UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
_____________________________________________________________
FORM 10-Q
_____________________________________________________________
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 3, 2018
or
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 001-35987
___________________________________________________________
(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)
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 x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer x | |
Non-accelerated filer o | Smaller reporting company o | |
(Do not check if a smaller reporting company) | Emerging growth company x | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class | Outstanding at July 16, 2018 | |
Class A Common Stock, $0.01 par value per share | ||
TABLE OF CONTENTS
Page | |||
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PART I
Item 1. Financial Statements
Noodles & Company
Condensed Consolidated Balance Sheets
(in thousands, except share and per share data)
July 3, 2018 | January 2, 2018 | |||||||
(unaudited) | ||||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | $ | ||||||
Accounts receivable | ||||||||
Inventories | ||||||||
Prepaid expenses and other assets | ||||||||
Income tax receivable | ||||||||
Total current assets | ||||||||
Property and equipment, net | ||||||||
Goodwill | ||||||||
Intangibles, net | ||||||||
Other assets, net | ||||||||
Total long-term assets | ||||||||
Total assets | $ | $ | ||||||
Liabilities and Stockholders’ Equity | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | $ | ||||||
Accrued payroll and benefits | ||||||||
Accrued expenses and other current liabilities | ||||||||
Current portion of long-term debt | ||||||||
Total current liabilities | ||||||||
Long-term debt, net | ||||||||
Deferred rent | ||||||||
Deferred tax liabilities, net | ||||||||
Other long-term liabilities | ||||||||
Total liabilities | ||||||||
Stockholders’ equity: | ||||||||
Preferred stock—$0.01 par value, 1,000,000 shares authorized and undesignated as of July 3, 2018 and January 2, 2018; no shares issued or outstanding | ||||||||
Common stock—$0.01 par value, 180,000,000 shares authorized as of July 3, 2018 and January 2, 2018; 43,690,395 issued and 41,266,524 outstanding as of July 3, 2018 and 43,550,329 issued and 41,126,458 outstanding as of January 2, 2018 | ||||||||
Treasury stock, at cost, 2,423,871 shares as of July 3, 2018 and January 2, 2018 | ( | ) | ( | ) | ||||
Additional paid-in capital | ||||||||
Accumulated deficit | ( | ) | ( | ) | ||||
Total stockholders’ equity | ||||||||
Total liabilities and stockholders’ equity | $ | $ | ||||||
See accompanying notes to condensed consolidated financial statements.
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Noodles & Company
Condensed Consolidated Statements of Operations
(in thousands, except share and per share data, unaudited)
Fiscal Quarter Ended | Two Fiscal Quarters Ended | |||||||||||||||
July 3, 2018 | July 4, 2017 | July 3, 2018 | July 4, 2017 | |||||||||||||
Revenue: | ||||||||||||||||
Restaurant revenue | $ | $ | $ | $ | ||||||||||||
Franchising royalties and fees | ||||||||||||||||
Total revenue | ||||||||||||||||
Costs and expenses: | ||||||||||||||||
Restaurant operating costs (exclusive of depreciation and amortization shown separately below): | ||||||||||||||||
Cost of sales | ||||||||||||||||
Labor | ||||||||||||||||
Occupancy | ||||||||||||||||
Other restaurant operating costs | ||||||||||||||||
General and administrative | ||||||||||||||||
Depreciation and amortization | ||||||||||||||||
Pre-opening | ||||||||||||||||
Restaurant impairments, closure costs and asset disposals | ||||||||||||||||
Total costs and expenses | ||||||||||||||||
Loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Loss on extinguishment of debt | ||||||||||||||||
Interest expense, net | ||||||||||||||||
Loss before income taxes | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
(Benefit) provision for income taxes | ( | ) | ( | ) | ||||||||||||
Net loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Accretion of preferred stock to redemption value | ( | ) | ( | ) | ||||||||||||
Net loss attributable to common stockholders | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
Loss per share of Class A and Class B common stock, combined: | ||||||||||||||||
Basic | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
Diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
Weighted average shares of Class A and Class B common stock outstanding, combined: | ||||||||||||||||
Basic | ||||||||||||||||
Diluted | ||||||||||||||||
See accompanying notes to condensed consolidated financial statements.
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Noodles & Company
Condensed Consolidated Statements of Comprehensive Loss
(in thousands, unaudited)
Fiscal Quarter Ended | Two Fiscal Quarters Ended | |||||||||||||||
July 3, 2018 | July 4, 2017 | July 3, 2018 | July 4, 2017 | |||||||||||||
Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
Other comprehensive loss: | ||||||||||||||||
Foreign currency translation adjustments | ( | ) | ( | ) | ||||||||||||
Other comprehensive loss | ( | ) | ( | ) | ||||||||||||
Comprehensive loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
See accompanying notes to condensed consolidated financial statements.
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Noodles & Company
Condensed Consolidated Statements of Cash Flows
(in thousands, unaudited)
Two Fiscal Quarters Ended | ||||||||
July 3, 2018 | July 4, 2017 | |||||||
Operating activities | ||||||||
Net loss | $ | ( | ) | $ | ( | ) | ||
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | ||||||||
Depreciation and amortization | ||||||||
Deferred income taxes | ( | ) | ||||||
Restaurant impairments, closure costs and asset disposals | ||||||||
Loss on extinguishment of debt | ||||||||
Amortization of debt issuance costs | ||||||||
Stock-based compensation | ||||||||
Non-cash gain on litigation settlement | ( | ) | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | ||||||||
Inventories | ( | ) | ( | ) | ||||
Prepaid expenses and other assets | ( | ) | ||||||
Accounts payable | ( | ) | ||||||
Deferred rent | ( | ) | ||||||
Income taxes | ( | ) | ||||||
Accrued expenses and other liabilities | ( | ) | ( | ) | ||||
Net cash provided by (used in) operating activities | ( | ) | ||||||
Investing activities | ||||||||
Purchases of property and equipment | ( | ) | ( | ) | ||||
Net cash used in investing activities | ( | ) | ( | ) | ||||
Financing activities | ||||||||
Net (payments) borrowings from swing line loan | ( | ) | ||||||
Proceeds from issuance of long-term debt | ||||||||
Payments on long-term debt | ( | ) | ( | ) | ||||
Issuance of preferred stock and common stock warrants, net of transaction expenses (see Note 9) | ||||||||
Issuance of common stock, net of transaction expenses (see Note 9) | ||||||||
Proceeds from exercise of stock options and employee stock purchase plan | ( | ) | ||||||
Debt issuance costs | ( | ) | ( | ) | ||||
Net cash provided by financing activities | ||||||||
Effect of exchange rate changes on cash | ||||||||
Net increase in cash and cash equivalents | ||||||||
Cash and cash equivalents | ||||||||
Beginning of period | ||||||||
End of period | $ | $ | ||||||
See accompanying notes to condensed consolidated financial statements.
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NOODLES & COMPANY
Notes to Condensed Consolidated Financial Statements
(unaudited)
1. Business Summary and Basis of Presentation
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 July 3, 2018, the Company had 404 company-owned restaurants and 65 franchise restaurants in 29 states and the District of Columbia. The Company operates its business as one operating and reportable segment.
Basis of Presentation
In February 2016, the FASB issued ASU No. 2016-02, “Leases.” The pronouncement amends the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheet and making targeted changes to lessor accounting. This pronouncement will be effective for interim and annual periods beginning after December 15, 2018 (the Company’s first quarter of fiscal 2019), with early adoption permitted. The new lease standard requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. The Company believes the adoption of ASU No. 2016-02 will have a significant impact on its consolidated balance sheets by significantly increasing its non-current assets and non-current liabilities in order to record the right of use assets and related lease liabilities for its existing operating leases. The Company is currently evaluating the impact the adoption of this accounting standard will have on its results of operations and cash flows and related disclosures.
Recently Adopted Accounting Pronouncements
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” which supersedes the revenue recognition requirements in Accounting Standards Codification 605, “Revenue Recognition.” This ASU is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. In August 2015, the FASB issued ASU No. 2015-14, which deferred the effective date of the new revenue standard by one year, and allowed entities the option to early adopt the new revenue standard as of the original effective date. There have been multiple standards
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updates amending this guidance or providing corrections or improvements on issues in the guidance. The requirements for these standards relating to Topic 606 are effective for interim and annual periods beginning after December 15, 2017. This standard permitted adoption using one of two transition methods, either the retrospective or modified retrospective transition method.
2. Supplemental Financial Information
July 3, 2018 | January 2, 2018 | |||||||
Leasehold improvements | $ | $ | ||||||
Furniture, fixtures and equipment | ||||||||
Construction in progress | ||||||||
Accumulated depreciation and amortization | ( | ) | ( | ) | ||||
$ | $ | |||||||
July 3, 2018 | January 2, 2018 | |||||||
Gift card liability | $ | $ | ||||||
Occupancy related | ||||||||
Utilities | ||||||||
Data breach liabilities | ||||||||
Other accrued expenses | ||||||||
$ | $ | |||||||
3. Long-Term Debt
2018 Credit Facility
On May 9, 2018, the Company entered into a credit facility with U.S. Bank National Association (the “2018 Credit Facility”). The 2018 Credit Facility consists of a term loan facility in an aggregate principal amount of $25.0 million and a revolving line of credit of $65.0 million (which may be increased to $75.0 million), which includes a letter of credit subfacility in the amount of $15.0 million and a swingline subfacility in the amount of $10.0 million. The 2018 Credit Facility has a four-year term and matures on May 9, 2022.
Borrowings under the 2018 Credit Facility, including the term loan facility, bear interest annually, at the Company’s option, at either (i) LIBOR plus a margin of 2.25 % to 3.25 % per annum, based upon the consolidated total lease-adjusted leverage ratio or (ii) the highest of the following base rates plus a margin of 1.25 % to 2.25 % per annum: (a) the federal funds rate plus 0.50 %; (b) the U.S. Bank prime rate or (c) the one-month LIBOR plus 1.00 %. The 2018 Credit Facility includes a commitment fee of 0.30 % to 0.50 % per annum, based upon the consolidated total lease-adjusted leverage ratio, on any unused portion of the revolving credit facility.
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As of July 3, 2018, the Company had $65.2 million of indebtedness and $3.8 million of letters of credit outstanding under the 2018 Credit Facility. The term loan requires principal payments of $156,250 per quarter starting in the second quarter of 2018 through the first quarter of 2019, $187,500 per quarter through the first quarter of 2020, $375,000 per quarter through the first quarter of 2021, and $531,250 per quarter through maturity in the second quarter of 2022.
Year 1 | $ | ||
Year 2 | |||
Year 3 | |||
Year 4 | |||
Total | $ | ||
The Company’s outstanding indebtedness bore interest between 4.95 % to 7.25 % during the first two quarters of 2018.
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 July 3, 2018.
Prior Credit Facility
4. Fair Value Measurements
The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and all other current liabilities approximate their fair values due to their short-term nature. The carrying amounts of borrowings under the credit facility approximate fair value as the line of credit and term borrowings vary with market interest rates and negotiated terms and conditions are consistent with current market rates. The fair value of the Company’s line of credit and term borrowings are measured using Level 2 inputs.
