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, 2019June 30, 2020
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 001-35987
NOODLES & COMPANY
(Exact name of registrant as specified in its charter)
|
| | |
Delaware | | 84-1303469 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
|
| | | | | | | | | | | | | | | | | | | |
| | | 520 Zang Street, Suite D | | | | | | | | | | | | | | | |
| | | Broomfield, | CO | | | | | | | | | | | | | | | 80021 |
| | | (Address of principal executive offices) | | | | | | | | | | | | | | | (Zip Code) |
(720) 214-1900
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
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, 2019August 3, 2020 |
Class A Common Stock, $0.01 par value per share | | 44,122,12144,354,811 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 | | | Shares | | Amount | | Shares | | Amount | |
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 |
| | | Shares | | Amount | | Shares | | Amount | |
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 | ) | | | 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 391380 company-owned restaurants and 6776 franchise restaurants in 29 states and the District of Columbia. The Company operates its business as one1 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 thirdsecond quarter of 2019,2019.
Risks and Uncertainties
We are subject to risks and uncertainties as a result of the fiscal quarter ended October 2, 2018COVID-19 pandemic. The extent of the impact of the COVID-19 pandemic on the Company’s business is referreduncertain and difficult to aspredict. Our operational and financial performance will depend on future developments, including the third quarterduration 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 adoptedFASB issued ASU 2016-02, “LeasesNo. 2019-12, Income Taxes (Topic 842),” along with related clarifications740): 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 transitionis to be applied using a prospective method, excluding amendments related to apply the standardfranchise 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 periodfiscal year of adoption; therefore,adoption. We are currently evaluating the Company has not appliedimpacts of adoption of the standardnew guidance to the comparative periods presented on its condensedour 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 guidanceASU 2016-13 did have a materialnot 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 2019consolidated 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 2018First 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 FacilityAmendment 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 2018Second 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 firstthird quarter of 2020,2021, $375,000 per quarter through the firstthird quarter of 2021,2022, and $531,250 per quarter through maturity in the secondthird quarter of 2022.2023 and $625,000 per quarter thereafter through maturity.
Aggregate maturities for debt outstanding as of October 1, 2019June 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 threetwo 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 thirdsecond quarter of 20192020 and the first three quarterssecond 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 2018Coronavirus Aid, Relief and the first three quarters of 2018 reflected changes made by the Tax Cuts and JobsEconomic Security Act (“TaxCARES Act”), which provides economic relief in response to the COVID-19 pandemic, was signed into lawlaw. 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 3.52.8 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 duringidentified as impaired for which the thirdCompany recorded an impairment charge of $2.1 million. In the second quarter of 2019, and 2 restaurant impairments during the first three quartersrestaurants 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 thirdsecond quarter and first threetwo 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 threetwo quarters of 2019 as well as ongoing costswere 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 threetwo quarters of 20192020 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 1,748,4444,142,754 and 176,3251,297,255 for the thirdsecond quarter of 20192020 and 2018,2019, respectively, and totaled 1,490,2023,309,278 and 2,758,8483,229,030 for the first threetwo 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 restaurantsBasis 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 includeMarch 2020. We commenced reopening a base termportion of 10 years,our dining rooms in June of 2020. During the second quarter of 2020, we were able to negotiate with optionsthe 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 periodsthe period of 5 to 15 years. Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognizerespective lease expense for these leases on a straight-line basis overterm. 