UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

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

For the quarterly period ended ~~October 1, 2019~~September 29, 2020

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

For the transition period from to

Commission File Number: 001-35987

NOODLES & COMPANY

(Exact name of registrant as specified in its charter)



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

Delaware

84-1303469

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

520 Zang Street, Suite D

Broomfield,

80021

(Address of principal executive offices)

(Zip Code)

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

(Registrant’s telephone number, including area code)

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

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



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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ 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

☒

~~Large accelerated filer~~

☐

~~Accelerated Filer~~

☒

Non-accelerated filer

☐

Smaller reporting company

☒

Emerging growth company

☐

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

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

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



Class						Outstanding at ~~November 1, 2019~~October 26, 2020
Class A Common Stock, $0.01 par value per share						~~44,122,121~~44,371,985 shares

Table of Contents

TABLE OF CONTENTS

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				September 29, 2020		December 31, 2019
	(unaudited)							(unaudited)
Assets							Assets
Current assets:							Current assets:
Cash and cash equivalents	$	3,086		$	4,655		Cash and cash equivalents	$	8,621	$	10,459
Accounts receivable	2,279			2,391			Accounts receivable	3,366		3,503
Inventories	9,875			9,646			Inventories	9,680		9,871
Prepaid expenses and other assets	4,291			6,474			Prepaid expenses and other assets	3,952		5,386
Income tax receivable	191			185			Income tax receivable	76		103
Total current assets	19,722			23,351			Total current assets	25,695		29,322
Property and equipment, net	134,682			138,774			Property and equipment, net	123,422		128,867
Operating lease assets, net	212,760			—			Operating lease assets, net	202,993		209,717
Goodwill	7,154			6,400			Goodwill	7,154		7,154
Intangibles, net	963			1,291			Intangibles, net	840		883
Other assets, net	2,346			2,216			Other assets, net	3,066		2,576
Total long-term assets	357,905			148,681			Total long-term assets	337,475		349,197
Total assets	$	377,627		$	172,032		Total assets	$	363,170	$	378,519
Liabilities and Stockholders’ Equity							Liabilities and Stockholders’ Equity
Current liabilities:							Current liabilities:
Accounts payable	$	8,145		$	7,854		Accounts payable	$	13,138	$	9,351
Accrued payroll and benefits	9,725			13,391			Accrued payroll and benefits	8,369		13,479
Accrued expenses and other current liabilities	9,563			11,183			Accrued expenses and other current liabilities	13,142		11,679
Current operating lease liabilities	22,431			—			Current operating lease liabilities	25,357		22,775
Current portion of long-term debt	1,125			719			Current portion of long-term debt	938		750
Total current liabilities	50,989			33,147			Total current liabilities	60,944		58,034
Long-term debt, net	41,963			44,183			Long-term debt, net	41,213		40,497
Long-term operating lease liabilities, net	229,157			—			Long-term operating lease liabilities, net	219,473		225,014
Deferred rent	—			37,334
Deferred tax liabilities, net	197			133			Deferred tax liabilities, net	272		200
Other long-term liabilities	4,275			4,554			Other long-term liabilities	8,406		4,203
Total liabilities	326,581			119,351			Total liabilities	330,308		327,948

Stockholders’ equity:							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 September 29, 2020 and December 31, 2019; 0 shares issued or outstanding							Preferred stock—$0.01 par value, 1,000,000 shares authorized and undesignated as of September 29, 2020 and December 31, 2019; 0 shares issued or outstanding	0		0
Common stock—$0.01 par value, 180,000,000 shares authorized as of September 29, 2020 and December 31, 2019; 46,795,534 issued and 44,371,663 outstanding as of September 29, 2020 and 46,557,934 issued and 44,134,063 outstanding as of December 31, 2019							Common stock—$0.01 par value, 180,000,000 shares authorized as of September 29, 2020 and December 31, 2019; 46,795,534 issued and 44,371,663 outstanding as of September 29, 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 September 29, 2020 and December 31, 2019							Treasury stock, at cost, 2,423,871 shares as of September 29, 2020 and December 31, 2019	(35,000)		(35,000)
Additional paid-in capital	199,878			198,352			Additional paid-in capital	202,314		200,585
Accumulated deficit	(114,297		)	(111,135		)	Accumulated deficit	(134,920)		(115,480)
Total stockholders’ equity	51,046			52,681			Total stockholders’ equity	32,862		50,571
Total liabilities and stockholders’ equity	$	377,627		$	172,032		Total liabilities and stockholders’ equity	$	363,170	$	378,519

See accompanying notes to condensed consolidated financial statements.

Table of Contents

Noodles & Company

Condensed Consolidated Statements of Operations

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


	Fiscal Quarter Ended				Three Fiscal Quarters Ended
	September 29, 2020		October 1, 2019		September 29, 2020		October 1, 2019
Revenue:
Restaurant revenue	$	104,413	$	116,759	$	283,150	$	344,382
Franchising royalties and fees, and other	1,569		1,545		3,337		4,158
Total revenue	105,982		118,304		286,487		348,540
Costs and expenses:
Restaurant operating costs (exclusive of depreciation and amortization shown separately below):
Cost of sales	25,900		29,544		71,124		89,083
Labor	31,264		37,951		92,632		113,920
Occupancy	11,737		12,108		35,473		36,849
Other restaurant operating costs	19,383		17,161		51,861		50,475
General and administrative	10,827		10,436		31,415		32,424
Depreciation and amortization	5,541		5,458		16,273		16,626
Pre-opening	239		266		383		331
Restaurant impairments, closure costs and asset disposals	369		336		3,983		3,640
Total costs and expenses	105,260		113,260		303,144		343,348
Income (loss) from operations	722		5,044		(16,657)		5,192

Interest expense, net	822		737		2,710		2,298
(Loss) income before taxes	(100)		4,307		(19,367)		2,894
Provision for income taxes	27		64		73		64
Net (loss) income and comprehensive (loss) income	$	(127)	$	4,243	$	(19,440)	$	2,830
(Loss) earnings per Class A and Class B common stock, combined
Basic	$	0	$	0.10	$	(0.44)	$	0.06
Diluted	$	0	$	0.09	$	(0.44)	$	0.06
Weighted average shares of Class A and Class B common stock outstanding, combined:
Basic	44,358,763		43,990,049		44,238,400		44,007,345
Diluted	44,358,763		44,899,176		44,238,400		45,078,539

Fiscal Quarter Ended Three Fiscal Quarters Ended
October 1,
2019 October 2,
2018 October 1,
2019 October 2,
2018
Revenue:
Restaurant revenue $ 116,759
$ 115,552
$ 344,382
$ 341,616
Franchising royalties and fees, and other 1,545
1,175
4,158
3,032
Total revenue 118,304
116,727
348,540
344,648
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
Labor 37,951
37,738
113,920
112,353
Occupancy 12,108
12,035
36,849
37,155
Other restaurant operating costs 17,161
16,224
50,475
49,997
General and administrative 10,436
10,399
32,424
35,480
Depreciation and amortization 5,458
5,790
16,626
17,407
Pre-opening 266
—
331
50
Restaurant impairments, closure costs and asset disposals 336
1,792
3,640
5,952
Total costs and expenses 113,260
114,595
343,348
349,356
Income (loss) from operations 5,044
2,132
5,192
(4,708 )
Loss on extinguishment of debt —
—
—
626
Interest expense, net 737
1,093
2,298
3,385
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:
Basic $ 0.10
$ 0.02
$ 0.06
$ (0.20 )
Diluted $ 0.09
$ 0.02
$ 0.06
$ (0.20 )
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
Diluted 44,899,176
44,829,363
45,078,539
41,798,640

See accompanying notes to condensed consolidated financial statements.

Table of Contents

Noodles & Company

Condensed Consolidated Statements of Stockholders’ Equity

(in thousands, except share data, unaudited)


																		Fiscal Quarter Ended
	Fiscal Quarter Ended																	Common Stock(1)			Treasury			Additional Paid-In Capital		Accumulated Deficit		Total Stockholders’ Equity
	Common Stock^{(1) (2)}			Treasury				Additional Paid-In Capital			Accumulated Deficit			Total Stockholders’ Equity				Shares	Amount		Shares	Amount
Balance—June 30, 2020																	Balance—June 30, 2020	46,778,682	$	468	2,423,871	$	(35,000)	$	201,601	$	(134,793)	$	32,276
Stock plan transactions and other																	Stock plan transactions and other	16,852	0		—	—		49		—		49
Stock-based compensation expense																	Stock-based compensation expense	—	—		—	—		664		—		664
Net loss																	Net loss	—	—		—	—		—		(127)		(127)
Balance—September 29, 2020																	Balance—September 29, 2020	46,795,534	$	468	2,423,871	$	(35,000)	$	202,314	$	(134,920)	$	32,862
	Shares	Amount		Shares	Amount			Additional Paid-In Capital			Accumulated Deficit			Total Stockholders’ Equity
Balance—July 2, 2019	46,508,586	$	465	2,423,871	$	(35,000	)										Balance—July 2, 2019	46,508,586	$	465	2,423,871	$	(35,000)	$	199,978	$	(118,540)	$	46,903
Stock plan transactions and other	37,406	—		—	—			(49		)	—			(49		)	Stock plan transactions and other	37,406	0		—	—		(49)		—		(49)
Stock-based compensation expense	—	—		—	—			(51		)	—			(51		)	Stock-based compensation expense	—	—		—	—		(51)		—		(51)
Net income	—	—		—	—			—			4,243			4,243			Net income	—	—		—	—		—		4,243		4,243
Balance—October 1, 2019	46,545,992	$	465	2,423,871	$	(35,000	)	$	199,878		$	(114,297	)	$	51,046		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
																		Three Fiscal Quarters Ended
	Three Fiscal Quarters Ended																	Common Stock(1)			Treasury			Additional Paid-In Capital		Accumulated Deficit		Total Stockholders’ Equity
	Common Stock^{(1) (2)}			Treasury				Additional Paid-In Capital			Accumulated Deficit			Total Stockholders’ Equity				Shares	Amount		Shares	Amount
Balance—December 31, 2019																	Balance—December 31, 2019	46,557,934	$	466	2,423,871	$	(35,000)	$	200,585	$	(115,480)	$	50,571
Stock plan transactions and other																	Stock plan transactions and other	237,600	2		—	—		(225)		—		(223)
Stock-based compensation expense																	Stock-based compensation expense	—	—		—	—		1,954		—		1,954
Net loss																	Net loss	—	—		—	—		—		(19,440)		(19,440)
Balance—September 29, 2020																	Balance—September 29, 2020	46,795,534	$	468	2,423,871	$	(35,000)	$	202,314	$	(134,920)	$	32,862
	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	)										Balance—January 1, 2019	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		)	Stock plan transactions and other	192,683	1		—	—		(285)		—		(284)
Stock-based compensation expense	—	—		—	—			1,811			—			1,811			Stock-based compensation expense	—	—		—	—		1,811		—		1,811
Adoption of ASU No. 2016-02, Leases (Topic 842)	—	—		—	—			—			(5,992		)	(5,992		)	Adoption of ASU No. 2016-02, Leases (Topic 842)	—	—		—	—		—		(5,992)		(5,992)
Net income	—	—		—	—			—			2,830			2,830			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—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		)
Balance—October 2, 2018	46,340,013	$	463	2,423,871	$	(35,000	)	$	197,666		$	(111,154	)	$	51,975

_____________


~~(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.

