. We will open two additional restaurants system-wide in the fourth quarter of 2019. We expect an annual unit growth rate of 5% by 2021.~~plan for 2021 and beyond.

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 volume (“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 typically higher in the second and third quarters. As a result of these factors, as well as the magnitude of the COVID-19 pandemic on any given quarter, our quarterly ~~and annual~~ operating results and comparable restaurant sales may fluctuate significantly.

Average Unit Volume

AUV consists of the average annualized sales of all ~~company-owned~~ restaurants for ~~the trailing 12 periods.~~a given time period. 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~~revenue 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;

abnormal weather patterns;

food safety and foodborne illness concerns;

the impact of the COVID-19 pandemic;

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 long-term growth strategy and we anticipate new restaurants will be a component of our long-term revenue growth, 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, acquisition costs, severance costs and stock-based compensation expense.

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.

Results of Operations

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


	Fiscal Quarter Ended						Three Fiscal Quarters Ended					Fiscal Quarter Ended					Two Fiscal Quarters Ended
	October 1, 2019			October 2, 2018			October 1, 2019		October 2, 2018			June 30, 2020			July 2, 2019		June 30, 2020			July 2, 2019
	(in thousands, unaudited)											(in thousands, unaudited)
Net income (loss)	$	4,243		$	1,050		$	2,830	$	(8,460	)
Net (loss) income												$	(13,478	)	$	438	$	(19,313	)	$	(1,413	)
Depreciation and amortization	5,458			5,790			16,626		17,407			5,397			5,661		10,732			11,168
Interest expense, net	737			1,093			2,298		3,385			920			800		1,888			1,561
Provision (benefit) for income taxes	64			(11		)	64		(259		)
Provision for income taxes												33			—		46			—
EBITDA	$	10,502		$	7,922		$	21,818	$	12,073		$	(7,128	)	$	6,899	$	(6,647	)	$	11,316
Restaurant impairments, closure costs and asset disposals ⁽¹⁾	336			1,792			3,640		5,952			2,558			2,884		3,614			3,304
Stock-based compensation expense	(61		)	640			1,820		2,232			1,094			1,155		1,253			1,881
Litigation settlement ⁽²⁾	—			—			—		3,796
Loss on extinguishment of debt ⁽³⁾	—			—			—		626
Fees and costs related to transactions and other acquisition/disposition costs ⁽⁴⁾	130			—			166		53
Severance costs ⁽⁵⁾	112			—			112		278
Fees and costs related to transactions and other acquisition/disposition costs												73			—		162			36
Severance costs												89			—		89			—
Adjusted EBITDA	$	11,019		$	10,354		$	27,556	$	25,010		$	(3,314	)	$	10,938	$	(1,529	)	$	16,537

_____________________

(1)

~~The first three quarters of 2019 include the impairment of two restaurants compared to one restaurant during the same period of 2018. Additionally, the first three quarters of 2018 included~~Restaurant impairments and closure costs ~~for the 12~~in all periods presented above include amounts related to restaurants ~~closed in the first two quarters of 2018, most of which were approaching the expiration of their leases.~~previously impaired or closed. See Note 7, Restaurant Impairments, Closure Costs and Asset Disposals.


~~(2)~~	The first three quarters of 2018 included 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 gift cards.


~~(3)~~	The first three quarters of 2018 included 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.


~~(4)~~	The third quarter of 2019 included expenses related to transaction and acquisition costs. The first three quarters of 2019 included acquisition costs related to the purchase of one franchise restaurant and costs related to transaction costs. The first three quarters of 2018 included expenses related to the registration statement the Company filed in 2018.


~~(5)~~	~~The third quarter of 2019 and first three quarters of 2019 and 2018 included 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 1, 2019		October 2, 2018		October 1, 2019		October 2, 2018		June 30, 2020		July 2, 2019		June 30, 2020		July 2, 2019
Company-Owned Restaurant Activity
Beginning of period	395		404		394		412		381		395		389		394
Openings	3		—		3		1		—		—		1		—
Acquisition ⁽²⁾	—		—		1		—		—		—		—		1
Closures									(1	)	—		(1	)	—
Divestitures ⁽¹⁾	(5	)	—		(5	)	—		—		—		(9	)	—
Closures	(2	)	(3	)	(2	)	(12	)
Restaurants at end of period	391		401		391		401		380		395		380		395
Franchise Restaurant Activity
Beginning of period	62		65		65		66		77		64		68		65
Openings	—		—		—		—		—		—		—		—
Acquisitions ⁽²⁾⁽¹⁾	5		—		5		—		—		—		9		—
Closures									(1	)	(2	)	(1	)	(2	)
Divestiture ⁽²⁾	—		—		(1	)	—		—		—		—		(1	)
Closures	—		—		(2	)	(1	)
Restaurants at end of period	67		65		67		65		76		62		76		62
Total restaurants	458		466		458		466		456		457		456		457

_____________________________


(1)	Represents ~~five~~nine company-owned restaurants sold to a franchisee.


