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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 June 30, 2020
or
     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from             to            
Commission File Number: 001-35987
___________________________________________________________
NOODLES & COMPANY
(Exact name of registrant as specified in its charter)
_____________________________________________________________
Delaware
 
84-1303469
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
520 Zang Street, Suite D
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Broomfield,
CO
 
 
 
 
 
 
 
 
 
 
 
 
 
 
80021
 
 
 
(Address of principal executive offices)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Zip Code)
 
(720) 214-1900
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)

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

Title of each class
Trading Symbol
Name of each exchange on which registered
Class A Common Stock, $0.01 par value per share
NDLS
Nasdaq Global Select Market
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  No 
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  
Yes  No 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
Accelerated Filer
 
 
 
 
 
Non-accelerated filer 
 
Smaller reporting company
 
 
 
Emerging growth company
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes   No 
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
 
Outstanding at August 3, 2020
Class A Common Stock, $0.01 par value per share
 
44,354,811 shares




TABLE OF CONTENTS

 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



1


PART I

Item 1. Financial Statements

Noodles & Company
Condensed Consolidated Balance Sheets
(in thousands, except share and per share data)
 
 
June 30,
2020
 
December 31,
2019
 
 
(unaudited)
 
 
Assets
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
62,076

 
$
10,459

Accounts receivable
 
2,406

 
3,503

Inventories
 
9,510

 
9,871

Prepaid expenses and other assets
 
3,562

 
5,386

Income tax receivable
 
180

 
103

Total current assets
 
77,734

 
29,322

Property and equipment, net
 
124,640

 
128,867

Operating lease assets, net
 
209,445

 
209,717

Goodwill
 
7,154

 
7,154

Intangibles, net

855

 
883

Other assets, net
 
2,567

 
2,576

Total long-term assets
 
344,661

 
349,197

Total assets
 
$
422,395

 
$
378,519

Liabilities and Stockholders’ Equity
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable
 
$
11,380

 
$
9,351

Accrued payroll and benefits
 
10,222

 
13,479

Accrued expenses and other current liabilities
 
12,478

 
11,679

Current operating lease liabilities
 
26,144

 
22,775

Current portion of long-term debt
 
750

 
750

Total current liabilities
 
60,974

 
58,034

Long-term debt, net
 
93,040

 
40,497

Long-term operating lease liabilities, net
 
229,196

 
225,014

Deferred tax liabilities, net
 
247

 
200

Other long-term liabilities
 
6,662

 
4,203

Total liabilities
 
390,119

 
327,948

 
 
 
 
 
Stockholders’ equity:
 
 
 
 
Preferred stock—$0.01 par value, 1,000,000 shares authorized and undesignated as of June 30, 2020 and December 31, 2019; no shares issued or outstanding
 

 

Common stock—$0.01 par value, 180,000,000 shares authorized as of June 30, 2020 and December 31, 2019; 46,778,682 issued and 44,354,811 outstanding as of June 30, 2020 and 46,557,934 issued and 44,134,063 outstanding as of December 31, 2019
 
468

 
466

Treasury stock, at cost, 2,423,871 shares as of June 30, 2020 and December 31, 2019
 
(35,000
)
 
(35,000
)
Additional paid-in capital
 
201,601

 
200,585

Accumulated deficit
 
(134,793
)
 
(115,480
)
Total stockholders’ equity
 
32,276

 
50,571

Total liabilities and stockholders’ equity
 
$
422,395

 
$
378,519

   See accompanying notes to condensed consolidated financial statements.

2


Noodles & Company
Condensed Consolidated Statements of Operations
(in thousands, except share and per share data, unaudited)

 
 
Fiscal Quarter Ended
 
Two Fiscal Quarters Ended
 
 
June 30,
2020
 
July 2,
2019
 
June 30,
2020
 
July 2,
2019
Revenue:
 
 
 
 
 
 
 
 
Restaurant revenue
 
$
80,021

 
$
118,858

 
$
178,737

 
$
227,623

Franchising royalties and fees, and other
 
136

 
1,332

 
1,768

 
2,613

Total revenue
 
80,157

 
120,190

 
180,505

 
230,236

Costs and expenses:
 
 
 
 
 
 
 
 
Restaurant operating costs (exclusive of depreciation and amortization shown separately below):
 