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

See accompanying notes to condensed consolidated financial statements.

Table of Contents

Noodles & Company

Condensed Consolidated Statements of Cash Flows

(in thousands, unaudited)


	Three Fiscal Quarters Ended							Three Fiscal Quarters Ended
	October 1, 2019			October 2, 2018				September 29, 2020		October 1, 2019
Operating activities							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) income							Net (loss) income	$	(19,440)	$	2,830
Adjustments to reconcile net (loss) income to net cash provided by operating activities:							Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and amortization	16,626			17,407			Depreciation and amortization	16,273		16,626
Deferred income taxes	64			(263		)	Deferred income taxes	72		64
Restaurant impairments, closure costs and asset disposals	3,647			5,289			Restaurant impairments, closure costs and asset disposals	3,034		3,647
Loss on extinguishment of debt	—			626
Amortization of debt issuance costs	374			484			Amortization of debt issuance costs	260		374
Stock-based compensation	1,780			2,232			Stock-based compensation	1,904		1,780
Gain on insurance proceeds received for property damage	—			(373		)
Changes in operating assets and liabilities:							Changes in operating assets and liabilities:
Accounts receivable	122			489			Accounts receivable	230		122
Inventories	(349		)	(647		)	Inventories	75		(349)
Prepaid expenses and other assets	(1,062		)	(402		)	Prepaid expenses and other assets	(802)		(1,062)
Accounts payable	(864		)	(2,172		)	Accounts payable	3,505		(864)
Deferred rent	—			(1,278		)
Income taxes	(6		)	(46		)	Income taxes	27		(6)
Operating lease assets and liabilities	(1,749		)	—			Operating lease assets and liabilities	4,034		(1,749)
Accrued expenses and other liabilities	(5,144		)	(17,754		)	Accrued expenses and other liabilities	(858)		(5,144)
Net cash provided by (used in) operating activities	16,269			(4,868		)
Net cash provided by operating activities							Net cash provided by operating activities	8,314		16,269
Investing activities							Investing activities
Purchases of property and equipment	(13,788		)	(9,937		)	Purchases of property and equipment	(9,887)		(13,788)
Insurance proceeds received for property damage	—			500
Proceeds from disposal of property and equipment	352			—			Proceeds from disposal of property and equipment	0		352
Franchise restaurant acquisition, net of cash acquired	(1,387		)	—			Franchise restaurant acquisition, net of cash acquired	0		(1,387)
Net cash used in investing activities	(14,823		)	(9,437		)	Net cash used in investing activities	(9,887)		(14,823)
Financing activities							Financing activities
Net payments from swing line loan	—			(101		)

Proceeds from issuance of long-term debt	—			74,889			Proceeds from issuance of long-term debt	55,500		0
Payments on long-term debt	(2,188		)	(84,030		)	Payments on long-term debt	(54,125)		(2,188)
Issuance of common stock, net of transaction expenses	—			23,157
Payments on finance leases	(543		)	—			Payments on finance leases	(686)		(543)
Debt issuance costs							Debt issuance costs	(731)		0
Stock plan transactions and tax withholding on share-based compensation awards	(284		)	654			Stock plan transactions and tax withholding on share-based compensation awards	(223)		(284)
Debt issuance costs	—			(1,707		)
Net cash (used in) provided by financing activities	(3,015		)	12,862
Net cash used in financing activities							Net cash used in financing activities	(265)		(3,015)
Net decrease in cash and cash equivalents	(1,569		)	(1,443		)	Net decrease in cash and cash equivalents	(1,838)		(1,569)
Cash and cash equivalents							Cash and cash equivalents
Beginning of period	4,655			3,361			Beginning of period	10,459		4,655
End of period	$	3,086		$	1,918		End of period	$	8,621	$	3,086

See accompanying notes to condensed consolidated financial statements.

Table of Contents

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,~~September 29, 2020, the Company had ~~391~~454 restaurants system-wide in 29 states, comprised of 378 company-owned restaurants and 6776 franchise ~~restaurants in 29 states and the District of Columbia.~~restaurants. The Company operates its business as ~~one~~1 operating and reportable segment.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of Noodles & Company and its subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. The accompanying interim unaudited condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America (“GAAP”) for complete financial statements. In the opinion of the Company, all adjustments considered necessary for the fair presentation of the Company’s results of operations, financial position and cash flows for the periods presented have been included and are of a normal, recurring nature. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The results of operations for any interim period are not necessarily indicative of results for the full year. Certain information and footnote disclosures normally included in the Company’s annual consolidated financial statements on Form 10-K have been condensed or omitted. The condensed consolidated balance sheet as of ~~January 1,~~December 31, 2019 was derived from audited financial statements. These financial statements should be read in conjunction with the audited financial statements and the related notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended ~~January 1,~~December 31, 2019.

Certain prior period balances within Note 7, Restaurant Impairments, Closure Costs and Asset Disposals have been reclassified to conform to the current year presentation. Such reclassifications had no effect on the Company's net income, earnings per share or accumulated deficit previously reported.

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 September 29, 2020 is referred to as the third quarter of 2020, and the fiscal quarter ended October 1, 2019 is referred to as the third quarter of ~~2019,~~2019.

Risks and Uncertainties

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

Recent Accounting Pronouncements

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

~~Recently Adopted Accounting Pronouncements~~

~~On January 2,~~In December 2019, the ~~Company adopted~~FASB issued ASU ~~2016-02, “Leases~~No. 2019-12, Income Taxes (Topic ~~842),” along with related clarifications~~740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”). ASU 2019-12 was issued as a means to reduce the complexity of accounting for income taxes for

those entities that fall within the scope of the accounting standard. This guidance is effective for public companies for annual reporting periods beginning after December 15, 2020 and improvements. This pronouncement requires a lessee to recognize a liability for lease obligations, which represents the discounted obligation to make future lease payments, and a corresponding right-of-use asset on the balance sheet.interim periods within those reporting periods. Interim period adoption is permitted. The guidance ~~also requires certain qualitative and quantitative disclosures about the amount, timing and uncertainty of cash flows arising from leases. The Company elected the alternative transition~~is to be applied using a prospective method, excluding amendments related to ~~apply the standard~~franchise taxes, which should be applied on either a retrospective basis for all periods presented or a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the ~~period~~fiscal year of ~~adoption; therefore,~~adoption. We do not believe that there will be a material impact of adopting the ~~Company has not applied the standard to the comparative periods presented~~new guidance on ~~its condensed~~our consolidated financial statements.

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

Recently Adopted Accounting Pronouncements

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

The adoption of the standard did not have a material impact on the Company’s Condensed Consolidated Statements of Operations in the third quarter of 2019 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.

~~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):


	September 29, 2020		December 31, 2019
Delivery program receivables	$	1,784	$	636
Insurance receivable	157		744
Vendor rebate receivables	611		788
Franchise receivables	517		527
Other receivables	297		808
	$	3,366	$	3,503

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


	September 29, 2020		December 31, 2019
Prepaid insurance	$	1,189	$	724
Prepaid occupancy related costs	863		834
Other prepaid expenses	1,861		2,075
Other current assets (1)	39		1,753
	$	3,952	$	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.

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


	September 29, 2020		December 31, 2019
Leasehold improvements	$	199,649	$	200,580
Furniture, fixtures and equipment	125,779		122,752
Construction in progress	6,403		2,890
	331,831		326,222
Accumulated depreciation and amortization	(208,409)		(197,355)
Property and equipment, net	$	123,422	$	128,867

October 1,
2019 January 1,
2019
Leasehold improvements $ 200,790
$ 197,571
Furniture, fixtures and equipment 123,641
121,479
Construction in progress 5,606
3,620
330,037
322,670
Accumulated depreciation and amortization (195,355 ) (183,896 )
Property and equipment, net $ 134,682
$ 138,774

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


	September 29, 2020		December 31, 2019
Accrued payroll and related liabilities	$	3,248	$	6,364
Accrued bonus	1,455		3,505
Insurance liabilities	3,666		3,610
	$	8,369	$	13,479

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


	September 29, 2020		December 31, 2019
Gift card liability	$	1,862	$	2,398
Occupancy related	1,581		1,458
Utilities	1,212		1,379
Deferred revenue	2,046		555
Current portion of finance lease liability	1,059		510
Other accrued expenses	5,382		5,379
Accrued expenses and other current liabilities	$	13,142	$	11,679

October 1,
2019 January 1,
2019
Gift card liability $ 1,446
$ 3,284
Occupancy related 1,699
2,600
Utilities 1,391
1,582
Other accrued expenses 5,027
3,717
Accrued expenses and other current liabilities $ 9,563
$ 11,183

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~~consisted 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~~included a letter of credit subfacility in the amount of $15.0 million and a swingline subfacility in the amount of $10.0 million. ~~The~~

On November 20, 2019, the Company amended its 2018 Credit Facility ~~has a four-year term~~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 ~~matures~~(iv) increased the limit on ~~May 9, 2022.~~capital expenditures to $37.0 million in 2020 and to $45.0 million in 2021 and each fiscal year thereafter.

Borrowings under the ~~2018~~First Amended Credit Facility, including the term loan facility, bear interest annually, at the Company’s option, at either (i) LIBOR plus a margin of ~~2.25%~~2.00% to ~~3.25%~~2.75% per annum, based upon the consolidated total lease-adjusted leverage ratio or (ii) the highest of the following base rates plus a margin of ~~1.25%~~1.00% to ~~2.25%~~1.75% per annum: (a) the federal funds rate plus 0.50%; (b) the U.S. Bank prime rate or (c) the one-month LIBOR plus 1.00%. The ~~2018 Credit Facility~~Amendment includes a commitment fee of ~~0.30%~~0.20% to ~~0.50%~~0.35% per annum, based upon the consolidated total lease-adjusted leverage ratio, on any unused portion of the revolving credit facility.

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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,~~September 29, 2020, the Company had ~~$44.4~~$44.0 million of indebtedness (excluding ~~$1.3~~$1.8 million of unamortized debt issuance costs) and $3.2 million of letters of credit outstanding under the ~~2018~~Second Amended Credit Facility. As of September 29, 2020, the Company had cash on hand of $8.6 million.

