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Table of Contents                                        


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
_____________________________________________________________
FORM 10-Q
_____________________________________________________________


        QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
For the quarterly period ended October 1, 2019
or
     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from             to            
Commission File Number: 001-35987
___________________________________________________________
NOODLES & COMPANY
(Exact name of registrant as specified in its charter)
_____________________________________________________________
Delaware
 
84-1303469
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
520 Zang Street, Suite D
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Broomfield,
CO
 
 
 
 
 
 
 
 
 
 
 
 
 
 
80021
 
 
 
(Address of principal executive offices)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Zip Code)
 
(720) 214-1900
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)

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

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes   No 
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
 
Outstanding at November 1, 2019
Class A Common Stock, $0.01 par value per share
 
44,122,121 shares



Table of Contents

TABLE OF CONTENTS

 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 





1

Table of Contents

PART I

Item 1. Financial Statements

Noodles & Company
Condensed Consolidated Balance Sheets
(in thousands, except share and per share data)
 
 
October 1,
2019
 
January 1,
2019
 
 
(unaudited)
 
 
Assets
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
3,086

 
$
4,655

Accounts receivable
 
2,279

 
2,391

Inventories
 
9,875

 
9,646

Prepaid expenses and other assets
 
4,291

 
6,474

Income tax receivable
 
191

 
185

Total current assets
 
19,722

 
23,351

Property and equipment, net
 
134,682

 
138,774

Operating lease assets, net
 
212,760

 

Goodwill
 
7,154

 
6,400

Intangibles, net

963

 
1,291

Other assets, net
 
2,346

 
2,216

Total long-term assets
 
357,905

 
148,681

Total assets
 
$
377,627

 
$
172,032

Liabilities and Stockholders’ Equity
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable
 
$
8,145

 
$
7,854

Accrued payroll and benefits
 
9,725

 
13,391

Accrued expenses and other current liabilities
 
9,563

 
11,183

Current operating lease liabilities
 
22,431

 

Current portion of long-term debt
 
1,125

 
719

Total current liabilities
 
50,989

 
33,147

Long-term debt, net
 
41,963

 
44,183

Long-term operating lease liabilities, net
 
229,157

 

Deferred rent
 

 
37,334

Deferred tax liabilities, net
 
197

 
133

Other long-term liabilities
 
4,275

 
4,554

Total liabilities
 
326,581

 
119,351

 
 
 
 
 
Stockholders’ equity:
 
 
 
 
Preferred stock—$0.01 par value, 1,000,000 shares authorized and undesignated as of October 1, 2019 and January 1, 2019; no shares issued or outstanding
 

 

Common stock—$0.01 par value, 180,000,000 shares authorized as of October 1, 2019 and January 1, 2019; 46,545,992 issued and 44,122,121 outstanding as of October 1, 2019 and 46,353,309 issued and 43,929,438 outstanding as of January 1, 2019
 
465

 
464

Treasury stock, at cost, 2,423,871 shares as of October 1, 2019 and January 1, 2019
 
(35,000
)
 
(35,000
)
Additional paid-in capital
 
199,878

 
198,352

Accumulated deficit
 
(114,297
)
 
(111,135
)
Total stockholders’ equity
 
51,046

 
52,681

Total liabilities and stockholders’ equity
 
$
377,627

 
$
172,032

   See accompanying notes to condensed consolidated financial statements.

2

Table of Contents

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

 
 
Fiscal Quarter Ended
 
Three Fiscal Quarters Ended
 
 
October 1,
2019
 
October 2,
2018
 
October 1,
2019
 
October 2,
2018
Revenue:
 
 
 
 
 
 
 
 
Restaurant revenue
 
$
116,759

 
$
115,552

 
$
344,382

 
$
341,616

Franchising royalties and fees, and other
 
1,545

 
1,175

 
4,158

 
3,032

Total revenue
 
118,304

 
116,727

 
348,540

 
344,648

Costs and expenses:
 
 
 
 
 
 
 
 
Restaurant operating costs (exclusive of depreciation and amortization shown separately below):
 
 
 
 
 
 
 
 
Cost of sales
 
29,544

 
30,617

 
89,083

 
90,962

Labor
 
37,951

 
37,738

 
113,920

 
112,353

Occupancy
 
12,108

 
12,035

 
36,849

 
37,155

Other restaurant operating costs
 
17,161

 
16,224

 
50,475

 
49,997

General and administrative
 
10,436

 
10,399

 
32,424

 
35,480

Depreciation and amortization
 
5,458

 
5,790

 
16,626

 
17,407

Pre-opening
 
266

 

 
331

 
50

Restaurant impairments, closure costs and asset disposals
 
336

 
1,792

 
3,640

 
5,952

Total costs and expenses
 
113,260

 
114,595

 
343,348

 
349,356

Income (loss) from operations
 
5,044

 
2,132

 
5,192

 
(4,708
)
Loss on extinguishment of debt
 

 

 

 
626

Interest expense, net
 
737

 
1,093

 
2,298

 
3,385

Income (loss) before income taxes
 
4,307

 
1,039

 
2,894

 
(8,719
)
Provision (benefit) for income taxes
 
64

 
(11
)
 
64

 
(259
)
Net income (loss) and comprehensive income (loss)
 
$
4,243

 
$
1,050

 
$
2,830

 
$
(8,460
)
Earnings (loss) per share of Class A and Class B common stock, combined:
 
 
 
 
 
 
 
 
Basic
 
$
0.10

 
$
0.02

 
$
0.06

 
$
(0.20
)
Diluted
 
$
0.09

 
$
0.02

 
$
0.06

 
$
(0.20
)
Weighted average shares of Class A and Class B common stock outstanding, combined:
 
 
 
 
 
 
 
 
Basic
 
43,990,049

 
43,094,524

 
44,007,345

 
41,798,640

Diluted
 
44,899,176

 
44,829,363

 
45,078,539

 
41,798,640


See accompanying notes to condensed consolidated financial statements.

