Noodles & Company Annual Report 2017

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FY2017 Annual Report · Noodles & Company

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended January 2, 2018

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
(State or other jurisdiction of
incorporation or organization)

520 Zang Street, Suite D

Broomfield, CO

(Address of Principal Executive Offices)

84-1303469
(IRS Employer
Identification No.)

80021

(Zip Code)

Registrant’s telephone number, including area code: (720) 214-1900

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

Title of each class

Common stock, par value $0.01 per share

Name of each exchange on which registered

Nasdaq (Global Select Market)

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  No 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes  No 

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 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  No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. 

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 

Non-accelerated filer 

(Do not check if a smaller reporting company)

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 Act). Yes  No 

The aggregate market value of the voting and non-voting common stock held by non-affiliates as of July 4, 2017, the last business day of the registrant’s
most recently completed second fiscal quarter, was $61.4 million. This amount was calculated based on the closing price of the common stock on July 4, 2017
on the Nasdaq Global Select Market. All executive officers and directors of the registrant have been deemed, solely for the purpose of the foregoing calculation,
to be “affiliates” of the registrant.

As of March 6, 2018, there were 39,605,699 shares of the registrant’s Class A common stock, par value of $0.01 per share, and 1,522,098 shares of the

registrant’s Class B common stock, par value $0.01 per share, outstanding.

TABLE OF CONTENTS

PART I
Business ................................................................................................................................................
Risk Factors ..........................................................................................................................................
Unresolved Staff Comments .................................................................................................................
Properties ..............................................................................................................................................
Legal Proceedings .................................................................................................................................
Mine Safety Disclosures .......................................................................................................................
PART II

Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities ...................................................................................................................................
Selected Financial Data ........................................................................................................................
Management's Discussion and Analysis of Financial Condition and Results of Operations ................
Quantitative and Qualitative Disclosures About Market Risk ..............................................................
Financial Statements and Supplementary Data .....................................................................................
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ................
Controls and Procedures .......................................................................................................................
Other Information .................................................................................................................................
PART III
Directors, Executive Officers and Corporate Governance ....................................................................
Executive Compensation ......................................................................................................................
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters ..................................................................................................................................................
Certain Relationships and Related Transactions, and Director Independence ......................................
Principal Accounting Fees and Services ...............................................................................................
PART IV
Exhibits, Financial Statement Schedules ..............................................................................................
Form 10-K Summary ............................................................................................................................

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SIGNATURES

Portions of the registrant’s proxy statement relating to its 2018 Annual Meeting of Stockholders, to be held on or about May 16, 2018, are incorporated by
reference into Part III of this Annual Report on Form 10-K, where so indicated. Such proxy statement will be filed with the U.S. Securities and Exchange
Commission within 120 days after the end of the fiscal year to which this report relates.

DOCUMENTS INCORPORATED BY REFERENCE

ITEM 1.

Business

General

PART I

Noodles & Company is a restaurant concept offering lunch and dinner within the fast-casual segment of the restaurant industry. We
opened our first location in Denver, Colorado in 1995, offering noodle and pasta dishes, staples of many cuisines, with the goal of
delivering fresh ingredients and flavors from around the world under one roof. Today, our globally inspired menu includes a wide
variety of high quality, cooked-to-order dishes, including noodles and pasta, soups, salads and appetizers. We believe that we offer our
customers value, with per person spend of $8.81 for the fiscal year ended January 2, 2018.

We offer nearly 20 globally inspired dishes together on a single menu that can be enjoyed inside our restaurants, taken to-go, or, in
some areas, delivered to our customers. We believe we will benefit from trends in consumer preferences such as the broader demand
for international cuisines and the increasing desire for convenience. At many restaurants, customers are limited to a particular ethnic
cuisine or type of dish, such as a sandwich, burrito or burger. At Noodles & Company, we aim to eliminate the “veto vote” by
satisfying the preferences of a wide range of customers, whether a family or parent with kids, a group of coworkers, an individual or a
large party.

We believe that our globally inspired menu, focused on noodle and pasta dishes, differentiates us from other restaurants. We believe
our attributes—global flavors, variety, dishes prepared-to-order and fast service—allow us to compete against multiple segments
throughout the restaurant industry and provide us a larger addressable market for lunch and dinner than competitors who focus on a
single cuisine. We believe we provide a pleasant dining experience by quickly delivering fresh food with friendly service at a price
point we believe is attractive to our customers. We also believe that our menu is well suited for off-premise dining occasions in which
customers order at our restaurant or online but then eat their meal at their home or office.

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. We refer to our Class A Common Stock, par value $0.01 per share,
as our “Class A common stock,” unless the context otherwise requires. We refer to our Class B Common Stock, par value $0.01 per
share, as our “Class B common stock,” unless the context otherwise requires. We refer to our Class A common stock and our Class B
common stock together as our “common stock.” The rights of the holders of our Class A common stock and our Class B common stock
are identical in all respects, except that our Class B common stock does not vote on the election or removal of directors unless and
until converted on a share for share basis into Class A common stock.

Our Concept and Business Strengths

Variety. We have purposefully chosen a range of healthy to indulgent dishes to satisfy multiple dietary preferences. Our menu
encourages customers to customize their meals to meet their tastes and nutritional preferences with our selection of 14 fresh vegetables
and seven proteins.

All of our dishes are cooked-to-order with fresh, high quality ingredients sourced from our carefully selected suppliers. Our
commitment to the freshness of our ingredients is further demonstrated by our use of seasonal ingredients and healthy add-in options
(such as organic tofu). Our culinary team strives to develop new dishes and limited time offerings to further reinforce our World
Kitchen brand positioning and regularly provide our customers additional options. For example, during 2017 we offered as new dishes
or limited time offerings items such as Thai Green Curry, Spicy Chipotle Adobo and Truffle Mac & Cheese. This focus on culinary
innovation allows us to prepare and serve high quality food and meet changing consumer trends.

Value. The value we offer, the quality of our food and the welcoming ambiance of our restaurants creates an overall customer
experience that we believe is unique and differentiated. Our per person spend is competitive not only within the fast-casual segment,
but also within the quick-service segment. We deliver value by combining a family-friendly dining environment with the opportunity
to enjoy many dishes containing a variety of fresh ingredients. We also offer Kids Meals which, at a fixed low price, offer the
opportunity for parents to feed their children a balanced meal with sides such as broccoli, carrots, fruit, applesauce and a smaller
portion of our house made rice crispy treat.

Our Restaurant Experience. We design each location individually, which we believe creates an inviting restaurant environment. We
believe the ambiance is warm and welcoming, with muted lighting and colors, comfortable seating and our own custom music mix,
which is intended to make our customers feel relaxed and at home.

We believe we deliver an exceptional overall dining experience. We believe that our customers should expect not only great food from
our restaurants, but also warm hospitality and attentive service. Whether you are a parent with kids or a businessperson with a laptop,
you simply order your food, grab a drink and take a seat. We cook each dish to order in approximately five minutes and bring the food
right to your table. Our customers may enjoy a relaxed meal or just eat and run.

We also believe that our experience meets consumers’ increasing desire for speed and convenience. A substantial amount of our
revenue is derived from customers who consume their meal off-premise, either by ordering at the restaurant and taking the food to go
or by ordering ahead of time through online, phone-in and delivery channels.

Consistent with our culture of enhanced customer service, we seek to hire individuals who will deliver prompt, attentive service by
engaging customers the moment they enter our restaurants. Our training philosophy empowers both our restaurant managers and team
members to add a personal touch when serving our customers, such as coming out from behind the counter to explain our menu and
guide customers to the right dish. Our restaurant managers are critical to our success, as we believe that their entrepreneurial spirit and
outreach efforts build our brand in our communities. We call our cashiers “Noodle Ambassadors” to highlight their role in helping our
customers explore our global menu. After our customers order at the counter, their food is delivered to their table by our friendly team
members.

Our Operational Strategy

We believe our brand and globally inspired menu resonates with consumers, and we believe our restaurants and team members provide
customers a unique and high-quality experience. We are focused on offering customers flavorful, cooked-to-order dishes in a warm and
welcoming environment at an attractive value.

In order to improve our profitability and earnings, as well as deliver an exceptional dining experience, in 2017 we enacted initiatives to
enhance our menu offerings and improve our operational consistency. We also closed a group of underperforming restaurants that had
been negatively impacting our profitability. We continue to execute on a strategy, outlined herein, to improve the operational and
financial performance of our restaurant base.

Restaurant initiatives. Our plan to improve our performance includes the following four key strategies:

•

Focusing on our global flavors and menu offerings. We believe that our globally inspired menu, focused on noodle and pasta
dishes, differentiates us from other restaurants. We also believe this global variety, which includes a range of healthy to
indulgent dishes that are cooked to order with fresh, high-quality ingredients, remains a competitive strength. In 2017 our
limited-time offers included Spicy Chipotle Adobo and Thai Green Curry with shrimp, both of which are new dishes with
distinctive flavor profiles. Also, in October of 2017 we launched nationally a Macaroni & Cheese menu which incorporated a
higher quality cheese sauce into our top-selling Wisconsin Mac & Cheese. With this launch we also featured a Buffalo Mac &
Cheese, Truffle Mac & Cheese and Barbecue Pork Mac. While we will continue to execute on our culinary initiatives we also
believe that we have opportunities to better communicate our positioning to our customers, both inside our restaurants and
through digital, social and media outlets.

Improving efficiencies and unit-level margins. We believe that there is significant opportunity to improve our operational
consistency as well as our overall unit level margins. In October 2016, we reduced the size of our core menu from 28 entrée
items to 19 entrée items, removing menu items that did not sell well and were challenging for our teams to execute. During
2017, we improved several processes inside our restaurants, such as the introduction of a produce chopper to improve
consistency and labor efficiency in our restaurants. We believe we have additional opportunity to improve efficiencies in our
business and economic models. As an example, in 2018 we intend to complete the national roll out of self-bussing stations,
which we believe will reduce labor hours and improve cleanliness in our restaurants. We also believe that we have
opportunity in our supply chain and food preparation procedures to reduce inbound ingredient costs and improve labor
efficiency.

•

Enhancing convenience for our customers. We believe there is significant opportunity in increasing convenience for our
customers. In 2017, we launched nationally our NoodlesREWARDS program, a loyalty program that also allows our

customers the convenience of ordering their favorites quickly and easily as they earn rewards for free or discounted food. We
have also begun a national rollout of dedicated pick-up areas for customers who order and pay ahead so that they can have a
faster and more convenient takeout experience. Finally, we have continued to expand our delivery program through select
third party providers, which offers an additional level of convenience for our customers.

•

Improving manager selection, training and development of our teams. We have increased the focus on the selection, training
and development of our restaurant teams. We have initiated the use of new assessment tools in management hiring, and we
have implemented certain changes to our restaurant compensation program to encourage team member retention. We have
also begun rolling out new training tools and learning management systems to improve execution and encourage career
development within our teams. Finally, we have begun a thorough, disciplined process of sharing best practices throughout
the organization.

Restaurant Portfolio and Franchising

Restaurant Portfolio. As of January 2, 2018, we had 412 company-owned restaurants and 66 franchise restaurants in 29 states and the
District of Columbia. Our restaurants are typically 2,600 to 2,700 square feet and are located in end-cap, in-line or free-standing
locations across a variety of urban and suburban markets. During the near-term we anticipate limited unit growth as we allow time for
our operational, financial and customer initiatives to become effective. We also anticipate that during this period we will be able to test
and define a prototype for new restaurants that will better facilitate future expansion and better meet the needs of the changing
consumer experience.

Over the past two years, we announced and executed our strategy to close underperforming restaurants and reduce restaurant growth.
We also announced plans to refranchise restaurants in certain of our markets. We continue to expect that we will refranchise restaurants
in selected markets in the future, but do not anticipate significant refranchising transactions to occur in 2018.

Restaurant Closings. We closed 55 restaurants in the first quarter of 2017. These restaurants significantly underperformed our
restaurant averages, as measured by average unit volumes (“AUVs”), restaurant contribution margin and cash flow. Many of these
restaurants were open for only the last three or four years in newer markets where brand awareness of our restaurants was not as strong
and where it has been more difficult to adequately staff our restaurants. Our closing of these restaurants has had a favorable effect on
our restaurant contribution, restaurant contribution margin, adjusted EBITDA, adjusted EBITDA margin and net income.