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 overFurther, for certain of our restaurants, the lease term. The Company recognizes expense for these leasesCOVID-19 pandemic had a significant impact to the underlying asset values. Based on a straight-line basis overan impairment analysis performed during the lease term. Additionally, tenant incentives usedquarter 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 reductionscarrying 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 expedientassets 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 componentsSublease income recognized in the Condensed Consolidated Statements of lease costsOperations 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, 2019June 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 threetwo 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, 2019June 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 threetwo 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 20192020 and 20182019 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 thirdsecond quarter of 2019,2020, system-wide comparable restaurant sales increased 2.1%decreased 30.9%, comprised of a 2.2% increase30.1% decrease for company-owned restaurants and a 1.6% increase35.4% 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 continuereturn to increasepositive 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 abilityrestaurants and other social distancing measures, (iii) our customers’ future willingness to successfully implementeat 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 strategiessuppliers 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 quarterfirst 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 thatmodified our labor costs will continuemodel 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 restaurantsrestaurant in the first threetwo quarters of 2019, most2020. From the last half of whichMarch through June 2020, nearly all of our dining rooms were at or approachingclosed 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 forin 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 threetwo quarters of 2019,2020, we opened threeone new company-owned restaurants, acquired one franchise restaurant and sold fivenine restaurants to a franchisee. As of October 1, 2019,June 30, 2020, we had 391380 company-owned restaurants and 6776 franchise restaurants in 29 states and the District of Columbia. Given recent improvementIn 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 spendingrevenue 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 includedRestaurant impairments and closure costs for the 12in 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 fivenine company-owned restaurants sold to a franchisee. |
| |
(2) | During the first quarter of 2019 we acquiredRepresents 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 | )% |
ThirdSecond Quarter Ended October 1, 2019June 30, 2020 Compared to ThirdSecond Quarter Ended OctoberJuly 2, 20182019
The table below presents our unaudited operating results for the thirdsecond quarters of 20192020 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 | | $ | | % |
| | |
| | (in thousands, unaudited) | | (in thousands, unaudited) |
Revenue: | | | | | | | | | | | | | | | | |
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 | % | | | | |
________________
Revenue
Total revenue increased $1.6decreased $40.0 million in the thirdsecond quarter of 2019,2020, or 1.4%33.3%, to $118.3$80.2 million, compared to $116.7$120.2 million in the thirdsecond quarter of 2018.2019. This increasedecrease was primarily due to a decline in traffic related to the increase in comparable restaurant salesimpact of the COVID-19 pandemic during the quarter, as well as new restaurant openings, partially offset bya $3.0 million decrease related to the impactrefranchising of 14 total restaurants closed since the beginning of thirdsecond quarter of 2018, most of which were approaching the expiration of their leases.2019.
AUV increased $50,000decreased $310,000 compared to the prior year. AUV for the trailing twelve monthssecond quarter of 2020 was $1,157,000.$891,000.
System-wide comparable restaurant sales growth was 2.1%were down 30.9% in the thirdsecond quarter of 2019,2020, comprised of a 2.2% increase30.1% decrease at company-owned restaurants and a 1.6% increase35.4% decrease at franchise-owned restaurants. ComparableThe comparable restaurant sales growthdecline in the thirdsecond quarter of 20192020 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 structurestructure. 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 thirdsecond quarter of 20192020 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 thirdsecond 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 increaseddecreased by $0.2$11.7 million, or 0.6%30.2%, in the thirdsecond quarter of 20192020 compared to the same period of 2018.2019. As a percentage of restaurant revenue, labor costs decreasedincreased to 32.5%33.9% in the thirdsecond quarter of 20192020 from 32.7% in the thirdsecond quarter of 2018 as2019 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 increaseddecreased by $0.1$0.6 million, or 0.6%5.2%, in the thirdsecond quarter of 2020 compared to the second quarter of 2019 comparedprimarily due to restaurants closed or impaired since the thirdbeginning 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 atincreased to 14.6% in the second quarter of 2020, compared to 10.4% in the thirdsecond quarter of 2019 compareddue to reduced revenue from the third quarterimpact of 2018.the COVID-19 pandemic.
Other Restaurant Operating Costs
Other restaurant operating costs increaseddecreased by $0.9$1.1 million, or 5.8%6.3%, in the thirdsecond quarter of 2020 compared to the second quarter of 2019 compareddue 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 thirdsecond quarter of 2020 compared to 14.2% in the second quarter of 2019 compareddue primarily to 14.0%increased third-party delivery fees resulting from a significant expansion of our use of third-party delivery services in the thirdsecond quarter of 2018.2020 due to the COVID-19 pandemic.