3

Table of Contents

Noodles & Company
Condensed Consolidated Statements of Stockholders’ Equity
(in thousands, except share data, unaudited)
 
 
Fiscal Quarter Ended
 
 
Common Stock(1) (2)
 
Treasury
 
 Additional Paid-In
Capital
 
Accumulated
Deficit
 
Total
Stockholders’
Equity
 
 
Shares
 
Amount
 
Shares
 
Amount
 
Balance—July 2, 2019
 
46,508,586

 
$
465

 
2,423,871

 
$
(35,000
)
 
$
199,978

 
$
(118,540
)
 
$
46,903

Stock plan transactions and other
 
37,406

 

 

 

 
(49
)
 

 
(49
)
Stock-based compensation expense
 

 

 

 

 
(51
)
 

 
(51
)
Net income
 

 

 

 

 

 
4,243

 
4,243

Balance—October 1, 2019
 
46,545,992

 
$
465

 
2,423,871

 
$
(35,000
)
 
$
199,878

 
$
(114,297
)
 
$
51,046

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance—July 3, 2018
 
43,690,395

 
$
437

 
2,423,871

 
$
(35,000
)
 
$
172,936

 
$
(112,204
)
 
$
26,169

Issuance of common stock in connection with a public offering, net of transaction expenses
 
2,500,000

 
25

 

 

 
23,132

 

 
23,157

Stock plan transactions and other
 
149,618

 
1

 

 

 
946

 

 
947

Stock-based compensation expense
 

 

 

 

 
652

 

 
652

Net income
 

 

 

 

 

 
1,050

 
1,050

Balance—October 2, 2018
 
46,340,013

 
$
463

 
2,423,871

 
$
(35,000
)
 
$
197,666

 
$
(111,154
)
 
$
51,975

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Fiscal Quarters Ended
 
 
Common Stock(1) (2)
 
Treasury
 
 Additional Paid-In
Capital
 
Accumulated
Deficit
 
Total
Stockholders’
Equity
 
 
Shares
 
Amount
 
Shares
 
Amount
 
Balance—January 1, 2019
 
46,353,309

 
$
464

 
2,423,871

 
$
(35,000
)
 
$
198,352

 
$
(111,135
)
 
$
52,681

Stock plan transactions and other
 
192,683

 
1

 

 

 
(285
)
 

 
(284
)
Stock-based compensation expense
 

 

 

 

 
1,811

 

 
1,811

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

 

 

 

 

 
(5,992
)
 
(5,992
)
Net income
 

 

 

 

 

 
2,830

 
2,830

Balance—October 1, 2019
 
46,545,992

 
$
465

 
2,423,871

 
$
(35,000
)
 
$
199,878

 
$
(114,297
)
 
$
51,046

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance—January 2, 2018
 
43,550,329

 
$
436

 
2,423,871

 
$
(35,000
)
 
$
171,613

 
$
(101,188
)
 
$
35,861

Issuance of common stock in connection with a public offering, net of transaction expenses
 
2,500,000

 
25

 

 

 
23,132

 

 
23,157

Stock plan transactions and other
 
289,684

 
2

 

 

 
652

 

 
654

Stock-based compensation expense
 

 

 

 

 
2,269

 

 
2,269

Adoption of ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606)
 

 

 

 

 

 
(1,506
)
 
(1,506
)
Net loss
 

 

 

 

 

 
(8,460
)
 
(8,460
)
Balance—October 2, 2018
 
46,340,013

 
$
463

 
2,423,871

 
$
(35,000
)
 
$
197,666

 
$
(111,154
)
 
$
51,975

_____________
(1)
Unless otherwise noted, activity relates to Class A common stock.
(2)
On May 24, 2018, 1,522,098 shares of Class B common stock were converted into the same number of the Company’s Class A common stock. As a result of the conversion, no shares of the Company’s Class B common stock were outstanding as of October 2, 2018.
See accompanying notes to condensed consolidated financial statements.

