Noodles & pany(NDLS) - 2021 Q2 - Quarterly Report

PART I - FINANCIAL INFORMATION This section covers unaudited condensed consolidated financial statements, management's discussion, and market risk disclosures Item 1. Financial Statements (unaudited) This section presents the unaudited condensed consolidated financial statements, including balance sheets, statements of operations, stockholders' equity, and cash flows, along with detailed notes. It highlights the financial impact of the COVID-19 pandemic, particularly on revenue, net loss, and liquidity, and outlines the company's accounting policies and significant estimates Condensed Consolidated Balance Sheets This subsection provides a snapshot of the company's financial position at specific dates, detailing assets, liabilities, and stockholders' equity Condensed Consolidated Balance Sheets (in thousands) | Metric | June 30, 2020 | December 31, 2019 | Change | | :----- | :------------ | :---------------- | :----- | | Cash and cash equivalents | $62,076 | $10,459 | +$51,617 | | Total current assets | $77,734 | $29,322 | +$48,412 | | Total assets | $422,395 | $378,519 | +$43,876 | | Total current liabilities | $60,974 | $58,034 | +$2,940 | | Long-term debt, net | $93,040 | $40,497 | +$52,543 | | Total liabilities | $390,119 | $327,948 | +$62,171 | | Total stockholders' equity | $32,276 | $50,571 | -$18,295 | Condensed Consolidated Statements of Operations This subsection presents the company's financial performance over specific periods, detailing revenues, expenses, and net income or loss Condensed Consolidated Statements of Operations (in thousands, unaudited) | Metric | Q2 2020 | Q2 2019 | Change (QoQ) | 2Q 2020 | 2Q 2019 | Change (YoY) | | :----- | :------ | :------ | :----------- | :------ | :------ | :----------- | | Total revenue | $80,157 | $120,190 | -$40,033 (-33.3%) | $180,505 | $230,236 | -$49,731 (-21.6%) | | (Loss) income from operations | $(12,525) | $1,238 | -$13,763 | $(17,379) | $148 | -$17,527 | | Net (loss) income | $(13,478) | $438 | -$13,916 | $(19,313) | $(1,413) | -$17,900 | | Basic EPS | $(0.30) | $0.01 | -$0.31 | $(0.44) | $(0.03) | -$0.41 | | Diluted EPS | $(0.30) | $0.01 | -$0.31 | $(0.44) | $(0.03) | -$0.41 | Condensed Consolidated Statements of Stockholders' Equity This subsection details changes in the company's equity accounts over specific periods, including common stock, additional paid-in capital, and accumulated deficit Condensed Consolidated Statements of Stockholders' Equity (in thousands, unaudited) | Metric | June 30, 2020 | December 31, 2019 | Change | | :----- | :------------ | :---------------- | :----- | | Common Stock | $468 | $466 | +$2 | | Treasury Stock | $(35,000) | $(35,000) | $0 | | Additional Paid-In Capital | $201,601 | $200,585 | +$1,016 | | Accumulated Deficit | $(134,793) | $(115,480) | -$19,313 | | Total Stockholders' Equity | $32,276 | $50,571 | -$18,295 | Condensed Consolidated Statements of Cash Flows This subsection outlines the company's cash inflows and outflows from operating, investing, and financing activities over specific periods Condensed Consolidated Statements of Cash Flows (in thousands, unaudited) | Metric | Two Fiscal Quarters Ended June 30, 2020 | Two Fiscal Quarters Ended July 2, 2019 | Change | | :----- | :-------------------------------------- | :------------------------------------- | :----- | | Net cash provided by operating activities | $6,707 | $9,008 | -$2,301 | | Net cash used in investing activities | $(6,810) | $(9,252) | +$2,442 | | Net cash provided by (used in) financing activities | $51,720 | $(1,073) | +$52,793 | | Net increase (decrease) in cash and cash equivalents | $51,617 | $(1,317) | +$52,934 | | Cash and cash equivalents, end of period | $62,076 | $3,338 | +$58,738 | Notes to Condensed Consolidated Financial Statements This section provides detailed explanations and additional information supporting the condensed consolidated financial statements 1. Business Summary and Basis of Presentation This note outlines the company's business operations, the impact of the COVID-19 pandemic, and the basis for financial statement presentation - As of June 30, 2020, the Company