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

Aggregate maturities for debt outstanding as of ~~October 1, 2019~~September 29, 2020 are as follows (in thousands):


Year 1	$	938
Year 2	1,500
Year 3	2,125
Year 4	2,500
Year 5	36,930
Total	$	43,993

Year 1 $ 1,125
Year 2 1,813
Year 3 41,451
Total $ 44,389

The Company’s outstanding indebtedness bore interest at rates between ~~5.34%~~3.07% to ~~7.25%~~6.25% during the first three quarters of ~~2019.~~2020.

Upon execution of the 2018 Credit Facility, the Company repaid in full its outstanding indebtedness under its prior credit facility using funds drawn on its 2018 Credit Facility. Upon repayment, the prior credit facility and all related agreements were terminated.

~~A loss on extinguishment of debt in the amount of $0.6 million was recorded during the second quarter of 2018 in connection with this repayment.~~

The Company also maintains outstanding letters of credit to secure obligations under its workers’ compensation program and certain lease obligations. The Company was in compliance with all of its debt covenants as of ~~October 1, 2019.~~September 29, 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.

Adjustments to the fair value of assets measured at fair value on a non-recurring basis as of September 29, 2020 and October 1, 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
October 1,
2019 October 2,
2018 October 1,
2019 October 2,
2018
Provision (benefit) for income taxes $ 64
$ (11 ) $ 64
$ (259 )
Effective tax rate 1.5 % (1.1 )% 2.2 % 3.0 %

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	Fiscal Quarter Ended						Three Fiscal Quarters Ended
	September 29, 2020			October 1, 2019			September 29, 2020			October 1, 2019
Provision for income taxes	$	27		$	64		$	73		$	64
Effective tax rate	(27.0)		%	1.5		%	(0.4)		%	2.2		%

The effective tax rate for the third quarter of ~~2019~~2020 and ~~the~~ first three quarters of ~~2019 reflect~~2020 reflects the impact of the previously recorded valuation allowance. For the remainder of fiscal ~~2019,~~2020, the Company does not anticipate material income tax expense or benefit as a result of the valuation allowance recorded. The Company will maintain the valuation allowance against deferred tax assets until there is sufficient evidence to support a full or partial reversal. The reversal of a previously recorded valuation allowance will generally result in a benefit from income tax. ~~The effective tax rates for~~

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

6. Stock-Based Compensation

The Company’s Stock Incentive Plan (the “Plan”), as amended and restated in May of 2013, authorizes the grant of non-qualified stock options, incentive stock options, stock appreciation rights, restricted stock, restricted stock units (“RSUs”), performance share units (“PSUs”) and incentive bonuses to employees, officers, non-employee directors and other service providers. As of ~~October 1, 2019,~~September 29, 2020, approximately ~~3.5~~2.9 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
	September 29, 2020		October 1, 2019		September 29, 2020		October 1, 2019
Stock-based compensation expense	$	708	$	(61)	$	1,960	$	1,820
Capitalized stock-based compensation expense	$	12	$	11	$	50	$	32

Fiscal Quarter Ended Three Fiscal Quarters Ended
October 1,
2019 October 2,
2018 October 1,
2019 October 2,
2018
Stock-based compensation expense $ (61 ) $ 640
$ 1,820
$ 2,232
Capitalized stock-based compensation expense $ 11
$ 12
$ 32
$ 37

~~Included in stock-based~~Stock-based compensation expense for the third quarter ~~and first three quarters~~ of 2019 isincluded 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
	September 29, 2020		October 1, 2019		September 29, 2020		October 1, 2019
Restaurant impairments (1)	$	113	$	89	$	2,375	$	2,554
Closure costs (1)	(168)		(809)		345		(675)
Loss on disposal of assets and other	424		1,056		1,263		1,761
	$	369	$	336	$	3,983	$	3,640

Fiscal Quarter Ended Three Fiscal Quarters Ended
October 1,
2019 October 2,
2018 October 1,
2019 October 2,
2018
Restaurant impairments ⁽¹⁾
$ 89
$ 314
$ 2,554
$ 1,231
Closure costs ⁽¹⁾
(643 ) 1,488
(112 ) 3,561
Loss (gain) on disposal of assets and other 890
(10 ) 1,198
1,160
$ 336
$ 1,792
$ 3,640
$ 5,952
_____________________________

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

~~_____________________________~~


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

There were 0 restaurant impairments during the third ~~quarter~~quarters of ~~2019~~2020 and ~~2 restaurant impairments during~~2019. During the first three quarters of ~~2019. There~~2020, 5 restaurants were 0impaired compared to 2 restaurant impairments ~~during the third quarter of 2018 and 1 restaurant impairment during~~in the first three quarters of ~~2018. Each of these periods include ongoing equipment costs for restaurants previously impaired.~~2019. 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

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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 the third quarter and first three quarters of 2020 and 2019 include ongoing costs related to restaurants closed in ~~the first three quarters of 2019~~previous years as well as ~~ongoing costs and adjustments to the liabilities to landlords as lease terminations occur. The closure costs of $1.5 million recognized~~3 company-owned restaurants closed during the third quarter of ~~2018 and $3.6 million recognized during~~2020 that were near the ~~first three quarters~~end 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~~lease term. In addition, closure costs were ~~approaching the expiration of their leases, as well as ongoing costs of restaurants closed in previous years. These ongoing costs include~~offset by gains resulting from adjustments to liabilities as lease terminations occur. These gains included a total of $0.6 million in the third quarter and first three quarters of 2020, and $0.8 million and $0.7 million during the third quarter and first three quarters of 2019, respectively.

Loss on disposal of assets and other includes expenses recognized during the ~~third quarter and~~ first three quarters of 2020 and 2019 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
	September 29, 2020		October 1, 2019		September 29, 2020		October 1, 2019
Net (loss) income	$	(127)	$	4,243	$	(19,440)	$	2,830
Shares:
Basic weighted average shares outstanding	44,358,763		43,990,049		44,238,400		44,007,345
Effect of dilutive securities	0		909,127		0		1,071,194
Diluted weighted average shares outstanding	44,358,763		44,899,176		44,238,400		45,078,539
(Loss) earnings per share:
Basic (loss) earnings per share	$	0	$	0.10	$	(0.44)	$	0.06
Diluted (loss) earnings per share	$	0	$	0.09	$	(0.44)	$	0.06

Fiscal Quarter Ended Three Fiscal Quarters Ended
October 1,
2019 October 2,
2018 October 1,
2019 October 2,
2018
Net income (loss) $ 4,243
$ 1,050
$ 2,830
$ (8,460 )
Shares:
Basic weighted average shares outstanding 43,990,049
43,094,524
44,007,345
41,798,640
Effect of dilutive securities 909,127
1,734,839
1,071,194
—
Diluted weighted average shares outstanding 44,899,176
44,829,363
45,078,539
41,798,640
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 )

The Company computes the effect of dilutive securities using the treasury stock method and average market prices during the period. Potential common shares are excluded from the computation of diluted earnings per share when the effect would be anti-dilutive. The shares issuable on the vesting or exercise of share-based awards or exercise of outstanding warrants that were excluded from the calculation of diluted earnings (loss) per share because the effect of their inclusion would have been anti-dilutive totaled ~~1,748,444~~3,107,448 and ~~176,325~~1,748,444 for the third ~~quarter~~quarters of ~~2019~~2020 and ~~2018,~~2019, respectively, and totaled ~~1,490,202~~3,251,799 and ~~2,758,848~~1,490,202 for the first three quarters of ~~2019~~2020 and ~~2018,~~2019, respectively.

9. Leases

~~The Company leases~~

As discussed in Note 1, Business Summary and Basis of Presentation, the onset of the COVID-19 pandemic impacted us significantly, including causing us to close all of our dining rooms starting in March 2020. We commenced reopening a portion of our dining rooms in June of 2020 and as of September 29, 2020, over 90% of our restaurant ~~facilities, office space~~dining rooms are open. During the second and ~~certain equipment that expire on various dates through January 2035. Lease terms for restaurants~~third quarters of 2020, we were able to negotiate with the majority of our landlords to obtain rent abatements, defer rent amounts due during the second quarter, or in ~~traditional shopping centers generally include a base term~~some cases, extend the period of ~~10 years, with options to extend these leases for additional periods of 5 to 15 years. Leases with an initial term of 12 months or less are not recorded on~~ the ~~balance sheet; we recognize~~respective lease ~~expense for these leases on a straight-line basis over~~term. In the case where the lease ~~term.~~term was extended, we remeasured the remaining consideration in the contract. The total rent that was deferred for lease amendments that have been executed through September 29, 2020 was $4.2 million.

~~The Company’s leases typically contain rent escalations over~~

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Further, for certain of our restaurants, the ~~lease term. The Company recognizes expense for these leases on a straight-line basis over~~COVID-19 pandemic has had an impact to the ~~lease term. Additionally, tenant incentives used~~underlying asset values. In the second quarter of 2020, we recorded right-of-use asset impairment charges of $0.3 million to ~~fund leasehold improvements are recognized when earned and~~ reduce the ~~right-of-use asset related to the lease. These are amortized through the right-of-use asset as reductions~~carrying value of ~~expense over the lease term.~~

Some of the Company’s leases include rent escalations based on inflation indexes and fair market value adjustments. Certain leases contain contingent rental provisions that include a fixed base rent plus an additional percentage of the restaurant’s sales in excess of stipulated amounts. Lease expense associated with rent escalation and contingent rental provisions is not material and is included withincertain operating lease ~~cost. Operating lease liabilities are calculated using~~assets to their respective estimated fair value. There was 0 impairment during the prevailing index or rate at lease commencement. Subsequent escalations in the index or rate and contingent rental payments are recognized as variable lease expenses. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.

~~The Company elected the practical expedient to account for lease and non-lease components as a single component for substantially all lease types.~~

~~As most~~third quarter 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.

2020.

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


Classification	Classification	October 1, 2019		Classification		September 29, 2020		December 31, 2019
Assets				Assets
Operating	Operating lease assets, net	$	212,760	Operating	Operating lease assets, net	$	202,993	$	209,717
Finance	Finance lease assets, net ⁽¹⁾	896		Finance	Finance lease assets, net (1)	3,308		771
Total leased assets		$	213,656	Total leased assets		$	206,301	$	210,488
Liabilities				Liabilities
Current lease liabilities				Current lease liabilities
Operating	Current operating lease liabilities	$	22,431	Operating	Current operating lease liabilities	$	25,357	$	22,775
Finance	Current finance lease liabilities ⁽²⁾	756		Finance	Current finance lease liabilities (2)	1,059		510
Long-term lease liabilities				Long-term lease liabilities
Operating	Long-term operating lease liabilities	229,157		Operating	Long-term operating lease liabilities	219,473		225,014
Finance	Long-term finance lease liabilities ⁽²⁾	158		Finance	Long-term finance lease liabilities (2)	2,309		281
Total lease liabilities		$	252,502	Total lease liabilities		$	248,198	$	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.