4

Table of Contents

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

 
 
Three Fiscal Quarters Ended
 
 
October 1,
2019
 
October 2,
2018
Operating activities
 
 
 
 
Net income (loss)
 
$
2,830

 
$
(8,460
)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 
 
 
 
Depreciation and amortization
 
16,626

 
17,407

Deferred income taxes
 
64

 
(263
)
Restaurant impairments, closure costs and asset disposals
 
3,647

 
5,289

Loss on extinguishment of debt
 

 
626

Amortization of debt issuance costs
 
374

 
484

Stock-based compensation
 
1,780

 
2,232

Gain on insurance proceeds received for property damage
 

 
(373
)
Changes in operating assets and liabilities:
 
 
 
 
Accounts receivable
 
122

 
489

Inventories
 
(349
)
 
(647
)
Prepaid expenses and other assets
 
(1,062
)
 
(402
)
Accounts payable
 
(864
)
 
(2,172
)
Deferred rent
 

 
(1,278
)
Income taxes
 
(6
)
 
(46
)
Operating lease assets and liabilities
 
(1,749
)
 

Accrued expenses and other liabilities
 
(5,144
)
 
(17,754
)
Net cash provided by (used in) operating activities
 
16,269

 
(4,868
)
Investing activities
 
 
 
 
Purchases of property and equipment
 
(13,788
)
 
(9,937
)
Insurance proceeds received for property damage
 

 
500

Proceeds from disposal of property and equipment
 
352

 

Franchise restaurant acquisition, net of cash acquired
 
(1,387
)
 

Net cash used in investing activities
 
(14,823
)
 
(9,437
)
Financing activities
 
 
 
 
Net payments from swing line loan
 

 
(101
)
Proceeds from issuance of long-term debt
 

 
74,889

Payments on long-term debt
 
(2,188
)
 
(84,030
)
Issuance of common stock, net of transaction expenses
 

 
23,157

Payments on finance leases
 
(543
)
 

Stock plan transactions and tax withholding on share-based compensation awards
 
(284
)
 
654

Debt issuance costs
 

 
(1,707
)
Net cash (used in) provided by financing activities
 
(3,015
)
 
12,862

Net decrease in cash and cash equivalents
 
(1,569
)
 
(1,443
)
Cash and cash equivalents
 
 
 
 
Beginning of period
 
4,655

 
3,361

End of period
 
$
3,086

 
$
1,918

See accompanying notes to condensed consolidated financial statements.

5

Table of Contents

NOODLES & COMPANY
Notes to Condensed Consolidated Financial Statements
(unaudited)

1. Business Summary and Basis of Presentation
Business
Noodles & Company (the “Company”), a Delaware corporation, develops and operates fast casual restaurants that serve globally inspired noodle and pasta dishes, soups, salads and appetizers. As of October 1, 2019, the Company had 391 company-owned restaurants and 67 franchise restaurants in 29 states and the District of Columbia. The Company operates its business as one operating and reportable segment.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include the accounts of Noodles & Company and its subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. The accompanying interim unaudited condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America (“GAAP”) for complete financial statements. In the opinion of the Company, all adjustments considered necessary for the fair presentation of the Company’s results of operations, financial position and cash flows for the periods presented have been included and are of a normal, recurring nature. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The results of operations for any interim period are not necessarily indicative of results for the full year. Certain information and footnote disclosures normally included in the Company’s annual consolidated financial statements on Form 10-K have been condensed or omitted. The condensed consolidated balance sheet as of January 1, 2019 was derived from audited financial statements. These financial statements should be read in conjunction with the audited financial statements and the related notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 1, 2019.
Fiscal Year
The Company operates on a 52- or 53-week fiscal year ending on the Tuesday closest to December 31. The Company’s fiscal quarters each contain 13 operating weeks, with the exception of the fourth quarter of a 53-week fiscal year, which contains 14 operating weeks. Fiscal year 2019, which ends on December 31, 2019, and fiscal year 2018, which ended on January 1, 2019, both contain 52 weeks. The Company’s fiscal quarter that ended October 1, 2019 is referred to as the third quarter of 2019, and the fiscal quarter ended October 2, 2018 is referred to as the third quarter of 2018.
Recent Accounting Pronouncements
The Company reviewed recently issued accounting pronouncements and concluded that they were either not applicable or not expected to have a material impact on the Company’s financial position or results of operations and cash flows.
Recently Adopted Accounting Pronouncements
On January 2, 2019, the Company adopted ASU 2016-02, “Leases (Topic 842),” along with related clarifications and improvements. This pronouncement requires a lessee to recognize a liability for lease obligations, which represents the discounted obligation to make future lease payments, and a corresponding right-of-use asset on the balance sheet. The guidance also requires certain qualitative and quantitative disclosures about the amount, timing and uncertainty of cash flows arising from leases. The Company elected the alternative transition method to apply the standard as of the beginning of the period of adoption; therefore, the Company has not applied the standard to the comparative periods presented on its condensed consolidated financial statements.

The adoption of this lease guidance did have a material impact on the Company’s Condensed Consolidated Balance Sheets by materially increasing its non-current assets and current and non-current liabilities due to the recognition of the right-of-use assets and related lease liabilities primarily related to the Company’s restaurant operating leases and corporate office space. Upon adoption, the right-of-use assets were based upon the operating lease liabilities adjusted for prepaid and deferred rent, liabilities associated with lease termination costs and impairment of right-of-use assets. The impairment of right-of-use assets upon adoption was recognized in retained earnings as of January 2, 2019.