5. Income Taxes
Fiscal Quarter Ended | Two Fiscal Quarters Ended | |||||||||||||||
July 3, 2018 | July 4, 2017 | July 3, 2018 | July 4, 2017 | |||||||||||||
(Benefit) provision for income taxes | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
Effective tax rate | % | ( | )% | % | ( | )% | ||||||||||
The effective tax rates for the second quarter of 2018 and the first two quarters of 2018, reflect changes made by the Tax Cuts and Jobs Act (“Tax Act”), which was signed into law in December 2017. The primary change from the Tax Act that impacts fiscal 2018 is related to an indefinite carry forward for federal and conforming states’ net operating losses, which enabled the Company to release a portion of the previously recorded valuation allowance. For the remainder of fiscal 2018, the Company does not anticipate material income tax expense or benefit as a result of the valuation allowance recorded. The Company will maintain the remaining valuation allowance against deferred tax assets until there is sufficient evidence to support a full or partial reversal. The reversal of a previously recorded valuation allowance will generally result in a benefit from income tax.
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6. Stock-Based Compensation
The Company’s Stock Incentive Plan, as amended and restated in May of 2013, authorizes the grant of nonqualified stock options, incentive stock options, stock appreciation rights, restricted stock, restricted stock units (“RSUs”) and incentive bonuses to employees, officers, nonemployee directors and other service providers. The number of shares of common stock available for issuance pursuant to awards granted under the Stock Incentive Plan on or after the Company’s initial public offering shall not exceed 3,750,500 shares.
Fiscal Quarter Ended | Two Fiscal Quarters Ended | ||||||||||||||
July 3, 2018 | July 4, 2017 | July 3, 2018 | July 4, 2017 | ||||||||||||
Stock-based compensation expense | $ | $ | $ | $ | |||||||||||
Capitalized stock-based compensation expense | $ | $ | $ | $ | |||||||||||
7. Restaurant Impairments, Closure Costs and Asset Disposals
Fiscal Quarter Ended | Two Fiscal Quarters Ended | ||||||||||||||
July 3, 2018 | July 4, 2017 | July 3, 2018 | July 4, 2017 | ||||||||||||
Restaurant impairments (1) | $ | $ | $ | $ | |||||||||||
Closure costs (1) | ( | ) | |||||||||||||
Loss on disposal of assets and other | |||||||||||||||
$ | $ | $ | $ | ||||||||||||
_____________________________
(1) | Restaurant impairments and closure costs in all periods presented above include amounts related to restaurants previously impaired or closed. |
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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.
Fiscal Quarter Ended | Two Fiscal Quarters Ended | |||||||||||||||
July 3, 2018 | July 4, 2017 | July 3, 2018 | July 4, 2017 | |||||||||||||
Net loss attributable to common stockholders | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
Shares: | ||||||||||||||||
Basic weighted average shares outstanding | ||||||||||||||||
Effect of dilutive securities | ||||||||||||||||
Diluted weighted average shares outstanding | ||||||||||||||||
Loss per share: | ||||||||||||||||
Basic loss per share | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
Diluted loss per share | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
9. Stockholders’ Equity
Securities Purchase Agreement with L Catterton
On February 8, 2017, the Company entered into a securities purchase agreement with L Catterton, pursuant to which the Company agreed, in return for aggregate gross proceeds of $18.5 million, to sell to L Catterton an aggregate of 18,500 shares of preferred stock convertible into 4,252,873 shares of the Company’s Class A common stock, par value $0.01 per share, at a price per share of $1,000 , plus warrants exercisable for five years beginning six months following their issuance for the purchase of 1,913,793 shares of the Company’s Class A common stock, at a price per share of $4.35 (such transactions, collectively, the “private placement”). The funding of the private placement occurred on February 9, 2017 and the net proceeds from the transaction were $16.6 million during the first two quarters of 2017, after $1.9 million of transaction expenses.
The Company determined that the preferred stock was more akin to a temporary equity security than permanent equity primarily because the preferred stock was contingently redeemable upon the occurrence of an event that was outside of the Company’s control. The proceeds were allocated between the three features of the private placement: the warrants, the embedded beneficial conversion feature in the preferred stock, and the preferred stock itself. The fair values of the warrants of $3.1 million and the embedded beneficial conversion feature of $3.1 million were recorded as a discount against the stated value of the preferred stock on the date of issuance. The fair value of the warrants was estimated using a Black-Scholes option pricing model which is a Level 2 estimate of fair value.
On April 5, 2017, the Company delivered a notice to L Catterton of its election to exercise the conversion option with respect to the Series A Convertible Preferred Stock. The terms of the preferred stock provided that the Company could, at its option upon the satisfaction of certain conditions, cause all outstanding shares of preferred stock to be automatically converted into the Company’s Class A common stock. The conversion of the preferred stock into 4,252,873 shares of the Company’s Class A Common Stock occurred on April 12, 2017. The discount was amortized, using the interest method, and treated as a deemed dividend through
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the date of conversion, which resulted in the accretion of the preferred stock to its full redemption value. After the conversion, no shares of preferred stock are outstanding.
At the conversion date, all unamortized discounts were recognized immediately as a deemed dividend, which increased the net loss attributable to common stockholders in the second quarter of 2017. The amortized discount, which was treated in the same manner as dividends, was $7.0 million for the second quarter of 2017 and $8.0 million for the first two quarters of 2017.
Securities Purchase Agreement with Mill Road Capital
On March 13, 2017, the Company entered into a securities purchase agreement with Mill Road Capital II, L.P. (“Mill Road”), pursuant to which the Company agreed, in return for aggregate gross proceeds of $31.5 million, to issue to Mill Road an aggregate of 8,873,240 shares of its Class A common stock, par value $0.01 per share, at a price per share of $3.55 , which was equal to the closing sale price for the Company’s Class A common stock on March 10, 2017. On April 3, 2017, such shares were issued and the funding of the private placement occurred. The net proceeds from the transaction were $29.1 million during the first two quarters of 2017, after $2.4 million of transaction expenses.
Conversion of Argentia Class B Common Stock
10. Supplemental Disclosures to Condensed Consolidated Statements of Cash Flows
July 3, 2018 | July 4, 2017 | |||||||
Interest paid (net of amounts capitalized) | $ | $ | ||||||
Income taxes paid (refunded) | ( | ) | ||||||
Changes in purchases of property and equipment accrued in accounts payable, net | ( | ) | ( | ) | ||||
Conversion of Series A convertible preferred stock to common stock | ||||||||
11. Revenue Recognition
Revenue
Revenue consists of sales from restaurant operations and franchise royalties and fees. Revenue from the operation of company-owned restaurants are recognized when sales occur. The Company reports revenue net of sales and use taxes collected from customers and remitted to governmental taxing authorities.
The Company adopted the revenue recognition standards under Topic 606 at the beginning of the first quarter of fiscal 2018 using the modified retrospective method. The adoption of these standards did not have an impact on the Company’s recognition of revenue from company-owned restaurants or its recognition of continuing royalty fees from franchisees, which are based on a percentage of restaurant revenues and are recognized in the period the related franchised restaurants’ sales occur.
Gift Cards
The Company sells gift cards which do not have an expiration date, and it does not deduct non-usage fees from outstanding gift card balances. The Company recognizes revenue from gift cards when the gift card is redeemed by the customer or the Company determines the likelihood of the gift card being redeemed by the customer is remote (“gift card breakage”). The determination of the gift card breakage rate is based upon Company-specific historical redemption patterns. The Company has determined that approximately 8 % of gift cards will not be redeemed, which is recognized ratably over the estimated redemption period of the gift card, approximately 18 months. Gift card liability balances are typically highest at the end of each calendar year following increased gift card purchases during the holiday season. The adoption of Topic 606 did not have an impact on the Company’s recognition of revenue from gift cards, including the recognition of gift card breakage, as the new standard requires the use of the “proportionate” method for recognizing breakage, which the Company has historically utilized.
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As of July 3, 2018 and January 2, 2018, the current portion of the gift card liability, $2.8 million and $4.1 million, respectively, is included in accrued expenses and other current liabilities, and the long-term portion, $0.3 million and $0.4 million, respectively, is included in other long-term liabilities in the Consolidated Balance Sheets.
Revenue recognized in the Condensed Consolidated Statements of Operations for the redemption of gift cards that were included in the gift card liability balances at the beginning of each fiscal year was $3.4 million and $3.1 million for the first two quarters of 2018 and 2017, respectively.
The revenue recognized from gift cards for the first two quarters of 2018 includes $0.3 million of gift card breakage that resulted from a change in the estimate for gift card unredeemed balances for the years 2014 and after. This change in estimate was a result of the Delaware Gift Card Litigation settlement in the second quarter of 2018 (see Note 12, Commitments and Contingencies).
Franchise Fees
Royalties from franchise restaurants are based on a percentage of restaurant revenues and are recognized in the period the related franchised restaurants’ sales occur. Development fees and franchise fees, portions of which are collected in advance, are nonrefundable and are recognized in income ratably over the term of the related franchise agreement or recognized upon the termination of the agreement between the Company and the franchisee. The adoption of Topic 606 did impact the Company’s accounting for initial fees charged to franchisees. In the past, the Company recognized initial franchise fees when all material services or conditions relating to the sale of the franchise had been substantially performed or satisfied by the Company, which was generally when a new franchise restaurant opened. In accordance with the new guidance, the Company has determined that the initial franchise services are not distinct from the continuing rights or services offered during the term of the franchise agreement and should be treated as a single performance obligation. Therefore, initial fees received from franchisees will be recognized as revenue over the term of each respective franchise agreement, which is typically 20 years.
An adjustment to beginning retained earnings and a corresponding contract liability of $1.5 million was established on the date of adoption, at the beginning of the first quarter of 2018, associated with the initial fees received through January 2, 2018 that would have been deferred and recognized over the term of each respective franchise agreement if the new guidance had been applied in the past.
12. Commitments and Contingencies
Data Security Incident
Overview
On June 28, 2016, the Company announced that a data security incident compromised the security of the payment information of some customers who used debit or credit cards at certain Noodles & Company locations between January 31, 2016 and June 2, 2016. The malware involved in the incident has been removed, and the Company believes that it no longer poses a risk to credit or debit cards currently being used at affected locations. The Company has implemented additional security procedures to further secure customers’ debit and credit card information.
Card Company Assessments
In the fourth quarter of 2016, the Company recorded a charge of $10.6 million for estimated losses, net of $1.0 million of insurance coverage, at the low end of an estimated range, associated with claims and anticipated claims by payment card companies for non-ordinary course operating expenses, card issuer losses and card replacement costs for which it expected to be liable (the “Data Breach Liabilities”). The Company also previously disclosed in prior reports filed with the SEC that it may ultimately be subject to Data Breach Liabilities that are up to $5.5 million greater than that amount. In 2017, the Company made payments of $4.0 million for the Data Breach Liabilities. On June 7, 2018, the Company received the final assessment from the third of the three payment card companies to which it expected to owe Data Breach Liabilities. This assessment was $11.0 million. In the second quarter of 2018, when the final assessment was received, the Company’s recorded a charge of $3.4 million to increase its accrual to cover this final assessment amount (which was within the range disclosed in prior reports filed with the SEC). The assessment was paid early in the third quarter of 2018.