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

(2)The ~~components~~current portion of the finance lease ~~costs are as follows (in thousands):~~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.

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

Sublease income recognized in the Condensed Consolidated Statements of Operations was $0.2 million for both the third quarter of 2020 and 2019, and $0.7 million and $0.4 million for the first three quarters of 2020 and 2019, respectively.

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

Operating Leases Finance Leases Total
Remainder of 2019 $ 10,815
$ 158
$ 10,973
2020 43,172
539
43,711
2021 42,375
216
42,591
2022 42,184
44
42,228
2023 40,831
14
40,845
Thereafter 189,439
9
189,448
Total lease payments 368,816
980
369,796
Less: Imputed interest 117,228
66
117,294
Present value of lease liabilities $ 251,588
$ 914
$ 252,502

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
	September 29, 2020		October 1, 2019		September 29, 2020		October 1, 2019
Cash paid for lease liabilities:
Operating leases	$	14,784	$	10,795	$	28,358	$	32,301
Finance leases	324		223		776		600
	$	15,108	$	11,018	$	29,134	$	32,901
Right-of-use assets obtained in exchange for lease liabilities:
Operating leases	$	108	$	2,646	$	10,388	$	7,856
Finance leases	545		0		3,387		229
	$	653	$	2,646	$	13,775	$	8,085

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

10. Supplemental Disclosures to Condensed Consolidated Statements of Cash Flows

The following table presents the supplemental disclosures to the Condensed Consolidated Statements of Cash Flows for the ~~first~~ three quarters ended September 29, 2020 and October 1, 2019 ~~and October 2, 2018~~ (in thousands):


	September 29, 2020		October 1, 2019
Interest paid (net of amounts capitalized)	$	1,902	$	1,972
Income taxes (refunded) paid	(78)		6
Purchases of property and equipment accrued in accounts payable	2,818		2,538

October 1,
2019 October 2,
2018
Interest paid (net of amounts capitalized) $ 1,972
$ 3,006
Income taxes paid 6
49
Changes in purchases of property and equipment accrued in accounts payable, net 1,200
(1,346 )

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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~~tax collected from customers and remitted to governmental taxing authorities.

Gift Cards

The Company sells gift cards which do not have an expiration date, and it does not deduct non-usage fees from outstanding gift card balances. The Company recognizes revenue from gift cards when the gift card is redeemed by the customer or the Company determines the likelihood of the gift card being redeemed by the customer is remote (“gift card breakage”). The determination of the gift card breakage rate is based upon Company-specific historical redemption patterns. The Company has determined that approximately 9% of gift cards will not be redeemed and recognizes gift card breakage ratably over the estimated redemption period of the gift card, which is approximately 24 months. Gift card liability balances are typically highest at the end of each calendar year following increased gift card purchases during the holiday season.

As of ~~October 1, 2019~~September 29, 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~~$0.5 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~~$2.8 million and ~~$4.4~~$4.1 million for the first three 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 of 2020, we resumed 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

The Company operates 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 September 29, 2020 and December 31, 2019, the deferred revenue related to the rewards was $2.0 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.~~September 29, 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.

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NOODLES & COMPANY

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

Noodles & Company is a Delaware corporation that was organized in 2002. Noodles & Company and its subsidiaries are sometimes referred to as “we,” “us,” “our” and the “Company” in this report. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and related notes in Item 1 and with the audited consolidated financial statements and the related notes included in our Annual Report on Form 10-K for our fiscal year ended ~~January 1,~~December 31, 2019. We operate on a 52- or 53-week fiscal year ending on the Tuesday closest to December 31. Our fiscal quarters each contain 13 operating weeks, with the exception of the fourth quarter of a 53-week fiscal year, which contains 14 operating weeks. Fiscal years ~~2019~~2020 and ~~2018~~2019 each contain 52 weeks.

Cautionary Note Regarding Forward-Looking Statements

In addition to historical information, this discussion and analysis contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties such as the number of restaurants we intend to open, projected capital expenditures and estimates of our effective tax rates. In some cases, you can identify forward-looking statements by terms such as “may,” “might,” “will,” “objective,” “intend,” “should,” “could,” “can,” “would,” “expect,” “believe,” “design,” “estimate,” “predict,” “potential,” “plan” or the negative of these terms and similar expressions intended to identify forward-looking statements. These statements reflect our current views with respect to future events and are based on currently available operating, financial and competitive information. Examples of forward-looking statements include all matters that are not historical facts, such as statements regarding our ability to navigate the COVID-19 pandemic, projected capital expenditures, the revenue and balance sheet impact of the COVID-19 pandemic, estimated costs associated with our closure of underperforming restaurants, the implementation and results of strategic initiatives and our future financial performance. Our actual results may differ materially from those anticipated in these forward-looking statements due to reasons including, but not limited to, the extent, duration and severity of the COVID-19 pandemic; governmental and customer response to the COVID-19 pandemic; other conditions beyond our control such as weather, natural disasters, disease outbreaks, epidemics or pandemics impacting our customers or food supplies; consumer reaction to industry related public health issues and health pandemics and perceptions of food safety, our ability to achieve and maintain increases in comparable restaurant sales and to successfully execute our business strategy, including new restaurant initiatives and operational strategies to improve the performance of our restaurant portfolio; our ability to maintain compliance with debt covenants and continue to access financing necessary to execute our business strategy; the success of our marketing efforts; our ability to open new restaurants on schedule; current economic conditions; price and availability of commodities; our ability to adequately staff our restaurants; changes in labor costs; consumer confidence and spending patterns; ~~consumer reaction to industry related public health issues and perceptions of food safety;~~ seasonal factors; ~~weather;~~ and those discussed in “Special Note Regarding Forward-Looking Statements” and “Risk Factors” as filed in our Annual Report on Form 10-K for our fiscal year ended ~~January 1, 2019.~~December 31, 2019 and in our Quarterly Report on Form 10-Q for the quarterly periods ended March 31, 2020 and June 30, 2020.

Impact of COVID-19 Pandemic on Our Business

The onset of the COVID-19 pandemic resulted in significant disruption to the restaurant industry and adversely affected our business. Comparable sales have meaningfully and progressively improved since the beginning of the COVID-19 pandemic 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, partially offset by improved efficiencies throughout the balance of our expense profile.

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, substantially all of our restaurants continue to operate, and dining rooms are open in over 85% of our company-owned locations. While we cannot predict the extent to which the COVID-19 pandemic will impact our business, 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.

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Recent Trends, Risks and Uncertainties

Comparable Restaurant Sales. In the third quarter of ~~2019,~~2020, system-wide comparable restaurant sales ~~increased 2.1%~~decreased 3.8%, comprised of a ~~2.2% increase~~3.6% decrease for company-owned restaurants and a ~~1.6% increase~~5.0% decrease for franchise restaurants. ~~Our ability to~~

Recent restaurant openings not in the Company’s comparable restaurant base, many of which offer order ahead drive-thru pick-up windows, continue to ~~increase~~perform at the highest sales level of any class of new restaurants in the Company’s history. In October of 2020, the Company opened two company-owned restaurants, including one restaurant that has broken the Company’s record for sales during their initial 7, 14 and 21 days of operation.

The cadence of comparable restaurant sales ~~depends in part on our ability to successfully implement our operational strategies~~ and ~~initiatives.~~

~~Increased Labor Costs.~~ ~~Similar to much of the restaurant industry, our base labor costs have risen in recent periods. In~~average unit volumes during the third quarter of 2020 are as set forth below. Company-owned restaurants were closed on July 4 and 5, 2020 in appreciation of our teams’ efforts during the COVID-19 pandemic. All restaurants were open during that time frame in 2019, negatively impacting comparable restaurant sales during the same period in 2020:


Comparable Restaurant Sales	4 Weeks Ended July 28, 2020 (1)	4 Weeks Ended August 25, 2020	5 Weeks Ended September 29, 2020
Company-owned	(8.4)%	(4.6)%	1.1%
Franchise	(7.2)%	(5.1)%	(3.2)%
System-wide	(8.2)%	(4.7)%	0.4%
Average Unit Volumes (000’s)	$1,181	$1,212	$1,172

_____________________

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

We believe our return to positive comparable sales for the five weeks ended September 29, 2020, aided by impressive digital growth, is evidence of our strong brand positioning and ability to meet the needs of today's consumer for great tasting healthy food served conveniently where and when guests want it. However, our ability to retain positive comparable 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 our restaurants and other social distancing measures, (iii) our customers’ future willingness to eat at restaurants and (iv) macroeconomic conditions and the length of time required for the national and local economies to achieve economic recovery following the crisis.

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

Labor Costs. In the first three quarters of 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, with the increased adoption of digital ordering from our customers, we ~~expect that~~modified our labor ~~costs will continue~~model to ~~rise as wage rates and benefit costs increase.~~reduce the number of front of house 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 ~~19 company-owned restaurants in 2018 and two~~four company-owned restaurants in the first three quarters of ~~2019, most of which were at or approaching the expiration of their leases. We~~2020. We currently do not anticipate a significant number of permanent restaurant closures ~~for~~in the foreseeable future; however, we may from time to time permanently close certain restaurants, including permanent closures at, or near, the expiration of ~~their leases.~~the leases for these restaurants.

Restaurant Development. In the first three quarters of ~~2019,~~2020, we opened two new company-owned restaurants. Subsequent to the third quarter of 2020, we opened ~~three new~~two additional company-owned ~~restaurants, acquired one franchise restaurant and sold five restaurants to a franchisee.~~restaurants. As of ~~October 1, 2019,~~September 29, 2020, we had ~~391~~378 company-owned restaurants and 6776 franchise restaurants in 29 ~~states~~states. 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 plan for 2021 and ~~the District~~beyond.

Table of Columbia. Given recent improvement in performance, operating effectiveness and liquidity, we are currently pursuing a disciplined development pipeline to execute a modest new unit growth rate in the near term. 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.Contents

Key Measures We Use to Evaluate Our Performance

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

Revenue

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

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

Seasonal factors cause our revenue to fluctuate from quarter to quarter. Our revenue per restaurant is typically lower in the first and fourth quarters, due to reduced winter and holiday traffic, and is typically higher in the second and third quarters. As a result of these factors, as well as the magnitude of the COVID-19 pandemic on any given quarter, our quarterly ~~and annual~~ operating results and comparable restaurant sales may fluctuate significantly.

Average Unit Volume

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

Comparable Restaurant Sales

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

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

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

•overall economic trends, particularly those related to consumer spending;

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

•pricing;

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

•marketing and promotional efforts;

•abnormal weather patterns;

•food safety and foodborne illness concerns;

•the impact of the COVID-19 pandemic;

•local competition;

•trade area dynamics;

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•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.