Reduction in Corporate Restaurant Growth. We continue to reduce our rate of company-owned restaurant unit growth. In 2017, we
opened 12 company-owned restaurants and in 2018, we plan to open between one and four company-owned restaurants. We did not
open restaurants in new markets in 2017 and do not intend to open restaurants in new markets in 2018; our openings in 2017 were, and
in 2018 will primarily be, in well-established markets where we maintain strong brand awareness and restaurant-level financial
performance that generally exceeds company averages. We believe this more moderate growth strategy will enhance our ability to
focus on improving restaurant operations and profitability. We will continue to evaluate our company-owned restaurant growth rate
based on our operational and financial performance, capital resources and real estate opportunities.

Franchising. As of January 2, 2018, we had 66 franchise units in 14 states operated by 12 franchisees. In 2017, our franchisees opened
three restaurants and closed 12 restaurants. We look for experienced, well-capitalized franchise partners who are able to leverage their
existing infrastructure and local knowledge in a manner that benefits both our franchisees and ourselves. As of January 2, 2018, a total
of nine area developers have signed development agreements providing for the opening of 64 additional restaurants in their respective
territories. We expect to continue to offer development rights in markets where we do not intend to build company-owned restaurants.
We may offer such rights to larger developers who commit to open 10 or more units, or to smaller developers who may commit to open
significantly fewer restaurants. We do not currently intend to offer single-unit franchises. We believe the strength and attractiveness of
our brand will attract experienced and well-capitalized area developers.

Site Development and Expansion

We consider our site selection and development process critical to our long-term success. We have used a combination of our own
internal team and outside real estate consultants to locate, evaluate and negotiate new sites using various criteria. In making site
selection decisions, we have also used several analytical tools designed to uncover the key site, demographic, business, retail,
competitive and traffic characteristics that drive successful locations.

Once a location has been approved by our executive-level selection committee, we begin a design process to match the characteristics
and feel of the location to the trade area. For example, in a trade area with a high percentage of families we will utilize additional booth
seating in the dining room, and in an urban location we will typically alter our kitchen design to enhance throughput for the busy lunch
hours.

Restaurant Management and Operations

Friendly People. We believe our genuine, friendly people separate us from our competitors. We value the individuality of our team
members, which we believe results in a management, operations and training philosophy distinct from that of our competitors. We
make an effort to hire team members who share a passion for food, have a competitive spirit and will operate our restaurants in a way
that is consistent with our high standards. We seek to hire individuals who will deliver prompt, attentive service by engaging customers
the moment they enter our restaurants. We empower our team members to enrich the experience of our customers and directly address
any concerns that may arise in a manner that contributes to the success of our business.

Restaurant Management and Employees. Each restaurant typically has a restaurant manager, an assistant manager and as many as 15 to
25 team members. We cross-train our employees in an effort to create a depth of competency in our critical restaurant functions.
Consistent with our emphasis on customer interaction, we encourage our restaurant managers and team members to welcome and
interact with customers throughout their visit. To lead our restaurant management teams, we have area managers (each of whom is
responsible for between five and 12 restaurants), as well as regional directors (each of whom is responsible for between 50 and 80
restaurants).

Training and Career Development. We believe that our training efforts create a culture of continuous learning and professional growth
that allows our team members to continue their career development with us. Within each restaurant, two to four team members are
designated to lead the training efforts and ensure a consistent approach to team member development. We produce training materials
that encourage individual contributions and participation from our team members while also requiring adherence to certain guidelines
and procedures.

Food Preparation and Quality. Our teams use classic professional cooking methods, including par boiling and sautéing many of our
vegetables, in full kitchens resembling those of full service restaurants. All team members, including our restaurant managers, spend
their first several days working solely with food and learning these techniques, and we spend a significant amount of time ensuring that
each team member learns how to prepare and cook our food properly. Despite our more labor-intensive method of food preparation, we
believe that we produce food with an efficiency that enables us to compete effectively.

The majority of our restaurants have exhibition-style kitchens. This design demonstrates our commitment to cooking fresh food in an
accessible manner. We provide each customer with individual attention and make every effort to respond to customer suggestions and
concerns in a personal and hospitable way.

All of our dishes are cooked to order at food safe temperatures or, in the case of salads, subject to our produce washing protocols,
which helps to ensure that the food that we serve to our customers is safe. We have designed our food safety and quality assurance
programs to maintain high standards for our food and food preparation procedures. Our quality assurance manager oversees
comprehensive restaurant and supplier audits based upon the potential food safety risk of each food. We also consider food safety and
quality assurance when selecting our distributors and suppliers. Our suppliers are inspected by federal, state and local regulators or
other reputable, qualified inspection services, which helps ensure their compliance with all federal food safety and quality guidelines.
We regularly inspect our suppliers to ensure that the ingredients we buy conform to our quality standards and that the prices we pay are
competitive. We also rely on our own recipes, specifications and protocols to ensure that our food is consistently the best quality that is
possible when it is served, including a physical examination of ingredients when they arrive at our restaurants. We train our employees
to pay detailed attention to food quality at every stage of the food preparation cycle, and we have developed a daily checklist that our
employees use to assess the freshness and quality of food supplies. Finally, we encourage our customers to provide feedback regarding
our food quality so that we can identify and resolve problems or concerns as quickly as possible.

Restaurant Marketing

Our marketing efforts seek to increase sales through a variety of channels and initiatives. Community-based restaurant marketing, as
well as online, social and other media tools, highlight our competitive strengths, including our varied and healthy menu offerings and
the value we offer our customers.

•

Our Menu Offerings. We focus some of our marketing efforts on new menu offerings to broaden our appeal to our customers.
We promote these items through a variety of formats including market-wide public relations events, social media marketing,
radio promotions, tastings and messaging to our NoodlesREWARDS members. In addition to increasing brand awareness,
these promotions also encourage prompt consumer action, resulting in more immediate increases in our customer traffic.

Online, Social and Other Media Tools. We rely on our website, www.noodles.com, to promote our business and increase
brand awareness. The information on or available through our website is not, and should not be considered, a part of this
report. Our customers are encouraged to sign up to receive communications through our NoodlesREWARDS program,
updating them on new menu offerings and promotional opportunities. As of January 2, 2018, more than 1.8 million of our
customers have signed up to receive communication either through our rewards or e-club programs. We also communicate
with our customers using social media, such as our Facebook and Instagram pages, our YouTube and Vimeo channels and our
Twitter feed. Our media tools also include advertising and direct mail in local, regional and national print/online media and
mass communications including radio and out of home. In July 2017, we launched our NoodlesREWARDS program
nationally which has provided a significant opportunity to create deeper relationships with our customers and increase
frequency and average spend. Our online and social media engagement provides exciting opportunities to engage with our
customers.

Digital Advertising. We use targeted digital advertising in many of our markets. We believe this helps to increase top of mind
awareness with potential customers and drives both frequency and trial. In addition, digital advertising provides us with the
opportunity to promote specific product platforms and offerings such as online ordering.

Creating New Meal Occasions. We also focus on ways Noodles & Company can serve customers at different times and in
new places. For example, our Kids Meal menu was created for the future foodies of the world, children aged ten and under
are invited to design their own meal made fresh-to-order, with quality ingredients, by choosing their entrée, two sides and a
drink for around $5. Customers who want to feed a large group can enjoy our catering options comprised of main entrées,
sides and desserts. We market these offerings in a variety of ways, including through in-restaurant posters, email,
NoodlesREWARDS messages, Facebook posts and other communications outside of our restaurants.

Making Noodles & Company Easier to Use. Some of our marketing efforts focus on making our restaurants easier to use. We
seek to deliver superior customer service at every opportunity, generating consumer awareness of menu offerings with in-
restaurant communications such as displays of our menu offerings that are visible upon entry and table top cards that
highlight healthy food offerings. We also continue to implement initiatives to improve convenience for our customers, such as
expanding the availability of third party delivery and introducing dedicated pick-up shelving units to increase the speed of the
to-go transaction.

Suppliers

Maintaining a high degree of quality in our restaurants depends in part on our ability to acquire fresh ingredients and other necessary
supplies that meet our specifications from reliable suppliers. We carefully select suppliers based on quality and their understanding of
our brand, and we seek to develop mutually beneficial long-term relationships with them. We work closely with our suppliers and use a
mix of forward, fixed and formula pricing protocols. We have tried to increase, in some cases, the number of suppliers for our
ingredients, which we believe can help mitigate pricing volatility, and we monitor industry news, trade issues, weather, crises and other
world events that may affect supply prices. In addition, a substantial volume of our produce items are grown in Mexico and other
countries and any new or increased import duties, tariffs or taxes, or other changes in U.S. trade or tax policy, could result in higher
food and supply costs.

Seasonality

Seasonal factors and the timing of holidays 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 higher in the second and third quarters.

Competition

We face competition from the casual dining, quick-service and fast casual segments of the restaurant industry. These segments are
highly competitive with respect to taste, price, food quality and presentation, service, location and the ambience and condition of each
restaurant, among other things. Our competition includes a variety of locally owned restaurants and national and regional chains who

offer dine-in, carry-out and delivery services. Many of our competitors have existed longer and have a more established market
presence with substantially greater financial, marketing, personnel and other resources than we have. Among our competitors are a
number of multi-unit, multi-market fast casual restaurant concepts, some of which are expanding nationally. As we expand, we will
face competition from these concepts and new competitors that strive to compete with our market segments.

We also face competition from firms outside the restaurant industry, such as grocery stores and home meal replacement services, who
sell prepared meals for takeout and in some cases, offer delivery service.

Intellectual Property and Trademarks

We own a number of trademarks and service marks registered or pending with the U.S. Patent and Trademark Office (“PTO”). The
marks we have registered with the PTO include the following: Noodles & Company, the Noodles & Company logo, Your World
Kitchen, Noodles & Company World Kitchen, Noodles World Kitchen, Noodles Rewards and Wisconsin Mac & Cheese. We also have
certain trademarks registered or pending in certain foreign countries. In addition, we have registered the Internet domain name
www.noodles.com. The information on, or that can be accessed through, our website is not part of this report. We believe that our
trademarks, service marks and other intellectual property rights have significant value and are important to the marketing of our brand,
and it is our policy to protect and defend vigorously our rights to such intellectual property.

Governmental Regulation and Environmental Matters

We are subject to extensive and varied federal, state and local government regulation, including regulations relating to public and
occupational health and safety, sanitation and fire prevention. We operate each of our restaurants in accordance with standards and
procedures designed to comply with applicable codes and regulations. However, an inability to obtain or retain health department or
other licenses could adversely affect our operations. Although we have not experienced, and do not anticipate, any significant
difficulties, delays or failures in obtaining required licenses, permits or approvals, any such problem could delay or prevent the
opening of, or adversely impact the viability of, a particular restaurant or group of restaurants.

In addition, in order to develop and construct restaurants, we need to comply with applicable zoning, land use and environmental
regulations. Federal and state environmental regulations have not had a material effect on our operations to date, but more stringent
and varied requirements of local governmental bodies with respect to zoning, land use and environmental factors could delay or even
prevent construction and increase development costs for new restaurants. We are also required to comply with the accessibility
standards mandated by the U.S. Americans with Disabilities Act (“ADA”), which generally prohibits discrimination in accommodation
or employment based on disability. We may in the future have to modify restaurants, for example by adding access ramps or
redesigning certain architectural fixtures, to provide service to or make reasonable accommodations for disabled persons. While these
expenses could be material, our current expectation is that any such actions will not require us to expend substantial funds.

In addition, we are subject to the U.S. Fair Labor Standards Act, the U.S. Immigration Reform and Control Act of 1986, the
Occupational Safety and Health Act and various other federal and state laws governing similar matters including minimum wages,
overtime, workplace safety and other working conditions. Our failure to fully comply with these laws could subject us to potential
litigation and liability. We are also subject to various laws and regulations relating to our current and any future franchise operations.