12
Delaware Gift Card Litigation
As previously disclosed in prior reports filed with the SEC, the Company was named as a defendant in an action filed in the Superior Court of Delaware in New Castle County (the “Court”), entitled The State of Delaware, William French v. Card Compliant, LLC, et. al. The complaint in this case alleged that a number of large retailers and restaurant companies, including the Company, knowingly refused to fulfill obligations under Delaware’s Abandoned Property Law by failing to report and deliver “unclaimed gift card funds” to the State of Delaware, and knowingly made, used or caused to be made or used, false statements and records to conceal, avoid or decrease an obligation to pay or transmit money to Delaware in violation of the Delaware False Claims and Reporting Act. The complaint sought an order that the Company cease and desist from violating the Delaware Abandoned Property Law, monetary damages (including treble damages under the False Claims and Reporting Act), penalties and attorneys’ fees and costs. In 2015 the Company recorded a loss contingency accrual based on a reasonable estimate of the probable losses that might arise from this matter; this loss contingency accrual did not have a material effect on our results of operations. On July 3, 2018, a settlement was reached in this matter, subject to execution of a definitive settlement agreement, which will dispose of all pending claims included in the litigation. The Company’s results of operations for the second quarter of 2018 include a charge of $0.3 million for the Company’s liability under this settlement. The Company also recorded a loss contingency accrual based on a reasonable estimate of the probable losses that may arise under Delaware’s Abandoned Property Law in resolving claims for unclaimed gift card funds for the years 2011, 2012 and 2013, which were not included as part of the litigation.
Other Matters
NOODLES & COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Noodles & Company is a Delaware corporation that was organized in 2002. Noodles & Company and its subsidiaries are sometimes referred to as “we,” “us,” “our” and the “Company” in this report. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and related notes in Item 1 and with the audited consolidated financial statements and the related notes included in our Annual Report on Form 10-K for our fiscal year ended January 2, 2018. We operate on a 52- or 53-week fiscal year ending on the Tuesday closest to December 31. Our fiscal quarters each contain 13 operating weeks, with the exception of the fourth quarter of a 53-week fiscal year, which contains 14 operating weeks. Fiscal years 2018 and 2017 each contain 52 weeks.
Cautionary Note Regarding Forward-Looking Statements
In addition to historical information, this discussion and analysis contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties such as the number of restaurants we intend to open, projected capital expenditures and estimates of our effective tax rates. In some cases, you can identify forward-looking statements by terms such as “may,” “might,” “will,” “objective,” “intend,” “should,” “could,” “can,” “would,” “expect,” “believe,” “design,” “estimate,” “predict,” “potential,” “plan” or the negative of these terms and similar expressions intended to identify forward-looking statements. These statements reflect our current views with respect to future events and are based on currently available operating, financial and competitive information. Examples of forward-looking statements include all matters that are not historical facts, such as statements regarding estimated costs associated with our closure of underperforming restaurants, the implementation and results of strategic initiatives and our future financial performance. Our actual results may differ materially from those anticipated in these forward-looking statements due to reasons including, but not limited to, our ability to achieve and maintain increases in comparable restaurant sales and to successfully execute our business strategy, including new restaurant initiatives and operational strategies to improve the performance of our restaurant portfolio; our ability to maintain compliance with debt covenants and continue to access financing necessary to execute our business strategy; costs associated
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with our data security incident, including losses associated with settling payment card networks’ expected claims; 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 2, 2018.
Key Measures We Use to Evaluate Our Performance
To evaluate the performance of our business, we utilize a variety of financial and performance measures. These key measures include revenue, average unit volumes (“AUVs”), comparable restaurant sales, restaurant contribution, restaurant contribution margin, EBITDA and adjusted EBITDA.
Revenue
Restaurant revenue represents sales of food and beverages in company-owned restaurants. Several factors affect our restaurant revenue in any period, including the number of restaurants in operation and per-restaurant sales.
Franchise royalties and fees represent royalty income and initial franchise fees. While we expect that the majority of our revenue and net income growth will be driven by company-owned restaurants, our franchise restaurants remain an important factor impacting our revenue and financial performance.
Seasonal factors cause our revenue to fluctuate from quarter to quarter. Our revenue per restaurant is typically lower in the first and fourth quarters, due to reduced winter and holiday traffic, and is higher in the second and third quarters. As a result of these factors, our quarterly and annual operating results and comparable restaurant sales may fluctuate significantly.
Average Unit Volumes
AUVs consist of the average annualized sales of all company-owned restaurants for the trailing 12 periods. AUVs are calculated by dividing restaurant revenue by the number of operating days within each time period and multiplying by the number of operating days we have in a typical year. This measurement allows management to assess changes in consumer traffic and per person spending patterns at our restaurants.
Comparable Restaurant Sales
Comparable restaurant sales refer to year-over-year sales comparisons for the comparable restaurant base. We define the comparable restaurant base to include restaurants open for at least 18 full periods. This measure highlights performance of existing restaurants, as the impact of new restaurant openings is excluded. Changes in comparable restaurant sales are generated by changes in traffic, which we calculate as the number of entrées sold, or changes in per-person spend, calculated as sales divided by traffic. Per-person spend can be influenced by changes in menu prices and the mix and number of items sold per person.
Measuring our comparable restaurant sales allows us to evaluate the performance of our existing restaurant base. Various factors impact comparable restaurant sales, including:
• | consumer recognition of our brand and our ability to respond to changing consumer preferences; |
• | overall economic trends, particularly those related to consumer spending; |
• | our ability to operate restaurants effectively and efficiently to meet consumer expectations; |
• | pricing; |
• | the number of restaurant transactions, per-person spend and average check amount; |
• | marketing and promotional efforts; |
• | weather; |
• | food safety and foodborne illness concerns; |
• | local competition; |
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• | trade area dynamics; |
• | introduction of new and seasonal menu items and limited time offerings; and |
• | opening new restaurants in the vicinity of existing locations. |
Consistent with common industry practice, we present comparable restaurant sales on a calendar-adjusted basis that aligns current year sales weeks with comparable periods in the prior year, regardless of whether they belong to the same fiscal period or not. Since opening new company-owned and franchise restaurants is a part of our growth strategy and we anticipate new restaurants will be a component of our revenue growth (albeit to a lesser extent in future periods, as discussed below), comparable restaurant sales is only one measure of how we evaluate our performance.
Restaurant Contribution and Restaurant Contribution Margin
Restaurant contribution represents restaurant revenue less restaurant operating costs which are cost of sales, labor, occupancy and other restaurant operating costs. Restaurant contribution margin represents restaurant contribution as a percentage of restaurant revenue. We expect restaurant contribution to increase in proportion to the number of new restaurants we open and our comparable restaurant sales growth.
We believe that restaurant contribution and restaurant contribution margin are important tools for investors and other interested parties because they are widely-used metrics within the restaurant industry to evaluate restaurant-level productivity, efficiency and performance. We also use restaurant contribution and restaurant contribution margin as metrics to evaluate the profitability of incremental sales at our restaurants, restaurant performance across periods and restaurant financial performance compared with competitors. Restaurant contribution and restaurant contribution margin are supplemental measures of the operating performance of our restaurants and are not reflective of the underlying performance of our business because corporate-level expenses are excluded from these measures.
EBITDA and Adjusted EBITDA
We define EBITDA as net income (loss) before interest expense, provision (benefit) for income taxes and depreciation and amortization. We define adjusted EBITDA as net income (loss) before interest expense, provision (benefit) for income taxes, depreciation and amortization, restaurant impairments, closure costs and asset disposals, certain litigation settlements, non-recurring registration and related transaction costs, loss on extinguishment of debt, severance costs and stock-based compensation.
Management believes that EBITDA and adjusted EBITDA provide clear pictures of our operating results by eliminating certain non-recurring and non-cash expenses that may vary widely from period to period and are not reflective of the underlying business performance.
The presentation of restaurant contribution, restaurant contribution margin, EBITDA and adjusted EBITDA is not intended to be considered in isolation or as a substitute for, or to be superior to, the financial information prepared and presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”). We use these non-GAAP financial measures for financial and operational decision making and as a means to evaluate period-to-period comparisons. We believe that they provide useful information to management and investors about operating results, enhance the overall understanding of past financial performance and future prospects and allow for greater transparency with respect to key metrics used by management in its financial and operational decision making.
Recent Trends, Risks and Uncertainties
Comparable Restaurant Sales. In the second quarter of 2018, comparable restaurant sales increased 5.4% system-wide, increased 5.0% for company-owned restaurants, and increased 8.0% for franchise restaurants. Comparable sales growth was driven primarily by an increase in traffic related to successful implementation of recent operational and brand initiatives, as well as a modest price increase. Comparable sales in the quarter also benefited from the impact of the shift in the timing of the Easter and 4th of July holidays by approximately 100 basis points (“bps”).
Increased Labor Costs. Similar to much of the restaurant industry, our labor costs have risen in recent periods and we expect that labor costs will continue to rise in future periods as wage rates and benefit costs increase. Some jurisdictions, including some of those in which we operate, have recently increased their minimum wage by a significant amount, and other jurisdictions are considering similar actions. Significant additional government-imposed increases could materially affect our labor costs.
Restaurant Development. We continue to reduce our rate of company-owned restaurant unit growth, which we anticipate will result in our revenue growing at a slower rate than would be expected if our unit growth rate continued at the historical rate. New restaurants have historically contributed substantially to our revenue growth. In the first two quarters of 2018, we opened one
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company-owned restaurant. As of July 3, 2018, we had 404 company-owned restaurants and 65 franchise restaurants in 29 states and the District of Columbia.
We currently do not intend to open any additional restaurants in 2018. We believe that this remains consistent with our moderate growth strategy and is an approach that will enhance our ability to continue focusing on improving restaurant operations and profitability at existing locations. We will continue to evaluate our company-owned restaurant growth rate based on our operational and financial performance, capital resources and real estate opportunities.
Certain Restaurant Closures. We closed 55 restaurants in the first quarter of 2017. These restaurants significantly underperformed our restaurant averages, as measured by AUVs, restaurant contribution margin and cash flow. Closing these restaurants has favorably affected our restaurant contribution, restaurant contribution margin, adjusted EBITDA, adjusted EBITDA margin and net income. Additionally, we closed nine company-owned restaurants in the first two quarters of 2018, most of which were approaching the expiration of their leases. We currently do not anticipate significant restaurant closures for the foreseeable future; however, we may continue to close restaurants at, or near, the expiration of their leases.