 
 
 
 
 
 
 
Cost of sales
 
20,020

 
30,448

 
45,224

 
59,539

Labor
 
27,137

 
38,877

 
61,368

 
75,969

Occupancy
 
11,676

 
12,311

 
23,736

 
24,741

Other restaurant operating costs
 
15,789

 
16,858

 
32,478

 
33,314

General and administrative
 
10,034

 
11,848

 
20,588

 
21,988

Depreciation and amortization
 
5,397

 
5,661

 
10,732

 
11,168

Pre-opening
 
71

 
65

 
144

 
65

Restaurant impairments, closure costs and asset disposals
 
2,558

 
2,884

 
3,614

 
3,304

Total costs and expenses
 
92,682

 
118,952

 
197,884

 
230,088

(Loss) income from operations
 
(12,525
)
 
1,238

 
(17,379
)
 
148

Interest expense, net
 
920

 
800

 
1,888

 
1,561

(Loss) income before taxes
 
(13,445
)
 
438

 
(19,267
)
 
(1,413
)
Provision for income taxes
 
33

 

 
46

 

Net (loss) income and comprehensive (loss) income
 
$
(13,478
)
 
$
438

 
$
(19,313
)
 
$
(1,413
)
(Loss) earnings per Class A and Class B common stock, combined
 
 
 
 
 
 
 
 
Basic
 
$
(0.30
)
 
$
0.01

 
$
(0.44
)
 
$
(0.03
)
Diluted
 
$
(0.30
)
 
$
0.01

 
$
(0.44
)
 
$
(0.03
)
Weighted average shares of Class A and Class B common stock outstanding, combined:
 
 
 
 
 
 
 
 
Basic
 
44,212,751

 
43,964,175

 
44,177,648

 
43,955,580

Diluted
 
44,212,751

 
45,075,888

 
44,177,648

 
43,955,580


See accompanying notes to condensed consolidated financial statements.

3


Noodles & Company
Condensed Consolidated Statements of Stockholders’ Equity
(in thousands, except share data, unaudited)
 
 
Fiscal Quarter Ended
 
 
Common Stock(1)
 
Treasury
 
 Additional Paid-In
Capital
 
Accumulated
Deficit
 
Total
Stockholders’
Equity
 
 
Shares
 
Amount
 
Shares
 
Amount
 
Balance—April 1, 2020
 
46,583,879

 
$
466

 
2,423,871

 
$
(35,000
)
 
$
200,755

 
$
(121,315
)
 
$
44,906

Stock plan transactions and other
 
194,803

 
2

 

 

 
(273
)
 

 
(271
)
Stock-based compensation expense
 

 

 

 

 
1,119

 

 
1,119

Net loss
 

 

 

 

 

 
(13,478
)
 
(13,478
)
Balance—June 30, 2020
 
46,778,682

 
$
468

 
2,423,871

 
$
(35,000
)
 
$
201,601

 
$
(134,793
)
 
$
32,276

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance—April 2, 2019
 
46,370,951

 
$
464

 
2,423,871

 
$
(35,000
)
 
$
199,110

 
$
(118,978
)
 
$
45,596

Stock plan transactions and other
 
137,635

 
1

 

 

 
(257
)
 

 
(256
)
Stock-based compensation expense
 

 

 

 

 
1,125

 

 
1,125

Net income
 

 

 

 

 

 
438

 
438

Balance—July 2, 2019
 
46,508,586

 
$
465

 
2,423,871

 
$
(35,000
)
 
$
199,978

 
$
(118,540
)
 
$
46,903

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Two Fiscal Quarters Ended
 
 
Common Stock(1)
 
Treasury
 
 Additional Paid-In
Capital
 
Accumulated
Deficit
 
Total
Stockholders’
Equity
 
 
Shares
 
Amount
 
Shares
 
Amount
 
Balance—December 31, 2019
 
46,557,934

 
$
466

 
2,423,871

 
$
(35,000
)
 
$
200,585

 
$
(115,480
)
 
$
50,571

Stock plan transactions and other
 
220,748

 
2

 

 

 
(274
)
 

 
(272
)
Stock-based compensation expense
 

 

 

 

 
1,290

 

 
1,290

Net loss
 

 

 

 

 

 
(19,313
)
 