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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						Three Fiscal Quarters Ended						September 29, 2020		October 1, 2019		September 29, 2020		October 1, 2019
	October 1, 2019			October 2, 2018			October 1, 2019		October 2, 2018				(in thousands, unaudited)
	(in thousands, unaudited)
Net income (loss)	$	4,243		$	1,050		$	2,830	$	(8,460	)
Net (loss) income												Net (loss) income	$	(127)	$	4,243	$	(19,440)	$	2,830
Depreciation and amortization	5,458			5,790			16,626		17,407			Depreciation and amortization	5,541		5,458		16,273		16,626
Interest expense, net	737			1,093			2,298		3,385			Interest expense, net	822		737		2,710		2,298
Provision (benefit) for income taxes	64			(11		)	64		(259		)
Provision for income taxes												Provision for income taxes	27		64		73		64
EBITDA	$	10,502		$	7,922		$	21,818	$	12,073		EBITDA	$	6,263	$	10,502	$	(384)	$	21,818
Restaurant impairments, closure costs and asset disposals ⁽¹⁾	336			1,792			3,640		5,952			Restaurant impairments, closure costs and asset disposals (1)	369		336		3,983		3,640
Stock-based compensation expense	(61		)	640			1,820		2,232			Stock-based compensation expense	708		(61)		1,960		1,820
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												Fees and costs related to transactions and other acquisition/disposition costs	—		130		162		166
Severance costs												Severance costs	365		112		454		112
Adjusted EBITDA	$	11,019		$	10,354		$	27,556	$	25,010		Adjusted EBITDA	$	7,705	$	11,019	$	6,175	$	27,556

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~~(1)~~

The first three quarters of 2019 include the impairment of two restaurants compared to one restaurant during the same period of 2018. Additionally, the first three quarters of 2018 included closure costs for the 12 restaurants closed in the first two quarters of 2018, most of which were approaching the expiration of their leases. 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.~~

(1)Restaurant impairments and closure costs in all periods presented above include amounts related to restaurants previously impaired or closed. See Note 7, Restaurant Impairments, Closure Costs and Asset Disposals.

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				Three Fiscal Quarters Ended
	October 1, 2019		October 2, 2018		October 1, 2019		October 2, 2018				September 29, 2020		October 1, 2019		September 29, 2020		October 1, 2019
Company-Owned Restaurant Activity									Company-Owned Restaurant Activity
Beginning of period	395		404		394		412		Beginning of period		380		395		389		394
Openings	3		—		3		1		Openings		1		3		2		3
Acquisition ⁽²⁾	—		—		1		—
Acquisition (1)									Acquisition (1)		—		—		—		1
Closures									Closures		(3)		(2)		(4)		(2)
Divestitures ⁽¹⁾⁽²⁾	(5	)	—		(5	)	—			—		(5)		(9)		(5)
Closures	(2	)	(3	)	(2	)	(12	)
Restaurants at end of period	391		401		391		401		Restaurants at end of period		378		391		378		391
Franchise Restaurant Activity									Franchise Restaurant Activity
Beginning of period	62		65		65		66		Beginning of period		76		62		68		65
Openings	—		—		—		—		Openings		—		—		—		—
Acquisitions ⁽²⁾	5		—		5		—		Acquisitions (2)		—		5		9		5
Closures									Closures		—		—		(1)		(2)
Divestiture ⁽²⁾⁽¹⁾	—		—		(1	)	—			—		—		—		(1)
Closures	—		—		(2	)	(1	)
Restaurants at end of period	67		65		67		65		Restaurants at end of period		76		67		76		67
Total restaurants	458		466		458		466		Total restaurants		454		458		454		458

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


~~(2)~~	~~During the first quarter of 2019 we acquired one franchise restaurant and during the third quarter of 2019 we sold five restaurants to a franchisee.~~

(1)Represents one franchise restaurant acquired by us.

(2)Represents nine company-owned restaurants sold to a franchisee in 2020 and five company-owned restaurants sold to a franchisee in 2019.

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.

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Fiscal Quarter Ended Three Fiscal Quarters Ended
October 1,
2019 October 2,
2018 October 1,
2019 October 2,
2018
(unaudited)
Revenue:
Restaurant revenue 98.7 % 99.0 % 98.8 % 99.1 %
Franchising royalties and fees, and other 1.3 % 1.0 % 1.2 % 0.9 %
Total revenue 100.0 % 100.0 % 100.0 % 100.0 %
Costs and expenses:
Restaurant operating costs (exclusive of depreciation and amortization shown separately below):
Cost of sales 25.3 % 26.5 % 25.9 % 26.6 %
Labor 32.5 % 32.7 % 33.1 % 32.9 %
Occupancy 10.4 % 10.4 % 10.7 % 10.9 %
Other restaurant operating costs 14.7 % 14.0 % 14.7 % 14.6 %
General and administrative 8.8 % 8.9 % 9.3 % 10.3 %
Depreciation and amortization 4.6 % 5.0 % 4.8 % 5.1 %
Pre-opening 0.2 % — % 0.1 % — %
Restaurant impairments, closure costs and asset disposals 0.3 % 1.5 % 1.0 % 1.7 %
Total costs and expenses 95.7 % 98.2 % 98.5 % 101.4 %
Income (loss) from operations 4.3 % 1.8 % 1.5 % (1.4 )%
Loss on extinguishment of debt — % — % — % 0.2 %
Interest expense, net 0.6 % 0.9 % 0.7 % 1.0 %
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 )%


	Fiscal Quarter Ended				Three Fiscal Quarters Ended
	September 29, 2020		October 1, 2019		September 29, 2020		October 1, 2019
	(unaudited)
Revenue:
Restaurant revenue	98.5	%	98.7	%	98.8	%	98.8	%
Franchising royalties and fees, and other	1.5	%	1.3	%	1.2	%	1.2	%
Total revenue	100.0	%	100.0	%	100.0	%	100.0	%
Costs and expenses:
Restaurant operating costs (exclusive of depreciation and amortization shown separately below):
Cost of sales	24.8	%	25.3	%	25.1	%	25.9	%
Labor	29.9	%	32.5	%	32.7	%	33.1	%
Occupancy	11.2	%	10.4	%	12.5	%	10.7	%
Other restaurant operating costs	18.6	%	14.7	%	18.3	%	14.7	%
General and administrative	10.2	%	8.8	%	11.0	%	9.3	%
Depreciation and amortization	5.2	%	4.6	%	5.7	%	4.8	%
Pre-opening	0.2	%	0.2	%	0.1	%	0.1	%
Restaurant impairments, closure costs and asset disposals	0.3	%	0.3	%	1.4	%	1.0	%
Total costs and expenses	99.3	%	95.7	%	105.8	%	98.5	%
Income (loss) from operations	0.7	%	4.3	%	(5.8)	%	1.5	%
Interest expense, net	0.8	%	0.6	%	0.9	%	0.7	%
(Loss) income before taxes	(0.1)	%	3.6	%	(6.8)	%	0.8	%
Provision for income taxes	—	%	0.1	%	—	%	—	%
Net (loss) income	(0.1)	%	3.6	%	(6.8)	%	0.8	%

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Third Quarter Ended ~~October 1, 2019~~September 29, 2020 Compared to Third Quarter Ended October ~~2, 2018~~1, 2019

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


	Fiscal Quarter Ended						Increase / (Decrease)							Fiscal Quarter Ended						Increase / (Decrease)
	October 1, 2019			October 2, 2018			$			%				September 29, 2020			October 1, 2019			$		%

			(in thousands, unaudited)													(in thousands, unaudited)
Revenue:													Revenue:
Restaurant revenue	$	116,759		$	115,552		$	1,207		1.0	%	Restaurant revenue		$	104,413		$	116,759		$	(12,346)	(10.6)	%
Franchising royalties and fees, and other	1,545			1,175			370			31.5	%	Franchising royalties and fees, and other		1,569			1,545			24		1.6	%
Total revenue	118,304			116,727			1,577			1.4	%	Total revenue		105,982			118,304			(12,322)		(10.4)	%
Costs and expenses:												Costs and expenses:
Restaurant operating costs (exclusive of depreciation and amortization shown separately below):												Restaurant operating costs (exclusive of depreciation and amortization shown separately below):
Cost of sales	29,544			30,617			(1,073		)	(3.5	)%	Cost of sales		25,900			29,544			(3,644)		(12.3)	%
Labor	37,951			37,738			213			0.6	%	Labor		31,264			37,951			(6,687)		(17.6)	%
Occupancy	12,108			12,035			73			0.6	%	Occupancy		11,737			12,108			(371)		(3.1)	%
Other restaurant operating costs	17,161			16,224			937			5.8	%	Other restaurant operating costs		19,383			17,161			2,222		12.9	%
General and administrative	10,436			10,399			37			0.4	%	General and administrative		10,827			10,436			391		3.7	%
Depreciation and amortization	5,458			5,790			(332		)	(5.7	)%	Depreciation and amortization		5,541			5,458			83		1.5	%
Pre-opening	266			—			266			*		Pre-opening		239			266			(27)		(10.2)	%
Restaurant impairments, closure costs and asset disposals	336			1,792			(1,456		)	(81.3	)%	Restaurant impairments, closure costs and asset disposals		369			336			33		9.8	%
Total costs and expenses	113,260			114,595			(1,335		)	(1.2	)%	Total costs and expenses		105,260			113,260			(8,000)		(7.1)	%
Income from operations	5,044			2,132			2,912			*		Income from operations		722			5,044			(4,322)		(85.7)	%

Interest expense, net	737			1,093			(356		)	(32.6	)%	Interest expense, net		822			737			85		11.5	%
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												(Loss) income before taxes		(100)			4,307			(4,407)		*
Provision for income taxes												Provision for income taxes		27			64			(37)		(57.8)	%
Net (loss) income												Net (loss) income		$	(127)		$	4,243		$	(4,370)	*
Company-owned:												Company-owned:
Average unit volume	$	1,157		$	1,107		$	50		4.5	%	Average unit volume		$	1,187		$	1,188		$	(1)	(0.1)	%
Comparable restaurant sales	2.2		%	5.2		%						Comparable restaurant sales		(3.6)		%	2.2		%

________________


*	~~Not meaningful.~~

*Not meaningful.

Revenue

Total revenue ~~increased $1.6~~decreased $12.3 million in the third quarter of ~~2019,~~2020, or ~~1.4%~~10.4%, to $106.0 million, compared to $118.3 million ~~compared~~in the third quarter of 2019. This decrease was due to ~~$116.7~~a decline in traffic related to the impact of the COVID-19 pandemic during the third quarter of 2020, as well as a $2.3 million decrease related to the refranchising of nine total restaurants since the third quarter of 2019. Additionally, revenue decreased due to temporary closures related to the COVID-19 pandemic, including the closure of all of our company-owned restaurants on July 4 and 5, 2020.