(2)	~~During the first quarter of 2019 we acquired~~Represents one franchise restaurant ~~and during the third quarter of 2019 we sold five restaurants to a franchisee.~~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				Fiscal Quarter Ended				Two Fiscal Quarters Ended
	October 1, 2019		October 2, 2018		October 1, 2019		October 2, 2018		June 30, 2020		July 2, 2019		June 30, 2020		July 2, 2019
	(unaudited)								(unaudited)
Revenue:
Restaurant revenue	98.7	%	99.0	%	98.8	%	99.1	%	99.8	%	98.9	%	99.0	%	98.9	%
Franchising royalties and fees, and other	1.3	%	1.0	%	1.2	%	0.9	%	0.2	%	1.1	%	1.0	%	1.1	%
Total revenue	100.0	%	100.0	%	100.0	%	100.0	%	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	25.3	%	26.5	%	25.9	%	26.6	%	25.0	%	25.6	%	25.3	%	26.2	%
Labor	32.5	%	32.7	%	33.1	%	32.9	%	33.9	%	32.7	%	34.3	%	33.4	%
Occupancy	10.4	%	10.4	%	10.7	%	10.9	%	14.6	%	10.4	%	13.3	%	10.9	%
Other restaurant operating costs	14.7	%	14.0	%	14.7	%	14.6	%	19.7	%	14.2	%	18.2	%	14.6	%
General and administrative	8.8	%	8.9	%	9.3	%	10.3	%	12.5	%	9.9	%	11.4	%	9.6	%
Depreciation and amortization	4.6	%	5.0	%	4.8	%	5.1	%	6.7	%	4.7	%	5.9	%	4.9	%
Pre-opening	0.2	%	—	%	0.1	%	—	%	0.1	%	0.1	%	0.1	%	—	%
Restaurant impairments, closure costs and asset disposals	0.3	%	1.5	%	1.0	%	1.7	%	3.2	%	2.4	%	2.0	%	1.4	%
Total costs and expenses	95.7	%	98.2	%	98.5	%	101.4	%	115.6	%	99.0	%	109.6	%	99.9	%
Income (loss) from operations	4.3	%	1.8	%	1.5	%	(1.4	)%
Loss on extinguishment of debt	—	%	—	%	—	%	0.2	%
(Loss) income from operations									(15.6	)%	1.0	%	(9.6	)%	0.1	%
Interest expense, net	0.6	%	0.9	%	0.7	%	1.0	%	1.1	%	0.7	%	1.0	%	0.7	%
Income (loss) before income taxes	3.6	%	0.9	%	0.8	%	(2.5	)%
Provision (benefit) for income taxes	—	%	—	%	—	%	(0.1	)%
Net income (loss)	3.6	%	0.9	%	0.8	%	(2.4	)%
(Loss) income before taxes									(16.8	)%	0.4	%	(10.7	)%	(0.6	)%
Provision for income taxes									—	%	—	%	—	%	—	%
Net (loss) income									(16.8	)%	0.4	%	(10.7	)%	(0.6	)%

~~Third~~Second Quarter Ended ~~October 1, 2019~~June 30, 2020 Compared to ~~Third~~Second Quarter Ended ~~October~~July 2, ~~2018~~2019

The table below presents our unaudited operating results for the ~~third~~second quarters of ~~2019~~2020 and ~~2018,~~2019, and the related quarter-over-quarter changes.


	Fiscal Quarter Ended						Increase / (Decrease)					Fiscal Quarter Ended						Increase / (Decrease)
	October 1, 2019			October 2, 2018			$			%		June 30, 2020			July 2, 2019			$			%
							$			%		June 30, 2020			July 2, 2019			$			%
	October 1, 2019		(in thousands, unaudited)											(in thousands, unaudited)
Revenue:				October 2, 2018
Restaurant revenue	$	116,759		$	115,552		$	1,207		1.0	%	$	80,021		$	118,858		$	(38,837	)	(32.7	)%
Franchising royalties and fees, and other	1,545			1,175			370			31.5	%	136			1,332			(1,196		)	(89.8	)%
Total revenue	118,304			116,727			1,577			1.4	%	80,157			120,190			(40,033		)	(33.3	)%
Costs and expenses:
Restaurant operating costs (exclusive of depreciation and amortization shown separately below):
Cost of sales	29,544			30,617			(1,073		)	(3.5	)%	20,020			30,448			(10,428		)	(34.2	)%
Labor	37,951			37,738			213			0.6	%	27,137			38,877			(11,740		)	(30.2	)%
Occupancy	12,108			12,035			73			0.6	%	11,676			12,311			(635		)	(5.2	)%
Other restaurant operating costs	17,161			16,224			937			5.8	%	15,789			16,858			(1,069		)	(6.3	)%
General and administrative	10,436			10,399			37			0.4	%	10,034			11,848			(1,814		)	(15.3	)%
Depreciation and amortization	5,458			5,790			(332		)	(5.7	)%	5,397			5,661			(264		)	(4.7	)%
Pre-opening	266			—			266			*		71			65			6			9.2	%
Restaurant impairments, closure costs and asset disposals	336			1,792			(1,456		)	(81.3	)%	2,558			2,884			(326		)	(11.3	)%
Total costs and expenses	113,260			114,595			(1,335		)	(1.2	)%	92,682			118,952			(26,270		)	(22.1	)%
Income from operations	5,044			2,132			2,912			*
(Loss) income from operations												(12,525		)	1,238			(13,763		)	*
Interest expense, net	737			1,093			(356		)	(32.6	)%	920			800			120			15.0	%
Income before income taxes	4,307			1,039			3,268			*
Provision (benefit) from income taxes	64			(11		)	75			*
Net income	$	4,243		$	1,050		$	3,193		*
(Loss) income before taxes												(13,445		)	438			(13,883		)	*
Provision for income taxes												33			—			33			100.0	%
Net (loss) income												$	(13,478	)	$	438		$	(13,916	)	*
Company-owned:
Average unit volume	$	1,157		$	1,107		$	50		4.5	%	$	891		$	1,201		$	(310	)	(25.8	)%
Comparable restaurant sales	2.2		%	5.2		%						(30.1		)%	4.8		%

________________


*	Not meaningful.

Revenue

Total revenue ~~increased $1.6~~decreased $40.0 million in the ~~third~~second quarter of ~~2019,~~2020, or ~~1.4%~~33.3%, to ~~$118.3~~$80.2 million, compared to ~~$116.7~~$120.2 million in the ~~third~~second quarter of ~~2018.~~2019. This ~~increase~~decrease was ~~primarily~~ due to a decline in traffic related to the ~~increase in comparable restaurant sales~~impact of the COVID-19 pandemic during the quarter, as well as ~~new restaurant openings, partially offset by~~a $3.0 million decrease related to the ~~impact~~refranchising of 14 total restaurants ~~closed~~ since the ~~beginning of third~~second quarter of ~~2018, most of which were approaching the expiration of their leases.~~2019.

AUV ~~increased $50,000~~decreased $310,000 compared to the prior year. AUV for the ~~trailing twelve months~~second quarter of 2020 was ~~$1,157,000.~~$891,000.

System-wide comparable restaurant sales ~~growth was 2.1%~~were down 30.9% in the ~~third~~second quarter of ~~2019,~~2020, comprised of a ~~2.2% increase~~30.1% decrease at company-owned restaurants and a ~~1.6% increase~~35.4% decrease at franchise-owned restaurants. ~~Comparable~~The comparable restaurant sales ~~growth~~decline in the ~~third~~second quarter of ~~2019~~2020 was driven primarily by a decline in traffic related to the impact of the COVID-19 pandemic, partially offset by increased off-premise sales and a new menu pricing ~~structure~~structure. Comparable restaurant sales improved throughout the quarter and ~~corresponding mix shift benefits.~~that improvement has continued into the third quarter. During the last two weeks of the July fiscal period, comparable sales declined only 3.8% at company-owned restaurants.