(19,313
)
Balance—June 30, 2020
 
46,778,682

 
$
468

 
2,423,871

 
$
(35,000
)
 
$
201,601

 
$
(134,793
)
 
$
32,276

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance—January 1, 2019
 
46,353,309

 
$
464

 
2,423,871

 
$
(35,000
)
 
$
198,352

 
$
(111,135
)
 
$
52,681

Stock plan transactions and other
 
155,277

 
1

 

 

 
(236
)
 

 
(235
)
Stock-based compensation expense
 

 

 

 

 
1,862

 

 
1,862

Adoption of ASU No. 2016-02, Leases (Topic 842)
 

 

 

 

 

 
(5,992
)
 
(5,992
)
Net loss
 

 

 

 

 

 
(1,413
)
 
(1,413
)
Balance—July 2, 2019
 
46,508,586

 
$
465

 
2,423,871

 
$
(35,000
)
 
$
199,978

 
$
(118,540
)
 
$
46,903

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

See accompanying notes to condensed consolidated financial statements.

4


Noodles & Company
Condensed Consolidated Statements of Cash Flows
(in thousands, unaudited)

 
 
Two Fiscal Quarters Ended
 
 
June 30,
2020
 
July 2,
2019
Operating activities
 
 
 
 
Net loss
 
$
(19,313
)
 
$
(1,413
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
10,732

 
11,168

Deferred income taxes
 
47

 

Restaurant impairments, closure costs and asset disposals
 
3,029

 
2,784

Amortization of debt issuance costs
 
149

 
250

Stock-based compensation
 
1,253

 
1,841

Changes in operating assets and liabilities:
 
 
 
 
Accounts receivable
 
1,190

 
(143
)
Inventories
 
306

 
(347
)
Prepaid expenses and other assets
 
87

 
(904
)
Accounts payable
 
2,722

 
(1,332
)
Income taxes
 
(77
)
 
(6
)
Operating lease assets and liabilities
 
7,507

 
(407
)
Accrued expenses and other liabilities
 
(925
)
 
(2,483
)
Net cash provided by operating activities
 
6,707

 
9,008

Investing activities
 
 
 
 
Purchases of property and equipment
 
(6,810
)
 
(8,217
)
Proceeds from disposal of property and equipment
 

 
352

Franchise restaurant acquisition, net of cash acquired
 

 
(1,387
)
Net cash used in investing activities
 
(6,810
)
 
(9,252
)
Financing activities
 
 
 
 
Proceeds from issuance of long-term debt
 
55,500

 

Payments on long-term debt
 
(2,375
)
 
(500
)
Payments on finance leases
 
(402
)
 
(338
)
Debt issuance costs

(731
)


Stock plan transactions and tax withholding on share-based compensation awards
 
(272
)
 
(235
)
Net cash provided by (used in) financing activities
 
51,720

 
(1,073
)
Net increase (decrease) in cash and cash equivalents
 
51,617

 
(1,317
)
Cash and cash equivalents
 
 
 
 
Beginning of period
 
10,459

 
4,655

End of period
 
$
62,076

 
$
3,338

See accompanying notes to condensed consolidated financial statements.

5


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 June 30, 2020, the Company had 380 company-owned restaurants and 76 franchise restaurants in 29 states and the District of Columbia. The Company operates its business as one operating and reportable segment.

Basis of Presentation

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

Fiscal Year

The Company operates on a 52- or 53-week fiscal year ending on the Tuesday closest to December 31. The Company’s fiscal quarters each contain 13 operating weeks, with the exception of the fourth quarter of a 53-week fiscal year, which contains 14 operating weeks. Fiscal year 2020, which ends on December 29, 2020, and fiscal year 2019, which ended on December 31, 2019, both contain 52 weeks. The Company’s fiscal quarter that ended June 30, 2020 is referred to as the second quarter of 2020, and the fiscal quarter ended July 2, 2019 is referred to as the second quarter of 2019.

Risks and Uncertainties

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

Recent Accounting Pronouncements
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 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 interim periods within those reporting periods. Interim period adoption is permitted. The guidance is to be applied using a prospective method, excluding amendments related to franchise taxes, which should be applied

6


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 fiscal year of adoption. We are currently evaluating the impacts of adoption of the new guidance to 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 ASU 2016-13 did not result in any impact to the Company’s consolidated financial statements or disclosures.