We are also subject to the Patient Protection and Affordable Care Act of 2010 (the “PPACA”), which requires health care coverage for
many previously uninsured individuals and expands coverage for those already insured. We began offering such benefits in 2015. It is
possible that legislation will be passed by Congress and signed into law that repeals the PPACA, in whole or in part, and/or introduces
a new form of health care reform. It is unclear at this point what the scope of any such legislation will be and when it would become
effective. Because of the uncertainty surrounding possible replacement health care reform legislation, we cannot predict with any
certainty the likely impact of the PPACA’s repeal or the adoption of any other health care reform legislation on our business, financial
condition or results of operations. Whether or not there is alternative health care legislation enacted in the U.S., there may be
significant disruption to the health care market in the coming months and years and the costs of the Company’s health care
expenditures may increase.

We are subject to federal, state and local environmental laws and regulations concerning waste disposal, pollution, protection of the
environment and the presence, discharge, storage, handling, release and disposal of, or exposure to, hazardous or toxic substances
(“environmental laws”). These environmental laws can provide for significant fines and penalties for non-compliance and liabilities for
remediation, sometimes without regard to whether the owner or operator of the property knew of, or was responsible for, the release or
presence of the hazardous or toxic substances. Third parties may also make claims against owners or operators of properties for

personal injuries and property damage associated with releases of, or actual or alleged exposure to, such substances. We are not aware
of any environmental laws that will materially affect our earnings or competitive position, or result in material capital expenditures
relating to our restaurants. However, we cannot predict what environmental laws will be enacted in the future, how existing or future
environmental laws will be administered, interpreted or enforced, or the amount of future expenditures that we may need to make to
comply with, or to satisfy claims relating to, environmental laws. It is possible that we will become subject to environmental liabilities
at our properties, and any such liabilities could materially affect our business, financial condition or results of operations.

Management Information Systems

We use a variety of applications and systems to securely manage the flow of information within each restaurant, and within our central
support office infrastructure. All of our restaurants use computerized management information systems, which we believe are scalable
to support any future growth plans. We use point-of-sale (“POS”) computers designed specifically for the restaurant industry. Our POS
system provides a touch screen interface, a graphical order confirmation display and integrated, high-speed credit card and gift card
processing. Our online ordering system allows customers to place orders online or through our mobile app. Orders taken remotely are
routed to the point-of-sale system based on the time of customer order pickup. The POS system is used to collect daily transaction data,
which generates information about daily sales, product mix and average check that we actively analyze. All products sold and prices at
our company-owned restaurants are programmed into the system from our central support office. We also continue to modernize and
make investments in our information technology networks and infrastructure, specifically in our physical and technological security
measures to anticipate cyber-attacks and prevent breaches, such as the data security incident we experienced in 2016, and to provide
improved control, security and scalability. Enhancing the security of our financial data, customer information and other personal
information is a high priority for us.

Our in-restaurant back office computer system is designed to assist in the management of our restaurants and provide labor and food
cost management tools. These tools provide restaurant operations management and our central support office quick access to detailed
business data and reduces restaurant managers’ administrative time. The system provides our restaurant managers the ability to submit
orders electronically with our distribution network. The system also supplies sales, bank deposit and variance data to our accounting
department on a daily basis. We use this data to generate daily sales information and weekly consolidated reports regarding sales and
other key measures.

Franchisees use similar point of sale systems and are required to report sales on a daily basis through an on-line reporting network and
submit their restaurant-level financial statements on a quarterly or annual basis.

Financial Information About Segments

We operate as a single accounting segment. Financial information related to our business is included in Item 8 of this Annual Report on
Form 10-K.

Employees

As of January 2, 2018, we had approximately 9,600 employees, including approximately 500 salaried employees and approximately
9,100 hourly employees. None of our employees are unionized or covered by a collective bargaining agreement, and we consider our
current employee relations to be good.

Available Information

We maintain a website at www.noodles.com, including an investor relations section at investor.noodles.com, on which we routinely post
important information, such as webcasts of quarterly earnings calls, and any related materials. You may access our Annual Reports on
Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, amendments to those reports and other reports relating to
us that are filed with or furnished to the SEC, free of charge in the investor relations section of our website as soon as reasonably
practicable after such material is electronically filed with or furnished to the SEC. The public may also read and copy materials we file
with the Securities and Exchange Commission (“SEC”) at the SEC’s Public Reference Room, which is located at 100 F Street, NE,
Washington, DC 20549. You can obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-
0330. The SEC also maintains a website that contains reports, proxy and information statements and other information regarding
issuers that file electronically with the SEC at www.sec.gov.

The contents of the websites mentioned above are not incorporated into and should not be considered a part of this report. The
references to the URLs for these websites are intended to be inactive textual references only.

Executive Officers of the Registrant

Name
Dave Boennighausen
Paul Murphy
Susan Daggett
Chas Hermann
Brad West
Kathy Lockhart

_____________
(1)

As of March 15, 2018

Age(1)
40
63
57
55
60

Position

Chief Executive Officer
Executive Chairman
Interim Chief Financial Officer
Chief Brand Officer
Executive Vice President of Operations
Vice President and Controller

Dave Boennighausen has served as our Chief Executive Officer (“CEO”) since June 2017 and as interim CEO from July 2016 through
June 2017. He has been a member of our Board of Directors since August 2015. Mr. Boennighausen served as our Chief Financial
Officer from July 2012 through his appointment as permanent CEO in June 2017. He has held various roles at the Company, including
Vice President of Finance and Executive Vice President of Finance, since joining the Company in 2004. He began his career with May
Department Stores. He holds an MBA from the Stanford Graduate School of Business and received a BS degree in Finance and
Marketing from Truman State University.

Paul J.B. Murphy III became our Executive Chairman in July 2017. Mr. Murphy previously served as Chief Executive Officer of Del
Taco Restaurants, Inc., a national operator and franchisor of fast casual restaurants from February 2009 to July 2017 (and as President
from February 2009 to December 2016). From 1996 to 2008, Mr. Murphy held various roles with Einstein Noah Restaurant Group,
Inc. (“Einstein’s”). Mr. Murphy originally joined Einstein’s as Senior Vice President, Operations in 1997. He was promoted to
Executive Vice President, Operations in 1998, and to Chief Operating Officer in 2002. In 2003, he was appointed President and Chief
Executive Officer. Mr. Murphy holds a Bachelor’s Degree in Religious Studies from Washington & Lee University.

Susan Daggett has served as our interim Chief Financial Officer (“CFO”) since June 2017 and as our Vice President of Finance since
August 2016. Ms. Daggett has extensive experience in the restaurant industry having served as Executive Vice President of Smiling
Moose Franco, LLC, from March 2016 through July 2016, and President of Smiling Moose Deli Franchise Company from November
2013 to March 2016. Ms. Daggett was Owner and President of Nuthatch Hill Consulting, LLC, which focused on the retail and real
estate industries, from January 2005 to October 2013. Prior to that time, she held various executive positions at Einstein’s as well as
financial roles at Arby’s Inc. and Burger King Corporation. She received a BS in Business Administration, with an emphasis in
Accounting, from the University of Northern Iowa.

Chas Hermann has served as our Chief Brand Officer since March 2018. Prior to joining us, Mr. Hermann provided consulting services
through Chas Hermann Consulting, a consulting services company he founded in 2008, with a focus on marketing, brand strategy,
product development and finance in high growth organizations. Through his consulting business he worked with Papa Murphy’s, Del
Taco and Redbox among others. His prior experience included executive marketing and merchandising positions with The Coffee Bean
and Tea Leaf, Commerce Bank, Starbucks Coffee Company and Universal Studios, Inc. He received a Bachelor of Science degree in
Accounting from the University of Florida.

Brad West has served as our Executive Vice President of Operations since September 2017. Mr. West has an extensive background in
operations in the restaurant industry over the past 40 years. Prior to joining us, he served as Vice President, Operations of Smoothie
King Franchises, Inc. Prior to that role, he was Chief Operating Officer of ACG Pizza Partners LLC, and he had earlier spent 15 years
at Einstein’s, most recently as Senior Vice President, Non-Traditional Business, where he was responsible for the operations,
development and growth of over 250 Einstein Bros. Bagels license locations. Mr. West also held key operational roles at CEC
Entertainment, Inc., Applebee’s International, Inc. franchise groups, and S&A Restaurant Corporation.

Kathy Lockhart has served as our Vice President and Controller since August 2006. Prior to joining us, Ms. Lockhart served as the Vice
President and Controller of several public and private restaurant and retail companies, including Einstein’s, Boston Market, VICORP
(parent company of Village Inn and Bakers Square restaurants) and Ultimate Electronics. She received a BA degree in Business

Administration and Political Science from Western Colorado State University, and she is a Certified Public Accountant and a member
of the American Institute of Certified Public Accountants.

ITEM 1A.

Risk Factors

Special Note Regarding Forward-Looking Statements

This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that
involve risks and uncertainties, including but not limited to the risks and uncertainties discussed under this Item 1A. “Risk Factors,”
Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Item 1. “Business.” 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 involve known and unknown risks, uncertainties and
other factors that may cause our actual results, performance or achievements to be materially different from any future results,
performances or achievements expressed or implied by the forward-looking statements. We discuss these risks, uncertainties and other
factors in greater detail below. These statements reflect our current views with respect to future events and are based on currently
available operating, financial and competitive information. Unless required by United States federal securities laws, we do not intend
to update any of these forward-looking statements to reflect circumstances or events that occur after the statement is made.

Risks Related to Our Business and Industry

We may not achieve our operational, strategic or financial goals.

We continue to pursue a number of financial, operational and strategic goals and we may be unsuccessful in achieving some or all of
them. Our strategies were designed to, among other objectives, improve restaurant operations and increase our net income, restaurant
contribution and restaurant contribution margin and adjusted EBITDA. However, these strategies may not be successful in achieving
our goals in part or at all. Further, we may encounter difficulty in executing these strategies. Failing to execute our operational
strategies could materially adversely affect our business, financial condition or results of operations.

Our strategies include focusing on our global flavors and menu offerings, improving efficiencies and unit level margins by simplifying
operations, enhancing convenience for our customers and improving manager selection, training and development of our teams.
However, customers may not favor new menu offerings or may not find initiatives aimed at their convenience appealing, and our
efforts to increase our sales growth and improve our offerings may be unsuccessful. Additionally, our operational initiatives may be
ineffective at reducing costs or may reduce the quality of the customer experience. Any failure of our new initiatives could materially
adversely affect our business, financial condition or results of operations.

Further, we have had, and expect to continue to have, priorities and initiatives in various stages of testing, evaluation and
implementation, upon which we expect to rely to improve our results of operations and financial condition. Failure to achieve
successful implementation of our initiatives could materially adversely affect our business, financial condition or results of operations.

We believe our culture, from the restaurant level up through management, is an important contributor to our success. As time passes,
however, we may have difficulty maintaining our culture or adapting it sufficiently to meet the needs of our operations. Among other
important factors, our culture depends on our ability to attract, retain and motivate employees who share our enthusiasm and dedication
to our concept. Our comparable restaurant sales, and more broadly, our business, financial condition or results of operations, could be
materially adversely affected if we do not maintain our infrastructure and culture.

Our strategic and operational goals are designed to improve our results of operations, including sales and profitability. The level of
comparable restaurant sales, which represent the change in year-over-year sales for restaurants open for at least 18 full periods, affects
our sales growth and will continue to be a critical factor affecting profit growth. Our ability to increase comparable restaurant sales
depends in part on our ability to successfully implement our initiatives to build sales. It is possible that such initiatives will not be
successful, that we will not achieve our target comparable restaurant sales growth or that the change in comparable restaurant sales
could be negative, which may cause a decrease in sales and profit growth that could materially adversely affect our business, financial
condition or results of operations.

Changes in economic conditions could materially affect our ability to maintain or increase sales at our restaurants or open new
restaurants.

The restaurant industry depends on consumer discretionary spending. The United States in general or the specific markets in which we
operate may suffer from depressed economic activity, recessionary economic cycles, higher fuel or energy costs, low consumer
confidence as a result of stock market volatility and other reasons, high levels of unemployment, reduced home values, increases in
home foreclosures, investment losses, personal bankruptcies, reduced access to credit or other economic factors that may affect
consumers’ discretionary spending. Traffic in our restaurants could decline if consumers choose to dine out less frequently or reduce
the amount they spend on meals while dining out. Negative economic conditions (including negative economic conditions resulting
from war, terrorist activities, global economic occurrences or trends or other geo-political events) might cause consumers to make
long-term changes to their discretionary spending behavior, including dining out less frequently or at lower priced restaurants on a
permanent basis. If restaurant sales decrease, our profitability would decline as we spread fixed costs across a lower level of sales.
Reductions in staff levels, additional asset impairment charges and additional restaurant closures could result from prolonged negative
restaurant sales, which could materially adversely affect our business, financial condition or results of operations.