Results of Operations
The following table presents a reconciliation of net loss to EBITDA and adjusted EBITDA:
Fiscal Quarter Ended | Two Fiscal Quarters Ended | |||||||||||||||
July 3, 2018 | July 4, 2017 | July 3, 2018 | July 4, 2017 | |||||||||||||
(in thousands, unaudited) | ||||||||||||||||
Net loss | $ | (5,935 | ) | $ | (1,815 | ) | $ | (9,510 | ) | $ | (28,660 | ) | ||||
Depreciation and amortization | 5,797 | 6,279 | 11,617 | 12,546 | ||||||||||||
Interest expense, net | 1,154 | 927 | 2,292 | 1,935 | ||||||||||||
(Benefit) provision for income taxes | (7 | ) | 80 | (248 | ) | 271 | ||||||||||
EBITDA | $ | 1,009 | $ | 5,471 | $ | 4,151 | $ | (13,908 | ) | |||||||
Restaurant impairments, closure costs and asset disposals (1) | 2,580 | 2,830 | 4,160 | 24,884 | ||||||||||||
Litigation settlement (2) | 3,796 | (421 | ) | 3,796 | (421 | ) | ||||||||||
Fees and costs related to registration statements and related transactions (3) | 53 | 40 | 53 | 679 | ||||||||||||
Loss on extinguishment of debt (4) | 626 | — | 626 | — | ||||||||||||
Severance costs (5) | — | 129 | 278 | 332 | ||||||||||||
Stock-based compensation expense | 1,012 | 647 | 1,592 | 945 | ||||||||||||
Adjusted EBITDA | $ | 9,076 | $ | 8,696 | $ | 14,656 | $ | 12,511 | ||||||||
_____________________
(1) | Restaurant impairments and closure costs in all periods presented above include amounts related to restaurants previously impaired or closed. Additionally, the first two quarters of 2018 includes closure costs of the nine restaurants closed in the first two quarters of 2018, most of which were approaching the expiration of their leases, and the impairment of one restaurant, and the first two quarters of 2017 includes the closure costs related to the 55 restaurants closed in the first quarter of 2017 and the impairment of 13 restaurants. See Note 7, Restaurant Impairments, Closure Costs and Asset Disposals. |
(2) | The second quarter of 2018 includes a charge of $3.4 million for the final assessment related to data breach liabilities, and a $0.3 million charge for a litigation settlement related to the Delaware gift card matter. The second quarter of 2017 includes a gain on an employment-related litigation settlement due to final settlement being less than what the Company had previously accrued. |
(3) | The second quarter of 2018 includes expenses related to the registration statement the Company filed in the second quarter of 2018. The first two quarters of 2017 includes expenses related to the registration statement the Company filed in the first quarter of 2017, which registration statement was later withdrawn. |
(4) | The second quarter of 2018 includes the loss on extinguishment of debt which resulted from writing off the remaining unamortized balance of debt issuance costs related to the prior credit facility when it was repaid in full in the second quarter of 2018. |
(5) | The first two quarters of 2018 and 2017 include severance costs from departmental structural changes. |
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Restaurant Openings, Closures and Relocations
The following table shows restaurants opened or closed during the periods indicated:
Fiscal Quarter Ended | Two Fiscal Quarters Ended | |||||||||||
July 3, 2018 | July 4, 2017 | July 3, 2018 | July 4, 2017 | |||||||||
Company-Owned Restaurant Activity | ||||||||||||
Beginning of period | 411 | 409 | 412 | 457 | ||||||||
Openings | — | 4 | 1 | 11 | ||||||||
Closures | (7 | ) | — | (9 | ) | (55 | ) | |||||
Restaurants at end of period | 404 | 413 | 404 | 413 | ||||||||
Franchise Restaurant Activity | ||||||||||||
Beginning of period | 65 | 73 | 66 | 75 | ||||||||
Openings | — | 1 | — | 2 | ||||||||
Closures | — | (1 | ) | (1 | ) | (4 | ) | |||||
Restaurants at end of period | 65 | 73 | 65 | 73 | ||||||||
Total restaurants | 469 | 486 | 469 | 486 | ||||||||
Statement of Operations as a Percentage of Revenue
The following table summarizes key components of our results of operations for the periods indicated as a percentage of our total revenue, except for the components of restaurant operating costs, which are expressed as a percentage of restaurant revenue.
_____________________________
Fiscal Quarter Ended | Two Fiscal Quarters Ended | |||||||||||
July 3, 2018 | July 4, 2017 | July 3, 2018 | July 4, 2017 | |||||||||
Revenue: | ||||||||||||
Restaurant revenue | 99.2 | % | 99.0 | % | 99.2 | % | 99.0 | % | ||||
Franchising royalties and fees | 0.8 | % | 1.0 | % | 0.8 | % | 1.0 | % | ||||
Total revenue | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||
Costs and expenses: | ||||||||||||
Restaurant operating costs (exclusive of depreciation and amortization shown separately below): (1) | ||||||||||||
Cost of sales | 26.7 | % | 26.5 | % | 26.7 | % | 27.2 | % | ||||
Labor | 32.7 | % | 32.6 | % | 33.0 | % | 33.5 | % | ||||
Occupancy | 10.6 | % | 11.3 | % | 11.1 | % | 11.7 | % | ||||
Other restaurant operating costs | 14.5 | % | 14.5 | % | 14.9 | % | 14.7 | % | ||||
General and administrative | 12.6 | % | 8.3 | % | 11.0 | % | 8.7 | % | ||||
Depreciation and amortization | 4.9 | % | 5.6 | % | 5.1 | % | 5.5 | % | ||||
Pre-opening | — | % | 0.2 | % | — | % | 0.3 | % | ||||
Restaurant impairments, closure costs and asset disposals | 2.2 | % | 2.5 | % | 1.8 | % | 10.8 | % | ||||
Total costs and expenses | 103.5 | % | 100.7 | % | 103.0 | % | 111.5 | % | ||||
Loss from operations | (3.5 | )% | (0.7 | )% | (3.0 | )% | (11.5 | )% | ||||
Loss on extinguishment of debt | 0.5 | % | — | % | 0.3 | % | — | % | ||||
Interest expense, net | 1.0 | % | 0.8 | % | 1.0 | % | 0.8 | % | ||||
Loss before income taxes | (5.1 | )% | (1.5 | )% | (4.3 | )% | (12.4 | )% | ||||
(Benefit) provision for income taxes | — | % | 0.1 | % | (0.1 | )% | 0.1 | % | ||||
Net loss | (5.1 | )% | (1.6 | )% | (4.2 | )% | (12.5 | )% | ||||
(1) | As a percentage of restaurant revenue. |
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Second Quarter Ended July 3, 2018 Compared to Second Quarter Ended July 4, 2017
The table below presents our unaudited operating results for the second quarters of 2018 and 2017, and the related quarter-over-quarter changes.
Fiscal Quarter Ended | Increase / (Decrease) | ||||||||||||||
July 3, 2018 | July 4, 2017 | $ | % | ||||||||||||
(in thousands) | |||||||||||||||
Revenue: | |||||||||||||||
Restaurant revenue | $ | 116,451 | $ | 111,628 | $ | 4,823 | 4.3 | % | |||||||
Franchising royalties and fees | 944 | 1,164 | (220 | ) | (18.9 | )% | |||||||||
Total revenue | 117,395 | 112,792 | 4,603 | 4.1 | % | ||||||||||
Costs and expenses: | |||||||||||||||
Restaurant operating costs (exclusive of depreciation and amortization shown separately below): | |||||||||||||||
Cost of sales | 31,089 | 29,598 | 1,491 | 5.0 | % | ||||||||||
Labor | 38,043 | 36,430 | 1,613 | 4.4 | % | ||||||||||
Occupancy | 12,357 | 12,630 | (273 | ) | (2.2 | )% | |||||||||
Other restaurant operating costs | 16,875 | 16,194 | 681 | 4.2 | % | ||||||||||
General and administrative | 14,813 | 9,393 | 5,420 | 57.7 | % | ||||||||||
Depreciation and amortization | 5,797 | 6,279 | (482 | ) | (7.7 | )% | |||||||||
Pre-opening | 3 | 246 | (243 | ) | (98.8 | )% | |||||||||
Restaurant impairments, asset disposals and closure costs | 2,580 | 2,830 | (250 | ) | (8.8 | )% | |||||||||
Total costs and expenses | 121,557 | 113,600 | 7,957 | 7.0 | % | ||||||||||
Loss from operations | (4,162 | ) | (808 | ) | (3,354 | ) | * | ||||||||
Loss on extinguishment of debt | 626 | — | 626 | 100.0 | % | ||||||||||
Interest expense, net | 1,154 | 927 | 227 | 24.5 | % | ||||||||||
Loss before income taxes | (5,942 | ) | (1,735 | ) | (4,207 | ) | * | ||||||||
(Benefit) provision for income taxes | (7 | ) | 80 | (87 | ) | * | |||||||||
Net loss | $ | (5,935 | ) | $ | (1,815 | ) | $ | (4,120 | ) | * | |||||
Company-owned: | |||||||||||||||
Average unit volumes | $ | 1,092 | $ | 1,065 | $ | 27 | 2.5 | % | |||||||
Comparable restaurant sales | 5.0 | % | (3.9 | )% | |||||||||||
________________
* | Not meaningful. |
Revenue
Total revenue increased $4.6 million in the second quarter of 2018, or 4.1%, to $117.4 million, compared to $112.8 million in the second quarter of 2017. This increase was primarily due to the increase in comparable restaurant sales, partially offset by the impact of restaurants closed since the second quarter of 2017, most of which were approaching the expiration of their leases.
AUVs increased $27,000 compared to the prior year. AUVs for the trailing twelve months were $1,092,000.
Comparable restaurant sales increased by 5.0% at company-owned restaurants, increased by 8.0% at franchise-owned restaurants and increased by 5.4% system-wide in the second quarter of 2018. Comparable sales growth was driven primarily by an increase in traffic related to successful implementation of recent operational and brand initiatives, as well as a modest price increase. Comparable sales in the quarter also benefited from the impact of the shift in the timing of the Easter and 4th of July holidays by approximately 100 bps.
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Cost of Sales
Cost of sales increased by $1.5 million, or 5.0%, in the second quarter of 2018 compared to the same period of 2017, due primarily to the increase in restaurant revenue in the second quarter of 2018. As a percentage of restaurant revenue, cost of sales increased to 26.7% in the second quarter of 2018 from 26.5% in the second quarter of 2017. The increase as a percentage of restaurant revenue was primarily due to the nationwide launch of zucchini noodles, which have a higher cost of goods sold than the balance of our menu offerings.
Labor Costs
Labor costs increased by $1.6 million, or 4.4%, in the second quarter of 2018 compared to the same period of 2017, due primarily to the increase in restaurant revenue in the second quarter of 2018. As a percentage of restaurant revenue, labor costs increased to 32.7% in the second quarter of 2018 from 32.6% in the second quarter of 2017. The nominal increase as a percentage of restaurant revenue was driven by wage inflation, almost completely offset by the benefit of labor savings initiatives and leverage on higher AUVs.
Occupancy Costs
Occupancy costs decreased by $0.3 million, or 2.2%, in the second quarter of 2018 compared to the second quarter of 2017, due primarily to the impact of restaurants closed since the second quarter of 2017, most of which were approaching the expiration of their leases. As a percentage of revenue, occupancy costs decreased to 10.6% in the second quarter of 2018, compared to 11.3% in the second quarter of 2017 due to leverage on higher AUVs.
Other Restaurant Operating Costs
Other restaurant operating costs increased by $0.7 million, or 4.2%, in the second quarter of 2018 compared to the second quarter of 2017, due primarily to expenses associated with marketing, culinary and off-premise initiatives. As a percentage of restaurant revenue, other restaurant operating costs was 14.5% in both the second quarters of 2018 and 2017, as expenses associated with marketing and initial investments in culinary and off-premise initiatives were offset by leverage on higher AUV’s.