2. Supplemental Financial Information

Accounts receivable consist of the following (in thousands):
 
 
June 30,
2020
 
December 31,
2019
Insurance receivable
 
$
96

 
$
744

Vendor rebate receivables
 
281

 
788

Franchise and other receivables
 
2,029

 
1,971

 
 
$
2,406

 
$
3,503



Prepaid expenses and other assets consist of the following (in thousands):
 
 
June 30,
2020
 
December 31,
2019
Prepaid occupancy related costs
 
$
608

 
$
834

Other prepaid expenses
 
2,948

 
2,799

Other current assets (1)
 
6

 
1,753

 
 
$
3,562

 
$
5,386

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

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

 
 
June 30,
2020
 
December 31,
2019
Leasehold improvements
 
$
197,859

 
$
200,580

Furniture, fixtures and equipment
 
124,587

 
122,752

Construction in progress
 
5,899

 
2,890

 
 
328,345

 
326,222

Accumulated depreciation and amortization
 
(203,705
)
 
(197,355
)
Property and equipment, net
 
$
124,640

 
$
128,867



7



Accrued payroll and benefits consist of the following (in thousands):
 
 
June 30,
2020
 
December 31,
2019
Accrued payroll and related liabilities
 
$
5,634

 
$
6,364

Accrued bonus
 
848

 
3,505

Insurance liabilities
 
3,740

 
3,610

 
 
$
10,222

 
$
13,479


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

 
 
June 30,
2020
 
December 31,
2019
Gift card liability
 
$
1,900

 
$
2,398

Occupancy related
 
1,695

 
1,458

Utilities
 
1,221

 
1,379

Deferred revenue
 
1,690

 
555

Current portion of finance lease liability
 
998

 
510

Other accrued expenses
 
4,974

 
5,379

Accrued expenses and other current liabilities
 
$
12,478

 
$
11,679



3. Long-Term Debt

On May 9, 2018, the Company entered into a credit facility with U.S. Bank National Association (the “2018 Credit Facility”). The 2018 Credit Facility consists of a term loan facility in an aggregate principal amount of $25.0 million and a revolving credit facility of $65.0 million (which may be increased to $75.0 million), which includes a letter of credit subfacility in the amount of $15.0 million and a swingline subfacility in the amount of $10.0 million. The 2018 Credit Facility has a four-year term and matures on May 9, 2022.
On November 20, 2019, the Company amended its 2018 Credit Facility by entering into the First Amendment to the Credit Facility (the “Amendment” or “First Amended Credit Facility”). Among other things, the Amendment: (i) extended the maturity date to November 20, 2024; (ii) increased the revolving credit facility from $65.0 million to $75.0 million; (iii) delayed step downs of the Company’s leverage covenant; and (iv) increased the limit on capital expenditures to $37.0 million in 2020 and to $45.0 million in 2021 and each fiscal year thereafter.
Borrowings under the 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 2.00% to 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 1.00% to 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 Amendment includes a commitment fee of 0.20% to 0.35% per annum, based upon the consolidated total lease-adjusted leverage ratio, on any unused portion of the revolving credit facility.
On June 16, 2020 (the “Effective Date”), the Company amended its 2018 Credit Facility by entering into the Second Amendment to the Credit Facility (the “Second Amendment” or the “Second Amended Credit Facility”). Beginning on the Effective Date and through the third quarter of 2021 (the “Amendment Period”), borrowings under the Second Amended Credit Facility, including the term loan facility (“Borrowings”), will bear interest at LIBOR plus 3.25% per annum. Following the Amendment Period, borrowings will bear interest at LIBOR plus a margin of 2.00% to 3.00% per annum, based upon the consolidated total lease-adjusted leverage ratio. Among other things, the Second Amendment (i) waives the lease-adjusted leverage ratio and fixed charge ratio covenants through the first quarter of 2021; (ii) amends the Company’s lease-adjusted leverage ratio and fixed coverage ratio covenant thresholds beginning in the second quarter of 2021 through the third quarter of 2022 and the first quarter of 2022, respectively and (iii) limits capital expenditures to $12.0 million in 2020, $12.0 million plus a liquidity-based performance basket up to an additional $12.0 million in 2021, $34.0 million in 2022, $37.0 million in 2023 and $45.0 million annually thereafter.