System-wide comparable sales were down 48.2% for the four weeks ended April 28, down 30.1% for the four weeks ended May 26 and down 17.8% for the five weeks ended June 30. Average unit volumes, which normalizes for the impact of temporary restaurant closures, declined 0.5% during the fiscal period ending July 28, 2020.

In the second quarter of 2020, we forgave the franchise royalties due to the COVID-19 pandemic. In the third quarter, we will resume recognizing franchise royalty revenue and cash collection.

Cost of Sales

Cost of sales decreased by ~~$1.1~~$10.4 million, or ~~3.5%~~34.2%, in the ~~third~~second quarter of ~~2019~~2020 compared to the same period of ~~2018,~~2019, due primarily to ~~ongoing supply chain savings initiatives since~~ the ~~third quarter of 2018.~~reduction in restaurant revenue. As a percentage of restaurant revenue, cost of sales decreased to ~~25.3%~~25.0% in the ~~third~~second quarter of 2020 compared to 25.6% in second quarter of 2019 ~~compared to 26.5% in third quarter of 2018~~ primarily due to ~~increased menu price and lower expenses resulting from~~ ongoing supply chain ~~initiatives.~~initiatives, increased menu pricing and lower discounting, partially offset by higher packaging costs associated with the shift to increased off-premise sales in response to the COVID-19 pandemic.

Labor Costs

Labor costs ~~increased~~decreased by ~~$0.2~~$11.7 million, or ~~0.6%~~30.2%, in the ~~third~~second quarter of ~~2019~~2020 compared to the same period of ~~2018.~~2019. As a percentage of restaurant revenue, labor costs ~~decreased~~increased to ~~32.5%~~33.9% in the ~~third~~second quarter of ~~2019~~2020 from 32.7% in the ~~third~~second quarter of ~~2018 as~~2019 due to the decline in restaurant sales associated with the COVID-19 pandemic, partially offset by labor ~~initiatives more than offset wage inflation.~~initiatives.

Occupancy Costs

Occupancy costs ~~increased~~decreased by ~~$0.1~~$0.6 million, or ~~0.6%~~5.2%, in the ~~third~~second quarter of 2020 compared to the second quarter of 2019 ~~compared~~primarily due to restaurants closed or impaired since the ~~third~~beginning of the second quarter of ~~2018.~~2019 as well the impact of rent concessions granted by certain landlords as a result of the COVID-19 pandemic. As a percentage of revenue, occupancy costs ~~remained flat at~~increased to 14.6% in the second quarter of 2020, compared to 10.4% in the ~~third~~second quarter of 2019 ~~compared~~due to reduced revenue from the ~~third quarter~~impact of ~~2018.~~the COVID-19 pandemic.

Other Restaurant Operating Costs

Other restaurant operating costs ~~increased~~decreased by ~~$0.9~~$1.1 million, or ~~5.8%~~6.3%, in the ~~third~~second quarter of 2020 compared to the second quarter of 2019 ~~compared~~due to cost savings initiatives related to the ~~third quarter of 2018, due primarily to increased third-party delivery fees.~~COVID-19 pandemic. As a percentage of restaurant revenue, other restaurant operating costs increased to ~~14.7%~~19.7% in the ~~third~~second quarter of 2020 compared to 14.2% in the second quarter of 2019 ~~compared~~due primarily to ~~14.0%~~increased third-party delivery fees resulting from a significant expansion of our use of third-party delivery services in the ~~third~~second quarter of ~~2018.~~2020 due to the COVID-19 pandemic.

General and Administrative Expense

General and administrative expense ~~was flat~~decreased by $1.8 million or 15.3% in the ~~third~~second quarter of 2020 compared to the second quarter of 2019, ~~compared~~due primarily to the ~~third quarter~~cost savings initiatives implemented as a result of ~~2018, primarily due to decreased stock-based compensation related to~~ the ~~departure of our former Executive Chairman~~COVID-19 pandemic including position reductions, furloughs, temporary salary reductions and reduction in ~~September of 2019,~~bonus expense, partially offset by ~~higher compensation costs as we filled out the management team.~~an increase in marketing expense. As a percentage of revenue, general and administrative expense ~~decreased~~increased to ~~8.8%~~12.5% in the ~~third~~second quarter of 2020 from 9.9% in the second quarter of 2019 ~~from 8.9%~~due primarily to the decline in ~~the third quarter of 2018.~~revenue.

Depreciation and Amortization

Depreciation and amortization decreased by $0.3 million, or ~~5.7%~~4.7%, in the ~~third~~second quarter of ~~2019~~2020 compared to the ~~third~~second quarter of ~~2018,~~2019, due primarily to restaurants closed or impaired since the beginning of the ~~third~~second quarter of ~~2018.~~2019 and the impact of the nine restaurants sold to a franchisee, partially offset by new asset additions. As a percentage of revenue, depreciation and amortization ~~decreased~~increased to ~~4.6%~~6.7% in the ~~third~~second quarter of ~~2019~~2020 from ~~5.0%~~4.7% in the ~~third~~second quarter of ~~2018.~~2019.

~~Pre-Opening Costs~~

~~Pre-opening costs increased $0.3 million in the third quarter of 2019 compared to the third quarter of 2018 due to more restaurants under construction as compared to the same period in 2018.~~

Restaurant Impairments, Closure Costs and Asset Disposals

Restaurant impairments, closure costs and asset disposals decreased by ~~$1.5~~$0.3 million in the ~~third~~second quarter of 2020 compared to the second quarter of 2019, ~~compared~~due primarily to a decrease in losses from the ~~third~~disposal of assets. We also recorded a $2.1 million impairment charge in the second quarter of ~~2018.~~2020 related to five restaurants that were particularly impacted by the COVID-19 pandemic. In the ~~third~~second quarter of 2019, we ~~did not record an~~recorded a $2.2 million impairment charge. Closure costs in the third quarter of 2019 included ongoing costs as well as adjustments to liabilities as lease terminations occur. In the third quarter of 2018, we did not impair any restaurants and recognized $1.5 million of closure costs related to the three restaurants closed in the third quarter of 2018 and ongoing costs from restaurants closed in previous periods. Additionally, the third quarter of 2018 included a gain of $0.4 million from the insurance proceeds receivedcharge for ~~property damage in excess of the loss recognized.~~two restaurants.