Competition from other restaurant companies could adversely affect us.

We face competition from the casual dining, fast casual and quick-service segments of the restaurant industry. These segments are
highly competitive with respect to taste, price, food quality and presentation, service, location and the ambience and condition of each
restaurant, among other things. Our competition includes a variety of locally owned restaurants and national and regional chains who
offer dine-in, carry-out and delivery services. Many of our competitors have existed longer and have a more established market
presence with substantially greater financial, marketing, personnel and other resources than we have. Among our competitors are a
number of multi-unit, multi-market fast casual restaurant concepts, some of which are expanding nationally. As we expand, we will
face competition from these concepts and new competitors that strive to compete with our market segments. For example, additional
competitive pressures come from the deli sections and in-store cafés of grocery store chains, as well as from convenience stores and
online meal preparation sites. These competitors may have, among other things, lower operating costs, food offerings more responsive
to consumer preferences, better locations, better facilities, better management, more effective marketing and more efficient operations.

Several of our competitors compete by offering menu items that are specifically identified as low in carbohydrates, gluten-free, or rich
in protein. In addition, many of our competitors emphasize lower-cost value options or meal packages, or strategies we do not currently
pursue. Any of these competitive factors may materially adversely affect our business, financial condition or results of operations.

Our marketing programs may not be successful.

We incur costs and expend other resources in our marketing efforts to attract and retain customers. These initiatives may not be
successful, resulting in expenses incurred without the benefit of higher revenues. Additionally, many of our competitors have more
marketing resources and we may not be able to successfully compete. If our competitors increase spending on marketing, or if our
marketing funds decrease for any reason, or if our advertising and promotions are less effective than those of our competitors, our
financial performance could be adversely affected.

Many of our competitors are devoting increased resources to their social media marketing programs. Social media can be challenging
because it reaches a broad audience with an ability to respond or react, in near real time. In addition, social media can facilitate the
improper disclosure of proprietary information, personally identifiable information, or inaccurate information. As a result, if we do not
appropriately manage our social media strategies, our marketing efforts in this area may not be successful and could damage our
reputation, negatively impacting our restaurant sales and financial performance.

New technologies or changes in consumer behavior facilitated by these technologies could negatively affect our business.

Advances in technologies or certain changes in consumer behavior driven by such technologies could impact the manner in which
meals are marketed, prepared, ordered and delivered. We may pursue certain of those technologies, but consumers may not accept
them or we may fail to successfully integrate them into our operations, thereby harming our financial performance. In addition, our
competitors, some of whom have more resources than us, may be more effective at responding to such advances in technologies and
erode our competitive position.

Negative publicity relating to one or more of our restaurants, including our franchised restaurants, could reduce sales at some or
all of our other restaurants.

Our success is dependent in part upon our ability to maintain and enhance the value of our brand, consumers’ connection to our brand
and positive relationships with our franchisees. We may be faced with negative publicity relating to food quality, restaurant facilities,
customer complaints or litigation alleging illness or injury, health inspection scores, integrity of our or our suppliers’ food processing,
employee relationships or other matters, regardless of whether the allegations are valid or whether we are held to be responsible. The
negative impact of adverse publicity relating to one restaurant may extend far beyond the restaurant or franchise involved to affect
some or all of our other restaurants. The risk of negative publicity is particularly great with respect to our franchised restaurants
because we are limited in the manner in which we can regulate them, especially on a real-time basis. Negative publicity generated by
such incidents may be amplified by the use of social media. A similar risk exists with respect to unrelated food service businesses, if
consumers associate those businesses with our own operations or are concerned with the food safety of the broader restaurant industry.

Additionally, employee claims against us based on, among other things, wage and hour violations, discrimination, harassment or
wrongful termination may also create negative publicity that could adversely affect us and divert our financial and management
resources that would otherwise be used to benefit the future performance of our operations. A significant increase in the number of
these claims or an increase in the number or scope of successful claims could materially adversely affect our business, financial
condition or results of operations. Consumer demand for our products and our brand’s value could diminish significantly if any such
incidents or other matters create negative publicity or otherwise erode consumer confidence in us or our products, or in the restaurant
industry as a whole, which would likely result in lower sales and could materially adversely affect our business, financial condition or
results of operations.

Food safety and foodborne illness concerns could have an adverse affect on our business.

We cannot guarantee that our internal controls and training will be fully effective in preventing all food safety issues at our restaurants,
including any occurrences of foodborne illnesses such as E. coli, Hepatitis A, listeria, norovirus and salmonella. The risk of illnesses
associated with our food might also increase in connection with the expansion of our catering business or other situations in which our
food is served in conditions that we cannot control. Furthermore, we and our franchisees rely on third-party vendors, making it difficult
to monitor food safety compliance and increasing the risk that foodborne illness would affect multiple locations rather than a single
restaurant. Some foodborne illness incidents could be caused by third-party vendors and transporters outside of our control. New
illnesses resistant to our current precautions may develop in the future, or diseases with long incubation periods could arise, that could
give rise to claims or allegations on a retroactive basis. One or more instances of foodborne illness in any of our restaurants or markets
or related to food products we sell could negatively affect our restaurant sales nationwide if highly publicized on national media outlets
or through social media. This risk exists even if it were later determined that the illness was wrongly attributed to us or one of our
restaurants.

A number of other restaurant chains have experienced incidents related to foodborne illnesses that have had a material adverse effect
on their operations, including E. coli, listeria and norovirus outbreaks at other fast casual concepts. These incidents at other restaurants
could cause some customers to have a negative perception of fast casual concepts generally, which can negatively affect our
restaurants. The occurrence of a similar incident at one or more of our restaurants, or negative publicity or public speculation about an
incident, could materially adversely affect our business, financial condition or results of operations.

Adverse weather conditions could affect our sales.

Adverse weather conditions, such as regional winter storms, floods and hurricanes, could affect our sales at restaurants in locations that
experience these weather conditions, which could materially adversely affect our business, financial condition or results of operations.
It is possible that weather conditions may impact our business more than other businesses in our industry because of the significant
concentration of our restaurants in the Upper Midwest, Rocky Mountain and Mid-Atlantic states.

Our business could be adversely affected by difficulties in hiring and retaining top-performing employees.

Our success depends on the efforts of our employees and our ability to hire, motivate and retain qualified employees. There may be a
small supply of qualified individuals in some of the communities in which we operate, and competition in these communities for
qualified individuals could require us to pay higher wages and provide greater benefits. We devote significant resources to training our
employees and strive to reduce turnover in order to keep top performing employees and better realize our investment in training new
employees. However, turnover among our restaurant employees may increase. Failure to hire and retain top-performing employees
could impact our financial performance by increasing our training and labor costs and reducing the quality of our customers’
experiences.

We rely heavily on information technology, and any material failure, weakness, interruption or breach of security could
prevent us from effectively operating our business.

We rely heavily on information systems, including point-of-sale processing in our restaurants, for management of our supply chain,
payment of obligations, collection of cash, credit and debit card transactions and other processes and procedures. We also rely on third-
party vendors to provide information technology systems and to securely process and store related information, especially as it relates
to credit and debit card transactions and online ordering. Our franchisees also rely on information systems and third party vendors. Our
ability to efficiently and effectively manage our business depends significantly on the reliability and capacity of these systems. Our
operations depend upon our and our franchisees’, and our vendors’, ability to protect computer equipment and systems against damage
from physical theft, fire, power loss, telecommunications failure or other catastrophic events, as well as from internal and external
security breaches, viruses and other disruptive problems. Avoiding such incidents in the future will require us and our franchisees and
vendors to continue to enhance information systems, procedures and controls and to hire, train and retain employees. The failure of
these systems to operate effectively, maintenance problems, upgrading or transitioning to new platforms, or a breach in security of
these systems could result in delays in customer service and reduce efficiency in our operations. Remediation of such problems could
result in significant, unplanned capital investments and harm our business, financial condition or results of operations.

We may be harmed by breaches of security of information technology systems or our confidential consumer, employee, financial, or
other propriety data.

We use many information technology systems throughout our operations, including systems that record and process customer sales,
manage human resources and generate accounting and financial reports. Through these systems, we have access to and store a variety
of consumer, employee, financial and other types of information related to our business. We also rely on third-party vendors to provide
information technology systems and to securely process and store related information. Our franchisees also use information technology
systems and rely on third party vendors. Like others in our industry, we have experienced many attempts to compromise our
information technology and data, and we may experience more attempts in the future. We may not respond adequately or timely,
because cyber-attacks take many forms, change frequently, are becoming increasingly sophisticated, and may be difficult to detect for
significant periods of time. If we or our franchisees, or third-party vendors, were to experience a material breach resulting in the
unauthorized access, use, or destruction of our information technology systems or confidential consumer, employee, financial, or other
propriety data, it could negatively impact our reputation, reduce our ability to attract and retain customers and employees and disrupt
the implementation and execution of our strategic goals. Moreover, such breaches could result in a violation of various privacy-related
laws and subject us to investigations or private litigation, which, in turn, could expose us to civil or criminal liability. We strive to
prevent breaches of our information technology systems and confidential data by enhancing our technology, improving related
procedures and controls and training our employees on cyber-security trends. Although we dedicate significant resources to preventing
security breaches, we may be unsuccessful, which could adversely affect our business, financial condition or results of operations.

We may be unable to negotiate favorable borrowing terms, and any additional capital we may require could be senior to existing
equity holders, dilute existing equity holders or include unfavorable restrictions.

As a general matter, operating and developing our business requires significant capital. Our credit agreement ends in 2019 and securing
access to credit on reasonable terms thereafter will require us to extend or refinance such agreement. In addition, in order to pursue our
business and operational strategies, we may need additional sources of liquidity in the future and it may be difficult or impossible at
such time to increase our liquidity. Our lenders may not agree to amend our credit agreement at such time to increase our borrowing
capacity. Further, our requirements for additional liquidity may coincide with periods during which we are not in compliance with
covenants under our credit agreement and our lenders may not agree to further amend our credit agreement to accommodate such non-
compliance. Even if we are able to access additional liquidity, agreements governing any borrowing arrangement could contain
covenants restricting our operations. If we raise additional funds through future issuances of equity or convertible debt securities, our

existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and
privileges superior to those of holders of our Class A common stock. Any debt financing, we secure in the future could involve
restrictive covenants relating to our capital-raising activities and other financial and operational matters, which might make it more
difficult for us to obtain additional capital and to pursue business opportunities. Moreover, if we issue new debt securities, the debt
holders would have rights senior to Class A common stockholders to make claims on our assets.

Governmental regulation may adversely affect our ability to open new restaurants or otherwise adversely affect our business,
financial condition or results of operations.

We are subject to various federal, state and local regulations, including those relating to building and zoning requirements and those
relating to the preparation and sale of food. Our restaurants are also subject to state and local licensing and regulation by health,
sanitation, food and occupational safety and other agencies. We may experience material difficulties or failures in obtaining the
necessary licenses, approvals or permits for our restaurants, which could delay planned restaurant openings or affect the operations at
our existing restaurants. In addition, stringent and varied requirements of local regulators with respect to zoning, land use and
environmental factors could delay or prevent development of new restaurants in particular locations.

We are subject to the ADA and similar state laws that give civil rights protections to individuals with disabilities in the context of
employment, public accommodations and other areas, including our restaurants. We may in the future have to modify restaurants, for
example, by adding access ramps or redesigning certain architectural fixtures, to provide service to or make reasonable
accommodations for disabled persons. The expenses associated with these modifications could be material.

Our operations are also subject to the U.S. Occupational Safety and Health Act, which governs worker health and safety, the U.S. Fair
Labor Standards Act, which governs such matters as minimum wages and overtime and a variety of similar federal, state and local laws
that govern these and other employment law matters. In addition, federal, state and local proposals related to paid sick leave or similar
matters could, if implemented, materially adversely affect our business, financial condition or results of operations.