General and Administrative Expense
General and administrative expense was flatdecreased by $1.8 million or 15.3% in the thirdsecond quarter of 2020 compared to the second quarter of 2019, compareddue primarily to the third quartercost savings initiatives implemented as a result of 2018, primarily due to decreased stock-based compensation related to the departure of our former Executive ChairmanCOVID-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 decreasedincreased to 8.8%12.5% in the thirdsecond 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 thirdsecond quarter of 20192020 compared to the thirdsecond quarter of 2018,2019, due primarily to restaurants closed or impaired since the beginning of the thirdsecond 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 decreasedincreased to 4.6%6.7% in the thirdsecond quarter of 20192020 from 5.0%4.7% in the thirdsecond 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 thirdsecond quarter of 2020 compared to the second quarter of 2019, compareddue primarily to a decrease in losses from the thirddisposal 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 thirdsecond quarter of 2019, we did not record anrecorded 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 decreasedincreased by $0.4$0.1 million in the thirdsecond quarter of 20192020 compared to the thirdsecond quarter of 2018.2019. The decreaseincrease was due to lowerhigher average borrowings during the thirdsecond quarter of 20192020 compared to the thirdsecond quarter of 2018.2019.
Provision (Benefit) fromfor Income Taxes
The effective tax rate was 1.5% for the third quarter of 2019 compared to (1.1)(0.2)% for the thirdsecond quarter of 2018.2020 compared to 0.0% for the second quarter of 2019. The effective tax rate for the thirdsecond quarter of 20192020 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.
ThreeTwo Quarters Ended October 1, 2019June 30, 2020 Compared to ThreeTwo Quarters Ended OctoberJuly 2, 20182019
The table below presents our unaudited operating results for the first threetwo quarters of 20192020 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 | | $ | | % |
| | |
| | (in thousands, except percentages) | | (in thousands, except percentages) |
Revenue: | | | | | | | | | | | | | | | | |
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 | % | | | | |
________________
Revenue
Total revenue increaseddecreased by $3.9$49.7 million, or 1.1%21.6%, in the first threetwo 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 increasedecrease was primarily due to the increasedecrease in comparable restaurant sales and new restaurant openings, partially offset byas 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 increaseddecreased by 3.4%19.0% at company-owned restaurants, increaseddecreased by 2.7%22.6% at franchise-owned restaurants and increaseddecreased by 3.3%19.5% system-wide in the first threetwo 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 threetwo quarters of 20192020 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 threetwo quarters of 20192020 compared to 26.6%26.2% in the first threetwo quarters of 20182019 primarily due to increased menu pricing and supply chain savings initiatives.
Labor Costs
Labor costs increaseddecreased by $1.6$14.6 million, or 1.4%19.2%, in the first threetwo quarters of 20192020 compared to the same period of 2018,2019, due primarily to the increasedecline in restaurant revenuesales associated with the COVID-19 pandemic, partially offset by labor initiatives in the first threetwo quarters of 2019.2020. As a percentage of restaurant revenue, labor costs increased to 33.1%34.3% in the first threetwo quarters of 20192020 compared to 32.9%33.4% in the first threetwo 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 threetwo quarters of 20192020 compared to the first threetwo 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 decreasedincreased to 10.7%13.3% in first threetwo quarters of 2019,2020, compared to 10.9% in the first threetwo 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 increaseddecreased by $0.5$0.8 million, or 1.0%2.5%, in the first threetwo quarters of 20192020 compared to the first threetwo 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 threetwo quarters of 2019,2020, compared to 14.6% in the first threetwo 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 threetwo quarters of 20192020 compared to the first threetwo 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 wellcost savings initiatives implemented as a decreaseresult 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 werebonus 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 decreasedincreased to 9.3%11.4% in the first threetwo quarters of 20192020 compared to 10.3%9.6% in the first threetwo 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 threetwo quarters of 20192020 compared to the first threetwo 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 decreasedincreased to 4.8%5.9% in the first threetwo 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 comparedprimarily to the first three quartersdecline 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 decreasedincreased by $2.3$0.3 million in the first threetwo quarters of 20192020 compared to the first threetwo quarters of 2018, primarily2019. The increase was largely due to a $3.7 million decrease inongoing closure costs partially offset by a $1.4 million increase in restaurant impairments. Inwhich was higher during the first threetwo 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. Closureas the closure costs in the first threetwo quarters of 2019 included ongoing costs as well aswere partially offset by gains recognized from the adjustments to liabilities ason lease terminations occur. Interminations. During the first threetwo quarters of 2018,2020, we impaired one restaurant, recognized $3.6 millionalso incurred losses from the disposal of closure costsassets related to 12the divestiture of company-owned restaurants closedto a franchisee. Additionally, there were five restaurant impairments in the first threetwo 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 debttwo restaurant impairments in the amountfirst two quarters of $0.62019.