Interest Expense

Interest expense ~~decreased~~increased by ~~$0.4~~$0.1 million in the ~~third~~second quarter of ~~2019~~2020 compared to the ~~third~~second quarter of ~~2018.~~2019. The ~~decrease~~increase was due to ~~lower~~higher average borrowings during the ~~third~~second quarter of ~~2019~~2020 compared to the ~~third~~second quarter of ~~2018.~~2019.

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

The effective tax rate was ~~1.5% for the third quarter of 2019 compared to (1.1)~~(0.2)% for the ~~third~~second quarter of ~~2018.~~2020 compared to 0.0% for the second quarter of 2019. The effective tax rate for the ~~third~~second quarter of ~~2019~~2020 reflects the impact of the previously recorded valuation allowance. 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. For the remainder of fiscal ~~2019,~~2020, 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.

~~Three~~Two Quarters Ended ~~October 1, 2019~~June 30, 2020 Compared to ~~Three~~Two Quarters Ended ~~October~~July 2, ~~2018~~2019

The table below presents our unaudited operating results for the first ~~three~~two quarters of ~~2019~~2020 and ~~2018,~~2019, and the related period-over-period changes.


	Three Fiscal Quarters Ended						Increase / (Decrease)					Two Fiscal Quarters Ended						Increase / (Decrease)
	October 1, 2019			October 2, 2018			$			%		June 30, 2020			July 2, 2019			$			%
							$			%		June 30, 2020			July 2, 2019			$			%
	October 1, 2019		(in thousands, except percentages)											(in thousands, except percentages)
Revenue:				October 2, 2018
Restaurant revenue	$	344,382		$	341,616		$	2,766		0.8	%	$	178,737		$	227,623		$	(48,886	)	(21.5	)%
Franchising royalties and fees, and other	4,158			3,032			1,126			37.1	%	1,768			2,613			(845		)	(32.3	)%
Total revenue	348,540			344,648			3,892			1.1	%	180,505			230,236			(49,731		)	(21.6	)%
Costs and expenses:
Restaurant operating costs (exclusive of depreciation and amortization shown separately below):
Cost of sales	89,083			90,962			(1,879		)	(2.1	)%	45,224			59,539			(14,315		)	(24.0	)%
Labor	113,920			112,353			1,567			1.4	%	61,368			75,969			(14,601		)	(19.2	)%
Occupancy	36,849			37,155			(306		)	(0.8	)%	23,736			24,741			(1,005		)	(4.1	)%
Other restaurant operating costs	50,475			49,997			478			1.0	%	32,478			33,314			(836		)	(2.5	)%
General and administrative	32,424			35,480			(3,056		)	(8.6	)%	20,588			21,988			(1,400		)	(6.4	)%
Depreciation and amortization	16,626			17,407			(781		)	(4.5	)%	10,732			11,168			(436		)	(3.9	)%
Pre-opening	331			50			281			*		144			65			79			*
Restaurant impairments, closure costs and asset disposals	3,640			5,952			(2,312		)	(38.8	)%	3,614			3,304			310			9.4	%
Total costs and expenses	343,348			349,356			(6,008		)	(1.7	)%	197,884			230,088			(32,204		)	(14.0	)%
Income (loss) from operations	5,192			(4,708		)	9,900			*
Loss on extinguishment of debt	—			626			(626		)	*
(Loss) income from operations												(17,379		)	148			(17,527		)	*
Interest expense, net	2,298			3,385			(1,087		)	(32.1	)%	1,888			1,561			327			20.9	%
Income (loss) before income taxes	2,894			(8,719		)	11,613			*
Provision (benefit) for income taxes	64			(259		)	323			*
Net income (loss)	$	2,830		$	(8,460	)	$	11,290		*
Loss before taxes												(19,267		)	(1,413		)	(17,854		)	*
Provision for income taxes												46			—			46			100.0	%
Net loss												$	(19,313	)	$	(1,413	)	$	(17,900	)	*
Company-owned:
Average unit volumes	$	1,157		$	1,107		$	50		4.5	%	$	966		$	1,152		$	(186	)	(16.1	)%
Comparable restaurant sales	3.4		%	3.3		%						(19.0		)%	3.9		%

________________


*	Not meaningful.

Revenue

Total revenue ~~increased~~decreased by ~~$3.9~~$49.7 million, or ~~1.1%~~21.6%, in the first ~~three~~two quarters of ~~2019,~~2020, to ~~$348.5~~$180.5 million compared to ~~$344.6~~$230.2 million in the same period of ~~2018.~~2019. This ~~increase~~decrease was primarily due to the ~~increase~~decrease in comparable restaurant sales ~~and new restaurant openings, partially offset by~~as a result of the ~~impact of restaurants closed since the beginning of 2018, most of which were approaching the expiration of their leases.~~COVID-19 pandemic.

Comparable restaurant sales ~~increased~~decreased by ~~3.4%~~19.0% at company-owned restaurants, ~~increased~~decreased by ~~2.7%~~22.6% at franchise-owned restaurants and ~~increased~~decreased by ~~3.3%~~19.5% system-wide in the first ~~three~~two quarters of ~~2019.~~2020. The comparable restaurant sales decline in the first two quarters of 2020 was driven primarily by a decline in traffic related to the impact of the COVID-19 pandemic, partially offset by increased off-premise sales and a new menu pricing structure.

Cost of Sales

Cost of sales decreased by ~~$1.9~~$14.3 million, or ~~2.1%~~24.0%, in the first ~~three~~two quarters of ~~2019~~2020 compared to the same period of ~~2018,~~2019, due primarily to ongoing supply chain ~~savings initiatives.~~initiatives, increased menu pricing and lower discounting, partially offset by higher packaging costs associated with the shift to increased off-premise sales in response to the COVID-19 pandemic. As a percentage of restaurant revenue, cost of sales decreased to ~~25.9%~~25.3% in the first ~~three~~two quarters of ~~2019~~2020 compared to ~~26.6%~~26.2% in the first ~~three~~two quarters of ~~2018~~2019 primarily due to increased menu pricing and supply chain savings initiatives.