General and Administrative Expense
General and administrative expense increased by $5.4 million, or 57.7%, in the second quarter of 2018 compared to the second quarter of 2017, primarily due to a $3.4 million charge for the final assessment related to the data breach liabilities and a $0.3 million charge for a litigation settlement related to the Delaware gift card matter disclosed under Part II, Item 1 of this report. Additionally, the second quarter of 2017 included a $0.4 million gain recognized on the employment-related litigation settlement, which was settled in 2016, due to final settlement being less than what the Company had previously accrued. As a percentage of revenue, general and administrative expense increased to 12.6% in the second quarter of 2018 from 8.3% in the second quarter of 2017.
Depreciation and Amortization
Depreciation and amortization decreased by $0.5 million, or 7.7%, in the second quarter of 2018 compared to the second quarter of 2017, due primarily to restaurants closed or impaired in prior quarters. As a percentage of revenue, depreciation and amortization decreased to 4.9% in the second quarter of 2018 from 5.6% in the second quarter of 2017.
Pre-Opening Costs
Pre-opening costs decreased by $0.2 million, or 98.8%, in the second quarter of 2018 compared to the second quarter of 2017. The decrease in pre-opening costs was due to no restaurants under construction during the second quarter of 2018.
Restaurant Impairments, Closure Costs and Asset Disposals
Restaurant impairments, closure costs and asset disposals decreased by $0.3 million in the second quarter of 2018 compared to the second quarter of 2017. Restaurant impairments, closure costs and asset disposals include closure costs related to the seven restaurants closed in the second quarter of 2018, most of which were approaching the expiration of their leases, as well as ongoing costs from restaurants closed in previous years. There were no restaurants impaired in the second quarter of 2018.
Restaurant impairments, closure costs and asset disposals in the second quarter of 2017 included a gain of $3.6 million related to closures primarily due to adjustments to the liabilities to landlords as lease terminations occurred for 21 of the 55 restaurants closed during the first quarter of 2017, partially offset by $2.0 million of costs related to the restaurants closed in the first quarter of 2017. Additionally, nine restaurants were impaired in the second quarter of 2017.
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Each quarter we evaluate possible impairment of fixed assets at the restaurant level and record an impairment loss whenever we determine that the fair value of these assets is less than their carrying value. There can be no assurance that such evaluations will not result in additional impairment costs in future periods.
Loss on Extinguishment of Debt
In May 2018, we entered into a credit facility with U.S. Bank National Association (the “2018 Credit Facility”) and repaid in full our outstanding indebtedness with Bank of America, N.A. (the “Prior Credit Facility”) using funds drawn on the 2018 Credit Facility. Upon repayment, the Prior Credit Facility and all related agreements were terminated. As a result, we wrote off the remaining unamortized balance of debt issuance costs related to the Prior Credit Facility and recognized a loss on extinguishment of debt in the amount of $0.6 million in the second quarter of 2018.
Interest Expense
Interest expense increased by $0.2 million in the second quarter of 2018 compared to the second quarter of 2017. The increase was the result of an increase in the average interest rate on our credit facility and higher amortization of debt issuance costs in the second quarter of 2018 compared to the second quarter of 2017.
(Benefit) Provision for Income Taxes
The effective tax rate was 0.1% for the second quarter of 2018 compared to (4.6)% for the second quarter of 2017. The effective tax rate for the second quarter of 2018 reflects changes made by the Tax Cuts and Jobs Act (“Tax Act”), which enabled us to release a portion of the previously recorded valuation allowance as a benefit from income tax. The effective tax rate for the second quarter of 2017 was primarily related to disallowed tax amortization on indefinite-lived intangibles. For the remainder of fiscal 2018, we do not anticipate material income tax expense or benefit as a result of the valuation allowance recorded. We will maintain the remaining valuation allowance against deferred tax assets until there is sufficient evidence to support a full or partial reversal. The reversal of a previously recorded valuation allowance will generally result in a benefit from income tax.
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Two Quarters Ended July 3, 2018 Compared to Two Quarters Ended July 4, 2017
The table below presents our unaudited operating results for the first two quarters of 2018 and 2017, and the related period-over-period changes.
Two Fiscal Quarters Ended | Increase / (Decrease) | ||||||||||||||
July 3, 2018 | July 4, 2017 | $ | % | ||||||||||||
(in thousands, except percentages) | |||||||||||||||
Revenue: | |||||||||||||||
Restaurant revenue | $ | 226,064 | $ | 227,155 | $ | (1,091 | ) | (0.5 | )% | ||||||
Franchising royalties and fees | 1,857 | 2,352 | (495 | ) | (21.0 | )% | |||||||||
Total revenue | 227,921 | 229,507 | (1,586 | ) | (0.7 | )% | |||||||||
Costs and expenses: | |||||||||||||||
Restaurant operating costs (exclusive of depreciation and amortization shown separately below): | |||||||||||||||
Cost of sales | 60,345 | 61,685 | (1,340 | ) | (2.2 | )% | |||||||||
Labor | 74,615 | 76,024 | (1,409 | ) | (1.9 | )% | |||||||||
Occupancy | 25,120 | 26,631 | (1,511 | ) | (5.7 | )% | |||||||||
Other restaurant operating costs | 33,773 | 33,341 | 432 | 1.3 | % | ||||||||||
General and administrative | 25,081 | 20,059 | 5,022 | 25.0 | % | ||||||||||
Depreciation and amortization | 11,617 | 12,546 | (929 | ) | (7.4 | )% | |||||||||
Pre-opening | 50 | 791 | (741 | ) | (93.7 | )% | |||||||||
Restaurant impairments, asset disposals and closure costs | 4,160 | 24,884 | (20,724 | ) | (83.3 | )% | |||||||||
Total costs and expenses | 234,761 | 255,961 | (21,200 | ) | (8.3 | )% | |||||||||
Loss from operations | (6,840 | ) | (26,454 | ) | 19,614 | 74.1 | % | ||||||||
Loss on extinguishment of debt | 626 | — | 626 | 100.0 | % | ||||||||||
Interest expense, net | 2,292 | 1,935 | 357 | 18.4 | % | ||||||||||
Loss before income taxes | (9,758 | ) | (28,389 | ) | 19,257 | 65.6 | % | ||||||||
(Benefit) provision for income taxes | (248 | ) | 271 | (519 | ) | * | |||||||||
Net loss | $ | (9,510 | ) | $ | (28,660 | ) | $ | 19,150 | 66.8 | % | |||||
Company-owned: | |||||||||||||||
Average unit volumes | $ | 1,092 | $ | 1,065 | $ | 27 | 2.5 | % | |||||||
Comparable restaurant sales | 2.4 | % | (3.2 | )% | |||||||||||
________________
* | Not meaningful. |
Revenue
Total revenue decreased by $1.6 million, or 0.7%, in the first two quarters of 2018, to $227.9 million compared to $229.5 million in the same period of 2017. This decrease was due to closing 55 company-owned restaurants in the first quarter of 2017 and restaurants closed since the second quarter of 2017, most of which were approaching the expiration of their leases, partially offset by the increase in comparable restaurant sales and additional restaurant openings since the beginning of 2017.
Comparable restaurant sales increased by 2.4% at company-owned restaurants, increased by 4.5% at franchise-owned restaurants and increased by 2.7% system-wide in the first two quarters of 2018.
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Cost of Sales
Cost of sales decreased by $1.3 million, or 2.2%, in the first two quarters of 2018 compared to the same period of 2017, due primarily to the decrease in restaurant revenue in the first two quarters of 2018 driven by restaurant closures in the first quarter of 2017. As a percentage of restaurant revenue, cost of sales decreased to 26.7% in the first two quarters of 2018 from 27.2% in the first two quarters of 2017. The decrease as a percentage of restaurant revenue was primarily due to favorable commodity pricing, partially offset by the nationwide launch of zucchini noodles in the second quarter of 2018, which have a higher cost of goods sold than the balance of our menu offerings.
Labor Costs
Labor costs decreased by $1.4 million, or 1.9%, in the first two quarters of 2018 compared to the same period of 2017, due primarily to the decrease in restaurant revenue in the first two quarters of 2018 driven by restaurant closures in the first quarter of 2017. As a percentage of restaurant revenue, labor costs decreased to 33.0% in the first two quarters of 2018 from 33.5% in the first two quarters of 2017. The decrease as a percentage of restaurant revenue was driven by the benefit of closing underperforming restaurants in the first quarter of 2017, labor savings initiatives and leverage on higher AUVs, partially offset by wage inflation.
Occupancy Costs
Occupancy costs decreased by $1.5 million, or 5.7%, in the first two quarters of 2018 compared to the first two quarters of 2017, due primarily to the favorable impact of restaurant closures during the first quarter of 2017. As a percentage of revenue, occupancy costs decreased to 11.1% in first two quarters of 2018, compared to 11.7% in the first two quarters of 2017, due to leverage on higher AUVs.
Other Restaurant Operating Costs
Other restaurant operating costs increased by $0.4 million, or 1.3%, in the first two quarters of 2018 compared to the first two quarters of 2017. As a percentage of restaurant revenue, other restaurant operating costs increased to 14.9% in the first two quarters of 2018, compared to 14.7% in the first two quarters of 2017, due primarily to decreased restaurant revenue in the first two quarters of 2018, driven by restaurant closures in the first quarter of 2017, expenses associated with marketing and initial investments in culinary and off-premise initiatives.
General and Administrative Expense
General and administrative expense increased by $5.0 million, or 25.0%, in the first two quarters of 2018 compared to the first two quarters of 2017, primarily due to a $3.4 million charge for the final assessment related to the Data Breach Liabilities and a $0.3 million charge for a litigation settlement related to the Delaware gift card matter described under Part II, Item 1 of this report. Additionally, the first two quarters of 2017 included a $0.4 million gain recognized on the employment-related litigation settlement, which was settled in 2016, due to final settlement being less than what the Company had previously accrued. As a percentage of revenue, general and administrative expense increased to 11.0% in the first two quarters of 2018 compared to 8.7% in the first two quarters of 2017.
Depreciation and Amortization
Depreciation and amortization decreased by $0.9 million, or 7.4%, in the first two quarters of 2018 compared to the first two quarters of 2017, due primarily to restaurants impaired or closed in prior quarters. As a percentage of revenue, depreciation and amortization decreased to 5.1% in the first two quarters of 2018, compared to 5.5% in the first two quarters of 2017.
Pre-Opening Costs
Pre-opening costs decreased by $0.7 million, or 93.7%, in the first two quarters of 2018 compared to the first two quarters of 2017. The decrease in pre-opening costs was due to fewer restaurants under construction compared to the comparable period in the prior year. As a percentage of revenue, pre-opening costs was flat in the first two quarters of 2018 and 2017.
Restaurant Impairments, Closure Costs and Asset Disposals
Restaurant impairments, closure costs and asset disposals decreased by $20.7 million in the first two quarters of 2018 compared to the first two quarters of 2017. The decrease was primarily due to the closure of 55 restaurants in the first quarter of 2017 and the impairment of 13 restaurants during the first two quarters of 2017, partially offset by $2.1 million of closure costs related to the nine restaurants closed in the first two quarters of 2018, most of which were approaching the expiration of their leases, and the impairment of one restaurant in the first two quarters of 2018. Both periods include ongoing costs of restaurants closed in previous years.