6


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

The impact on the Condensed Consolidated Balance Sheet on the date of adoption was as follows:
 
January 1,
2019
 
Adjustments Due to the Adoption of Topic 842
(unaudited)
 
January 2, 2019
(unaudited)
Assets
 
 
 
 
 
Current assets:
 
 
 
 
 
Cash and cash equivalents
$
4,655

 
$

 
$
4,655

Accounts receivable
2,391

 
225

 
2,616

Inventories
9,646

 

 
9,646

Prepaid expenses and other assets
6,474

 
(3,243
)
 
3,231

Income tax receivable
185

 

 
185

Total current assets
23,351

 
(3,018
)
 
20,333

Property and equipment, net
138,774

 
844

 
139,618

Operating lease assets, net

 
219,883

 
219,883

Goodwill
6,400

 

 
6,400

Intangibles, net
1,291

 
(67
)
 
1,224

Other assets, net
2,216

 

 
2,216

Total long-term assets
148,681

 
220,660

 
369,341

Total assets
$
172,032

 
$
217,642

 
$
389,674

Liabilities and Stockholders’ Equity
 
 
 
 
 
Current liabilities:
 
 
 
 
 
Accounts payable
$
7,854

 
$

 
$
7,854

Accrued payroll and benefits
13,391

 

 
13,391

Accrued expenses and other current liabilities
11,183

 
(553
)
 
10,630

Current operating lease liabilities

 

 

Current portion of long-term debt
719

 

 
719

Total current liabilities
33,147

 
(553
)
 
32,594

Long-term debt, net
44,183

 

 
44,183

Long-term operating lease liabilities, net

 
260,931

 
260,931

Deferred rent
37,334

 
(37,186
)
 
148

Deferred tax liabilities, net
133

 

 
133

Other long-term liabilities
4,554

 
442

 
4,996

Total liabilities
119,351

 
223,634

 
342,985

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

 

 

Common stock—$0.01 par value, 180,000,000 shares authorized as of January 1, 2019; 46,353,309 issued and 43,929,438 outstanding as of January 1, 2019
464

 

 
464

Treasury stock, at cost, 2,423,871 shares as of January 1, 2019
(35,000
)
 

 
(35,000
)
Additional paid-in capital
198,352

 

 
198,352

Accumulated deficit
(111,135
)
 
(5,992
)
 
(117,127
)
Total stockholders’ equity
52,681

 
(5,992
)
 
46,689

Total liabilities and stockholders’ equity
$
172,032

 
$
217,642

 
$
389,674



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2. Supplemental Financial Information
Property and equipment, net, consists of the following (in thousands):
 
 
October 1,
2019
 
January 1,
2019
Leasehold improvements
 
$
200,790

 
$
197,571

Furniture, fixtures and equipment
 
123,641

 
121,479

Construction in progress
 
5,606

 
3,620

 
 
330,037

 
322,670

Accumulated depreciation and amortization
 
(195,355
)
 
(183,896
)
Property and equipment, net
 
$
134,682

 
$
138,774



Accrued expenses and other current liabilities consist of the following (in thousands):
 
 
October 1,
2019
 
January 1,
2019
Gift card liability
 
$
1,446

 
$
3,284

Occupancy related
 
1,699

 
2,600

Utilities
 
1,391

 
1,582

Other accrued expenses
 
5,027

 
3,717

Accrued expenses and other current liabilities
 
$
9,563

 
$
11,183



3. Long-Term Debt
On May 9, 2018, the Company entered into a credit facility with U.S. Bank National Association (the “2018 Credit Facility”). The 2018 Credit Facility consists 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.
As of October 1, 2019, the Company had $44.4 million of indebtedness (excluding $1.3 million of unamortized debt issuance costs) and $3.2 million of letters of credit outstanding under the 2018 Credit Facility. The term loan requires principal payments of $156,250 per quarter 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.
Aggregate maturities for debt outstanding as of October 1, 2019 are as follows (in thousands):
Year 1
$
1,125

Year 2
1,813

Year 3
41,451

Total
$
44,389


The Company’s outstanding indebtedness bore interest at rates between 5.34% to 7.25% during the first three quarters of 2019.
Upon execution of the 2018 Credit Facility, the Company repaid in full its outstanding indebtedness under its prior credit facility using funds drawn on its 2018 Credit Facility. Upon repayment, the prior credit facility and all related agreements were terminated.

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

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

4. Fair Value Measurements
The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and all other current liabilities approximate their fair values due to their short-term nature. The carrying amounts of borrowings approximate fair value as the line of credit and term borrowings vary with market interest rates and negotiated terms and conditions are consistent with current market rates. The fair value of the Company’s line of credit borrowings is measured using Level 2 inputs.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Assets recognized or disclosed at fair value in the condensed consolidated financial statements on a non-recurring basis include items such as leasehold improvements, property and equipment, operating lease assets, goodwill and other intangible assets. These assets are measured at fair value if determined to be impaired or when acquired.
Adjustments to the fair value of assets measured at fair value on a non-recurring basis as of October 1, 2019 and October 2, 2018 are discussed in Note 7, Restaurant Impairments, Closure Costs and Asset Disposals.
5. Income Taxes
The following table presents the Company’s provision (benefit) for income taxes (in thousands):
 
 
Fiscal Quarter Ended
 
Three Fiscal Quarters Ended
 
 
October 1,
2019
 
October 2,
2018
 
October 1,
2019
 
October 2,
2018
Provision (benefit) for income taxes
 
$
64

 
$
(11
)
 
$
64

 
$
(259
)
Effective tax rate
 
1.5
%
 
(1.1
)%
 
2.2
%
 
3.0
%


The effective tax rate for the third quarter of 2019 and the first three quarters of 2019 reflect the impact of the previously recorded valuation allowance. For the remainder of fiscal 2019, the Company does not anticipate material income tax expense or benefit as a result of the valuation allowance recorded. The Company will maintain the valuation allowance against deferred tax assets until there is sufficient evidence to support a full or partial reversal. The reversal of a previously recorded valuation allowance will generally result in a benefit from income tax. The effective tax rates for the third quarter of 2018 and the first three quarters of 2018 reflected changes made by the Tax Cuts and Jobs Act (“Tax Act”), which was signed into law in December 2017.