8


As of June 30, 2020, the Company had $95.7 million of indebtedness (excluding $2.0 million of unamortized debt issuance costs) and $3.2 million of letters of credit outstanding under the Second Amended Credit Facility. As of June 30, 2020, the Company had cash on hand of $62.1 million.
The term loan requires principal payments of $187,500 per quarter through the third quarter of 2021, $375,000 per quarter through the third quarter of 2022, and $531,250 per quarter through the third quarter of 2023 and $625,000 per quarter thereafter through maturity.

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

Year 1
$
750

Year 2
1,313

Year 3
1,969

Year 4
2,406

Year 5
89,305

Total
$
95,743



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

The Company also maintains outstanding letters of credit to secure obligations under its workers’ compensation program and certain lease obligations. The Company was in compliance with all of its debt covenants as of June 30, 2020.
4. Fair Value Measurements

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

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

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

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

Adjustments to the fair value of assets measured at fair value on a non-recurring basis as of June 30, 2020 and July 2, 2019 are discussed in Note 7, Restaurant Impairments, Closure Costs and Asset Disposals.

5. Income Taxes

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

 
 
Fiscal Quarter Ended
 
Two Fiscal Quarters Ended
 
 
June 30,
2020
 
July 2,
2019
 
June 30,
2020
 
July 2,
2019
Provision for income taxes
 
$
33

 
$

 
$
46

 
$

Effective tax rate
 
(0.2
)%
 
%
 
(0.2
)%
 
%


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

9


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.

On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), which provides economic relief in response to the COVID-19 pandemic, was signed into 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 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 June 30, 2020, approximately 2.8 million share-based awards were available to be granted under the Plan.

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

 
Fiscal Quarter Ended
 
Two Fiscal Quarters Ended
 
June 30,
2020
 
July 2,
2019
 
June 30,
2020
 
July 2,
2019
Stock-based compensation expense
$
1,094

 
$
1,155

 
$
1,253

 
$
1,881

Capitalized stock-based compensation expense
$
25

 
$
10

 
$
37

 
$
21



7. Restaurant Impairments, Closure Costs and Asset Disposals

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

 
Fiscal Quarter Ended
 
Two Fiscal Quarters Ended
 
June 30,
2020
 
July 2,
2019
 
June 30,
2020
 
July 2,
2019
Restaurant impairments (1)
$
2,135

 
$
2,276

 
$
2,262

 
$
2,465

Closure costs (1)
299

 
173

 
512

 
134

Loss on disposal of assets and other
124

 
435

 
840

 
705

 
$
2,558

 
$
2,884

 
$
3,614

 
$
3,304


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

During the second quarter of 2020, five restaurants were identified as impaired for which the Company recorded an impairment charge of $2.1 million. In the second quarter of 2019, two restaurants were impaired for a total impairment charge of $2.2 million. Impairment is based on management’s current assessment of the expected future cash flows of a restaurant based on recent results and other specific market factors. Impairment expense is a Level 3 fair value measure and is determined by comparing the carrying value of restaurant assets to the estimated fair market value of the restaurant assets at resale value and the right-of-use asset based on a discounted cash flow analysis utilizing market lease rates. The Company will continue to monitor the impact from the COVID-19 pandemic as it relates to recoverability of long-lived assets. Although we have seen an improvement in sales, we are unable to predict how long these conditions will persist, what additional measures may be introduced by governments or what effect any such additional measures may have on restaurants and our business. Any measure that encourages consumers to stay in their homes, engage in social distancing or avoid larger gatherings of people for an extended period of time is highly likely to be harmful to the restaurant industry in general.

Closure costs in each of the second quarter and first two quarters of 2020 and 2019 include ongoing costs related to restaurants closed in previous years as well as one company-owned restaurant closed during the second quarter of 2020 that was near the end of its lease term. In addition, closure costs in the second quarter and first two quarters of 2019 were partially offset by a gain of $0.1 million and $0.4 million, respectively, from adjustments to liabilities as lease terminations occur.