Loss on Extinguishment of Debt
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In May 2018, we entered into the 2018 Credit Facility and repaid in full our outstanding indebtedness under the Prior Credit Facility using funds drawn on the 2018 Credit Facility. As a result, we wrote off the remaining unamortized balance of debt issuance costs related to the Prior Credit Facility and recognized a loss on extinguishment of debt in the amount of $0.6 million in the second quarter of 2018.
Interest Expense
Interest expense increased by $0.4 million in the first two quarters of 2018 compared to the same period of 2017. The increase was the result of an increase in the average interest rate on our credit facility and higher amortization of debt issuance costs in the first two quarters of 2018 compared to the first two quarters of 2017.
(Benefit) Provision for Income Taxes
The effective tax rate was 2.5% for the first two quarters of 2018 compared to (1.0)% for the first two quarters of 2017. The effective tax rate for the first two quarters of 2018 reflects changes made by the Tax Act, which enabled the Company to release a portion of the previously recorded valuation allowance as a benefit from income tax. The effective tax rate for the first two quarters of 2017 is primarily related to disallowed tax amortization on indefinite-lived intangibles. For the remainder of fiscal 2018, we do not anticipate material income tax expense or benefit as a result of the valuation allowance recorded. We will maintain the valuation allowance against deferred tax assets until there is sufficient evidence to support a full or partial reversal. The reversal of a previously recorded valuation allowance will generally result in a benefit from income tax.
Liquidity and Capital Resources
Summary of Cash Flows
Historically, our primary sources of liquidity and cash flows were operating cash flows and borrowings on our revolving line of credit. In the first quarter of 2017 we determined that we needed additional sources of liquidity in order to pursue our operational strategies and fund obligations such as the liabilities to landlords from the termination of our leases for the restaurants closed in the first quarter of 2017, fees to be paid to our real estate advisor and brokers related to such terminations and other costs of closing restaurants, including severance for terminated employees (“Restaurant Closing Liabilities”) and estimated losses associated with claims and anticipated claims by payment card companies for non-ordinary course operating expenses, card issuer losses and card replacement costs for which we expected to be liable (the “Data Breach Liabilities”). We completed two private placement transactions for aggregate gross proceeds to us of $50.0 million in the first quarter of 2017 to provide us with additional liquidity.
We have historically used cash to fund capital expenditures for new restaurant openings, reinvest in our existing restaurants, invest in infrastructure and information technology and maintain working capital; however, due to our anticipated modest unit growth, cash required for new restaurant openings has been correspondingly reduced. Our working capital position benefits from the fact that we generally collect cash from sales to customers the same day, or in the case of credit or debit card transactions, within several days of the related sale, and we typically have up to 30 days to pay our vendors. We believe that expected cash flow from operations and existing borrowing capacity under our credit facility are adequate to fund debt service requirements, operating lease obligations, capital expenditures, the remaining estimated Restaurant Closing Liabilities and working capital obligations for the remainder of fiscal year 2018. There are no material changes in the Company’s contractual obligations that are outside the ordinary course of business.
Cash flows from operating, investing and financing activities are shown in the following table (in thousands):
Two Fiscal Quarters Ended | ||||||||
July 3, 2018 | July 4, 2017 | |||||||
Net cash provided by (used in) operating activities | $ | 2,837 | $ | (8,231 | ) | |||
Net cash used in investing activities | (7,051 | ) | (12,213 | ) | ||||
Net cash provided by financing activities | 4,493 | 21,763 | ||||||
Effect of exchange rate changes on cash | $ | — | $ | 2 | ||||
Net increase in cash and cash equivalents | $ | 279 | $ | 1,321 | ||||
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Operating Activities
Net cash provided by operating activities was $2.8 million for the first two quarters of 2018, as compared to net cash used in operating activities of $8.2 million for the first two quarters of 2017. The improvement in operating cash flows resulted primarily from the lower net loss during the first two quarters of 2018 as compared to the first two quarters of 2017, payments made in the first two quarters of 2017 for the termination of leases related to closed restaurants of $7.1 million, a litigation settlement of $2.6 million and for the Data Breach Liabilities of $4.0 million, as well as other working capital changes due to timing. Payments for the termination of leases related to closed restaurants in the first two quarters of 2018 were $2.1 million.
Investing Activities
Net cash flows used in investing activities in the first two quarters of 2018 decreased $5.2 million compared to the first two quarters of 2017, primarily due to the reduction in new restaurant development during the first two quarters of 2018 compared to the same period of 2017. Both periods include reinvestment in existing restaurants and investments in technology.
Financing Activities
Net cash provided by financing activities in the two quarters of 2018 decreased $17.3 million compared to the two quarters of 2017. The decrease in net cash provided by financing activities is primarily due to the net proceeds received from the private placement transactions that occurred during the first two quarters of 2017, net of repayments on long-term debt.
Capital Resources
Future Capital Expenditure Requirements. Our capital expenditure requirements are primarily dependent upon the pace of our real estate development program and resulting new restaurant openings, costs for maintenance and remodeling of our existing restaurants, as well as information technology expenses and other general corporate capital expenditures. As mentioned above, our real estate development growth has been and will continue to be reduced in upcoming quarters, compared to our historical rates.
We estimate capital expenditures for the remainder of 2018 to be approximately $6.0 million to $9.0 million for a total of approximately $13.0 million to $16.0 million for the fiscal year. We expect such capital expenditures to be funded by a combination of cash from operations and borrowings under our revolving credit facility.
Current Resources. Our operations have not required significant working capital and, like many restaurant companies, we operate with negative working capital. Restaurant sales are primarily paid for in cash or by credit or debit card, and restaurant operations do not require significant inventories or receivables. In addition, we receive trade credit for the purchase of food, beverages and supplies, therefore reducing the need for incremental working capital to support growth.
Liquidity. We believe that our current cash and cash equivalents, the expected cash flows from company-owned restaurant operations, the expected franchise fees and royalties and borrowings under the credit facility will be sufficient to fund our cash requirements for working capital needs and capital improvements and maintenance of existing restaurants for the next twelve months. We expect to pay approximately $5.0 million to $8.0 million for the termination of leases related to closed restaurants, including related fees and expenses over the next three to six months. Additionally, the final assessment for Data Breach Liabilities in the amount of $11.0 million, was paid early in the third quarter of 2018.
Credit Facility
On May 9, 2018, we entered into the 2018 Credit Facility which consists of a term loan facility in an aggregate principal amount of $25.0 million and a revolving line of credit of $65.0 million (which may be increased to $75.0 million), which includes a letter of credit subfacility in the amount of $15.0 million and a swingline subfacility in the amount of $10.0 million. The 2018 Credit Facility has a four-year term and matures on May 9, 2022.
Upon execution of the 2018 Credit Facility, we repaid in full our outstanding indebtedness under our Prior Credit Facility using funds drawn on our 2018 Credit Facility. Upon repayment, the Prior Credit Facility and all related agreements were terminated.
As of July 3, 2018, we had $65.2 million of indebtedness and $3.8 million of letters of credit outstanding under our 2018 Credit Facility. The term loan requires principal payments of $156,250 per quarter starting in the second quarter of 2018 through the first quarter of 2019, $187,500 per quarter through the first quarter of 2020, $375,000 per quarter through the first quarter of 2021, and $531,250 per quarter through maturity in the second quarter of 2022.
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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, throughout the fiscal year ending January 1, 2019. However, there can be no assurance we will meet such financial covenants. If such covenants are not met, we would be required to seek a waiver or amendment from the banks participating in the credit facility. There can be no assurance that such waiver or amendment would be granted, which could have a material adverse impact on our liquidity.
Our 2018 Credit Facility is secured by a pledge of stock of substantially all of our subsidiaries and a lien on substantially all of our and our subsidiaries’ personal property assets.
Off-Balance Sheet Arrangements
We had no off-balance sheet arrangements or obligations as of July 3, 2018.
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Critical Accounting Policies and Estimates
Our condensed consolidated financial statements and accompanying notes are prepared in accordance with GAAP. Preparing consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. These estimates and assumptions are affected by the application of our accounting policies. Our significant accounting policies are described in our Annual Report on Form 10-K for the year ended January 2, 2018. Critical accounting estimates are those that require application of management’s most difficult, subjective or complex judgments, often as a result of matters that are inherently uncertain and may change in subsequent periods. While we apply our judgment based on assumptions believed to be reasonable under the circumstances, actual results could vary from these assumptions. It is possible that materially different amounts would be reported using different assumptions. Our critical accounting estimates are identified and described in our annual consolidated financial statements and the related notes included in our Annual Report on Form 10-K for our fiscal year ended January 2, 2018.
JOBS Act
We qualify as an “emerging growth company” pursuant to the provisions of the Jumpstart our Business Startups (“JOBS”) Act. For as long as we are an “emerging growth company,” we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies,” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, exemptions from the requirements of holding advisory “say-on-pay” votes on executive compensation and shareholder advisory votes on golden parachute compensation. We will cease to be an “emerging growth company” at the end of this fiscal year.
In addition, Section 107 of the JOBS Act also provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. An “emerging growth company” can therefore delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. However, we “opted out” of such extended transition period and, as a result, we comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised accounting standards was irrevocable.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk
We are exposed to market risk from changes in interest rates on debt. Our exposure to interest rate fluctuations is limited to our outstanding bank debt, which bears interest at variable rates. As of July 3, 2018, we had $65.2 million of indebtedness under our revolving line of credit and term loan. An increase or decrease of 1.0% in the effective interest rate applied on this loan would have resulted in a pre-tax interest expense fluctuation of approximately $0.7 million on an annualized basis.
Commodity Price Risk
We purchase certain products that are affected by commodity prices and are, therefore, subject to price volatility caused by weather, market conditions and other factors which are not considered predictable or within our control. Although these products are subject to changes in commodity prices, certain purchasing contracts or pricing arrangements contain risk management techniques designed to minimize price volatility. The purchasing contracts and pricing arrangements we use may result in unconditional purchase obligations, which are not reflected in our consolidated balance sheets. Typically, we use these types of purchasing techniques to control costs as an alternative to directly managing financial instruments to hedge commodity prices. In many cases, we believe we will be able to address material commodity cost increases by adjusting our menu pricing or changing our product delivery strategy. However, increases in commodity prices, without adjustments to our menu prices, could increase restaurant operating costs as a percentage of company-owned restaurant revenue.
Inflation
The primary inflationary factors affecting our operations are food, labor costs, energy costs and materials used in the construction of new restaurants. Increases in the minimum wage requirements directly affect our labor costs. Many of our leases require us to pay taxes, maintenance, repairs, insurance and utilities, all of which are generally subject to inflationary increases. Finally, the cost of constructing our restaurants is subject to inflationary increases in the costs of labor and material. Over the past five years, inflation has not significantly affected our operating results with the exception of increased wage inflation that has affected our results from 2015 through the first two quarters of 2018. We expect wage inflation to continue to affect our results in the near future.