6. Stock-Based Compensation
The Company’s Stock Incentive Plan (the “Plan”), as amended and restated in May of 2013, authorizes the grant of non-qualified stock options, incentive stock options, stock appreciation rights, restricted stock, restricted stock units (“RSUs”) and incentive bonuses to employees, officers, non-employee directors and other service providers. As of October 1, 2019, approximately 3.5 million share-based awards were available to be granted under the Plan.
The following table shows total stock-based compensation expense (in thousands):
 
Fiscal Quarter Ended
 
Three Fiscal Quarters Ended
 
October 1,
2019
 
October 2,
2018
 
October 1,
2019
 
October 2,
2018
Stock-based compensation expense
$
(61
)
 
$
640

 
$
1,820

 
$
2,232

Capitalized stock-based compensation expense
$
11

 
$
12

 
$
32

 
$
37


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


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7. Restaurant Impairments, Closure Costs and Asset Disposals
The following table presents restaurant impairments, closure costs and asset disposals (in thousands):
 
Fiscal Quarter Ended
 
Three Fiscal Quarters Ended
 
October 1,
2019
 
October 2,
2018
 
October 1,
2019
 
October 2,
2018
Restaurant impairments (1)
$
89

 
$
314

 
$
2,554

 
$
1,231

Closure costs (1)
(643
)
 
1,488

 
(112
)
 
3,561

Loss (gain) on disposal of assets and other
890

 
(10
)
 
1,198

 
1,160

 
$
336

 
$
1,792

 
$
3,640

 
$
5,952


_____________________________
(1)
Restaurant impairments and closure costs in all periods presented above include amounts related to restaurants previously impaired or closed.
There were no restaurant impairments during the third quarter of 2019 and two restaurant impairments during the first three quarters of 2019. There were no restaurant impairments during the third quarter of 2018 and one restaurant impairment during the first three quarters of 2018. Each of these periods include ongoing equipment costs for restaurants previously impaired. Impairment is based on management’s current assessment of the expected future cash flows of a restaurant based on recent results and other specific market factors. Impairment expense is a Level 3 fair value measure and is determined by comparing the carrying value of restaurant assets to the estimated fair market value of the restaurant assets at resale value and the right-of-use asset based on a discounted cash flow analysis utilizing market lease rates.
Closure costs in the third quarter and first three quarters of 2019 include costs related to restaurants closed in the first three quarters of 2019 as well as ongoing costs and adjustments to the liabilities to landlords as lease terminations occur. The closure costs of $1.5 million recognized during the third quarter of 2018 and $3.6 million recognized during the first three quarters of 2018 are related to the three restaurants closed in the third quarter of 2018 and 12 restaurants closed in the first three quarters of 2018, most of which were approaching the expiration of their leases, as well as ongoing costs of restaurants closed in previous years. These ongoing costs include adjustments to liabilities as lease terminations occur.
Loss on disposal of assets and other includes expenses recognized during the third quarter and first three quarters of 2019 related to the divestiture of five company-owned restaurants to a franchisee, offset by adjustments related to changes in the Company’s assessment of remaining operating lease terms, partially offset by ongoing costs of restaurants closed in previous years.
These expenses are included in the “Restaurant impairments, closure costs and asset disposals” line in the Condensed Consolidated Statements of Operations.

8. Earnings (Loss) Per Share
Basic earnings (loss) per share (“EPS”) is calculated by dividing net income (loss) available to common stockholders by the weighted-average number of shares of common stock outstanding during each period. Diluted EPS is calculated using net income (loss) available to common stockholders divided by diluted weighted-average shares of common stock outstanding during each period. Potentially dilutive securities include shares of common stock underlying stock options, warrants and RSUs. Diluted EPS considers the impact of potentially dilutive securities except in periods in which there is a loss because the inclusion of the potential common shares would have an anti-dilutive effect.