10


Loss on disposal of assets and other includes expenses recognized during the first two quarters of 2020 related to the divestiture of company-owned restaurants to a 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
 
Two Fiscal Quarters Ended
 
 
June 30,
2020
 
July 2,
2019
 
June 30,
2020
 
July 2,
2019
Net (loss) income
 
$
(13,478
)
 
$
438

 
$
(19,313
)
 
$
(1,413
)
Shares:
 
 
 
 
 
 
 
 
Basic weighted average shares outstanding
 
44,212,751

 
43,964,175

 
44,177,648

 
43,955,580

Effect of dilutive securities
 

 
1,111,713

 

 

Diluted weighted average shares outstanding
 
44,212,751

 
45,075,888

 
44,177,648

 
43,955,580

(Loss) earnings per share:
 
 
 
 
 
 
 
 
Basic (loss) earnings per share
 
$
(0.30
)
 
$
0.01

 
$
(0.44
)
 
$
(0.03
)
Diluted (loss) earnings per share
 
$
(0.30
)
 
$
0.01

 
$
(0.44
)
 
$
(0.03
)


The Company computes the effect of dilutive securities using the treasury stock method and average market prices during the period. Potential common shares are excluded from the computation of diluted earnings per share when the effect would be anti-dilutive. The shares issuable on the vesting or exercise of share-based awards or exercise of outstanding warrants that were excluded from the calculation of diluted earnings (loss) per share because the effect of their inclusion would have been anti-dilutive totaled 4,142,754 and 1,297,255 for the second quarter of 2020 and 2019, respectively, and totaled 3,309,278 and 3,229,030 for the first two quarters of 2020 and 2019, respectively.

9. Leases

As discussed in Note 1, Business Summary and Basis of Presentation, 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. During the second quarter 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 some cases, extend the period of the respective lease term. In the case where the lease term was extended, we remeasured the remaining consideration in the contract. The total rent that was deferred for lease amendments that have been executed through June 30, 2020 was $4.0 million.
Further, for certain of our restaurants, the COVID-19 pandemic had a significant impact to the underlying asset values. Based on an impairment analysis performed during the quarter ended June 30, 2020, we recorded asset impairment charges of $0.3 million to reduce the carrying value of certain operating lease assets to their respective estimated fair value.
Supplemental balance sheet information related to leases is as follows (in thousands):


11


Classification
June 30,
2020
 
December 31,
2019
Assets
 
 
 
 
Operating
Operating lease assets, net
$
209,445

 
$
209,717

Finance
Finance lease assets, net (1)
3,086

 
771

Total leased assets
 
$
212,531

 
$
210,488

Liabilities
 
 
 
 
Current lease liabilities
 
 
 
 
Operating
Current operating lease liabilities
$
26,144

 
$
22,775

Finance
Current finance lease liabilities (2)
998

 
510

Long-term lease liabilities
 
 
 
 
Operating
Long-term operating lease liabilities
229,196

 
225,014

Finance
Long-term finance lease liabilities (2)
2,127

 
281

Total lease liabilities
 
$
258,465

 
$
248,580

_____________________
(1)
The finance lease assets are included in property and equipment, net in the Condensed Consolidated Balance Sheets.
(2)
The current portion of the finance lease liabilities is included in accrued expenses and other current liabilities, and the long-term portion was included in other long-term liabilities in the Condensed Consolidated Balance Sheets.

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

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

 
 
Fiscal Quarter Ended
 
Two Fiscal Quarters Ended
 
 
June 30,
2020
 
July 2,
2019
 
June 30,
2020
 
July 2,
2019
Cash paid for lease liabilities:
 
 
 
 
 
 
 
 
Operating leases
 
$
6,066

 
$
10,813

 
$
13,574

 
$
21,506

Finance leases
 
270

 
160

 
452

 
377

 
 
$
6,336

 
$
10,973

 
$
14,026

 
$
21,883

Right-of-use assets obtained in exchange for lease liabilities:
 
 
 
 
 
 
 
 
Operating leases
 
$
4,557

 
$
2,049

 
$
10,281

 
$
5,210

Finance leases
 
1,238

 
179

 
2,842

 
229

 
 