AUV, which normalizes for the impact of temporary restaurant closures, was relatively flat year-over-year as strong off-premise sales, including digital, offset the COVID-19 pandemic related impacts including having in restaurant dining closed for a significant portion of the third quarter 2020.

System-wide comparable restaurant sales were down 3.8% in the third quarter of ~~2018. This increase was primarily due~~2020 compared to the ~~increase in~~same period of 2019, comprised of a 3.6% decrease at company-owned restaurants and a 5.0% decrease at franchise-owned restaurants. The comparable restaurant sales ~~as well as new restaurant openings, partially offset by the impact of restaurants closed since the beginning of third quarter of 2018, most of which were approaching the expiration of their leases.~~

~~AUV increased $50,000 compared to the prior year. AUV for the trailing twelve months was $1,157,000.~~

~~System-wide comparable restaurant sales growth was 2.1%~~decline in the third quarter of ~~2019, comprised of a 2.2% increase at company-owned restaurants and a 1.6% increase at franchise-owned restaurants. Comparable restaurant sales growth in the third quarter of 2019~~2020 was driven primarily by a decline in traffic related to the impact

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of the COVID-19 pandemic, partially offset by increased off-premise sales. Comparable restaurant sales ~~a new menu pricing structure~~improved throughout the quarter.

System-wide comparable sales were down 8.2% for the four weeks ended July 28, 2020, down 4.7% for the four weeks ended August 25, 2020 and ~~corresponding mix shift benefits.~~increased 0.4% for the five weeks ended September 29, 2020.

Cost of Sales

Cost of sales decreased by ~~$1.1~~$3.6 million, or ~~3.5%~~12.3%, in the third quarter of ~~2019~~2020 compared to the same period of ~~2018,~~2019, due primarily to ~~ongoing supply chain savings initiatives since~~ the ~~third quarter of 2018.~~reduction in restaurant revenue. As a percentage of restaurant revenue, cost of sales decreased to ~~25.3%~~ 24.8% in the third quarter of ~~2019~~2020 compared to ~~26.5%~~25.3% in third quarter of ~~2018~~2019 primarily due to ~~increased menu price and lower expenses resulting from~~ ongoing supply chain ~~initiatives.~~initiatives, increased menu pricing and lower discounting, partially offset by higher packaging costs associated with the shift to increased off-premise sales in response to the COVID-19 pandemic.

Labor Costs

Labor costs ~~increased~~decreased by ~~$0.2~~$6.7 million, or ~~0.6%~~17.6%, in the third quarter of ~~2019~~2020 compared to the same period of ~~2018.~~2019. As a percentage of restaurant revenue, labor costs decreased toto 29.9% in the third quarter of 2020 from 32.5% in the third quarter of 2019 ~~from 32.7% in the third quarter~~as a result of ~~2018 as~~ labor initiatives ~~more than~~including modifying our labor model to reduce the number of front of house hours in our restaurants, especially during the time that indoor dining was not available, and improved turnover trends, partly offset ~~wage inflation.~~by the decline in restaurant sales associated with the COVID-19 pandemic.

Occupancy Costs

Occupancy costs ~~increased~~decreased by ~~$0.1~~$0.4 million, or ~~0.6%~~3.1%, in the third quarter of ~~2019~~2020 compared to the third quarter of ~~2018.~~2019 primarily due to restaurants closed or impaired since the beginning of the third quarter of 2019. As a percentage of revenue, occupancy costs ~~remained flat at~~increased to 11.2% in the third quarter of 2020, compared to 10.4% in the third quarter of 2019 due to reduced revenue from the impact of the COVID-19 pandemic.

Other Restaurant Operating Costs

Other restaurant operating costs increased by $2.2 million, or 12.9%, in the third quarter of 2020 compared to the third quarter of ~~2018.~~

~~Other Restaurant Operating Costs~~

~~Other restaurant operating costs increased by $0.9 million, or 5.8%, in the third quarter of~~ 2019 ~~compared to the third quarter of 2018,~~ due ~~primarily~~ to increased third-party delivery fees partially offset by a decrease in utilities and credit card fees. AsAs a percentage of restaurant revenue, other restaurant operating costs increasedto 18.6% in the third quarter of 2020 compared to 14.7% in the third quarter of 2019 ~~compared~~due primarily to ~~14.0%~~increased third-party delivery fees resulting from a significant expansion of our use of third-party delivery services due to the COVID-19 pandemic. Third party delivery fees were 5.5% and 1.6% of total revenue for the third quarters of 2020 and 2019, respectively.

General and Administrative Expense

General and administrative expense increased by $0.4 million or 3.7% in the third quarter of ~~2018.~~

~~General and Administrative Expense~~

~~General and administrative expense was flat in the third quarter of 2019~~2020 compared to the third quarter of ~~2018,~~2019, due primarily to the cost savings initiatives implemented as a result of the COVID-19 pandemic, including position reductions, temporary salary reductions and reduction in bonus expense, partially offset by increases in severance and stock based compensation. The third quarter of 2019 included a credit related to cancelled grants due ~~to decreased stock-based compensation related~~ to the departure of our ~~former~~ Executive ~~Chairman in September of 2019, offset by higher compensation costs as we filled out the management team.~~Chairman. As a percentage of revenue, general and administrative expense ~~decreased~~increased to 10.2% in the third quarter of 2020 from 8.8% in the third 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~~increased by ~~$0.3~~$0.1 million, or ~~5.7%~~1.5%, in the third quarter of ~~2019~~2020 compared to the third quarter of ~~2018,~~2019, due primarily to restaurants closed or impaired since the beginning of the third quarter of ~~2018.~~2019 and the impact of the nine

restaurants sold to a franchisee, partially offset by new asset additions. As a percentage of revenue, depreciation and

amortization ~~decreased~~increased to 5.2% in the third quarter of 2020 from 4.6% in the third quarter of ~~2019 from 5.0% in the third 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~~remained flat in the third quarter of 2020 compared to the third quarter of 2019. No impairment was recorded in the third quarters of 2020 or 2019.

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Interest Expense

Interest expense increased by ~~$1.5~~$0.1 million in the third quarter of ~~2019~~2020 compared to the third quarter of ~~2018. In~~2019. The increase was due to higher average borrowings and a higher average interest rate during the third quarter of 2019, we did not record an 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 received for property damage in excess of the loss recognized.

~~Interest Expense~~

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

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

The effective tax rate was (27.0)% for the third quarter of 2020 compared to 1.5% for the third quarter of ~~2019 compared to (1.1)%~~2019. The amount recorded for the provision for income taxes for the third quarter of ~~2018.~~2020 was $27,000. The effective tax rate for the third quarter of ~~2019~~2020 reflects the impact of the previously recorded valuation allowance. The effective tax rate for the third quarter of 2018 reflects changes made by the Tax Cuts and Jobs Act (“Tax Act”), which enabled us to release a portion of the previously recorded valuation allowance as a benefit from income tax. For the remainder of fiscal ~~2019,~~2020, we do not anticipate material income tax expense or benefit as a result of the valuation allowance recorded. We will maintain a valuation allowance against deferred tax assets until there is sufficient evidence to support a full or partial reversal. The reversal of a previously recorded valuation allowance will generally result in a benefit from income tax.

Three Quarters Ended ~~October 1, 2019~~September 29, 2020 Compared to Three Quarters Ended October ~~2, 2018~~1, 2019

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


	Three Fiscal Quarters Ended						Increase / (Decrease)							Three Fiscal Quarters Ended						Increase / (Decrease)
	October 1, 2019			October 2, 2018			$			%				September 29, 2020			October 1, 2019			$		%

			(in thousands, except percentages)													(in thousands, except percentages)
Revenue:													Revenue:
Restaurant revenue	$	344,382		$	341,616		$	2,766		0.8	%	Restaurant revenue		$	283,150		$	344,382		$	(61,232)	(17.8)	%
Franchising royalties and fees, and other	4,158			3,032			1,126			37.1	%	Franchising royalties and fees, and other		3,337			4,158			(821)		(19.7)	%
Total revenue	348,540			344,648			3,892			1.1	%	Total revenue		286,487			348,540			(62,053)		(17.8)	%
Costs and expenses:												Costs and expenses:
Restaurant operating costs (exclusive of depreciation and amortization shown separately below):												Restaurant operating costs (exclusive of depreciation and amortization shown separately below):
Cost of sales	89,083			90,962			(1,879		)	(2.1	)%	Cost of sales		71,124			89,083			(17,959)		(20.2)	%
Labor	113,920			112,353			1,567			1.4	%	Labor		92,632			113,920			(21,288)		(18.7)	%
Occupancy	36,849			37,155			(306		)	(0.8	)%	Occupancy		35,473			36,849			(1,376)		(3.7)	%
Other restaurant operating costs	50,475			49,997			478			1.0	%	Other restaurant operating costs		51,861			50,475			1,386		2.7	%
General and administrative	32,424			35,480			(3,056		)	(8.6	)%	General and administrative		31,415			32,424			(1,009)		(3.1)	%
Depreciation and amortization	16,626			17,407			(781		)	(4.5	)%	Depreciation and amortization		16,273			16,626			(353)		(2.1)	%
Pre-opening	331			50			281			*		Pre-opening		383			331			52		15.7	%
Restaurant impairments, closure costs and asset disposals	3,640			5,952			(2,312		)	(38.8	)%	Restaurant impairments, closure costs and asset disposals		3,983			3,640			343		9.4	%
Total costs and expenses	343,348			349,356			(6,008		)	(1.7	)%	Total costs and expenses		303,144			343,348			(40,204)		(11.7)	%
Income (loss) from operations	5,192			(4,708		)	9,900			*
Loss on extinguishment of debt	—			626			(626		)	*
(Loss) income from operations												(Loss) income from operations		(16,657)			5,192			(21,849)		*
Interest expense, net	2,298			3,385			(1,087		)	(32.1	)%	Interest expense, net		2,710			2,298			412		17.9	%
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) income before taxes												(Loss) income before taxes		(19,367)			2,894			(22,261)		*
Provision for income taxes												Provision for income taxes		73			64			9		14.1	%
Net (loss) income												Net (loss) income		$	(19,440)		$	2,830		$	(22,270)	*
Company-owned:												Company-owned:
Average unit volumes	$	1,157		$	1,107		$	50		4.5	%	Average unit volumes		$	1,037		$	1,164		$	(127)	(10.9)	%
Comparable restaurant sales	3.4		%	3.3		%						Comparable restaurant sales		(14.0)		%	3.4		%

________________


*	~~Not meaningful.~~

*Not meaningful.