We rely heavily on certain vendors, suppliers and distributors, which could adversely affect our business.

Our ability to maintain consistent price, quality and safety throughout our restaurants depends in part upon our ability to acquire
specified food products and supplies in sufficient quantities from third-party vendors, suppliers and distributors at a reasonable cost.
We do not control the businesses of our vendors, suppliers and distributors and our efforts to specify and monitor the standards under
which they perform may not be successful. Furthermore, certain food items are perishable, and we have limited control over whether
these items will be delivered to us in appropriate condition for use in our restaurants. If any of our distributors or suppliers performs
inadequately, or our distribution or supply relationships are disrupted for any reason, our business, financial condition, results of
operations or cash flows could be adversely affected. If we cannot replace or engage distributors or suppliers who meet our
specifications in a short period of time, including any suppliers who are a sole source of supply of a particular ingredient, that could
increase our expenses and cause shortages of food and other items at our restaurants, which could cause a restaurant to remove items
from its menu. If that were to happen, affected restaurants could experience significant reductions in sales during the shortage or
thereafter, if customers change their dining habits as a result. Our focus on a limited menu would make the consequences of a shortage
of a key ingredient more severe. In addition, because we provide moderately priced food, we may choose not to, or may be unable to,
pass along commodity price increases to consumers. These potential changes in food and supply costs could materially adversely affect
our business, financial condition or results of operations.

In addition, we use various third-party vendors to provide, support and maintain most of our management information systems. We
also outsource certain accounting, payroll and human resource functions to business process service providers. The failure of such
vendors to fulfill their obligations could disrupt our operations. Additionally, any changes we may make to the services we obtain from
our vendors, or new vendors we employ, may disrupt our operations. These disruptions could materially adversely affect our business,
financial condition or results of operations.

Changes in food and supply costs could adversely affect our results of operations.

Our profitability depends in part on our ability to anticipate and react to changes in food and supply costs. Shortages or interruptions in
the availability of certain supplies caused by seasonal fluctuations, unanticipated demand, problems in production or distribution, food
contamination, product recalls, government regulations, inclement weather or other conditions could adversely affect the availability,
quality and cost of our ingredients, which could harm our operations. Weather related issues, such as freezes, heavy rains or drought,
may also lead to temporary spikes in the prices of some ingredients such as produce or meats. Increasing weather volatility or other

long-term changes in global weather patterns, including any changes associated with global climate change, could have a significant
impact on the price, availability and timing of delivery of some of our ingredients. In addition, at certain times of the year a substantial
volume of our produce items are imported from Mexico and other countries. Any new or increased import duties, tariffs or taxes, or
other changes in U.S. trade or tax policy, could result in higher food and supply costs. Any increase in the prices of the food products
most critical to our menu, such as pasta, beef, chicken, wheat flour, cheese and other dairy products, tofu and vegetables, could
adversely affect our operating results. Although we try to manage the impact that these fluctuations have on our operating results, we
remain susceptible to increases in food costs as a result of factors beyond our control, such as general economic conditions, seasonal
fluctuations, weather conditions, demand, food safety concerns, generalized infectious diseases, product recalls and government
regulations.

Changes in employment laws may adversely affect our business.

Various federal and state labor laws govern the relationship with our employees and affect operating costs. These laws include
employee classification as exempt/non-exempt for overtime and other purposes, minimum wage requirements, unemployment tax
rates, workers’ compensation rates, mandatory health benefits, immigration status and other wage and benefit requirements. 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 in the following areas could
materially affect our business, financial condition, operating results or cash flow: overtime rules; mandatory health benefits; vacation
accruals; paid leaves of absence, including paid sick leave; and tax reporting.

Immigration laws have recently been an area of considerable focus by the Department of Homeland Security, with enforcement
operations taking place across the country, resulting in arrests, detentions and deportation of unauthorized workers. Some of these
changes and enforcement programs may increase our obligations for compliance and oversight, which could subject us to additional
costs and make our hiring process more cumbersome, or reduce the availability of potential employees. Although we require all
workers to provide us with government-specified documentation evidencing their employment eligibility, some of our employees may,
without our knowledge, be unauthorized workers. We currently participate in the “E-Verify” program, an Internet-based, free program
run by the United States government to verify employment eligibility, in all of our restaurants and in our corporate support office.
However, use of the “E-Verify” program does not guarantee that we will successfully identify all applicants who are ineligible for
employment. Unauthorized workers are subject to deportation and may subject us to fines or penalties, and if any of our workers are
found to be unauthorized we could experience adverse publicity that negatively impacts our brand and may make it more difficult to
hire and keep qualified employees. Termination of a significant number of employees who were unauthorized employees may disrupt
our operations, cause temporary increases in our labor costs as we train new employees and result in additional adverse publicity. We
could also become subject to fines, penalties and other costs related to claims that we did not fully comply with all recordkeeping
obligations of federal and state immigration compliance laws. These factors could materially adversely affect our business, financial
condition or results of operations.

If we or our franchisees face labor shortages or increased labor costs, our operating results could be adversely affected.

Labor is a primary component in the cost of operating our restaurants. If we or our franchisees face labor shortages or increased labor
costs because of increased competition for employees, higher employee turnover rates, increases in the federal, state or local minimum
wage or other employee benefits costs (including costs associated with health insurance coverage), our operating expenses could
increase. In addition, our success depends in part upon our and our franchisees’ ability to attract, motivate and retain a sufficient
number of well-qualified restaurant operators and management personnel, as well as a sufficient number of other qualified employees,
including customer service and kitchen staff, to keep pace with our expansion schedule. Qualified individuals needed to fill these
positions are in short supply in some geographic areas, and the national unemployment rate, as well as the unemployment rates in
many of the areas in which we operate, has continued to fall over the past few years. In addition, restaurants have traditionally
experienced relatively high employee turnover rates. Our and our franchisees’ ability to recruit and retain qualified individuals may
delay the planned openings of new restaurants or result in higher employee turnover in existing restaurants, which could have a
material adverse effect on our business, financial condition or results of operations.

If we or our franchisees are unable to continue to recruit and retain sufficiently qualified individuals at wages comparable to those we
currently pay, our business could be adversely affected. Competition for these employees could require us or our franchisees to pay
higher wages, which could result in higher labor costs. In addition, increases in the minimum wage, which have become more common
and more material in size in recent years, would increase our labor costs. Additionally, costs associated with workers’ compensation are
rising, and these costs may continue to rise in the future. We may be unable to increase our menu prices in order to pass these increased

labor costs on to consumers, in which case our margins would be negatively affected, which could materially adversely affect our
business, financial condition or results of operations.

We depend on the services of key executives, the loss of which could materially harm our business.

We rely on executives and senior management to drive the financial and operational performance of our business. Turnover of
executives and senior management can adversely impact the price of our Class A common stock, our results of operations and may
make recruiting for future management positions more difficult or may require us to offer more generous executive compensation
packages to attract top executives. In recent years, we have experienced both executive and senior management turnover. Changes in
other key management positions may temporarily affect our financial performance and results of operations as new management
becomes familiar with our business. Our future success depends on our ability to identify, attract and retain qualified personnel on a
timely basis. In addition, we must successfully integrate newly hired management personnel within our organization in order to
achieve our operating objectives.

The effect of changes to healthcare laws in the United States may increase the number of employees who elect to participate in our
healthcare plans, which may increase our healthcare costs and further changes or the repeal of existing healthcare laws may
further significantly increase our healthcare costs and negatively impact our financial results in future periods.

The Patient Protection and Affordable Care Act of 2010 (the “PPACA”) requires health care coverage for many previously uninsured
individuals and expands coverage for those already insured. We began offering such benefits in July 2015, and as a consequence we are
incurring additional expenses for employee healthcare. If we fail to continue to offer such benefits, or the benefits we elect to offer do
not meet the applicable requirements, we may incur penalties. It is also possible that by making changes or failing to make changes in
the healthcare plans we offer, we will become less competitive in the market for our labor. Finally, continuing to implement the
requirements of the PPACA is likely to impose additional administrative costs. The future costs and other effects of these new
healthcare requirements cannot be determined with certainty, but they may continue to significantly increase our healthcare coverage
costs and could materially adversely affect our, business, financial condition or results of operations.

In addition to changes to the PPACA that have been implemented recently, it is possible that additional legislation will be passed by
Congress and signed into law that further repeals the PPACA, in whole or in part, and/or introduces a new form of health care reform.
It is unclear at this point what the scope of such legislation would be and when it would become effective. Because of the uncertainty
surrounding possible replacement health care reform legislation, we cannot predict with any certainty the likely impact of the PPACA’s
repeal or the adoption of any other health care reform legislation on our business, financial condition or results of operations. Whether
or not there is alternative health care legislation enacted in the U.S., there is likely to be significant disruption to the health care market
in the coming months and years and the costs of the Company’s health care expenditures may increase.

We may not be successful in executing our franchise strategy.

It is possible that we will seek to sell restaurants within certain markets to new or existing franchisees. In connection with a sale to new
or existing franchisees of restaurants in existing markets, we may enter into agreements that also provide for the development of new
restaurants by such franchisees. We may be unable to identify franchisees willing to partner with us with respect to existing restaurants
we elect to sell or new restaurants. Becoming a franchisee entails economic risks and uncertainties and the perceived risks and
uncertainties may not, in the view of potential franchisees, outweigh the anticipated benefits. Our inability to identify franchisees, or to
sell units to existing or new franchisees, could adversely affect our franchising strategy, which could materially adversely affect our
business, financial condition or results of operations.

In addition, to the extent we are able to identify franchisees for the franchising of existing restaurants or the development of new
restaurants, our success is dependent on the performance of our franchisees in successfully operating the restaurants. Our franchisees
may not achieve financial and operational objectives, and they may close existing restaurants due to underperformance or they may
ultimately be unsuccessful in developing new restaurants. We may also not be able to manage our franchise system effectively. Failure
to provide our franchisees with adequate support and resources could materially adversely affect these franchisees, as well as cause
disputes between us and them and potentially lead to material liabilities.

We rely in part on our franchisees, and if our franchisees cannot develop or finance new restaurants, build them on suitable sites
or open them on schedule, our success may be affected.

We rely in part on our franchisees and the manner in which they operate their locations to develop and promote our business. Although
we have developed criteria to evaluate and screen prospective franchisees, we cannot be certain that our franchisees will have the
business acumen or financial resources necessary to operate successful franchises in their franchise areas and state franchise laws may
limit our ability to terminate or modify these franchise arrangements. Moreover, despite our training, support and monitoring,
franchisees may not successfully operate restaurants in a manner consistent with our standards and requirements, or may not hire and
train qualified managers and other restaurant personnel. The failure of our franchisees to operate their franchises successfully could
have a material adverse effect on us, our reputation, our brand and our ability to attract prospective franchisees and could materially
adversely affect our business, financial condition or results of operations.

Franchisees may not have access to the financial or management resources that they need to open the restaurants contemplated by their
agreements with us, or be able to find suitable sites on which to develop them, or they may elect to cease development for other
reasons. Franchisees may not be able to negotiate acceptable lease or purchase terms for the sites, obtain the necessary permits and
government approvals or meet construction schedules. Any of these problems could reduce our franchise revenues. Additionally, our
franchisees typically depend on financing from banks and other financial institutions, which may not always be available to them, in
order to construct and open new restaurants. The lack of adequate financing could adversely affect the number and rate of new
restaurant openings by our franchisees and could materially adversely affect our future franchise revenues.

Failure to support our franchise system could have a material adverse affect on our business, financial condition or results of
operations.

Our strategy depends in part on our franchise network, which requires enhanced business support systems, management information
systems, financial controls and other systems and procedures as well as additional management, franchise support and financial
resources. We may not be able to manage our franchise system effectively. Failure to provide our franchisees with adequate support
and resources could materially adversely affect both our new and existing franchisees as well as cause disputes between us and our
franchisees and potentially lead to material liabilities. Any of the foregoing could materially adversely affect our business, financial
condition or results of operations.

Unionization activities or labor disputes may disrupt our operations and affect our profitability.