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Item 4. Controls and Procedures
Our management carried out an evaluation, under the supervision and with the participation of our chief executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of July 3, 2018, pursuant to Rule 13a-15 under the Exchange Act. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Based on that evaluation, our chief executive officer and principal financial officer concluded that our disclosure controls and procedures are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II
Item 1. Legal Proceedings
Delaware Gift Card Litigation
As previously disclosed in prior reports filed with the SEC, we were named as a defendant in an action filed in the Superior Court of Delaware in New Castle County (the “Court”), entitled The State of Delaware, William French v. Card Compliant, LLC, et. al. The case was filed under seal in June 2013 and was unsealed on March 26, 2014. The complaint in this case alleged that a number of large retailers and restaurant companies, including us, knowingly refused to fulfill obligations under Delaware’s Abandoned Property Law by failing to report and deliver “unclaimed gift card funds” to the State of Delaware, and knowingly made, used or caused to be made or used, false statements and records to conceal, avoid or decrease an obligation to pay or transmit money to Delaware in violation of the Delaware False Claims and Reporting Act. The complaint sought an order that the Company cease and desist from violating the Delaware Abandoned Property Law, monetary damages (including treble damages under the False Claims and Reporting Act), penalties and attorneys’ fees and costs. In 2015 we recorded a loss contingency accrual based on a reasonable estimate of the probable losses that might arise from this matter; this loss contingency accrual did not have a material effect on our results of operations. On July 3, 2018, a settlement was reached in this matter, subject to execution of a definitive settlement agreement, which will dispose of all pending claims included in the litigation. Our results of operations for the second quarter of 2018 include a charge of $0.3 million for our liability under this settlement. We also recorded a loss contingency accrual based on a reasonable estimate of the probable losses that may arise under Delaware’s Abandoned Property Law in resolving claims for unclaimed gift card funds for the years 2011, 2012 and 2013, which were not included as part of the litigation.
Other Matters
In the normal course of business, we are subject to other proceedings, lawsuits and claims. Such matters are subject to many uncertainties, and outcomes are not predictable with assurance. Consequently, we are unable to ascertain the ultimate aggregate amount of monetary liability or financial impact with respect to these matters as of July 3, 2018. These matters could affect the operating results of any one financial reporting period when resolved in future periods. We believe that an unfavorable outcome with respect to these matters is remote or a potential range of loss is not material to our consolidated financial statements. Significant increases in the number of these claims, or one or more successful claims that result in greater liabilities than we currently anticipate, could materially adversely affect our business, financial condition, results of operations or cash flows.
Item 1A. Risk Factors
A description of the risk factors associated with our business is contained in the “Risk Factors” section of our Annual Report on Form 10-K for our fiscal year ended January 2, 2018. There have been no material changes to our Risk Factors as previously reported.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
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Item 6. Exhibit Index
Exhibit Number | Description of Exhibit | ||
10.1 | |||
31.1 | |||
32.1 | |||
101.INS | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | ||
101.SCH | XBRL Taxonomy Extension Schema Document | ||
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | ||
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | ||
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | ||
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | ||
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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/ DAVE BOENNIGHAUSEN |
Dave Boennighausen Chief Executive Officer and Principal Financial Officer | |
Date | July 19, 2018 |
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Exhibit 10.1
PERFORMANCE RESTRICTED STOCK UNIT AGREEMENT
This PERFORMANCE RESTRICTED STOCK UNIT AGREEMENT (this "Agreement") is made as of ___________, 2018 (the "Effective Date") by and between Noodles & Company, a Delaware corporation (the "Company"), and _____________ (the "Participant").
RECITALS
A. The Company has adopted the Noodles & Company Amended and Restated 2010 Stock Incentive Plan (the "Plan"), a copy of which is attached hereto as Exhibit 1.
B. The Company desires to grant the Participant the right to a proprietary interest in the Company to encourage the Participant's contribution to the success and progress of the Company.
C. In accordance with the Plan, the Administrator (as defined in the Plan) has granted to the Participant restricted stock units with respect to a target number of ____ shares (the “Target Number”) of Class A Common Stock of the Company, par value $0.01 per share ("Shares"), subject to the terms and conditions of the Plan and this Agreement.
AGREEMENTS
NOW, THEREFORE, in consideration of the mutual terms, conditions and other covenants and agreements set forth herein, the parties hereto hereby agree as follows:
1. Definitions. Capitalized terms used herein shall have the following meanings, and capitalized terms not otherwise defined herein shall have the meaning specified in the Plan:
"Adjusted EBITDA" means, for the Performance Period, the Company’s aggregate earnings before interest, taxes, depreciation and amortization, adjusted for (a) restaurant impairments, closure costs and asset disposals; (b) data breach liabilities; (c) material litigation settlements; severance costs; (d) stock-based compensation expenses; and (e) other adjustments to the Adjusted EBITDA disclosure in the Company’s annual Form 10-K filed with the Securities and Exchange Commission. The Adjusted EBITDA results shall be appropriately adjusted by the Administrator to exclude the effect of acquisitions and dispositions and in such other circumstances as it deems appropriate.
"Agreement" has the meaning set forth in the Preamble.
"Business Day" means a day other than Saturday, Sunday or any day on which banks located in the State of New York are authorized or obligated to close.
"Cause" has the meaning in the Participant's employment or severance protection agreement with the Company or, if there is no such agreement or definition, means that the Participant (a) is convicted of, or pleads guilty or nolo contendere to, a felony (other than a traffic-related felony) or any other crime involving dishonesty or moral turpitude; or (b) willfully engages in illegal conduct or gross misconduct that is materially and demonstrably injurious to
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the Company; or (c) willfully violates any noncompetition or nonsolicitation covenant between the Participant and the Company. The determination of "Cause" shall be in the reasonable discretion of the Administrator.
"Change in Control Price" means the price per Share on a fully-diluted basis offered in conjunction with any transaction resulting in a Change in Control as determined in good faith by the Administrator as constituted before the Change in Control, or in the case of a Change in Control that does not result in a payment for Shares, the average Fair Market Value of a Share on the 30 trading days immediately preceding the date on which the Change in Control occurs.
"Company" has the meaning set forth in the Preamble.
"Disability" has the meaning ascribed to such term in the Plan.
"Effective Date" has the meaning set forth in the Preamble.
"Employer" means the Company and/or any of its subsidiaries with which the Participant is employed.
"Participant" has the meaning set forth in the Preamble.
"Performance Period" means the Company’s fiscal year beginning January 3, 2018 and the two next-following fiscal years.
"Person" means and includes an individual, a partnership, a corporation, a limited liability company, a trust, a joint venture, an unincorporated organization and any governmental or regulatory body or agency or other authority.
"Plan" has the meaning set forth in the Recitals.
"PSUs" has the meaning set forth in Section 2.
"Sales Growth" means the average of the annual percentage changes in the comparable restaurant sales (i.e., the year-over-year percentage change in sales) of the Company and its franchisees for restaurants that have been open for at least 18 months, for the three fiscal years in the Performance Period.
"Shares" has the meaning set forth in the Recitals.
"Termination Date" means the date on which the Participant experiences a Termination of Employment (as defined in the Plan).
"Withholding Obligation" means the amount determined in the Administrator's sole discretion to be the minimum sufficient to satisfy all federal, state, local and other withholding tax obligations that the Administrator determines may arise with respect to the issuance of Shares or payment of income earned in respect of any PSUs.
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2. Grant of PSUs. The Company grants to the Participant performance restricted stock units (the "PSUs") with respect to the Target Number of Shares, subject to adjustment as provided herein.
3. Earned PSUs.
(a) Fifty percent (50%) of the PSUs with respect to the Target Number of Shares shall be eligible to be earned and vest as follows (the “Sales-Based PSUs”), based on achievement of Sales Growth for the Performance Period:
• | Sales Growth of less than 0.33%: None of the Sales-Based PSUs will be earned or eligible to vest. |
• | Sales Growth of at least 0.33% (“Threshold Sales Growth Goal”): 25% of Sales-Based PSUs will be earned and eligible to vest. |
• | Sales Growth of at least 2.0% (“Target Sales Growth Goal”): 100% of Sales-Based PSUs will be earned and eligible to vest. |
• | Sales Growth of at least 4.0% (“Maximum Sales Growth Goal”): 200% of Sales-Based PSUs will be earned and eligible to vest. |
If actual Sales Growth for the Performance Period is between the Threshold Sales Growth Goal and the Target Sales Growth Goal, or between the Target Sales Growth Goal and the Maximum Sales Growth Goal, the number of Sales-Based PSUs that will be earned and eligible to vest will be determined by linear interpolation. For example, if Sales Growth were 3.0%, then 150% of Sales-Based PSUs would be earned and eligible to vest.
(b) Fifty percent (50%) of the PSUs with respect to the Target Number of Shares shall be eligible to be earned and vest as follows (the “EBITDA-Based PSUs”), based on achievement of Adjusted EBITDA for the Performance Period:
• | Adjusted EBITDA of less than $95,400,000: None of the EBITDA-Based PSUs will be earned and be eligible to vest. |
• | Adjusted EBITDA of at least $95,400,000 (“Threshold EBITDA Goal”): 25% of EBITDA-Based PSUs will be earned and eligible to vest. |
• | Adjusted EBITDA of at least $106,300,000 (“Target EBITDA Goal”): 100% of EBITDA-Based PSUs will be earned and eligible to vest. |
• | Adjusted EBITDA of at least $124,000,000 (“Maximum EBITDA Goal”): 200% of EBITDA-Based PSUs will be earned and eligible to vest. |
If actual Adjusted EBITDA for the Performance Period is between the Threshold EBITDA Goal and the Target EBITDA Goal, or between the Target EBITDA Goal and the Maximum EBITDA Goal, the number of EBITDA-Based PSUs that will be earned and be eligible to vest will be determined by linear interpolation. For example, if Adjusted EBITDA were $115,150,000, then 150% of EBITDA-Based PSUs would be earned and eligible to vest.
3. Vesting. Any PSUs that are earned pursuant to Section 2 shall vest on June __, 2021 (the “Vesting Date”), subject to the Participant remaining continuously employed by the
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Employer through that date. Notwithstanding the foregoing, the PSUs shall be treated as follows for certain types of Terminations of Employment prior to the Vesting Date:
(a) Death/Disability. If the Participant’s Termination of Employment is due to death or Disability prior to the Vesting Date, any PSUs that are earned pursuant to Section 2 shall be paid to the Participant (or, as applicable, his or her estate) following the end of the Performance Period, at the time specified in Section 5.
(b) Termination without Cause (not within 12 months following a Change in Control). If the Participant’s employment is terminated by the Employer without Cause other than within 12 months following a Change in Control, then the number of PSUs that are earned and which shall vest shall be determined by the Administrator in its discretion based on actual performance through the end of the fiscal quarter ending immediately prior to the date of such termination. The earned PSUs shall be paid to the Participant following the end of the Performance Period, at the time specified in Section 5.
4. Change in Control.
(a) In the event a Change in Control occurs before the end of the Performance Period, unless otherwise determined by the Administrator in its discretion and subject to Section 4(b), the PSUs shall be converted into time-vesting restricted stock units or such other rights as determined by the Administrator (collectively, “RSUs”) as follows. If the Change in Control occurs prior to the last day of the first fiscal year in the Performance Period, the number of RSUs shall equal the PSUs that would have been earned based on achievement at the Target Sales Growth Goal and the Target EBITDA Goal. If the Change in Control occurs on or after the first day of the second fiscal year in the Performance Period, the number of RSUs shall equal the number of PSUs that are earned through the date of the Change in Control as determined by the Administrator in its discretion based on actual performance (using the annual goals for the three fiscal years in the Performance Period taken into account by the Administrator in determining the Sales Growth and Adjusted EBITDA goals for the entire Performance Period) through the day immediately preceding the Change in Control. Any such RSUs shall be eligible to vest on the Vesting Date subject to the Participant remaining continuously employed by the Employer through that date; provided, however, that if the Participant’s Termination of Employment is by the Employer without Cause within 12 months following the Change in Control, the RSUs shall vest upon such termination.