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Revenue

Total revenue ~~increased~~decreased by ~~$3.9~~$62.1 million, or ~~1.1%~~17.8%, in the first three quarters of ~~2019,~~2020, to ~~$348.5~~$286.5 million compared to ~~$344.6~~$348.5 million in the same period of ~~2018.~~2019. This ~~increase~~decrease was primarily due to the ~~increase~~decrease in comparable restaurant sales as a result of the COVID-19 pandemic as well as refranchising 14 restaurants to a franchisee and ~~new restaurant openings, partially offset by~~ the impact of closures of our company-owned restaurants ~~closed since~~on July 4 and 5, 2020.

AUVs were down slightly in the ~~beginning~~first three quarters of ~~2018, most~~2020 compared to the first three quarters of ~~which were approaching~~2019 due primarily to the ~~expiration~~decline in the second quarter of ~~their leases.~~2020 as a result of the early impacts of the COVID-19 pandemic.

Comparable restaurant sales ~~increased~~decreased by ~~3.4%~~14.0% at company-owned restaurants, ~~increased~~decreased by ~~2.7%~~16.7% at franchise-owned restaurants and ~~increased~~decreased by ~~3.3%~~14.3% system-wide in the first three quarters of ~~2019.~~2020. The comparable restaurant sales decline in the first three 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~~$18.0 million, or 20.2%, in the first three quarters of 2020 compared to the same period of 2019, due primarily to the decline in restaurant sales associated with the COVID-19 pandemic, ongoing supply chain initiatives, increased menu pricing and lower discounting, partially offset by higher packaging costs associated with the shift to increased off-premise sales. As a percentage of restaurant revenue, cost of sales decreased to 25.1% in the first three quarters of 2020 compared to 25.9% in the first three quarters of 2019 primarily due to increased menu pricing and supply chain savings initiatives.

Labor Costs

Labor costs decreased by $21.3 million, or 18.7%, in the first three quarters of 2020 compared to the same period of 2019, due primarily to the decline in restaurant sales associated with the COVID-19 pandemic as well as labor initiatives implemented in the first three quarters of 2020 including modifying our labor model to reduce the number of front of house hours in our restaurants, especially during the time that indoor dining rooms were closed. As a percentage of restaurant revenue, labor costs decreased to 32.7% in the first three quarters of 2020 compared to 33.1% in the first three quarters of 2019. The decrease as a percentage of restaurant revenue was driven by the labor initiatives implemented.

Occupancy Costs

Occupancy costs decreased by $1.4 million, or 3.7%, in the first three quarters of 2020 compared to the first three quarters of 2019 due to restaurants closed or impaired since the beginning of the third quarter of 2019 as well as the impact of the 14 restaurants sold to a franchisee since the third quarter of 2019. As a percentage of revenue, occupancy costs increased to 12.5% in first three quarters of 2020, compared to 10.7% in the first three quarters of 2019, primarily due to reduced revenue from the impact of the COVID-19 pandemic.

Other Restaurant Operating Costs

Other restaurant operating costs increased by $1.4 million, or 2.7%, in the first three quarters of 2020 compared to the first three quarters of 2019, due to increased third-party delivery fees partially offset by decreases in utilities, repairs and maintenance, and credit card fees. As a percentage of restaurant revenue, other restaurant operating costs increased to 18.3% in the first three quarters of 2020, compared to 14.7% in the first three quarters of 2019 due primarily to increased third-party delivery fees resulting from a significant expansion of our use of third-party delivery services in the second and third quarters of 2020 due to the COVID-19 pandemic. Third party delivery fees were 4.8% and 1.4% of total revenue for the first three quarters of 2020 and 2019, respectively.

General and Administrative Expense

General and administrative expense decreased by $1.0 million, or 3.1%, in the first three quarters of 2020 compared to the first three quarters of 2019, due primarily to the cost savings initiatives implemented as a result of the COVID-19 pandemic, including position reductions, furloughs, temporary salary reductions and reduction in bonus expense, partially offset by an increase in severance and marketing expense. As a percentage of revenue, general and administrative expense increased to 11.0% in the first three quarters of 2020 compared to 9.3% in the first three quarters of 2019, primarily due to reduced revenue from the impact of the COVID-19 pandemic.

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Depreciation and Amortization

Depreciation and amortization decreased by $0.4 million, or 2.1%, in the first three quarters of 2019 compared to the same period of 2018, due primarily to ongoing supply chain savings initiatives. As a percentage of restaurant revenue, cost of sales decreased to 25.9% in the first three quarters of 2019 compared to 26.6% in the first three quarters of 2018 primarily due to increased menu pricing and supply chain savings initiatives.

~~Labor Costs~~

Labor costs increased by $1.6 million, or 1.4%, in the first three quarters of 2019 compared to the same period of 2018, due primarily to the increase in restaurant revenue in the first three quarters of 2019. As a percentage of restaurant revenue, labor costs increased to 33.1% in the first three quarters of 2019 compared to 32.9% in the first three quarters of 2018. The increase as a percentage of restaurant revenue was driven by wage inflation and training investments, mostly offset by labor efficiencies.

~~Occupancy Costs~~

~~Occupancy costs decreased by $0.3 million, or 0.8%, in the first three quarters of 2019~~2020 compared to the first three quarters of ~~2018. As a percentage of revenue, occupancy costs decreased to 10.7% in first three quarters of~~ 2019 ~~compared to 10.9% in the first three quarters of 2018,~~ primarily due to ~~leverage on higher AUVs.~~

~~Other Restaurant Operating Costs~~

~~Other restaurant operating costs increased by $0.5 million,~~restaurants closed or ~~1.0%, in~~impaired since the ~~first three quarters~~third quarter of 2019 ~~compared~~and the impact of the 14 restaurants sold to ~~the first three quarters of 2018, due primarily to off-premise investments which were~~a franchisee, partially offset by lower utilities costs. As a percentage of restaurant revenue, other restaurant operating costs increased to 14.7% in the first three quarters of 2019, compared to 14.6% in the first three quarters of 2018.

~~General and Administrative Expense~~

General and administrative expense decreased by $3.1 million, or 8.6%, in the first three quarters of 2019 compared to the first three quarters of 2018, due primarily to the recognition of a $3.4 million charge for the final settlement related to data breach liabilities incurred in the second quarter of 2018, as well as a decrease in stock-based compensation related to the departure of our former Executive Chairman in September of 2019. These decreases were partially offset by higher compensation costs as we filled out the management team. As a percentage of revenue, general and administrative expense decreased to 9.3% in the first three quarters of 2019 compared to 10.3% in the first three quarters of 2018.

~~Depreciation and Amortization~~

~~Depreciation and amortization decreased by $0.8 million, or 4.5%, in the first three quarters of 2019 compared to the first three quarters of 2018.~~ new asset additions. As a percentage of revenue, depreciation and amortization ~~decreased~~ increased to 5.7% in the first three quarters of 2020, compared to 4.8% in the first three quarters of 2019, ~~compared~~due primarily to ~~5.1%~~the decline in restaurant sales as a result of the ~~first three quarters of 2018, due to restaurants impaired or closed in prior quarters.~~COVID-19 pandemic.

~~Pre-Opening~~

Restaurant Impairments, Closure Costs and Asset Disposals

~~Pre-opening~~

Restaurant impairments, closure costs and asset disposals increased by $0.3 million in the first three quarters of ~~2019 as~~2020 compared to the first three quarters of ~~2018~~2019. The increase was largely due to ~~more restaurants under construction as~~ongoing closure costs which was higher during the first three quarters of 2020 by $1.0 million compared to the same period in ~~2018.~~

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

~~Restaurant impairments,~~2019 as the closure costs and asset disposals decreased by $2.3 million in the first three quarters of 2019 compared to the first three quarters of 2018, primarily due to a $3.7 million decrease in closure costs, partially offset by a $1.4 million increase in restaurant impairments. In the first three quarters of 2019, we recorded a $2.2 million impairment charge for two restaurants. Closure costs in the first three quarters of 2019 ~~included ongoing costs as well as~~were partially offset by gains recognized from the adjustments to liabilities ason lease ~~terminations occur. In~~terminations. During the first three quarters of ~~2018,~~2020, we ~~impaired one restaurant, recognized $3.6 million~~also incurred losses from the disposal of ~~closure costs~~assets related to 12the divestiture of company-owned restaurants ~~closed~~to a franchisee. Additionally, there were five restaurant impairments in the first three quarters of ~~2018 and incurred $1.2 million loss on disposal of assets.~~

~~Loss on Extinguishment of Debt~~

In May 2018, we entered into the 2018 Credit Facility and repaid in full our outstanding indebtedness under the Prior Credit Facility using funds drawn on the 2018 Credit Facility. As a result, we wrote off the remaining unamortized balance of debt issuance costs related2020 compared to ~~the Prior Credit Facility and recognized a loss on extinguishment of debt~~two restaurant impairments in the ~~amount~~first three quarters of ~~$0.6~~2019.

Interest Expense

Interest expense increased by $0.4 million in the first three quarters of ~~2018.~~

~~Interest Expense~~

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

Provision for Income Taxes

The effective tax rate was (0.4)% for the first three quarters of 2020 compared to 2.2% for the first three quarters of ~~2019 compared to 3.0% for the first three quarters of 2018.~~2019. The effective tax rate for the first three quarters of ~~2019~~2020 reflects the impact of the previously recorded valuation allowance. The effective tax rate for the first three quarters of 2018 reflects changes made by the Tax Act, which enabled the Company to release a portion of the previously recorded valuation allowance as a benefit from income tax. For the remainder of fiscal ~~2019,~~2020, we do not anticipate material income tax expense or benefit as a result of the valuation allowance recorded. We will maintain a valuation allowance against deferred tax assets until there is sufficient evidence to support a full or partial reversal. The reversal of a previously recorded valuation allowance will generally result in a benefit from income tax.

Liquidity and Capital Resources

Summary of Cash Flows

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

On June 16, 2020 (the “Effective Date”), the Company amended its 2018 Credit Facility by entering into the Second Amendment to the Credit Facility (the “Second Amendment” or the “Second Amended Credit Facility”). Beginning on the Effective Date and through the third quarter of 2021 (the “Amendment Period”), borrowings under the Second Amended Credit Facility, including the term loan facility (“Borrowings”), will bear interest at LIBOR plus 3.25% per annum. Following the Amendment Period, Borrowings will bear interest at LIBOR plus a margin of 2.00% to 3.00% per annum, based upon the consolidated total lease-adjusted leverage ratio. Among other things, the Second Amendment (i) waives the lease-adjusted leverage ratio and fixed charge ratio covenants until the beginning of the second quarter of 2021, (ii) amends the Company’s lease-adjusted leverage ratio and fixed coverage ratio covenant thresholds beginning in the second quarter of 2021 through the third quarter of 2022 and the first quarter of 2022, respectively and (iii) limits capital expenditures to $12.0 million in 2020, $12.0 million plus a liquidity-based performance basket up to an additional $12.0 million in 2021, $34.0 million in 2022, $37.0 million in 2023 and $45.0 million annually thereafter. As of ~~October 1, 2019,~~September 29, 2020, our cash and cash equivalents balance was ~~$3.1~~$8.6 million and the amount available for future borrowings under our ~~2018~~Amended Credit Facility was ~~$41.4~~$52.3 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.