$
5,795

 
$
2,228

 
$
13,123

 
$
5,439



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

 
Operating Leases
 
Finance Leases
 
Total
Remainder of 2020
$
22,747

 
$
599

 
$
23,346

2021
44,433

 
978

 
45,411

2022
43,604

 
836

 
44,440

2023
42,514

 
682

 
43,196

2024
40,982

 
218

 
41,200

Thereafter
170,200

 
37

 
170,237

Total lease payments
364,480

 
3,350

 
367,830

Less: Imputed interest
109,140

 
225

 
109,365

Present value of lease liabilities
$
255,340

 
$
3,125

 
$
258,465




12


10. Supplemental Disclosures to Condensed Consolidated Statements of Cash Flows

The following table presents the supplemental disclosures to the Condensed Consolidated Statements of Cash Flows for the two quarters ended June 30, 2020 and July 2, 2019 (in thousands):

 
 
June 30,
2020
 
July 2,
2019
Interest paid (net of amounts capitalized)
 
$
1,666

 
$
1,382

Income taxes paid
 
25

 
6

Purchases of property and equipment accrued in accounts payable
 
1,793

 
2,392



11. Revenue Recognition

Revenue

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

Gift Cards

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

As of June 30, 2020 and December 31, 2019, the current portion of the gift card liability, $1.9 million and $2.4 million, respectively, was included in accrued expenses and other current liabilities, and the long-term portion, $0.6 million and $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 $2.1 million and $3.2 million for the first two quarters of 2020 and 2019, respectively.

Franchise Fees

Royalties from franchise restaurants are based on a percentage of restaurant revenues and are recognized in the period the related franchised restaurants’ sales occur. In the second quarter of 2020, we forgave the franchise royalties due for the quarter due to the impact of the COVID-19 pandemic. In the third quarter, we will resume recognizing franchise royalty revenue and cash collection. Development fees and franchise fees, portions of which are collected in advance, are nonrefundable and are recognized in income ratably over the term of the related franchise agreement or recognized upon the termination of the agreement between the Company and the franchisee. The Company has determined that the initial franchise services are not distinct from the continuing rights or services offered during the term of the franchise agreement and should be treated as a single performance obligation; therefore, initial fees received from franchisees are recognized as revenue over the term of each respective franchise agreement, which is typically 20 years.
Loyalty Program
Customers who register on the Noodles App are automatically enrolled in the Noodles Rewards program, which is primarily a spend-based loyalty program. With each purchase, Noodles Rewards members earn loyalty points that can be redeemed for rewards, including free products. Using an estimate of the value of reward redemptions, we defer revenue associated with points earned, net of estimated points that will not be redeemed. Points generally expire after six months. Revenue is recognized in a future period when the reward points are redeemed. As of June 30, 2020 and December 31, 2019, the deferred revenue related to the rewards was $1.7 million and $0.6 million, respectively, and was included in accrued expenses and other current liabilities in the Condensed Consolidated Balance Sheets.

13



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 June 30, 2020. These matters could affect the operating results of any one financial reporting period when resolved in future periods. The Company believes that an unfavorable outcome with respect to these matters is remote or a potential range of loss is not material to its consolidated financial statements. Significant increases in the number of these claims, or one or more successful claims that result in greater liabilities than the Company currently anticipates, could materially and adversely affect its business, financial condition, results of operations or cash flows.

14


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 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 2020 and 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; seasonal factors; 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 December 31, 2019 and in our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2020..

Impact of COVID-19 Pandemic on Our Business

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

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

15


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

Recent Trends, Risks and Uncertainties

Comparable Restaurant Sales. In the second quarter of 2020, system-wide comparable restaurant sales decreased 30.9%, comprised of a 30.1% decrease for company-owned restaurants and a 35.4% decrease for franchise restaurants.

The cadence of comparable restaurant sales and average unit volumes during the second quarter and third quarter to-date are as set forth below. Company-owned restaurants were closed July 4th and 5th 2020 in appreciation of our teams’ efforts during the pandemic. All restaurants were open during that time frame in 2019, negatively impacting comparable restaurant sales during same period in 2020:
Comparable Restaurant Sales
4 Weeks Ended April 28, 2020
4 Weeks Ended May 26, 2020
5 Weeks Ended June 30, 2020
2 Weeks Ended July 14, 2020 (1)
2 Weeks Ended July 28, 2020
Company-owned
(47.0)%
(28.9)%
(17.7)%
(13.9)%
(3.8)%
Franchise
(55.5)%
(37.3)%
(18.1)%
(7.5)%
(7.8)%
System-wide
(48.2)%
(30.1)%
(17.8)%
(13.0)%
(4.4)%
Average Unit Volumes (000’s)
$685
$901
$1,044
$1,168
$1,181
_________________
(1) Company-owned restaurants were closed July 4 and July 5, 2020.