Labor Costs

Labor costs ~~increased~~decreased by ~~$1.6~~$14.6 million, or ~~1.4%~~19.2%, in the first ~~three~~two quarters of ~~2019~~2020 compared to the same period of ~~2018,~~2019, due primarily to the ~~increase~~decline in restaurant ~~revenue~~sales associated with the COVID-19 pandemic, partially offset by labor initiatives in the first ~~three~~two quarters of ~~2019.~~2020. As a percentage of restaurant revenue, labor costs increased to ~~33.1%~~34.3% in the first ~~three~~two quarters of ~~2019~~2020 compared to ~~32.9%~~33.4% in the first ~~three~~two quarters of ~~2018.~~2019. The increase as a percentage of restaurant revenue was driven by ~~wage inflation and training investments, mostly offset by labor efficiencies.~~the decline in restaurant sales.

Occupancy Costs

Occupancy costs decreased by ~~$0.3~~$1.0 million, or ~~0.8%~~4.1%, in the first ~~three~~two quarters of ~~2019~~2020 compared to the first ~~three~~two quarters of ~~2018.~~2019 due to restaurants closed or impaired since the beginning of the first quarter of 2019 as well as the impact of the nine restaurants sold to a franchisee in January 2020. As a percentage of revenue, occupancy costs ~~decreased~~increased to ~~10.7%~~13.3% in first ~~three~~two quarters of ~~2019,~~2020, compared to 10.9% in the first ~~three~~two quarters of ~~2018,~~2019, primarily due to ~~leverage on higher AUVs.~~reduced revenue from the impact of the COVID-19 pandemic.

Other Restaurant Operating Costs

Other restaurant operating costs ~~increased~~decreased by ~~$0.5~~$0.8 million, or ~~1.0%~~2.5%, in the first ~~three~~two quarters of ~~2019~~2020 compared to the first ~~three~~two quarters of ~~2018,~~2019, due primarily to ~~off-premise investments which were partially offset by lower utilities costs.~~cost savings initiatives related to the COVID-19 pandemic. As a percentage of restaurant revenue, other restaurant operating costs increased to ~~14.7%~~18.2% in the first ~~three~~two quarters of ~~2019,~~2020, compared to 14.6% in the first ~~three~~two quarters of ~~2018.~~2019 due primarily to increased third-party delivery fees resulting from a significant expansion of our use of third-party delivery services in the first two quarters of 2020 due to the COVID-19 pandemic.

General and Administrative Expense

General and administrative expense decreased by ~~$3.1~~$1.4 million, or ~~8.6%~~6.4%, in the first ~~three~~two quarters of ~~2019~~2020 compared to the first ~~three~~two quarters of ~~2018,~~2019, due primarily to the ~~recognition of a $3.4 million charge for the final settlement related to data breach liabilities incurred in the second quarter of 2018, as well~~cost savings initiatives implemented as a ~~decrease~~result of the COVID-19 pandemic including position reductions, furloughs, temporary salary reductions and reduction in ~~stock-based compensation related to the departure of our former Executive Chairman in September of 2019. These decreases were~~bonus expense, partially offset by ~~higher compensation costs as we filled out the management team.~~an increase in marketing expense. As a percentage of revenue, general and administrative expense ~~decreased~~increased to ~~9.3%~~11.4% in the first ~~three~~two quarters of ~~2019~~2020 compared to ~~10.3%~~9.6% in the first ~~three~~two quarters of ~~2018.~~2019.

Depreciation and Amortization

Depreciation and amortization decreased by ~~$0.8~~$0.4 million, or ~~4.5%~~3.9%, in the first ~~three~~two quarters of ~~2019~~2020 compared to the first ~~three~~two quarters of ~~2018.~~2019 primarily due to restaurants closed or impaired in the second quarter of 2019 and the impact of the nine restaurants sold to a franchisee, partially offset by new asset additions. As a percentage of revenue, depreciation and amortization ~~decreased~~increased to ~~4.8%~~5.9% in the first ~~three~~two quarters of 2020, compared to 4.9% in the first two quarters of 2019, ~~compared to 5.1% in the first three quarters of 2018,~~ due ~~to restaurants impaired or closed in prior quarters.~~

~~Pre-Opening Costs~~

~~Pre-opening costs increased $0.3 million in the first three quarters of 2019 as compared~~primarily to the ~~first three quarters~~decline in restaurant sales as a result of ~~2018 due to more restaurants under construction as compared to~~ the ~~same period in 2018.~~COVID-19 pandemic.

Restaurant Impairments, Closure Costs and Asset Disposals

Restaurant impairments, closure costs and asset disposals ~~decreased~~increased by ~~$2.3~~$0.3 million in the first ~~three~~two quarters of ~~2019~~2020 compared to the first ~~three~~two quarters of ~~2018, primarily~~2019. The increase was largely due to ~~a $3.7 million decrease in~~ongoing closure costs ~~partially offset by a $1.4 million increase in restaurant impairments. In~~which was higher during the first ~~three~~two quarters of 2020 by $0.4 million compared to the same period in 2019 ~~we recorded a $2.2 million impairment charge for two restaurants. Closure~~as the closure costs in the first ~~three~~two quarters of 2019 ~~included ongoing costs as well as~~were partially offset by gains recognized from the adjustments to liabilities ason lease ~~terminations occur. In~~terminations. During the first ~~three~~two quarters of ~~2018,~~2020, we ~~impaired one restaurant, recognized $3.6 million~~also incurred losses from the disposal of ~~closure costs~~assets related to 12the divestiture of company-owned restaurants ~~closed~~to a franchisee. Additionally, there were five restaurant impairments in the first ~~three~~two quarters of ~~2018 and 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 related2020 compared to ~~the Prior Credit Facility and recognized a loss on extinguishment of debt~~two restaurant impairments in the ~~amount~~first two quarters of ~~$0.6~~2019.

Interest Expense

Interest expense increased by $0.3 million in the first ~~three~~two quarters of ~~2018.~~

~~Interest Expense~~

~~Interest expense decreased by $1.1 million in the first three quarters of 2019~~2020 compared to the same period of ~~2018.~~2019. The ~~decrease~~increase was mainly due to ~~the lower~~higher average borrowings in the first ~~three~~two quarters of ~~2019~~2020 compared to the first ~~three~~two quarters of ~~2018.~~2019.