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The following table sets forth the computations of basic and diluted EPS (in thousands, except share and per share data):
 
 
Fiscal Quarter Ended
 
Three Fiscal Quarters Ended
 
 
October 1,
2019
 
October 2,
2018
 
October 1,
2019
 
October 2,
2018
Net income (loss)
 
$
4,243

 
$
1,050

 
$
2,830

 
$
(8,460
)
Shares:
 
 
 
 
 
 
 
 
Basic weighted average shares outstanding
 
43,990,049

 
43,094,524

 
44,007,345

 
41,798,640

Effect of dilutive securities
 
909,127

 
1,734,839

 
1,071,194

 

Diluted weighted average shares outstanding
 
44,899,176

 
44,829,363

 
45,078,539

 
41,798,640

Earnings (loss) per share:
 
 
 
 
 
 
 
 
Basic earnings (loss) per share
 
$
0.10

 
$
0.02

 
$
0.06

 
$
(0.20
)
Diluted earnings (loss) per share
 
$
0.09

 
$
0.02

 
$
0.06

 
$
(0.20
)


The Company computes the effect of dilutive securities using the treasury stock method and average market prices during the period. Potential common shares are excluded from the computation of diluted earnings per share when the effect would be anti-dilutive. The shares issuable on the vesting or exercise of share-based awards or exercise of outstanding warrants that were excluded from the calculation of diluted earnings (loss) per share because the effect of their inclusion would have been anti-dilutive totaled 1,748,444 and 176,325 for the third quarter of 2019 and 2018, respectively, and totaled 1,490,202 and 2,758,848 for the first three quarters of 2019 and 2018, respectively.
9. Leases
The Company leases restaurant facilities, office space and certain equipment that expire on various dates through January 2035. Lease terms for restaurants in traditional shopping centers generally include a base term of 10 years, with options to extend these leases for additional periods of 5 to 15 years. Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term.
The Company’s leases typically contain rent escalations over the lease term. The Company recognizes expense for these leases on a straight-line basis over the lease term. Additionally, tenant incentives used to fund leasehold improvements are recognized when earned and reduce the right-of-use asset related to the lease. These are amortized through the right-of-use asset as reductions of expense over the lease term.
Some of the Company’s leases include rent escalations based on inflation indexes and fair market value adjustments. Certain leases contain contingent rental provisions that include a fixed base rent plus an additional percentage of the restaurant’s sales in excess of stipulated amounts. Lease expense associated with rent escalation and contingent rental provisions is not material and is included within operating lease cost. Operating lease liabilities are calculated using the prevailing index or rate at lease commencement. Subsequent escalations in the index or rate and contingent rental payments are recognized as variable lease expenses. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.

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

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

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

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Classification
October 1,
2019
Assets
 
 
Operating
Operating lease assets, net
$
212,760

Finance
Finance lease assets, net (1)
896

Total leased assets
 
$
213,656

Liabilities
 
 
Current lease liabilities
 
 
Operating
Current operating lease liabilities
$
22,431

Finance
Current finance lease liabilities (2)
756

Long-term lease liabilities
 
 
Operating
Long-term operating lease liabilities
229,157

Finance
Long-term finance lease liabilities (2)
158

Total lease liabilities
 
$
252,502

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

The components of lease costs are as follows (in thousands):
 
 
 
Fiscal Quarter Ended
 
Three Fiscal Quarters Ended
Classification
 
October 1,
2019
 
October 1,
2019
Operating lease cost
Occupancy, other restaurant operating costs, and general and administrative expenses
 
$
10,251

 
$
30,583

Finance lease cost
 
 
 
 
 
Amortization of lease assets
Depreciation and amortization
 
161

 
511

Interest on lease liabilities
Interest expense, net
 
18

 
58

 
 
 
10,430

 
31,152

Sublease income
Franchising royalties and fees, and other
 
(184
)
 
(384
)
Total lease cost, net
 
 
$
10,246

 
$
30,768



Future minimum lease payments required under existing leases as of October 1, 2019 are as follows (in thousands):
 
Operating Leases
 
Finance Leases
 
Total
Remainder of 2019
$
10,815

 
$
158

 
$
10,973

2020
43,172

 
539

 
43,711

2021
42,375

 
216

 
42,591

2022
42,184

 
44

 
42,228

2023
40,831

 
14

 
40,845

Thereafter
189,439

 
9

 
189,448

Total lease payments
368,816

 
980

 
369,796

Less: Imputed interest
117,228

 
66

 
117,294

Present value of lease liabilities
$
251,588

 
$
914

 
$
252,502



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


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Lease term and discount rate as of October 1, 2019 are as follows:
 
October 1,
2019
Weighted average remaining lease term (years):
 
Operating
9.5

Finance
2.0

Weighted average discount rate:
 
Operating
8.69
%
Finance
7.20
%

Supplemental disclosures of cash flow information related to leases for the third quarter and the first three quarters ended October 1, 2019 are as follows (in thousands):
 
 
Fiscal Quarter Ended
 
Three Fiscal Quarters Ended
 
 
October 1,
2019
 
October 1,
2019
Cash paid for lease liabilities:
 
 
 
 
Operating leases
 
$
10,795

 
$
32,301

Finance leases
 
223

 
600

 
 
$
11,018

 
$
32,901

Right-of-use assets obtained in exchange for new lease liabilities:
 
 
 
 
Operating leases
 
$
2,646

 
$
7,856

Finance leases
 

 
229

 
 
$
2,646

 
$
8,085



10. Supplemental Disclosures to Condensed Consolidated Statements of Cash Flows
The following table presents the supplemental disclosures to the Condensed Consolidated Statements of Cash Flows for the first three quarters ended October 1, 2019 and October 2, 2018 (in thousands):
 
 
October 1,
2019
 
October 2,
2018
Interest paid (net of amounts capitalized)
 