Our ability to return to positive comparable restaurant sales depends, among other reasons, on (i) the duration of the COVID-19 pandemic, (ii) limitations imposed by federal, state and local governments with respect to reduced seating capacity in 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 two quarters of 2020, we were able to mitigate the impact of increased base labor costs through labor efficiencies such as our procedures around optimizing food preparation times. Additionally, during the first two quarters of 2020, we modified our labor model to reduce the number of staffing hours in our restaurants. Some jurisdictions in which we operate have recently increased their minimum wage and other jurisdictions are considering similar actions. Significant additional government-imposed increases could materially affect our labor costs.

Certain Restaurant Closures. We permanently closed one company-owned restaurant in the first two quarters of 2020. From the last half of March through June 2020, nearly all of our dining rooms were closed due to the COVID-19 pandemic. We have begun reopening dining rooms in certain restaurants and will continue to open the remaining dining rooms as appropriate. We currently do not anticipate a significant number of permanent restaurant closures in the foreseeable future; however, we may from time to time permanently close certain restaurants, including permanent closures at, or near, the expiration of the leases for these restaurants.

Restaurant Development. In the first two quarters of 2020, we opened one new company-owned restaurant and sold nine restaurants to a franchisee. As of June 30, 2020, we had 380 company-owned restaurants and 76 franchise restaurants in 29 states and the District of Columbia. In response to the onset of the COVID-19 pandemic and to preserve cash, we substantively halted capital investment in new unit development during the second quarter. Given the Company’s sales recovery in recent months, as well as an anticipated increase in favorable real estate availability, we expect to incorporate increased unit development into our strategic growth plan for 2021 and beyond.

Key Measures We Use to Evaluate Our Performance


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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 operating results and comparable restaurant sales may fluctuate significantly.

Average Unit Volume

AUV consists of the average annualized sales of all restaurants for 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 revenue patterns at our restaurants.

Comparable Restaurant Sales

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

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

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

overall economic trends, particularly those related to consumer spending;

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

pricing;

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

marketing and promotional efforts;

abnormal weather patterns;

food safety and foodborne illness concerns;

the impact of the COVID-19 pandemic;

local competition;

trade area dynamics;

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

opening new restaurants in the vicinity of existing locations.

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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 to EBITDA and adjusted EBITDA:
 
 
Fiscal Quarter Ended
 
Two Fiscal Quarters Ended
 
 
June 30,
2020
 
July 2,
2019
 
June 30,
2020
 
July 2,
2019
 
 
(in thousands, unaudited)
Net (loss) income
 
$
(13,478
)
 
$
438

 
$
(19,313
)
 
$
(1,413
)
Depreciation and amortization
 
5,397

 
5,661

 
10,732

 
11,168

Interest expense, net
 
920

 
800

 
1,888

 
1,561

Provision for income taxes
 
33

 

 
46

 

EBITDA
 
$
(7,128
)
 
$
6,899

 
$
(6,647
)
 
$
11,316

Restaurant impairments, closure costs and asset disposals (1)
 
2,558

 
2,884

 
3,614

 
3,304

Stock-based compensation expense
 
1,094

 
1,155

 
1,253

 
1,881

Fees and costs related to transactions and other acquisition/disposition costs
 
73

 

 
162

 
36

Severance costs
 
89

 

 
89

 

Adjusted EBITDA
 
$
(3,314
)
 
$
10,938

 
$
(1,529
)
 
$
16,537

_____________________
(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
 
Two Fiscal Quarters Ended
 
 
June 30,
2020
 
July 2,
2019
 
June 30,
2020
 
July 2,
2019
Company-Owned Restaurant Activity
 
 
 
 
 
 
 
 
Beginning of period
 
381

 
395

 
389

 
394

Openings
 

 

 
1

 

Acquisition (2)
 

 

 

 
1

Closures
 
(1
)
 

 
(1
)
 

Divestitures (1)
 

 

 
(9
)