Provision for Income Taxes

The effective tax rate was ~~2.2%~~(0.2)% for the first ~~three~~two quarters of ~~2019~~2020 compared to ~~3.0%~~0.0% for the first ~~three~~two quarters of ~~2018.~~2019. The effective tax rate for the first ~~three~~two quarters of ~~2019~~2020 reflects the impact of the previously recorded valuation allowance. The effective tax rate for the first three 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,~~2020, 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

On November 20, 2019, the Company amended its 2018 Credit Facility by entering into the First Amendment to the Credit Facility (the “Amendment” or “Amended Credit Facility”).

On June 16, 2020 (the “Effective Date”), the Company amended its 2018 Credit Facility by entering into the Second Amendment to the Credit Facility (the “Second Amendment” or the “Second Amended Credit Facility”). Beginning on the Effective Date and through the third quarter of 2021 (the “Amendment Period”), borrowings under the Second Amended Credit Facility, including the term loan facility (“Borrowings”), will bear interest at LIBOR plus 3.25% per annum. Following the Amendment Period, Borrowings will bear interest at LIBOR plus a margin of 2.00% to 3.00% per annum, based upon the consolidated total lease-adjusted leverage ratio. Among other things, the Second Amendment (i) waives the lease-adjusted leverage ratio and fixed charge ratio covenants until the beginning of the second quarter of 2021, (ii) amends the Company’s lease-adjusted leverage ratio and fixed coverage ratio covenant thresholds beginning in the second quarter of 2021 through the third quarter of 2022 and the first quarter of 2022, respectively and (iii) limits capital expenditures to $12.0 million in 2020, $12.0 million plus a liquidity-based performance basket up to an additional $12.0 million in 2021, $34.0 million in 2022, $37.0 million in 2023 and $45.0 million annually thereafter. As of ~~October 1, 2019,~~June 30, 2020, our cash and cash equivalents balance was ~~$3.1~~$62.1 million and the amount available for future borrowings under our ~~2018~~Amended Credit Facility was ~~$41.4~~$0.5 million.

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.~~capital. 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.

WeThere is significant uncertainty surrounding the potential impact of the COVID-19 pandemic on our results of operations and cash flows. In the first two quarters of 2020, we proactively took steps to increase available cash on hand and reduce operating expenses, which included, but were not limited to, targeted reductions in discretionary operating expenses and capital expenditures, and drawing down funds available under our Amended Credit Facility.

Based on our most recent estimates of the COVID-19 pandemic impacts for the next twelve months, we believe that we will be in compliance with our debt covenants and have sufficient sources of cash to meet our liquidity needs and capital resource requirements for the next twelve months, primarily through currently available cash and cash equivalents and cash flows from ~~operations and undrawn capacity under our revolving credit line.~~operations.

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

Three Fiscal Quarters Ended
October 1,
2019 October 2,
2018
Net cash provided by (used in) operating activities $ 16,269
$ (4,868 )
Net cash used in investing activities (14,823 ) (9,437 )
Net cash (used in) provided by financing activities (3,015 ) 12,862
Net decrease in cash and cash equivalents $ (1,569 ) $ (1,443 )



	Two Fiscal Quarters Ended
	June 30, 2020			July 2, 2019
Net cash provided by operating activities	$	6,707		$	9,008
Net cash used in investing activities	(6,810		)	(9,252		)
Net cash provided by (used in) financing activities	51,720			(1,073		)
Net increase (decrease) in cash and cash equivalents	$	51,617		$	(1,317	)

Operating Activities

Net cash provided by operating activities ~~increased~~decreased to ~~$16.3~~$6.7 million in the first ~~three~~two quarters of ~~2019~~2020 from net cash ~~used in~~provided by operating activities of ~~$4.9~~$9.0 million in the first ~~three~~two quarters of ~~2018.~~2019. The ~~improvement~~decline in operating cash flows resulted primarily from ~~better operating results~~decreased net income during the first ~~three~~two quarters of ~~2019~~2020 due to the COVID-19 pandemic as well as working capital changes during the first two quarters of 2020 compared to the prior ~~comparable~~ period of 2019, adjusted for non-cash items such as depreciation and amortization, restaurant impairments, closure costs and asset disposals, stock-based ~~compensation and changes in working capital due to timing. The first three quarters of 2018 included the payment of the liabilities related to the data breach that occurred in 2017.~~compensation.

Investing Activities

Net cash used in investing activities ~~increased $5.4~~decreased $2.4 million in the first ~~three~~two quarters of ~~2019~~2020 from ~~$9.4~~$9.3 million in the first ~~three~~two quarters of ~~2018.~~2019. This ~~increase is~~decrease was primarily due to ~~construction activities on~~fewer new restaurant ~~development~~openings in the first two quarters of 2020 compared to 2019 and the ~~purchase~~acquisition of one franchise ~~restaurant. Both periods include reinvestments~~restaurant in ~~existing restaurants and investments in technology.~~2019.

Financing Activities

Net cash ~~used in~~provided by financing activities was ~~$3.0~~$51.7 million in the first ~~three~~two quarters of ~~2019~~2020 largely related to ~~repayments of long-term debt.~~precautionary draws on our revolving credit facility totaling $55.5 million. The first ~~three~~two quarters of ~~2018~~both 2020 and 2019 included ~~net proceeds received from borrowings made from the new credit facility, net of repayments to extinguish the prior credit facility.~~payments on long-term debt and finance leases.

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.

Due to the initial impact of the COVID-19 pandemic, in the first two quarters of 2020, we substantively halted capital investment in new unit development as well as other discretionary capital initiatives, including our “kitchen of the future” initiative. We estimate capital expenditures for the remainder of 2019 to be approximately $3.0 million to $5.0 million, which includes $1.0 million to $3.0 million related to our construction of new restaurants before any reductions for landlord reimbursements. Our total capital expenditures will be approximately ~~$17.0~~$10.0 million to ~~$19.0~~$12.0 million for fiscal year 2020, primarily for repairs and maintenance and the ~~fiscal year.~~opening of two to four company restaurants. We expect such capital expenditures to be funded by ~~a combination of~~currently available cash and cash equivalents and cash from ~~operations and borrowings under our revolving credit facility.~~operations.

Current Resources. Our operations have not historically 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. With uncertainty surrounding the COVID-19 pandemic and as a precautionary measure, we borrowed $55.5 million under our revolving credit facility during the first two quarters of 2020 to improve our cash position, providing the Company with a cash balance of approximately $62.1 million at the end of the second quarter of 2020 compared to $10.5 million as of December 31, 2019. We believe that our current cash and cash equivalents, the expected cash flows from company-owned restaurant operations and 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 at least the next twelve months.