Although none of our employees are currently covered under collective bargaining agreements, our employees may elect to be
represented by labor unions in the future. If a significant number of our employees were to become unionized and collective bargaining
agreement terms were significantly different from our current compensation arrangements, it could adversely affect our business,
financial condition or results of operations. In addition, a labor dispute involving some or all of our employees may harm our
reputation, disrupt our operations and reduce our revenues and resolution of disputes may increase our costs. Potential changes in labor
laws, including the possible passage of legislation designed to make it easier for employees to unionize, or increases in politically-
inspired labor activism, could increase the likelihood of some or all of our employees being subjected to greater organized labor
influence, and could have an adverse effect on our business and financial results by imposing requirements that could potentially
increase our costs, reduce our flexibility and impact our employee culture.

As an employer, we may be subject to various employment-related claims, such as individual, class action or government enforcement
actions relating to alleged employment discrimination, employee classification and related withholding, wage-hour, labor standards or
healthcare and benefit issues. Such actions, if brought against us and successful in whole or in part, may affect our ability to compete
or could materially adversely affect our business, financial condition or results of operations.

Changes to estimates related to our property, fixtures and equipment or operating results that are lower than our current estimates
at certain restaurant locations may cause us to incur impairment charges on certain long-lived assets, which may materially
adversely affect our results of operations.

In accordance with accounting guidance as it relates to the impairment of long-lived assets, we make certain estimates and projections
with regard to individual restaurant operations, as well as our overall performance, in connection with our impairment analyses for
long-lived assets. When impairment triggers are deemed to exist for any location, the estimated undiscounted future cash flows are
compared to its carrying value. If the carrying value exceeds the undiscounted cash flows, an impairment charge equal to the difference
between the carrying value and the fair value is recorded. The projections of future cash flows used in these analyses require the use of

judgment and a number of estimates and projections of future operating results. If actual results differ from our estimates, additional
charges for asset impairments may be required in the future. Over the past several years we have recognized significant impairment
charges and if future impairment charges continue to be significant, this could have a material adverse affect on our our business,
financial condition or results of operations.

We are subject to risks associated with long-term non-cancellable leases and the costs of exiting leases at restaurants we have
closed or may close in the future may be greater than we estimate or could be greater than the funds we raise to address closure
costs.

We do not own any real property. Payments under our operating leases account for a significant portion of our operating expenses and
we expect the new restaurants we open in the future will similarly be leased. Our leases generally have an initial term of ten years and
generally can be extended only in five-year increments (at increased rates). All of our leases require a fixed annual rent, although some
require the payment of additional rent if restaurant sales exceed a negotiated amount. Generally, our leases are “net” leases, which
require us to pay all of the cost of insurance, taxes, maintenance and utilities. We generally cannot cancel these leases. Additional sites
that we lease are likely to be subject to similar long-term non-cancelable leases. In connection with closing restaurants, we may
nonetheless be committed to perform our obligations under the applicable lease including, among other things, paying the base rent for
the balance of the lease term. In addition, as each of our leases expires, we may fail to negotiate renewals, either on commercially
acceptable terms or at all, which could cause us to pay increased occupancy costs or to close restaurants in desirable locations.

We may sublease or assign properties and face future liability if subtenants or assignees default or incur contingent liabilities.

While we have negotiated lease termination agreements for a substantial majority of the underperforming restaurants we have closed
on terms that were acceptable to us, we may be unable to negotiate lease termination agreements on the remaining restaurants we have
closed on acceptable terms, due to unexpectedly high costs or otherwise. Accordingly, in such cases we may seek either to assign
leases and retain contingent liability for rent and other lease obligations or to retain the tenant’s obligations under the lease and
sublease the restaurant premises to a third party. But we may be unable to enter into such arrangements on acceptable terms and even if
we do such arrangements may result in our incurring liabilities and expenses in future periods or the rent payments we receive from
subtenants being less than our rent obligations under the leases. Under these circumstances, we would be responsible for any shortfall.
In addition, continuing liabilities and obligations under assigned or subleased properties could result in expenses in future periods,
which could adversely affect our business, financial condition or results of operations in those periods.

Opening and operating new restaurants entails numerous risk and uncertainties.

One element of our operational strategy is the opening of new restaurants and operating those restaurants on a profitable basis. In 2017,
we opened 12 company-owned restaurants and closed 57 company-owned restaurants. Our franchisees opened three restaurants and
closed 12 restaurants. We expect to open between one and four company-wide restaurants in 2018, a significant decrease from 2017, as
we have modified our business strategy to open fewer restaurants, with such openings primarily taking place in well-established
existing markets.

Opening new restaurants presents numerous risks and uncertainties. We may not be able to open new restaurants as quickly as planned.
In the past, we have experienced delays in opening some restaurants and that could happen again. Delays or failures in opening new
restaurants could materially adversely affect our business strategy and our expected results.

Our ability to open new restaurants also depends on other factors, including: site selection; negotiating leases with acceptable terms;
identifying, hiring and training qualified employees; the state of the labor market in each local market; timely delivery of leased
premises to use; managing construction and development costs; avoiding the impact of inclement weather, natural disasters and other
calamities; obtaining construction materials and labor at acceptable costs; securing required governmental approvals, permits and
licenses; and accessing sufficient capital.

New restaurants, once opened, may not be profitable.

New restaurants may not be profitable and their sales performance may not follow historical patterns. In addition, our average
restaurant sales and comparable restaurant sales may underperform our expectations. Our ability to operate new restaurants profitably
and increase average restaurant sales and comparable restaurant sales will depend on many factors, some of which are beyond our
control, including: consumer awareness, understanding and support of our brand; general economic conditions, local labor costs and

prices we pay for the food products and other supplies we use; changes in consumer preferences; competition; temporary and
permanent site characteristics of new restaurants; and changes in government regulation.

If our new restaurants do not perform as planned, our business and future prospects could be harmed. In addition, if we are unable to
achieve our expected average restaurant sales, our business, financial condition or results of operations could be materially adversely
affected.

Opening new restaurants in existing markets may negatively affect sales at our existing restaurants.

The consumer target area of our restaurants varies by location, depending on a number of factors, including population density, other
local retail and business attractions, area demographics and geography. As a result, opening a new restaurant in or near markets in
which we already have restaurants could adversely affect the sales of these existing restaurants. Existing restaurants could also make it
more difficult to build our consumer base for a new restaurant in the same market. Our core business strategy does not entail opening
new restaurants that we believe will materially affect sales at our existing restaurants, but we may selectively open new restaurants in
and around areas of existing restaurants that are operating at or near capacity to effectively serve our customers. Sales cannibalization
between our restaurants may become significant in the future as we continue to expand our operations and could affect our sales
growth, which could, in turn, materially adversely affect our business, financial condition or results of operations.

New information or attitudes regarding diet and health could result in changes in regulations and consumer consumption habits
that could adversely affect our results of operations.

Regulations and consumer eating habits may change as a result of new information or attitudes regarding diet, health and safety. Such
changes may include federal, state and local regulations and recommendations from medical and diet professionals pertaining to the
ingredients and nutritional content of the food and beverages we offer. The success of our restaurant operations is dependent, in part,
upon our ability to effectively respond to changes in any consumer health regulations and our ability to adapt our menu offerings to
trends in food consumption. If consumer health regulations or consumer eating habits change significantly, we may choose or be
required to modify or delete certain menu items, which may adversely affect the attractiveness of our restaurants to new or returning
customers. To the extent we are unwilling or unable to respond with appropriate changes to our menu offerings, it could materially
affect consumer demand and could have an adverse impact on our business, financial condition or results of operations.

Government regulation and consumer eating habits may impact our business as a result of changes in attitudes regarding diet and
health or new information regarding the adverse health effects of consuming certain menu offerings. These changes have resulted in,
and may continue to result in, laws and regulations requiring us to disclose the nutritional content of our food offerings, and they have
resulted, and may continue to result in, laws and regulations affecting permissible ingredients and menu offerings. For example, a
number of states, counties and cities have enacted menu labeling laws requiring multi-unit restaurant operators to disclose to
consumers certain nutritional information, or have enacted legislation restricting the use of certain types of ingredients in restaurants.
These requirements may be different or inconsistent with requirements under the PPACA, which establishes a uniform, federal
requirement for certain restaurants to post nutritional information on their menus. Specifically, the PPACA requires chain restaurants
with 20 or more locations operating under the same name and offering substantially the same menu, effective as of May 7, 2018, to
publish the total number of calories of standard menu items on menus and menu boards, along with a statement that puts this calorie
information in the context of a total daily calorie intake. Inconsistencies among state laws with respect to presentation of nutritional
content could be challenging for us to comply with in an efficient manner. The PPACA also requires covered restaurants to provide to
consumers, upon request, a written summary of detailed nutritional information for each standard menu item, and to provide a
statement on menus and menu boards about the availability of this information upon request. An unfavorable report on, or reaction to,
our menu ingredients, the size of our portions or the nutritional content of our menu items could negatively influence the demand for
our offerings.

Compliance with current and future laws and regulations regarding the ingredients and nutritional content of our menu items may be
costly and time-consuming. Additionally, if consumer health regulations or consumer eating habits change significantly, we may be
required to modify or discontinue certain menu items and we may experience higher costs associated with the implementation of those
changes. The risks and costs associated with nutritional disclosures on our menus could also impact our operations, particularly given
differences among applicable legal requirements and practices within the restaurant industry with respect to testing and disclosure,
ordinary variations in food preparation among our own restaurants and the need to rely on the accuracy and completeness of nutritional
information obtained from third-party suppliers.

We may not be able to effectively respond to changes in consumer health and safety perceptions or to successfully implement the
nutrient content disclosure requirements and adapt our menu offerings to trends in eating habits. The imposition of additional menu
labeling laws could materially adversely affect our business, financial condition or results of operations, as well as our position within
the restaurant industry in general.

We may not be able to adequately protect our intellectual property, which could harm the value of our brand and could adversely
affect our business.

Our intellectual property is material to the conduct of our business and our marketing efforts. Our ability to implement our business
plan successfully depends in part on our ability to further build brand recognition using our trademarks, service marks, trade dress and
other proprietary intellectual property, including our name and logos and the unique ambience of our restaurants. While it is our policy
to protect and defend vigorously our rights to our intellectual property, we cannot predict whether steps taken by us to protect our
intellectual property rights will be adequate to prevent misappropriation of these rights or the use by others of restaurant features based
upon, or otherwise similar to, our concept. It may be difficult for us to prevent others from copying elements of our concept and any
litigation to enforce our rights will likely be costly and may not be successful. Although we believe that we have sufficient rights to all
of our trademarks and service marks, we may face claims of infringement that could interfere with our ability to market our restaurants
and promote our brand. Any such litigation may be costly and divert resources from our business. Moreover, if we are unable to
successfully defend against such claims, we may be prevented from using our trademarks or service marks in the future, may be liable
for damages and may have to change our marketing efforts, which in turn could materially adversely affect our business, financial
condition or results of operations.

We could be party to litigation that could adversely affect us by distracting management, increasing our expenses or subjecting us
to material money damages and other remedies.

Our customers occasionally file complaints or lawsuits against us alleging we caused an illness or injury they suffered at or after a visit
to our restaurants, or that we have problems with food quality or operations. These kinds of complaints or lawsuits may be more
common in a period in which the public is focused on health safety issues, or may attract more attention due to publication on various
social media outlets. We are also subject to a variety of other claims arising in the ordinary course of our business, including personal
injury claims, contract claims and claims alleging violations of federal and state law regarding workplace and employment matters,
equal opportunity, discrimination and similar matters and we could become subject to class action or other lawsuits related to these or
different matters in the future. Regardless of whether any claims against us are valid, or whether we are ultimately held liable, claims
may be expensive to defend and may divert time and money away from our operations and hurt our performance. A judgment in excess
of our insurance coverage for any claims could materially adversely affect our financial condition or results of operations. Any adverse
publicity resulting from these allegations, even if proven to be false, may also materially adversely affect our reputation or prospects,
which in turn could materially adversely affect our business, financial condition or results of operations.

In addition, the restaurant industry has from time to time been subject to claims based on the nutritional content of food products sold
and disclosure and advertising practices. We may in the future also be subject to this type of proceeding or to publicity about these
matters (particularly those directed at the quick-service or fast casual segments of the industry) may harm our reputation and could
materially adversely affect our business, financial condition or results of operations.