operated 380 company-owned and 76 franchise restaurants in 29 states and D.C[15] - The COVID-19 pandemic has created significant risks and uncertainties, impacting operational and financial performance, leading to the implementation of new initiatives like direct delivery and curbside pickup[18] - The Company early adopted ASU 2016-13 on January 1, 2020, with no impact on consolidated financial statements. It is currently evaluating ASU 2019-12 and ASU 2020-04[19][21][22] 2. Supplemental Financial Information This note provides detailed breakdowns of specific balance sheet accounts, including accounts receivable, property and equipment, and accrued payroll and benefits Accounts Receivable (in thousands) | Category | June 30, 2020 | December 31, 2019 | | :------- | :------------ | :---------------- | | Insurance receivable | $96 | $744 | | Vendor rebate receivables | $281 | $788 | | Franchise and other receivables | $2,029 | $1,971 | | Total | $2,406 | $3,503 | Property and Equipment, Net (in thousands) | Category | June 30, 2020 | December 31, 2019 | | :------- | :------------ | :---------------- | | Leasehold improvements | $197,859 | $200,580 | | Furniture, fixtures and equipment | $124,587 | $122,752 | | Construction in progress | $5,899 | $2,890 | | Accumulated depreciation and amortization | $(203,705) | $(197,355) | | Property and equipment, net | $124,640 | $128,867 | Accrued Payroll and Benefits (in thousands) | Category | June 30, 2020 | December 31, 2019 | | :------- | :------------ | :---------------- | | Accrued payroll and related liabilities | $5,634 | $6,364 | | Accrued bonus | $848 | $3,505 | | Insurance liabilities | $3,740 | $3,610 | | Total | $10,222 | $13,479 | 3. Long-Term Debt This note details the company's long-term debt arrangements, including credit facility amendments, covenant waivers, and debt maturities - The 2018 Credit Facility was amended in November 2019, extending maturity to November 20, 2024, and increasing the revolving credit facility to $75.0 million[29] - A Second Amendment in June 2020 waived lease-adjusted leverage ratio and fixed charge ratio covenants through Q1 2021 and limited capital expenditures to $12.0 million in 2020[31] Debt Outstanding and Maturities (in thousands) | Metric | Amount | | :----- | :----- | | Indebtedness as of June 30, 2020 | $95,700 | | Letters of credit outstanding | $3,200 | | Cash on hand as of June 30, 2020 | $62,100 | | Aggregate Maturities (Year 1) | $750 | | Aggregate Maturities (Year 5) | $89,305 | 4. Fair Value Measurements This note describes the company's fair value measurement methodologies for financial instruments and assets, including qualitative impairment assessments - Carrying amounts of cash, receivables, payables, and current liabilities approximate fair value due to their short-term nature[35] - Fair value of borrowings is measured using Level 2 inputs, as rates vary with market conditions[35] - A qualitative impairment assessment of goodwill was performed in Q2 2020 due to COVID-19, but no impairment charge was recorded[37] 5. Income Taxes This note presents the provision for income taxes and effective tax rates, discussing the impact of valuation allowances and recent tax legislation Provision for Income Taxes (in thousands) | Metric | Q2 2020 | Q2 2019 | 2Q 2020 | 2Q 2019 | | :----- | :------ | :------ | :------ | :------ | | Provision for income taxes | $33 | $0 | $46 | $0 | | Effective tax rate | (0.2)% | 0.0% | (0.2)% | 0.0% | - The effective tax rate reflects the impact of a previously recorded valuation allowance, and no material income tax expense or benefit is expected for the remainder of fiscal 2020[39][40] - The CARES Act provisions are not expected to have a material impact on the Company's tax rate or expense in 2020[41] 6. Stock-Based Compensation This note details the company's stock-based compensation plans, including available awards and recognized compensation expense - Approximately 2.8 million share-based awards were available to be granted under the Plan as of June 30, 2020[42] Stock-Based Compensation Expense (in thousands) | Metric | Q2 2020 | Q2 2019 | 2Q 2020 | 2Q 2019 | | :----- | :------ | :------ | :------ | :------ | | Stock-based compensation expense | $1,094 | $1,155 | $1,253 | $1,881 | | Capitalized stock-based compensation expense | $25 | $10 | $37 | $21 | 7. Restaurant Impairments, Closure Costs and Asset Disposals This note outlines charges related to restaurant impairments, closure costs, and losses on asset disposals, primarily driven by the COVID-19 pandemic Restaurant Impairments, Closure Costs and Asset Disposals (in thousands) | Metric | Q2 2020 | Q2 2019 | 2Q 2020 | 2Q 2019 | | :----- | :------ | :------ | :------ | :------ | | Restaurant impairments | $2,135 | $2,276 | $2,262 | $2,465 | | Closure costs | $299 | $173 | $512 | $134 | | Loss on disposal of assets and other | $124 | $435 | $840 | $705 | | Total | $2,558 | $2,884 | $3,614 | $3,304 | - In Q2 2020, five restaurants were identified as impaired, resulting in a $2.1 million impairment charge, primarily due to the COVID-19 pandemic[45] - Closure costs in 2020 include ongoing costs for previously closed restaurants and one company-owned restaurant closed in Q2 2020[46] 8. Earnings (Loss) Per Share This note provides the calculation of basic and diluted earnings per share, including the treatment of potentially dilutive securities Earnings (Loss) Per Share (in thousands, except share and per share data) | Metric | Q2 2020 | Q2 2019 | 2Q 2020 | 2Q 2019 | | :----- | :------ | :------ | :------ | :------ | | Net (loss) income | $(13,478) | $438 | $(19,313) | $(1,413) | | Basic weighted average shares outstanding | 44,212,751 | 43,964,175 | 44,177,648 | 43,955,580 | | Diluted weighted average shares outstanding | 44,212,751 | 45,075,888 | 44,177,648 | 43,955,580 | | Basic (loss) earnings per share | $(0.30) | $0.01 | $(0.31) | $(0.31) | | Diluted (loss) earnings per share | $(0.30) | $0.01 | $(0.44) | $(0.03) | - Potentially dilutive securities totaling 4,142,754 shares for Q2 2020 and 3,309,278 for the first two quarters of 2020 were excluded from diluted EPS calculations due to their anti-dilutive effect[49] 9. Leases This note details the company's lease arrangements, including rent abatements, deferrals, and the breakdown of lease liabilities and cash payments - The Company negotiated rent abatements, deferrals, or lease term extensions with landlords due to COVID-19, deferring $4.0 million in rent through June 30, 2020[50] - Asset impairment charges of $0.3 million were recorded to reduce the carrying value of certain operating lease assets[51] Total Lease Liabilities (in thousands) | Category | June 30, 2020 | December 31, 2019 | | :------- | :------------ | :---------------- | | Current operating lease liabilities | $26,144 | $22,775 | | Current finance lease liabilities | $998 | $510 | | Long-term operating lease liabilities | $229,196 | $225,014 | | Long-term finance lease liabilities | $2,127 | $281 | | Total lease liabilities | $258,465 | $248,580 | Cash Paid for Lease Liabilities (in thousands) | Lease Type | Q2 2020 | Q2 2019 | 2Q 2020 | 2Q 2019 | | :--------- | :------ | :------ | :------ | :------ | | Operating leases | $6,066 | $10,813 | $13,574 | $21,506 | | Finance leases | $270 | $160 | $452 | $377 | | Total | $6,336 | $10,973 | $14,026 | $21,883 | 10. Supplemental Disclosures to Condensed Consolidated Statements of Cash Flows This note provides additional cash flow information, including interest paid, income taxes paid, and non-cash investing activities Supplemental Cash Flow Disclosures (in thousands) | Metric | June 30, 2020 | July 2, 2019 | | :----- | :------------ | :----------- | | Interest paid (net of amounts capitalized) | $1,666 | $1,382 | | Income taxes paid | $25 | $6 | | Purchases of property and equipment accrued in accounts payable | $1,793 | $2,392 | 11. Revenue Recognition This note explains the company's policies for recognizing revenue from gift cards and franchise royalties, including deferred revenue balances - Revenue from gift cards is recognized upon redemption or estimated breakage (9% over 24 months)[57] Gift Card Liability (in thousands) | Category | June 30, 2020 | December 31, 2019 | | :------- | :------------ | :---------------- | | Current portion | $1,900 | $2,398 | | Long-term portion | $600 | $900 | - Franchise royalties for Q2 2020 were forgiven due to COVID-19 but will resume recognition and collection in Q3[60] Deferred Revenue - Loyalty Program (in thousands) | Date | Amount | | :--- | :----- | | June 30, 2020 | $1,700 | | December 31, 2019 | $600 | 12. Commitments and Contingencies This note describes the company's legal proceedings and claims, assessing their potential financial impact - The Company is subject to various legal proceedings and claims, but believes an unfavorable outcome is remote or not material to its financial statements as of June 30, 2020[62] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the Company's financial condition and results of operations, emphasizing the significant impact of the COVID-19 pandemic on sales, costs, and strategic adjustments. It details key performance measures and analyzes financial results for the second quarter and first two quarters of 2020 compared to the prior year Impact of COVID-19 Pandemic on Our Business This section discusses the significant operational and financial challenges posed by the COVID-19 pandemic, including sales declines and strategic adaptations - COVID-19 has significantly impacted the business, restricting dining room access and negatively affecting sales[66] - Comparable sales have progressively improved, but the shift to off-premise dining has reduced restaurant-level margins due to higher delivery fees[66] - The Company has implemented new initiatives like direct delivery and curbside pickup to bolster off-premise capabilities[18] Recent Trends, Risks and Uncertainties This section analyzes recent sales trends, cost dynamics, and strategic adjustments, including restaurant development plans and the impact of off-premise dining Comparable Restaurant Sales Trends (Q2 2020 & Early Q3 2020) | Period | Company-owned | Franchise | System-wide | Average Unit Volumes (000's) | | :----- | :------------ | :-------- | :---------- | :--------------------------- | | 4 Weeks Ended April 28, 2020 | (47.0)% | (55.5)% | (48.2)% | $685 | | 4 Weeks Ended May 26, 2020 | (28.9)% | (37.3)% | (30.1)% | $901 | | 5 Weeks Ended June 30, 2020 | (17.7)% | (18.1)% | (17.8)% | $1,044 | | 2 Weeks Ended July 14, 2020 | (13.9)% | (7.5)% | (13.0)% | $1,168 | | 2 Weeks Ended July 28, 2020 | (3.8)% | (7.8)% | (4.4)% | $1,181 | - Cost of sales decreased as a percentage of restaurant revenue due to supply chain savings and increased menu pricing, despite higher packaging costs for off-premise orders[72][103] - Labor costs increased as a percentage of restaurant revenue due to sales decline, but the Company mitigated impact through labor efficiencies and reduced staffing hours[73][104] - The Company opened one new company-owned restaurant and sold nine to a franchisee in the first two quarters of 2020, halting new development to preserve cash, but plans increased development for 2021 and beyond[75] Key Measures We Use to Evaluate Our Performance This section defines the key financial and operational metrics used by management to assess the company's performance and profitability - Key performance measures include revenue, AUV, comparable restaurant sales, restaurant contribution, restaurant contribution margin, EBITDA, and Adjusted EBITDA[77] - AUV measures average annualized sales, while comparable restaurant sales track year-over-year performance of existing restaurants, influenced by traffic, per-person spend, and external factors like COVID-19[80][81][82] - Restaurant contribution and margin are used to evaluate restaurant-level profitability, excluding corporate expenses. EBITDA and Adjusted EBITDA provide a clearer picture of operating results by removing non-recurring and non-cash expenses[84][86][87] Results of Operations This section provides a detailed comparative analysis of the company's financial performance for the second quarter and first two quarters of 2020 versus prior periods Second Quarter Ended June 30, 2020 Compared to Second Quarter Ended July 2, 2019 This subsection compares the company's financial results for the second quarter of 2020 against the same period in 2019, highlighting revenue and profitability changes Q2 