Credit Facility

~~On May 9, 2018,~~

In November of 2019, we ~~entered into the~~amended our 2018 Credit Facility ~~which consists of a term loan~~by entering into that certain First Amendment to Credit Agreement (the “Amendment” or “First Amended Credit Facility”). Among other things, the Amendment: (i) extended the maturity date to November 20, 2024; (ii) increased the revolving credit facility ~~in an aggregate principal amount of $25.0 million and a revolving line of credit of~~from $65.0 million ~~(which may be increased~~ to $75.0 ~~million), which includes a letter~~million; (iii) delayed step downs of ~~credit subfacility~~the Company’s leverage covenant; and (iv) increased the limit on capital expenditures to $37.0 million in ~~the amount of $15.0~~2020 and to $45.0 million in 2021 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.~~each fiscal year thereafter. Upon execution of the ~~2018~~First Amended Credit Facility, the Company repaid in full its outstanding indebtedness under its prior credit facility using funds drawn on ~~its 2018~~the First Amended Credit Facility. Upon repayment, the prior credit facility and all related agreements were terminated.

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. 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.

In light of the current uncertainty in the global markets resulting from the COVID-19 pandemic, we increased our borrowing as a precautionary measure in order to bolster our cash position and enhance financial flexibility. The borrowings are reflected on our balance sheet as cash and cash equivalents and may in the future be used for general corporate purposes, including, without limitation, working capital, capital expenditures in the ordinary course of business, or other lawful corporate purposes, all in accordance with and subject to the terms and conditions of the Second Amended Credit Facility.

As of ~~October 1, 2019,~~June 30, 2020, we had ~~$44.4~~$95.7 million of indebtedness (excluding ~~$1.3~~$2.0 million of unamortized debt issuance costs) and $3.2 million of letters of credit outstanding under the ~~2018~~Second Amended Credit Facility. The term loan requires principal payments of $187,500 per quarter through the ~~first~~third quarter of ~~2020,~~2021, $375,000 per quarter through the ~~first~~third quarter of ~~2021,~~2022, and $531,250 per quarter through ~~maturity in~~ the ~~second~~third quarter of ~~2022.~~2023 and $625,000 per quarter thereafter through maturity.

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 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~~Second Amended 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.

Based on our most recent estimates of the COVID-19 pandemic impact, we believe that we will be in compliance with our debt covenants and have sufficient liquidity to meet our cash requirements and reduced capital resource requirements for the next twelve months primarily through currently available cash and cash equivalents and cash flows from operations.

Off-Balance Sheet Arrangements

We had no off-balance sheet arrangements or obligations as of ~~October 1, 2019.~~June 30, 2020.

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 1,~~December 31, 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 1,~~December 31, 2019.

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 1, 2019,~~June 30, 2020, we had ~~$44.4~~$95.7 million of outstanding borrowings under our credit facility. An increase or decrease of 1.0% in the effective interest rate applied on these loans would have resulted in a pre-tax interest expense fluctuation of approximately ~~$0.4~~$1.0 million on an annualized basis. There is currently uncertainty around whether LIBOR will continue to exist after 2021. If LIBOR ceases to exist, we may need to renegotiate our loan documents and we cannot predict what alternative index would be negotiated with our lenders. As a result, our interest expense could increase, in which event could change interest payments and funding our other fixed costs, and our available cash flow for general corporate requirements may be affected.

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. 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 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 affected our results from ~~2015~~2016 through the first ~~three~~two quarters of ~~2019.~~2020. We expect wage inflation tomay 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 chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of ~~October 1, 2019,~~June 30, 2020, 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 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 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

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 1, 2019.~~June 30, 2020. 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 1,~~December 31, 2019. There have been no material changes to our Risk Factors as previously reported other than as noted below.

~~We may~~ This risk factor is intended to be ~~harmed by breaches~~an update to the Risk Factor related to an outbreak of ~~security of information technology systems~~disease, epidemic or pandemic found in our ~~confidential consumer, employee, financial, or other proprietary data.~~Form 10-K filed on February 26, 2020.

~~We use many information technology systems throughout~~The recent and ongoing COVID-19 pandemic has, and we expect will continue to materially affect our operations, as well as the business or operations of third parties with whom we conduct business such as our suppliers and franchisees.

In December 2019, a novel strain of coronavirus, SARS-CoV-2, causing a disease referred to as COVID-19, was reported to have surfaced in Wuhan, China. Since then, COVID-19 has spread to other countries, including ~~systems that record~~the United States. In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic. Further, the President of the United States declared the COVID-19 pandemic a national emergency. Similarly, several states in which we operate declared states of emergency related to the spread of COVID-19 and ~~process customer sales, manage human resources~~issued executive orders directing individuals to stay at their place of residence for an indefinite period of time and ~~generate accounting~~the vast majority required the closures of restaurant dining rooms (subject to certain exceptions to facilitate authorized necessary activities) to mitigate the impact of the COVID-19 pandemic.

In response to these public health directives and ~~financial reports. For example,~~orders, we have introduced direct delivery nationwide through the Noodles app and website, expanded our ~~restaurants use computerized management information systems, including point-of-sale computers that process customer credit card, debit card~~third-party delivery service and ~~gift card payments, and in-restaurant back office computer systems designed to assist in the management~~launched curbside delivery at all of our restaurants. Despite our mitigating efforts, the effects of the executive orders and ~~provide labor~~shelter-in-place orders may materially and food cost management tools. Our franchisees use similar point of sale systems and are required to report business and operational data through an online reporting network. Through these systems, we have access to and store a variety of consumer, employee, financial and other types of information related to our business. We also rely on third-party vendors to provide information technology systems and to securely process and store related information. Our franchisees also use information technology systems and rely on third-party vendors. If our technology systems, or those of third party vendors we or our franchisees rely upon, are compromised as a result of a cyber-attack (including from circumvention of security systems, denial-of-service attacks, hacking, “phishing” attacks, computer viruses, ransomware, malware, or social engineering) or other external or internal methods, it could adversely affect our ~~reputation,~~ business, the magnitude of which will depend, in part, on the length and severity of the restrictions and other limitations on our ability to conduct our business in the ordinary course. These and similar, and perhaps more severe, disruptions in our operations could negatively impact our business, operating results and financial condition.