Our current insurance may not provide adequate levels of coverage against claims.

There are types of losses we may incur that cannot be insured against or that we believe are not economically reasonable to insure
against. Such losses could have a material adverse effect on our business and results of operations. In addition, we self-insure a
significant portion of expected losses under our employee health, workers’ compensation, general liability, property and cyber
insurance programs. Unanticipated changes in the actuarial assumptions and management estimates underlying our reserves for these
losses could result in materially different amounts of expense under these programs, which could have a material adverse effect on our
financial condition, results of operations and liquidity. Failure to obtain and maintain adequate directors’ and officers’ insurance could
materially adversely affect our ability to attract and retain qualified officers and directors.

Changes to accounting rules or regulations may adversely affect our results of operations.

Changes to existing accounting rules or regulations may impact our future results of operations or cause the perception that we are
more highly leveraged. Other new accounting rules or regulations and varying interpretations of existing accounting rules or
regulations have occurred and may occur in the future. For instance, accounting regulatory authorities have implemented a requirement

that lessees capitalize operating leases in their financial statements beginning in 2019. Such change will require us to record significant
lease obligations on our balance sheet and make other changes to our financial statements. This and other future changes to accounting
rules or regulations could materially adversely affect our business, financial condition or results of operations.

Failure of our internal control over financial reporting could adversely affect our business and financial results.

Our management is responsible for establishing and maintaining effective internal control over financial reporting under Section 404 of
the Sarbanes-Oxley Act of 2002. Internal control over financial reporting is a process to provide reasonable assurance regarding the
reliability of financial reporting for external purposes in accordance with GAAP. Because of its inherent limitations, internal control
over financial reporting is not intended to provide absolute assurance that we would prevent or detect a misstatement of our financial
statements or fraud. Any failure to maintain an effective system of internal control over financial reporting could limit our ability to
report our financial results accurately and timely or to detect and prevent fraud. The identification of a material weakness could
indicate a lack of controls adequate to generate accurate financial statements that, in turn, could cause a loss of investor confidence and
decline in the market price of our Class A common stock. We may not be able to timely remediate any material weaknesses that may be
identified in future periods or maintain all of the controls necessary for continued compliance. Likewise, we cannot assure you that we
will be able to retain sufficient skilled finance and accounting personnel, especially in light of the increased demand for such personnel
among publicly traded companies.

We will cease to be an “emerging growth company” at the end of our 2018 fiscal year and are currently an “accelerated filer” under the
Exchange Act; therefore, we will be subject to independent auditor attestation for our 2018 fiscal year. Our independent registered
public accounting firm will be required to attest to the effectiveness of our internal control over financial reporting pursuant to
Section 404 of the Sarbanes-Oxley Act when we cease to be an “emerging growth company” under the JOBS Act unless we become a
“non-accelerated filer” under the Exchange Act.

Our principal stockholders and their affiliates own a substantial portion of our outstanding equity, and their interests may not
always coincide with the interests of the other holders.

As of January 2, 2018, L Catterton and certain of its affiliates, Argentia Private Investments, Inc. (“Argentia”) and Mill Road Capital
II, L.P. and certain of its affiliates (“Mill Road”) beneficially owned in the aggregate shares representing approximately 68.6% of our
outstanding voting power, assuming no conversion of Class B common stock into Class A common stock. L Catterton and certain of its
affiliates beneficially owned, in the aggregate, shares representing approximately 27.0% of our outstanding equity interests and
approximately 28.1% of our outstanding voting power as of January 2, 2018. Argentia beneficially owned shares representing
approximately 20.1% of our outstanding equity interests and approximately 17.1% of our outstanding voting power as of January 2,
2018. Mill Road and certain of its affiliates beneficially owned, in the aggregate, shares representing approximately 21.6% of our
outstanding equity interests and 22.4% of our outstanding voting power as of January 2, 2018. As a result, L Catterton, Argentia and
Mill Road could continue to potentially have significant influence over all matters presented to our stockholders for approval,
including election and removal of our directors and change in control transactions. The interests of L Catterton, Argentia and Mill Road
may not always coincide with the interests of the other holders of our common stock.

Our quarterly operating results may fluctuate significantly and could fall below the expectations of securities analysts and investors
due to seasonality and other factors, some of which are beyond our control, resulting in a decline in our stock price.

Our quarterly operating results may fluctuate significantly because of several factors, including but not limited to: increases and
decreases in AUVs and comparable restaurant sales; profitability of our restaurants; labor availability and costs for hourly and
management personnel; changes in interest rates; macroeconomic conditions, both nationally and locally; negative publicity relating to
the consumption of products we serve; changes in consumer preferences and competitive conditions; impairment of long-lived assets
and any loss on and exit costs associated with restaurant closures; expansion to new markets; the timing of new restaurant openings
and related expense; restaurant operating costs for our newly-opened restaurants; increases in infrastructure costs; and fluctuations in
commodity prices.

Seasonal factors, particularly weather disruptions, and the timing of holidays also 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
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. Accordingly, results for any one quarter are not necessarily indicative of results to be
expected for any other quarter or for any year and comparable restaurant sales for any particular future period may decrease. In the

future, operating results may fall below the expectations of securities analysts and investors. In that event, the price of our Class A
common stock would likely decrease.

The price of our Class A common stock may be volatile.

The market price of our Class A common stock could fluctuate significantly. Those fluctuations could be based on various factors,
including: our operating performance and the performance of our competitors or restaurant companies in general; the public’s reaction
to our press releases, our other public announcements and our filings with the SEC; changes in earnings estimates or recommendations
by research analysts who follow us or other companies in our industry; global, national or local economic, legal and regulatory factors
unrelated to our performance; changes in, or our ability to achieve, projections or estimates of our operating results made by analysts,
investors or management; future sales of our Class A common stock by our officers, directors and significant stockholders; the exercise
of warrants for shares of Class A common stock; the arrival or departure of key personnel; and other developments affecting us, our
industry or our competitors.

In addition, in recent years the stock market has experienced significant price and volume fluctuations. These fluctuations may be
unrelated to the operating performance of particular companies. These broad market fluctuations may cause declines in the market
price of our Class A common stock. The price of our Class A common stock could fluctuate based upon factors that have little or
nothing to do with our business, financial condition or results of operations, and those fluctuations could materially reduce the price of
our Class A common stock.

We do not intend to pay dividends for the foreseeable future.

We have never declared or paid any cash dividends on our common stock. For the foreseeable future, we intend to retain any earnings
to finance the operation of our business, and we do not anticipate paying any cash dividends on our common stock. See Item 5.
“Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities-Dividends.”

Future sales of our common stock, or the perception that such sales may occur, could depress our Class A common stock price.

Sales of a substantial number of shares of our common stock in the public market, or the perception that such sales may occur, could
depress the market price of our common stock. Our amended and restated certificate of incorporation authorizes us to issue up to
180,000,000 shares of Class A common stock and Class B common stock. As of January 2, 2018, we have 39,604,360 outstanding
shares of Class A common stock and 1,522,098 shares of Class B common stock. In addition, as of such date, approximately 1,660,494
shares of Class A common stock are issuable upon the exercise of outstanding stock options and vesting of restricted stock units, and
1,913,793 shares of Class A common stock and 28,850 shares of Class B common stock are issuable upon the exercise of warrants.
Moreover, as of that date, approximately 4.8 million shares of our common stock are available for future grants under our stock
incentive plan and for future purchase under our employee stock purchase plan.

Provisions in our charter documents and Delaware law may delay or prevent our acquisition by a third party.

Our amended and restated certificate of incorporation and second amended and restated bylaws, and Delaware law, contain several
provisions that may make it more difficult for a third party to acquire control of us without the approval of our Board of Directors. For
example, we have a classified Board of Directors with three-year staggered terms, which could delay the ability of stockholders to
change membership of a majority of our Board of Directors. Additionally, the terms of outstanding warrants contain change of control
provisions which, in the event of a potential change of control transaction, may require the payment of a premium to holders of such
warrants. These provisions may make it more difficult or expensive for a third party to acquire a majority of our outstanding equity
interests. These provisions also may delay, prevent or deter a merger, acquisition, tender offer, proxy contest or other transaction that
might otherwise result in our stockholders receiving a premium over the market price for their common stock.

ITEM 1B.

Unresolved Staff Comments

None.

ITEM 2.

Properties

As of January 2, 2018, we and our franchisees operated 478 restaurants in 29 states and the District of Columbia. Our restaurants are
typically 2,600 to 2,700 square feet and are located in a variety of suburban, urban and small markets. We lease the property for our
central support office and all of the properties on which we operate restaurants. The chart below shows the locations of our company-
owned and franchised restaurants as of January 2, 2018.

State
Arizona
California
Colorado
Connecticut
District of Columbia
Florida
Idaho
Illinois
Indiana
Iowa
Kansas
Kentucky
Maryland
Michigan
Minnesota
Missouri
Montana
Nebraska
New York
North Carolina
North Dakota
Ohio
Oregon
Pennsylvania
South Dakota
Tennessee
Utah
Virginia
Washington
Wisconsin

Company-
owned

5
20
61
—
1
5
6
50
25
10
10
2
26
—
45
5
—
—
—
15
—
18
6
9
—
5
15
28
2
43
412

Franchised
—
—
—
4
—
1
—
5
—
1
—
5
—
23
1
8
2
6
1
—
3
—
—
—
3
—
—
—
—
3
66

Total

5
20
61
4
1
6
6
55
25
11
10
7
26
23
46
13
2
6
1
15
3
18
6
9
3
5
15
28
2
46
478

We are obligated under non-cancelable leases for our restaurants and our central support office. Our restaurant leases generally have
initial terms of 10 years with two or more five-year renewal options. Our restaurant leases may require us to pay a proportionate share
of real estate taxes, insurance, common area maintenance charges and other operating costs. Some restaurant leases provide for
contingent rental payments based on sales thresholds, although we generally do not expect to pay significant contingent rent on these
properties based on the thresholds in those leases.

ITEM 3.

Legal Proceedings

Data Security Litigation

On June 28, 2016, we 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. In addition to
claims by payment card companies with respect to the data security incident, we were a defendant in a purported class action lawsuit
filed on September 7, 2016 in the United States District Court for the District of Colorado (the “Court”), Selco Community Credit
Union vs. Noodles & Company, alleging that we negligently failed to provide adequate security to protect the payment card
information of customers of the plaintiffs and those of other similarly situated credit unions, banks and other financial institutions
alleged to be part of the putative class, causing those institutions to suffer financial losses (the “Selco Litigation”). The complaint in the
Selco Litigation also claimed we were negligent per se based on alleged violations of Section 5 of the Federal Trade Commission Act
and sought monetary damages, injunctive relief and attorneys’ fees. On July 21, 2017, the Court granted a Motion to Dismiss in the
Selco Litigation in favor of us. A notice of appeal of the dismissal was filed on August 15, 2017. On November 2, 2017 a mediation
was held and a settlement, which was funded entirely by insurance proceeds, was reached, which resulted in a dismissal of the appeal
and a resolution of the Selco Litigation on November 20, 2017.

Delaware Gift Card Litigation

As previously disclosed in prior reports filed with the SEC, the Company is 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 alleges 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 seeks an order that we 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. On November 23, 2015, the Court ruled on a motion to dismiss the complaint. While the
Court granted the motion to dismiss with respect to a claim alleging that the defendants intended to defraud the government or
willfully concealed property owed to the government and for which a certificate or receipt was provided, it did not dismiss the other
claims alleging that the defendants knowingly made false statements to avoid transmitting money to the government. The trial date
with respect to this matter is set for May 21, 2018. The defendants have filed a motion for summary judgment in the case. A motion
and supplemental motion for summary judgment have been filed on behalf of us. Oral argument on the motion for summary judgment
was held on November 8, 2017, and the motion is now with the Court for ruling. 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. However, we may ultimately be subject to greater losses resulting from the litigation. We
intend to continue to vigorously defend this action.

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 January 2, 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 4.

Mine Safety Disclosures

Not applicable.

PART II

ITEM 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity

Securities

Our Class A common stock has traded on the Nasdaq Global Select Market under the symbol NDLS since it began trading on June 28,
2013, the date of our initial public offering (“IPO”). The following table sets forth, for the periods indicated, the high and low sales
prices per share of our Class A common stock as reported on the Nasdaq Global Select Market.