2020 vs. Q2 2019 Financial Performance (in thousands, unaudited) | Metric | Q2 2020 | Q2 2019 | Change ($) | Change (%) | | :----- | :------ | :------ | :--------- | :--------- | | Total revenue | $80,157 | $120,190 | $(40,033) | (33.3)% | | (Loss) income from operations | $(12,525) | $1,238 | $(13,763) | Not meaningful | | Net (loss) income | $(13,478) | $438 | $(13,916) | Not meaningful | | Basic EPS | $(0.30) | $0.01 | $(0.31) | Not meaningful | | Diluted EPS | $(0.30) | $0.01 | $(0.31) | Not meaningful | | Company-owned AUV | $891 | $1,201 | $(310) | (25.8)% | | Comparable restaurant sales (company-owned) | (30.1)% | 4.8% | | | | Comparable restaurant sales (system-wide) | (30.9)% | | | | - Total revenue decreased by $40.0 million (33.3%) due to COVID-19 traffic decline and refranchising of 14 restaurants[99] - Cost of sales as a percentage of restaurant revenue decreased to 25.0% from 25.6% due to supply chain initiatives, menu pricing, and lower discounting, despite higher packaging costs[103] - Labor costs increased to 33.9% of restaurant revenue (from 32.7%), occupancy costs to 14.6% (from 10.4%), and other operating costs to 19.7% (from 14.2%), primarily due to the decline in restaurant sales[104][105][106] Two Quarters Ended June 30, 2020 Compared to Two Quarters Ended July 2, 2019 This subsection compares the company's financial results for the first two quarters of 2020 against the same period in 2019, detailing overall performance trends 2Q 2020 vs. 2Q 2019 Financial Performance (in thousands, unaudited) | Metric | 2Q 2020 | 2Q 2019 | Change ($) | Change (%) | | :----- | :------ | :------ | :--------- | :--------- | | Total revenue | $180,505 | $230,236 | $(49,731) | (21.6)% | | (Loss) income from operations | $(17,379) | $148 | $(17,527) | Not meaningful | | Net loss | $(19,313) | $(1,413) | $(17,900) | Not meaningful | | Company-owned AUV | $966 | $1,152 | $(186) | (16.1)% | | Comparable restaurant sales (company-owned) | (19.0)% | 3.9% | | | | Comparable restaurant sales (system-wide) | (19.5)% | | | | - Total revenue decreased by $49.7 million (21.6%) primarily due to a decline in comparable restaurant sales caused by the COVID-19 pandemic[113] - Cost of sales as a percentage of restaurant revenue decreased to 25.3% from 26.2% due to increased menu pricing and supply chain savings[115] - Labor costs increased to 34.3% of restaurant revenue (from 33.4%), occupancy costs to 13.3% (from 10.9%), and other operating costs to 18.2% (from 14.6%), mainly due to reduced revenue and higher third-party delivery fees[116][117][118] Liquidity and Capital Resources This section assesses the company's cash position, capital expenditures, debt covenants, and ability to meet future financial obligations - Cash and cash equivalents increased to $62.1 million by June 30, 2020, from $10.5 million at December 31, 2019, largely due to a $55.5 million precautionary draw on the revolving credit facility[125][136] - Capital expenditures for fiscal year 2020 are estimated at $10.0 million to $12.0 million, primarily for repairs, maintenance, and two to four new company restaurants, a reduction from previous plans[134] - The Company believes it has sufficient liquidity to meet its needs for the next twelve months through available cash and cash flows from operations and expects to remain in compliance with debt covenants[128][144] - The Second Amendment to the Credit Facility waived certain covenants through Q1 2021 and adjusted capital expenditure limits for future years[125][139] Critical Accounting Policies and Estimates This section outlines the significant accounting policies and estimates that require management's subjective judgment and can materially impact financial reporting - Financial statements are prepared under GAAP, requiring management estimates and assumptions that affect reported amounts[146] - Critical accounting estimates involve difficult, subjective judgments, and actual results may vary from assumptions[146] Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company is exposed to interest rate risk on its variable-rate debt, with a 1.0% change in interest rates potentially impacting pre-tax interest