Although the ultimate severity of the COVID-19 pandemic is uncertain at this time, we expect that the pandemic will continue to adversely impact the Company's financial condition orand results of ~~operations.~~operations, including, but not limited to:

•

We have experienced and we expect we will continue to experience significant reductions in demand for our products as customers may not be able to dine at our restaurants due to illness, quarantine or government or self-imposed restrictions placed on our restaurants' operations. From the last half of March through May 2020, nearly all of our dining rooms were closed due to the COVID-19 pandemic. We have begun reopening dining rooms in certain restaurants and will continue to open the remaining dining rooms as appropriate. Additionally, social distancing measures or changes in consumer spending behaviors due to the COVID-19 pandemic as customers choose to avoid public gathering places may continue to impact traffic in our restaurants after they resume normal operations and such actions could result in a loss of sales and profit.

The ~~cyber risks we face range from cyber-attacks common~~impact of a health pandemic on us might be disproportionately greater than on other dining concepts that depend less on the gathering of people. To the extent that a virus or disease is food-borne, or perceived to ~~most industries~~be food-borne, future outbreaks may adversely affect the price and availability of certain food products and cause our customers to ~~attacks that target us due to~~eat less of a product.

Depending on the ~~confidential consumer information we obtain through our electronic processing of credit~~severity and ~~debit card transactions. Like others in our industry, we have experienced many attempts to compromise our information technology and data, and we may experience more attempts in~~ the ~~future. For example, in 2016, we experienced a malware attack that compromised the security~~duration of the payment information of some customers who used debit or credit cards at certain locations between January 31, 2016 and June 2, 2016. We subsequently made payments of approximately $11 million to certain payment card companies for card issuer losses, card replacement costs and other charges issued by payment card companies, and incurred additional fees and costs associated with the data security incident, including legal fees, investigative fees, other professional fees, costs of communications with customers and capital investments for remediation activities.

~~Because cyber-attacks take many forms, change frequently, are becoming increasingly sophisticated, and may be difficult to detect for significant periods of time, we~~COVID-19 pandemic, our franchisees may not be able to ~~respond adequately or timely to future cyber-attacks. If~~meet the franchise royalty fee obligations that we orhave historically received. We are working with our franchisees ~~or third-party vendors, were~~ to ~~experience a material breach resulting in the unauthorized access, use, or destruction~~support their financial liquidity during this period of ~~our~~uncertainty. We have granted deferral of certain royalties, information technology ~~systems or confidential consumer, employee, financial, or other proprietary data, it could negatively impact~~support, and marketing fees earned from franchisees.

•

Depending on the severity and the duration of the COVID-19 pandemic, our liquidity may be further negatively impacted, as a result, we may be required to pursue additional sources of financing to meet our financial obligations. Obtaining such financing is not guaranteed and is largely dependent upon market conditions and other factors. Further actions may be required to improve our cash position, including but not limited to, further reductions of corporate expenses and foregoing additional capital expenditures and other discretionary expenses.

As more business and activities have shifted online due to the COVID-19 pandemic restrictions on congregating and physical movements, we have seen an increase in cyber security threats and attempts to breach our reputation, reduce our ability to attract and retain customers and employees and disrupt the implementation and execution of our strategic goals. Moreover, such breaches could result in a violation of various privacy-related laws and subject us to investigations or private litigation, which, in turn, could expose us to civil or criminal liability, fines and penalties imposed by state and federal regulators, claims for purportedly fraudulent transactions arising outsecurity networks.

The extent of the ~~actual or alleged theft~~impact of ~~credit or debit card information, compromised security~~the COVID-19 pandemic on the Company's operations and ~~information systems, failure~~financial results depends on future developments and is highly uncertain due to the unknown duration and severity of ~~our employees to comply with applicable laws,~~ the ~~unauthorized acquisition or use of such information by third parties, or other similar claims,~~outbreak. The situation is changing rapidly and ~~various costs associated with such matters.~~future impacts may materialize that are not yet known.

We strive to mitigate the risk of breaches of our information technology systems and confidential data by enhancing our information technology networks and infrastructure, specifically in our physical and technological security measures, to anticipate cyber-attacks and defend against breaches, improving related procedures and controls and training our employees on cyber-security trends. While we have taken preventative measures to mitigate this risk, we can provide no assurance that we will not be the subject of cyber-attacks and data breaches in the future. Additionally, we carry cyber insurance to minimize the potential impact that a security breach may have on our financial condition or results of operations; however, liabilities incurred in connection with a security breach may exceed the limit that our data security liability insurer will pay or reimburse, in which case we would bear these fees and costs directly. Although we dedicate significant resources to preventing security breaches, we may be unsuccessful, which could adversely affect our business, financial condition or results of operations.

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			~~Chas Hermann Separation~~Temporary Salary Protection Waiver Letter between Noodles & Company and Dave Boennighausen dated ~~September 26, 2019~~April 1, 2020. Incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q filed on June 17, 2020 (File No. 001-35987).
10.2			Second Amendment to Credit Agreement dated June 16, 2020, by and among Noodles & Company, each of the Guarantors signatory thereto, U.S. Bank National Association, as Administrative Agent, L/C Issuer and Swing Line Issuer and the lenders signatory thereto. Incorporated by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q filed on June 17, 2020 (File No. 001-35987).
31.1			Certification of Principal Executive Officer 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 Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith)
101.INS			Inline 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			Inline XBRL Taxonomy Extension Schema Document
101.CAL			Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF			Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB			Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE			Inline XBRL Taxonomy Extension Presentation Linkbase Document
104.0			Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

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/ KEN KUICK
	Ken Kuick Chief Financial Officer (principal financial officer and duly authorized signatory for the registrant)
Date	~~November 8, 2019~~August 6, 2020

3132



			Page
PART I
	Item 1.	Financial Statements (unaudited)	2
		Condensed Consolidated Balance Sheets	2
		Condensed Consolidated Statements of Operations	3
		Condensed Consolidated Statements of 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	15
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	2628
	Item 4.	Controls and Procedures	2728
PART II
	Item 1.	Legal Proceedings	2829
	Item 1A.	Risk Factors	2829
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	2930
	Item 3.	Defaults Upon Senior Securities	2930
	Item 4.	Mine Safety Disclosures	2930
	Item 5.	Other Information	2930
	Item 6.	Exhibits	3031
SIGNATURES			3132



	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