(b) Notwithstanding Section 4(a), if the PSUs (or, as applicable, RSUs) are not continued, assumed or substituted for in a Change in Control, the PSUs shall be earned to the extent determined by the Administrator (taking into account the principles in Section 4(a) for conversion to RSUs), such earned PSUs shall vest upon the Change in Control, and the Participant will receive with respect to such PSUs either (i) the consideration (whether stock, cash, or other securities or property) received in the Change in Control by holders of Shares for each Share held on the effective date of the Change in Control, (ii) common stock of the successor to the Company with a value equal to the Change in Control Price, or (iii) cash equal to the Change in Control Price, as determined by the Administrator in its discretion.
5. Settlement.
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(a) The PSUs (or, if Section 4 applies, the RSUs) shall be settled promptly following the Vesting Date (or, if the last sentence of Section 4 applies, within 10 days following the Participant’s Termination Date) by the Company delivering to the Participant one Share for each PSU that has been earned and vests. In no event shall such settlement occur later than March 15 of the year following the year in which the PSUs (or, as applicable, RSUs) vest.
(b) All PSUs that are not earned or that do not vest shall immediately expire on the Termination Date.
6. Dividends. Any cash dividends paid with respect to Shares before settlement of the shares underlying unvested PSUs (or RSUs, if applicable) shall not be paid currently, but shall be converted into additional PSUs (or RSUs, if applicable) to be settled pursuant to Section 5 at the same time as the underlying earned and vested PSUs (or RSUs, if applicable). Any PSUs resulting from such conversion (the “Dividend Units”) will be considered PSUs (or RSUs, if applicable) for purposes of this Agreement and will be subject to all of the terms, conditions and restrictions set forth herein that apply to the underlying PSUs (or RSUs, if applicable) that generated the Dividend Units. As of each date that the Company would otherwise pay the declared dividend on the Shares underlying the PSUs or RSUs (the “Dividend Payment Date”) in the absence of the reinvestment requirements of this Section, the number of Dividend Units will be determined by dividing the amount of dividends otherwise attributable to the PSUs or RSUs but not paid on the Dividend Payment Date by the Fair Market Value of the Shares on the Dividend Payment Date.
7. No transferability of the PSUs. Except as permitted by the Administrator or as permitted under the Plan, the Participant may not assign or transfer the PSUs to anyone other than by will or the laws of descent and distribution. The Company may cancel the Participant's PSUs if the Participant attempts to assign or transfer them in a manner inconsistent with this Section 7.
8. Adjustments. In the event that any dividend or other distribution (whether in the form of cash, Shares, other securities or other property, but excluding regular, quarterly and other periodic cash dividends),stock split or a combination or consolidation of the outstanding Shares into a lesser number of shares, is declared with respect to the Shares, then the PSUs shall be subject to adjustment as provided in Section 12(a) of the Plan.
9. Restrictions on Resales of Shares. The Company may impose such restrictions, conditions or limitations as it determines appropriate as to the timing and manner of any resales by the Participant or other subsequent transfers by the Participant of any Shares issued as a result of the settlement of the PSUs, including without limitation (a) restrictions under an insider trading policy,(b) restrictions designed to delay and/or coordinate the timing and manner of sales by Participant and other grantees and (c) restrictions as to the use of a specified brokerage firm for such resales or other transfers.
10. No Interest in Shares Subject to PSUs. Neither the Participant (individually or as a member of a group) nor any beneficiary or other Person claiming under or through the Participant shall have any right, title, interest, or privilege in or to any Shares allocated or
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reserved for the purpose of the Plan or subject to this Agreement except as to such Shares, if any, as shall have been issued to such Person following vesting of the PSUs.
11. Plan Controls. The PSUs hereby granted are subject to, and the Company and the Participant agree to be bound by, all of the terms and conditions of the Plan as the same may be amended from time to time in accordance with the terms thereof; provided, however, that no such amendment shall be effective as to the PSUs without the Participant's consent insofar as it adversely affects the Participant's material rights under this Agreement, which consent will not be unreasonably withheld by the Participant.
12. Not an Employment Contract. Nothing in the Plan, this Agreement or any other instrument executed pursuant hereto or thereto shall confer upon the Participant any right to continue in the employ of the Employer or any affiliate thereof or shall affect the right of the Employer to terminate the employment of the Participant at any time with or without Cause (unless otherwise set forth in an employment agreement between the Company and the Participant).
13. Governing Law. This Agreement, and any disputes or controversies arising hereunder, shall be construed and enforced in accordance with and governed by the internal laws of the State of Delaware other than principles of law that would apply the law of another jurisdiction.
14. Taxes. The Administrator may, in its sole discretion, make such provisions and take such steps as it may deem necessary or appropriate to satisfy the Withholding Obligations with respect to the issuance of Shares, including deducting the amount of any such Withholding Obligations from any other amount then or thereafter payable to the Participant, requiring the Participant to pay to the Company the amount of such Withholding Obligations or to execute such documents as the Administrator deems necessary or desirable to enable it to satisfy the Withholding Obligations, or any other means provided in the Plan; provided, however, that, the Participant may satisfy any Withholding Obligations by (i) directing the Company to withhold that number of Shares with an aggregate fair market value equal to the amount of the Withholding Obligations or (ii) delivering to the Company such number of previously held Shares that have been owned by the Participant with an aggregate fair market value equal to the amount of the Withholding Obligations.
15. Notices. All notices, requests, demands and other communications called for or contemplated hereunder shall be in writing and shall be deemed to have been given when delivered to the party to whom addressed or when sent by telecopy (if promptly confirmed by registered or certified mail, return receipt requested, prepaid and addressed) to the parties, their successors in interest, or their assignees at the following addresses, or at such other addresses as the parties may designate by written notice in the manner aforesaid:
If to the Company to:
Noodles & Company
520 Zang Street, Suite D
520 Zang Street, Suite D
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Broomfield, CO 80021
Fax: (720) 214-1921
Attention: General Counsel
Fax: (720) 214-1921
Attention: General Counsel
If to the Participant to the address set forth below the Participant's signature below.
All such notices, requests and other communications will (i) if delivered personally to the address as provided in this Section 15, be deemed given upon delivery,(ii) if delivered by facsimile transmission to the facsimile number as provided for in this Section 15, be deemed given upon facsimile confirmation,(iii) if delivered by mail in the manner described above to the address as provided for in this Section 15, be deemed given on the earlier of the third Business Day following mailing or upon receipt, and (iv) if delivered by overnight courier to the address as provided in this Section 15, be deemed given on the earlier of the first Business Day following the date sent by such overnight courier or upon receipt (in each case regardless of whether such notice, request or other communication is received by any other Person to whom a copy of such notice is to be delivered pursuant to this Section 15. Any party from time to time may change its address, facsimile number or other information for the purpose of notices to that party by giving notice specifying such change to the other parties hereto.
Either party may, by notice given to the other party in accordance with this Section 15, designate another address or Person for receipt of notices hereunder.
16. Amendments and Waivers. This Agreement shall not be changed, altered, modified or amended, except by a written agreement signed by both parties hereto. The failure of any party to insist in any one instance or more upon strict performance of any of the terms and conditions hereof, or to exercise any right or privilege herein conferred, shall not be construed as a waiver of such terms, conditions, rights or privileges, but same shall continue to remain in full force and effect. Any waiver by any party of any violation of, breach of or default under any provision of this Agreement by the other party shall not be construed as, or constitute, a continuing waiver of such provision, or waiver of any other violation of, breach of or default under any other provision of this Agreement. Any waiver by any party of any provision hereof shall be effective only by a writing signed by the party to be charged.
17. Entire Agreement. This Agreement, together with the Plan, sets forth the entire agreement and understanding between the parties hereto as to the subject matter hereof and thereof and supersedes all prior oral and written and all contemporaneous oral discussions, agreements and understandings of any kind or nature, regarding the subject matter hereof and thereof between the parties hereto.
18. Separability. If any term or provision of this Agreement shall to any extent be invalid, illegal or incapable of being enforced by any rule of law, or public policy, all other conditions and provisions of this Agreement nevertheless shall remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner adverse to any party. Upon such determination that any term or provision is invalid, illegal or incapable of being enforced, the invalid or unenforceable provisions, to the extent
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permitted by law, shall be deemed amended and given such interpretation so as to effect the original intent of the parties as closely as possible in an acceptable manner to the end that transactions contemplated hereby are fulfilled to the maximum extent possible.
19. Headings; Construction. Headings in this Agreement are for reference purposes only and shall not be deemed to have any substantive effect. The words "include," "includes" and "including" when used herein shall be deemed in each case to be followed by the words "without limitation."
20. Counterparts. This Agreement may be executed in multiple counterparts, each of which shall be deemed an original, and all of which together shall constitute one and the same instrument.
21. Further Assurances. The Participant shall cooperate and take such action as may be reasonably requested by the Company in order to carry out the provisions and purposes of this Agreement.
22. Remedies. In the event of a breach by any party to this Agreement of its obligations under this Agreement, any party injured by such breach, in addition to being entitled to exercise all rights granted by law, including recovery of damages, shall be entitled to specific performance of its rights under this Agreement. The parties agree that the provisions of this Agreement shall be specifically enforceable, it being agreed by the parties that the remedy at law, including monetary damages, for breach of any such provision will be inadequate compensation for any loss and that any defense in any action for specific performance that a remedy at law would be adequate is hereby waived.
23. Electronic Delivery. By executing the Agreement, the Participant hereby consents to the delivery of information (including, without limitation, information required to be delivered to the Participant pursuant to applicable securities laws) regarding the Company and the subsidiaries, the Plan, the PSUs and the Shares via Company web site or other electronic delivery
24. Binding Effect. This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective permitted successors and assigns, including any Permitted Transferees.
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the Effective Date.
THE COMPANY:
NOODLES & COMPANY
By:
Name:
Title:
PARTICIPANT:
Name:
Address:
Tel:
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EXHIBIT 1
NOODLES & COMPANY
AMENDED AND RESTATED
AMENDED AND RESTATED
2010 STOCK INCENTIVE PLAN
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Exhibit 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER
I, Dave Boennighausen, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Noodles and Company;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |
(b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | |
(c) | Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | |
(d) | Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and | |
5. I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and | |
(b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. | |
Date: July 19, 2018
/s/ DAVE BOENNIGHAUSEN | ||
Dave Boennighausen | ||
Chief Executive Officer (Principal Executive Officer and Principal Financial Officer) | ||
Exhibit 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER
I, Dave Boennighausen, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of Noodles & Company on Form 10-Q for the fiscal quarter ended July 3, 2018 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report on Form 10-Q fairly presents in all material respects the financial condition and results of operations of Noodles & Company.
Date: July 19, 2018
By: | /s/ DAVE BOENNIGHAUSEN | ||
Name: | Dave Boennighausen | ||
Title: | Chief Executive Officer and Principal Financial Officer | ||
This certification accompanies this Quarterly Report on Form 10-Q pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the Company specifically incorporates it by reference.