expense by $1.0 million annually. Commodity price risk is managed through purchasing contracts, and menu pricing adjustments are a primary strategy for cost increases. Wage inflation has affected results from 2016 through Q2 2020 and is expected to continue - A 1.0% change in the effective interest rate on $95.7 million outstanding debt would result in an approximate $1.0 million pre-tax interest expense fluctuation annually[147] - Commodity price risk is managed through purchasing contracts, and menu pricing adjustments are used to address material cost increases[148] - Wage inflation has significantly affected operating results from 2016 through Q2 2020 and is expected to continue[149] Item 4. Controls and Procedures Management, including the CEO and CFO, evaluated the effectiveness of disclosure controls and procedures as of June 30, 2020, concluding they are effective in providing reasonable assurance that required information is recorded, processed, summarized, and reported timely. There have been no material changes in internal control over financial reporting during the most recent fiscal quarter - Disclosure controls and procedures were evaluated and deemed effective as of June 30, 2020, providing reasonable assurance for timely and accurate financial reporting[150][151] - No material changes in internal control over financial reporting occurred during the most recent fiscal quarter[152] PART II - OTHER INFORMATION This section includes disclosures on legal proceedings, risk factors, equity sales, defaults, mine safety, and other relevant information Item 1. Legal Proceedings The Company is involved in various legal proceedings and claims typical of its business. While outcomes are uncertain, management believes that an unfavorable outcome for these matters is remote or not material to its consolidated financial statements as of June 30, 2020 - The Company is subject to various legal proceedings and claims, but believes an unfavorable outcome is remote or not material to its financial statements as of June 30, 2020[154] Item 1A. Risk Factors The COVID-19 pandemic has materially affected the Company's operations, leading to significant reductions in demand, dining room closures, and potential impacts on franchisee royalty payments and liquidity. The Company has adapted with direct delivery and curbside pickup but faces ongoing uncertainties regarding the pandemic's duration and severity, and increased cybersecurity threats - The COVID-19 pandemic has materially affected operations, causing significant reductions in demand and dining room closures[156][159] - The Company has introduced direct delivery and curbside pickup and expanded third-party delivery services in response to public health directives[158] - Franchisees may struggle to meet royalty obligations, and the Company's liquidity could be further negatively impacted, potentially requiring additional financing[161][163] - The shift to online activities due to COVID-19 restrictions has led to an increase in cybersecurity threats[164] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds There were no unregistered sales of equity securities or use of proceeds to report - None[165] Item 3. Defaults Upon Senior Securities There were no defaults upon senior securities to report - None[165] Item 4. Mine Safety Disclosures This item is not applicable to the Company - Not applicable[165] Item 5. Other Information There is no other information to report - None[166] Item 6. Exhibits This section lists the exhibits filed with the quarterly report, including amendments to the credit agreement, certifications, and XBRL-related documents - Key exhibits include the Second Amendment to Credit Agreement (Exhibit 10.2) and certifications from the Principal Executive Officer and Principal Financial Officer (Exhibits 31.1, 31.2, 32.1)[168] SIGNATURES This section contains the official signatures certifying the accuracy and completeness of the quarterly report SIGNATURES The report is duly signed on behalf of Noodles & Company by Ken Kuick, Chief Financial Officer, on August 6, 2020 - The report was signed by Ken Kuick, Chief Financial Officer, on August 6, 2020[171]