Interest Expense
Interest expense increased by $0.3 million in the first threetwo quarters of 2018.
Interest Expense
Interest expense decreased by $1.1 million in the first three quarters of 20192020 compared to the same period of 2018.2019. The decreaseincrease was mainly due to the lowerhigher average borrowings in the first threetwo quarters of 20192020 compared to the first threetwo quarters of 2018.2019.
Provision for Income Taxes
The effective tax rate was 2.2%(0.2)% for the first threetwo quarters of 20192020 compared to 3.0%0.0% for the first threetwo quarters of 2018.2019. The effective tax rate for the first threetwo quarters of 20192020 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 2018Amended 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 increaseddecreased to $16.3$6.7 million in the first threetwo quarters of 20192020 from net cash used inprovided by operating activities of $4.9$9.0 million in the first threetwo quarters of 2018.2019. The improvementdecline in operating cash flows resulted primarily from better operating resultsdecreased net income during the first threetwo quarters of 20192020 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 $5.4decreased $2.4 million in the first threetwo quarters of 20192020 from $9.4$9.3 million in the first threetwo quarters of 2018.2019. This increase isdecrease was primarily due to construction activities onfewer new restaurant developmentopenings in the first two quarters of 2020 compared to 2019 and the purchaseacquisition of one franchise restaurant. Both periods include reinvestmentsrestaurant in existing restaurants and investments in technology.2019.
Financing Activities
Net cash used inprovided by financing activities was $3.0$51.7 million in the first threetwo quarters of 20192020 largely related to repayments of long-term debt.precautionary draws on our revolving credit facility totaling $55.5 million. The first threetwo quarters of 2018both 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 ofcurrently 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 theamended our 2018 Credit Facility which consists of a term loanby 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 offrom $65.0 million (which may be increased to $75.0 million), which includes a lettermillion; (iii) delayed step downs of credit subfacilitythe Company’s leverage covenant; and (iv) increased the limit on capital expenditures to $37.0 million in the amount of $15.02020 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 2018First Amended Credit Facility, the Company repaid in full its outstanding indebtedness under its prior credit facility using funds drawn on its 2018the First Amended Credit Facility. Upon repayment, the prior credit facility and all related agreements were terminated.
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.
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 2018Second Amended Credit Facility. The term loan requires principal payments of $187,500 per quarter through the firstthird quarter of 2020,2021, $375,000 per quarter through the firstthird quarter of 2021,2022, and $531,250 per quarter through maturity in the secondthird 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 2018Second 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 20152016 through the first threetwo 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 breachesan update to the Risk Factor related to an outbreak of security of information technology systemsdisease, 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 throughoutThe 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 recordthe 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 resourcesissued executive orders directing individuals to stay at their place of residence for an indefinite period of time and generate accountingthe 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 cardthird-party delivery service and gift card payments, and in-restaurant back office computer systems designed to assist in the managementlaunched curbside delivery at all of our restaurants. Despite our mitigating efforts, the effects of the executive orders and provide laborshelter-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:
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• | 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 commonimpact 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 industriesbe 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 toeat less of a product.
Depending on the confidential consumer information we obtain through our electronic processing of creditseverity 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 securityduration 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, weCOVID-19 pandemic, our franchisees may not be able to respond adequately or timely to future cyber-attacks. Ifmeet 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 destructionsupport their financial liquidity during this period of ouruncertainty. We have granted deferral of certain royalties, information technology systems or confidential consumer, employee, financial, or other proprietary data, it could negatively impactsupport, and marketing fees earned from franchisees.
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• | 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 theftimpact of credit or debit card information, compromised securitythe COVID-19 pandemic on the Company's operations and information systems, failurefinancial 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
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Exhibit Number | | Description of Exhibit |
10.1 |
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10.2 |
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31.1 |
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31.2 |
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32.1 |
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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.
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NOODLES & COMPANY |
By: | /s/ KEN KUICK |
| Ken Kuick Chief Financial Officer (principal financial officer and duly authorized signatory for the registrant)
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Date | November 8, 2019August 6, 2020 |