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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
	September 29, 2020		October 1, 2019
Net cash provided by operating activities	$	8,314	$	16,269
Net cash used in investing activities	(9,887)		(14,823)
Net cash used in financing activities	(265)		(3,015)
Net decrease in cash and cash equivalents	$	(1,838)	$	(1,569)

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 )

Operating Activities

Net cash provided by operating activities ~~increased~~decreased to $8.3 million in the first three quarters of 2020 from net cash provided by operating activities of $16.3 million in the first three quarters of ~~2019 from net cash used in operating activities of $4.9 million in the first three quarters of 2018.~~2019. The ~~improvement~~decline in operating cash flows resulted primarily from ~~better operating results~~decreased net income during the first three quarters of ~~2019~~2020 due to the COVID-19 pandemic as well as working capital changes during the first three quarters of 2020 compared to the prior ~~comparable~~ period of 2019, adjusted for non-cash items such as depreciation and amortization, restaurant impairments, closure costs and asset disposals, stock-based ~~compensation and changes in working capital due to timing. The first three quarters of 2018 included the payment of the liabilities related to the data breach that occurred in 2017.~~compensation.

Investing Activities

Net cash used in investing activities ~~increased $5.4~~decreased $4.9 million in the first three quarters of ~~2019~~2020 from ~~$9.4~~$14.8 million in the first three quarters of ~~2018.~~2019. This ~~increase is~~decrease was primarily due to ~~construction activities on~~fewer new restaurant ~~development~~openings in the first three quarters of 2020 compared to 2019 and the ~~purchase~~acquisition of one franchise ~~restaurant. Both periods include reinvestments~~restaurant in ~~existing restaurants and investments in technology.~~2019.

Financing Activities

Net cash used in financing activities was ~~$3.0~~$0.3 million in the first three quarters of ~~2019~~2020 largely related to precautionary draws on our revolving credit facility of $55.5 million offset by subsequent repayments ~~of long-term debt.~~totaling $54.1 million and related debt issuance costs as well as payments on finance leases. The first three quarters of ~~2018~~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~~will be ~~approximately $3.0~~approximately $11.5 million to ~~$5.0~~$12.0 million ~~which includes $1.0 million to $3.0 million related to our construction~~ for fiscal year 2020, primarily for repairs and maintenance and the opening of ~~new~~ four company-owned restaurants ~~before any reductions for landlord reimbursements. Our total capital expenditures will be approximately $17.0 million to $19.0 million for the fiscal year.~~. We expect such capital expenditures to be funded by ~~a combination of~~currently available cash and cash equivalents and cash from ~~operations and borrowings under our revolving credit facility.~~operations.

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

Liquidity.In the third quarter of 2020, we paid down $51.8 million on our revolving credit facility, providing the Company with a cash balance of approximately $8.6 million at the end of the third 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, the expected franchise fees and royalties and available 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.

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Credit Facility

~~On May 9, 2018,~~

In November of 2019, we ~~entered into the~~amended our 2018 Credit Facility ~~which consists of a term loan~~by entering into that certain First Amendment to Credit Agreement (the “Amendment” or “First Amended Credit Facility”). Among other things, the Amendment: (i) extended the maturity date to November 20, 2024; (ii) increased the revolving credit facility ~~in an aggregate principal amount of $25.0 million and a revolving line of credit of~~from $65.0 million ~~(which may be increased~~ to $75.0 ~~million), which includes a letter~~million; (iii) delayed step downs of ~~credit subfacility~~the Company’s leverage covenant; and (iv) increased the limit on capital expenditures to $37.0 million in ~~the amount of $15.0~~2020 and to $45.0 million in 2021 and ~~a swingline subfacility in the amount of $10.0 million. The 2018 Credit Facility has a four-year term and matures on May 9, 2022.~~each fiscal year thereafter. Upon execution of the ~~2018~~First Amended Credit Facility, the Company repaid in full its outstanding indebtedness under its prior credit facility using funds drawn on ~~its 2018~~the First Amended Credit Facility. Upon repayment, the prior credit facility and all related agreements were terminated.

We have historically used cash to fund capital expenditures for new restaurant openings, reinvest in our existing restaurants, invest in infrastructure and information technology and maintain working capital. Our working capital position benefits from the fact that we generally collect cash from sales to customers the same day, or in the case of credit or debit card transactions, within several days of the related sale, and we typically have up to 30 days to pay our vendors.

As of ~~October 1, 2019,~~September 29, 2020, we had ~~$44.4~~$44.0 million of indebtedness (excluding ~~$1.3~~$1.8 million of unamortized debt issuance costs) and $3.2 million of letters of credit outstanding under the ~~2018~~Second Amended Credit Facility. The term loan requires principal payments of $187,500 per quarter through the ~~first~~third quarter of ~~2020,~~2021, $375,000 per quarter through the ~~first~~third quarter of ~~2021,~~2022, and $531,250 per quarter through ~~maturity in~~ the ~~second~~third quarter of ~~2022.~~2023 and $625,000 per quarter thereafter through maturity.

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

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

We expect that we will meet all applicable financial covenants in our 2018 Credit Facility, including the maximum consolidated total lease-adjusted leverage ratio, through at least the fiscal year ending December 31, 2019. However, there can be no assurance we will meet such financial covenants. If such covenants are not met, we would be required to seek a waiver or amendment from the banks participating in the credit facility. There can be no assurance that such waiver or amendment would be granted, which could have a material adverse impact on our liquidity.

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

Based on our most recent financial estimates of the impact of the COVID-19 pandemic on our business, 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.~~September 29, 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

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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,~~September 29, 2020, we had ~~$44.4~~$44.0 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~~$0.4 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, thereby increasing our interest payments and costs of funding our other fixed costs, and impacting our available cash flow for general corporate requirements.

Commodity Price Risk

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

Inflation

The primary inflationary factors affecting our operations are food, labor costs, energy costs and materials used in the construction of new restaurants. Increases in the minimum wage requirements directly affect our labor costs. Many of our leases require us to pay taxes, maintenance, repairs, insurance and utilities, all of which are generally subject to inflationary increases. Finally, the cost of constructing our restaurants is subject to inflationary increases in the costs of labor and material. Over the past five years, inflation has not significantly affected our operating results with the exception of increased wage inflation that affected our results from ~~2015~~2016 through the first three 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~~principal executive ~~officer~~ and ~~chief~~ financial officer, of of the effectiveness of the design and operation of our disclosure controls and procedures as of ~~October 1, 2019,~~September 29, 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~~principal 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~~accounting 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.

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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.~~September 29, 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 be harmed by breaches of security of information technology systems or our confidential consumer, employee, financial, or other proprietary data.~~

We use many information technology systems throughout our operations, including systems that record and process customer sales, manage human resources and generate accounting and financial reports. For example, our restaurants use computerized management information systems, including point-of-sale computers that process customer credit card, debit card and gift card payments, and in-restaurant back office computer systems designed to assist in the management of our restaurants and provide labor 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, financial condition or results of operations.

The cyber risks we face range from cyber-attacks common to most industries to attacks that target us due to the confidential consumer information we obtain through our electronic processing of credit and debit card transactions. Like others in our ~~industry, we have experienced many attempts to compromise~~Annual Report on Form 10-K for our ~~information technology~~fiscal year ended December 31, 2019 and ~~data, and we may experience more attempts~~ in our Quarterly Report on Form 10-Q for the future. For example, in 2016, we experienced a malware attack that compromised the security of the payment information of some customers who used debit or credit cards at certain locations between Januaryquarterly periods ended March 31, ~~2016~~2020 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.30, 2020.

Because cyber-attacks take many forms, change frequently, are becoming increasingly sophisticated, and may be difficult to detect for significant periods of time, we may not be able to respond adequately or timely to future cyber-attacks. If we or our franchisees, or third-party vendors, were to experience a material breach resulting in the unauthorized access, use, or destruction of our information technology systems or confidential consumer, employee, financial, or other proprietary data, it could negatively impact 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 out of the actual or alleged theft of credit or debit card information, compromised security and information systems, failure of our employees to comply with applicable laws, the unauthorized acquisition or use of such information by third parties, or other similar claims, and various costs associated with such matters.

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.

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Item 6. Exhibit Index



Exhibit Number		Description of Exhibit
~~10.1~~10.1*			~~Chas Hermann Separation Letter~~Employment Agreement, dated ~~September 26, 2019~~October 27, 2020, between Noodles & Company and Dave Boennighausen
~~31.1~~10.2*			Employment Agreement, dated October 27, 2020, between Noodles & Company and Brad West
10.3*		Employment Agreement, dated October 27, 2020, between Noodles & Company and Stacey Pool
10.4*		Employment Agreement, dated October 27, 2020, between Noodles & Company and Melissa Heidman
31.1		Certification of Principal Executive ~~Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002~~
~~31.2~~	~~Certification of Principal~~and Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
~~32.1~~
32.1		Certification of Principal Executive ~~Officer~~ and ~~Principal~~ Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith)
101.INS				Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
101.SCH				Inline XBRL Taxonomy Extension Schema Document
101.CAL				Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF				Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB				Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE				Inline XBRL Taxonomy Extension Presentation Linkbase Document
104.0		Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

__________________

*Management contract or compensatory plan or arrangement.

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SIGNATURES

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



NOODLES & COMPANY
By:			/s/ ~~KEN KUICK~~KATHRYN LOCKHART
			~~Ken Kuick~~Kathryn Lockhart Chief ~~Financial~~Accounting Officer ~~(principal financial~~(chief accounting officer and duly authorized signatory for the registrant)
Date			~~November 8, 2019~~October 29, 2020



	Page
PART I
	Item 1.	Financial Statements (unaudited)	2
		Condensed Consolidated Balance Sheets	2
		Condensed Consolidated Statements of Operations	3
		Condensed Consolidated Statements of Stockholders’ Equity	4
		Condensed Consolidated Statements of Cash Flows	5
		Notes to Condensed Consolidated Financial Statements	6
	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	1514
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	26
	Item 4.	Controls and Procedures	27
PART II
	Item 1.	Legal Proceedings	28
	Item 1A.	Risk Factors	28
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	2928
	Item 3.	Defaults Upon Senior Securities	2928
	Item 4.	Mine Safety Disclosures	2928
	Item 5.	Other Information	2928
	Item 6.	Exhibits	3029
SIGNATURES			3130



	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