$
1,972

 
$
3,006

Income taxes paid
 
6

 
49

Changes in purchases of property and equipment accrued in accounts payable, net
 
1,200

 
(1,346
)


11. Revenue Recognition
Revenue
Revenue consists of sales from restaurant operations, franchise royalties and fees, and sublease income. Revenue from the operation of company-owned restaurants is recognized when sales occur. The Company reports revenue net of sales and use taxes collected from customers and remitted to governmental taxing authorities.
Gift Cards
The Company sells gift cards which do not have an expiration date, and it does not deduct non-usage fees from outstanding gift card balances. The Company recognizes revenue from gift cards when the gift card is redeemed by the customer or the Company determines the likelihood of the gift card being redeemed by the customer is remote (“gift card breakage”). The determination of the gift card breakage rate is based upon Company-specific historical redemption patterns. The Company has determined that approximately 9% of gift cards will not be redeemed and recognizes gift card breakage ratably over the estimated redemption period of the gift card, which is approximately 24 months. Gift card liability balances are typically highest at the end of each calendar year following increased gift card purchases during the holiday season.

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As of October 1, 2019 and January 1, 2019, the current portion of the gift card liability, $1.4 million and $3.3 million, respectively, was included in accrued expenses and other current liabilities, and the long-term portion, $0.7 million and $0.4 million, respectively, was included in other long-term liabilities in the Condensed Consolidated Balance Sheets.
Revenue recognized in the Condensed Consolidated Statements of Operations for the redemption of gift cards was $4.1 million and $4.4 million for the first three quarters of 2019 and 2018, respectively. The revenue recognized from gift cards for the first three quarters of 2018 included $0.3 million of gift card breakage that resulted from a change in the estimate for gift card unredeemed balances for the years 2014 and after. This change in estimate was a result of a litigation settlement in the second quarter of 2018.
Franchise Fees
Royalties from franchise restaurants are based on a percentage of restaurant revenues and are recognized in the period the related franchised restaurants’ sales occur. Development fees and franchise fees, portions of which are collected in advance, are nonrefundable and are recognized in income ratably over the term of the related franchise agreement or recognized upon the termination of the agreement between the Company and the franchisee. The Company has determined that the initial franchise services are not distinct from the continuing rights or services offered during the term of the franchise agreement and should be treated as a single performance obligation; therefore, initial fees received from franchisees are recognized as revenue over the term of each respective franchise agreement, which is typically 20 years.

12. Commitments and Contingencies
In the normal course of business, the Company is subject to other proceedings, lawsuits and claims. Such matters are subject to many uncertainties, and outcomes are not predictable with assurance. Consequently, the Company is unable to ascertain the ultimate aggregate amount of monetary liability or financial impact with respect to these matters as of October 1, 2019. These matters could affect the operating results of any one financial reporting period when resolved in future periods. The Company believes that an unfavorable outcome with respect to these matters is remote or a potential range of loss is not material to its consolidated financial statements. Significant increases in the number of these claims, or one or more successful claims that result in greater liabilities than the Company currently anticipates, could materially and adversely affect its business, financial condition, results of operations or cash flows.


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NOODLES & COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Noodles & Company is a Delaware corporation that was organized in 2002. Noodles & Company and its subsidiaries are sometimes referred to as “we,” “us,” “our” and the “Company” in this report. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and related notes in Item 1 and with the audited consolidated financial statements and the related notes included in our Annual Report on Form 10-K for our fiscal year ended January 1, 2019. We operate on a 52- or 53-week fiscal year ending on the Tuesday closest to December 31. Our fiscal quarters each contain 13 operating weeks, with the exception of the fourth quarter of a 53-week fiscal year, which contains 14 operating weeks. Fiscal years 2019 and 2018 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; the success of our marketing efforts; our ability to open new restaurants on schedule; current economic conditions; price and availability of commodities; our ability to adequately staff our restaurants; changes in labor costs; consumer confidence and spending patterns; consumer reaction to industry related public health issues and perceptions of food safety; seasonal factors; weather; and those discussed in “Special Note Regarding Forward-Looking Statements” and “Risk Factors” as filed in our Annual Report on Form 10-K for our fiscal year ended January 1, 2019.
Recent Trends, Risks and Uncertainties
Comparable Restaurant Sales. In the third quarter of 2019, system-wide comparable restaurant sales increased 2.1%, comprised of a 2.2% increase for company-owned restaurants and a 1.6% increase for franchise restaurants. Our ability to continue to increase comparable restaurant sales depends in part on our ability to successfully implement our operational strategies and initiatives.
Increased Labor Costs. Similar to much of the restaurant industry, our base labor costs have risen in recent periods. In the third quarter of 2019, we were able to mitigate the impact of increased base labor costs through labor efficiencies; however, we expect that labor costs will continue to rise as wage rates and benefit costs increase. Some jurisdictions in which we operate have recently increased their minimum wage by a significant amount and other jurisdictions are considering similar actions. Significant additional government-imposed increases could materially affect our labor costs.
Certain Restaurant Closures. We closed 19 company-owned restaurants in 2018 and two company-owned restaurants in the first three quarters of 2019, most of which were at or approaching the expiration of their leases. We currently do not anticipate significant restaurant closures for the foreseeable future; however, we may from time to time close certain restaurants, including closures at, or near, the expiration of their leases.
Restaurant Development. In the first three quarters of 2019, we opened three new company-owned restaurants, acquired one franchise restaurant and sold five restaurants to a franchisee. As of October 1, 2019, we had 391 company-owned restaurants and 67 franchise restaurants in 29 states and the District of Columbia. Given recent improvement in performance, operating effectiveness and liquidity, we are currently pursuing a disciplined development pipeline to execute a modest new unit growth rate in the near term. We will open two additional restaurants system-wide in the fourth quarter of 2019. We expect an annual unit growth rate of 5% by 2021.

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Key Measures We Use to Evaluate Our Performance
To evaluate the performance of our business, we utilize a variety of financial and performance measures. These key measures include revenue, average unit volume (“AUV”), comparable restaurant sales, restaurant contribution, restaurant contribution margin, EBITDA and adjusted EBITDA.
Revenue
Restaurant revenue represents sales of food and beverages in company-owned restaurants. Several factors affect our restaurant revenue in any period, including the number of restaurants in operation and per-restaurant sales.
Franchise royalties and fees represent royalty income and initial franchise fees. While we expect that the majority of our revenue and net income growth will be driven by company-owned restaurants, our franchise restaurants remain an important factor impacting our revenue and financial performance.
Seasonal factors cause our revenue to fluctuate from quarter to quarter. Our revenue per restaurant is typically lower in the first and fourth quarters, due to reduced winter and holiday traffic, and is 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 Volume
AUV consists of the average annualized sales of all company-owned restaurants for the trailing 12 periods. AUV is calculated by dividing restaurant revenue by the number of operating days within each time period and multiplying by the number of operating days we have in a typical year. This measurement allows management to assess changes in consumer traffic and per person spending patterns at our restaurants.
Comparable Restaurant Sales
Comparable restaurant sales refer to year-over-year sales comparisons for the comparable restaurant base. We define the comparable restaurant base to include restaurants open for at least 18 full periods. This measure highlights performance of existing restaurants, as the impact of new restaurant openings is excluded. Changes in comparable restaurant sales are generated by changes in traffic, which we calculate as the number of entrées sold, or changes in per-person spend, calculated as sales divided by traffic. Per-person spend can be influenced by changes in menu prices and the mix and number of items sold per person.
Measuring our comparable restaurant sales allows us to evaluate the performance of our existing restaurant base. Various factors impact comparable restaurant sales, including:
consumer recognition of our brand and our ability to respond to changing consumer preferences;

overall economic trends, particularly those related to consumer spending;

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

pricing;

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

marketing and promotional efforts;

abnormal weather patterns;

food safety and foodborne illness concerns;

local competition;

trade area dynamics;

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

opening new restaurants in the vicinity of existing locations.


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Consistent with common industry practice, we present comparable restaurant sales on a calendar-adjusted basis that aligns current year sales weeks with comparable periods in the prior year, regardless of whether they belong to the same fiscal period or not. Since opening new company-owned and franchise restaurants is a part of our growth strategy and we anticipate new restaurants will be a component of our revenue growth, comparable restaurant sales is only one measure of how we evaluate our performance.
Restaurant Contribution and Restaurant Contribution Margin
Restaurant contribution represents restaurant revenue less restaurant operating costs which are cost of sales, labor, occupancy and other restaurant operating costs. Restaurant contribution margin represents restaurant contribution as a percentage of restaurant revenue. We expect restaurant contribution to increase in proportion to the number of new restaurants we open and our comparable restaurant sales growth.
We believe that restaurant contribution and restaurant contribution margin are important tools for investors and other interested parties because they are widely-used metrics within the restaurant industry to evaluate restaurant-level productivity, efficiency and performance. We also use restaurant contribution and restaurant contribution margin as metrics to evaluate the profitability of incremental sales at our restaurants, restaurant performance across periods and restaurant financial performance compared with competitors. Restaurant contribution and restaurant contribution margin are supplemental measures of the operating performance of our restaurants and are not reflective of the underlying performance of our business because corporate-level expenses are excluded from these measures.
EBITDA and Adjusted EBITDA
We define EBITDA as net income (loss) before interest expense, provision (benefit) for income taxes and depreciation and amortization. We define adjusted EBITDA as net income (loss) before interest expense, provision (benefit) for income taxes, depreciation and amortization, restaurant impairments, closure costs and asset disposals, acquisition costs, severance costs and stock-based compensation expense.
We believe that EBITDA and adjusted EBITDA provide clear pictures of our operating results by eliminating certain non-recurring and non-cash expenses that may vary widely from period to period and are not reflective of the underlying business performance.
The presentation of restaurant contribution, restaurant contribution margin, EBITDA and adjusted EBITDA is not intended to be considered in isolation or as a substitute for, or to be superior to, the financial information prepared and presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”). We use these non-GAAP financial measures for financial and operational decision making and as a means to evaluate period-to-period comparisons. We believe that they provide useful information to management and investors about operating results, enhance the overall understanding of past financial performance and future prospects and allow for greater transparency with respect to key metrics used by management in its financial and operational decision making.
Results of Operations
The following table presents a reconciliation of net income (loss) to EBITDA and adjusted EBITDA:
 
 
Fiscal Quarter Ended