Fiscal Year 2017
First quarter (January 4, 2017 - April 4, 2017)
Second quarter (April 5, 2017 - July 4, 2017)
Third quarter (July 5, 2017 - October 3, 2017)
Fourth quarter (October 4, 2017 - January 2, 2018)
Fiscal Year 2016
First quarter (December 30, 2015 - March 29, 2016)
Second quarter (March 30, 2016 - June 28, 2016)
Third quarter (June 29, 2016 - September 27, 2016)
Fourth quarter (September 28, 2016 - January 3, 2017)

High

Low

$
$
$
$

5.95 $
5.95 $
4.85 $
5.70 $

13.65 $
12.55 $
10.47 $
5.10 $

3.30
3.50
3.60
4.25

9.32
9.28
4.91
3.51

As of March 6, 2018, there were approximately 44 holders of record of our common stock. The number of holders of record is based
upon the actual numbers of holders registered at such date and does not include holders of shares in “street name” or persons,
partnerships, associates, corporations or other entities in security position listings maintained by depositories.

Purchases of Equity Securities by the Issuer

We had no share repurchases during the fourth quarter of 2017.

Sales of Unregistered Securities by the Issuer

We sold no unregistered securities that have not been previously included in a Quarterly Report on Form 10-Q or in a Current Report
on Form 8-K.

Stock Performance Graph

The following graph compares the cumulative total shareholder return on our Class A common stock from June 28, 2013 (using the
price of which our shares of Class A common stock were initially sold to the public) to January 2, 2018 to that of the total return of the
Nasdaq Composite and the S&P 600 Restaurants Index. The comparison assumes $100 was invested in our common stock on June 28,
2013 and in each of the forgoing indices on June 28, 2013 and assumes the reinvestment of dividends. This graph is furnished and not
“filed” with the Securities and Exchange Commission or “soliciting material” under the Exchange Act and shall not be incorporated by
reference into any such filings, irrespective of any general incorporation contained in such filing.

The stock price performance included in this graph is not necessarily indicative of future stock price performance.

Dividends

No dividends have been declared or paid on our shares of common stock. We do not anticipate paying any cash dividends on any of
our shares of common stock in the foreseeable future. We currently intend to retain any earnings to finance the development and
expansion of our business. Any future determination to pay dividends will be at the discretion of our Board of Directors and will be
dependent upon then-existing conditions, including our earnings, capital requirements, results of operations, financial condition,
business prospects and other factors that our Board of Directors considers relevant. Further, the Company’s credit facility and warrants
each contain provisions that limit its ability to pay dividends on its common stock. See “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” and “Certain Relationships and Related Transactions, and Director Independence” for
additional information regarding our financial condition.

ITEM 6.

Selected Financial Data

The following table summarizes the consolidated historical financial and operating data for the periods indicated. The statements of
operations data for the fiscal years ended January 2, 2018, January 3, 2017 and December 29, 2015, and the balance sheet data as of
January 2, 2018 and January 3, 2017 have been derived from our audited consolidated financial statements included in Item 8.
“Financial Statements and Supplementary Data,” and the statements of operations data from the fiscal years ended December 30, 2014
and December 31, 2013, and the balance sheet data as of December 29, 2015, December 30, 2014 and December 31, 2013 have been
derived from our audited consolidated financial statements not included in this report.

The historical results presented below are not necessarily indicative of the results to be expected for any future period. This
information should be read in conjunction with “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” and our audited consolidated financial statements and the related notes included elsewhere in this report.

We operate on a 52- or 53-week fiscal year ending on the Tuesday closest to December 31. Fiscal year 2016, which ended on
January 3, 2017, contained 53 weeks, and all other fiscal years presented below contained 52 weeks. We refer to our fiscal years as
2017, 2016, 2015, 2014 and 2013. Our fiscal quarters each contain thirteen weeks, with the exception of the fourth quarter of a 53-
week fiscal year, which contains fourteen weeks.

January 2,
2018

January 3,
2017

December 29,
2015

December 30,
2014

December 31,
2013

Fiscal Year Ended

(in thousands)

Revenue:

Restaurant revenue

Franchising royalties and fees

Total revenue

Costs and Expenses:

Restaurant operating costs (exclusive of depreciation and amortization, shown

451,599 $

482,544 $

4,893

456,492

4,930

487,474

separately below):

Cost of sales

Labor

Occupancy

Other restaurant operating costs

General and administrative(1)(2)

Depreciation and amortization

Pre-opening

Restaurant impairments, closure costs and asset disposals (3)

Total costs and expenses

(Loss) income from operations

Debt extinguishment expense

Interest expense, net

(Loss) income before income taxes

(Benefit) provision for income taxes

Net (loss) income

Accretion of preferred stock to redemption value (4)

121,473

150,161

51,877

64,091

39,746

24,613

935

37,446

490,342

(33,850)

—

3,839

(37,689)

(207)

(37,482)

(7,967)

130,630

161,219

55,912

73,011

55,654

28,134

3,131

47,311

555,002

(67,528)

—

2,916

(70,444)

1,233

(71,677)

—

Net (loss) income attributable to common stockholders

(45,449) $

(71,677) $

450,482 $
4,969
455,451

120,455
143,145
50,300
63,549
37,244
27,802
4,407
29,616
476,518
(21,067)
—
1,432
(22,499)
(8,734)
(13,765)
—
(13,765) $

398,993 $

347,140

4,748

403,741

3,784

350,924

107,217

120,492

42,540

52,580

31,394

24,787

4,425

1,391

384,826

18,915

—

365

18,550

7,122

11,428

—

11,428 $

91,892

104,040

35,173

44,078

35,893

20,623

3,809

1,164

336,672

14,252

624

2,196

11,432

4,767

6,665

—

6,665

_____________
(1)

General and administrative expenses in 2013 included $0.5 million of management fee expense in accordance with our management services agreement and through the Class C
common stock dividend paid to the holder of the one outstanding share of our Class C common stock. In connection with our IPO, the management services agreement expired, and
the one share of Class C common stock was redeemed. In the second quarter of 2013, we incurred $5.7 million of IPO-related expenses: $2.0 million of stock-based compensation
related to accelerated vesting of outstanding stock options, $1.2 million of stock-based compensation related to stock options granted to our then-Chief Executive Officer and then-
President and Chief Operating Officer of which 50% were vested at grant, $1.7 million of transaction bonuses and related payroll taxes and $0.8 million in transaction payments to
our equity sponsors. Additionally, we incurred $0.7 million of expenses related to our follow-on offering which closed in December of 2013.

(2)

General and administrative expenses in 2016 include a $10.6 million charge for estimated losses associated with claims and anticipated claims by payment card companies from the
data security incident, a $2.7 million charge for severance expenses and a $3.0 million charge for an employment-related litigation settlement.

(3)

Restaurant impairments, closure costs and asset disposals include $16.2 million, $41.6 million and $25.4 million of charges in 2017, 2016 and 2015, respectively related to 34
restaurants in 2017, 54 restaurants in 2016 and 39 restaurants in 2015 that were identified as impaired. Additionally, we recognized $20.1 million, $2.3 million and $3.1 million in
2017, 2016 and 2015, respectively, of closure costs which are also included in restaurant impairments, closure costs and asset disposals. The closure costs recognized during 2017
are related to the 55 restaurants closed during the first quarter of 2017, as well as ongoing costs of restaurants closed in the fourth quarter of 2015. The closure costs recognized in
2016 are related to the ongoing costs of restaurants closed in the fourth quarter of 2015. The closure costs recognized in 2015 relate to the 16 restaurants closed in the fourth quarter
of 2015.

(4)

Represents the accretion of the preferred stock issued to L Catterton to its full redemption value. See Note 8, Stockholders’ Equity for additional information.

(Loss) earnings per Class A and Class B common share, combined:

Basic

Diluted

Weighted average Class A and Class B common shares outstanding, combined:

Basic

Diluted

Selected Operating Data:

Company-owned restaurants at end of period

Franchise-owned restaurants at end of period

Company-owned:

Average unit volumes(1)

Comparable restaurant sales(2)

Restaurant contribution(3)

as a percentage of restaurant revenue

Balance Sheet Data:

Total current assets

Total assets

Total current liabilities

Total long-term debt

Total liabilities

Total stockholders' equity

Fiscal Year Ended

January 2,
2018

January 3,
2017

December 29,
2015

December 30,
2014

December 31,
2013

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

(1.20)

(2.58)

(0.48 ) $
(0.48 ) $

0.38

0.37

0.25

0.24

37,759,497

27,808,708

28,938,901
28,938,901

29,717,304

31,001,099

26,406,904

27,688,629

412

457

422
70

1,072

(2.7)%

63,997

1,075

(0.9)%

61,772

14.2 %

12.8 %

1,103
(0.2)%

73,033

16.2 %

As of

386

1,147

0.3%

76,164

19.1%

318

1,179

3.4%

71,957

20.7%

January 2,
2018

January 3,
2017

December 29,
2015

December 30,
2014

December 31,
2013

(in thousands)

22,058 $

25,788 $

185,233

43,869

57,624

149,372

35,861

209,461

49,033

84,676

183,643

25,818

25,401 $
239,961
32,914
67,732
146,189
93,772

22,776 $

238,539

25,831

27,136

98,424

140,115

18,333

187,350

24,165

5,860

62,877

124,473

_____________
(1)

AUVs consist of average annualized sales of all company-owned restaurants over the trailing 12 periods in a typical operating year.

(2)

(3)

Comparable restaurant sales represent year-over-year sales for restaurants open for at least 18 full periods.

Restaurant contribution represents restaurant revenue less restaurant operating costs, which are the cost of sales, labor, occupancy and other operating items. Restaurant
contribution is a non-GAAP measure that is neither required by, nor presented in accordance with accounting principles generally accepted in the United States of America
(“GAAP”), and the calculation thereof may not be comparable to similar measures reported by other companies. Restaurant contribution is a supplemental measure of the operating
performance of our restaurants and is not reflective of the underlying performance of our business because corporate-level expenses are excluded from this measure.

Restaurant contribution has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP.
Management does not consider restaurant contribution in isolation or as an alternative to financial measures determined in accordance with GAAP. However, management
believes that restaurant contribution is an important tool for investors and other interested parties because it is a widely-used metric within the restaurant industry to evaluate
restaurant-level productivity, efficiency and performance. Management also uses restaurant contribution as a metric to evaluate the profitability of incremental sales at our
restaurants, restaurant performance across periods and restaurant financial performance compared with competitors. See Item 7. “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” included elsewhere in this annual report on Form 10-K for a discussion of restaurant contribution and other key performance
indicators.

A reconciliation of (loss) income from operations to restaurant contribution is presented below:

Fiscal Year Ended

January 2,
2018

January 3,
2017

December 29,
2015

December 30,
2014

December 31,
2013

(Loss) income from operations

(33,850) $

(67,528) $

Less: Franchising royalties and fees

Add: General and administrative

Depreciation and amortization

Pre-opening

Restaurant impairments, closure costs and asset disposals

4,893

39,746

24,613

935

37,446

4,930

55,654

28,134

3,131

47,311

Restaurant contribution

63,997 $

61,772 $

(in thousands)

(21,067) $
4,969
37,244
27,802
4,407
29,616
73,033 $

18,915 $
4,748
31,394
24,787
4,425
1,391
76,164 $

14,252

3,784

35,893

20,623

3,809

1,164

71,957

ITEM 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with Item 6.
“Selected Financial Data” and our consolidated financial statements and related notes included in Item 8. “Financial Statements and
Supplementary Data.” In addition to historical information, this discussion and analysis contains forward-looking statements that
involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as
a result of certain factors including, but not limited to, those discussed in Item 1A. “Risk Factors” and elsewhere in this report.

We operate on a 52- or 53-week fiscal year ending on the Tuesday closest to December 31. Fiscal year 2016, which ended on
January 3, 2017, contained 53 weeks and both fiscal years 2017 and 2015, which ended on January 2, 2018 and December 29, 2015,
respectively, contained 52 weeks. We refer to our fiscal years as 2017, 2016 and 2015. Our fiscal quarters each contained 13 operating
weeks, with the exception of the fourth quarter of 2016, which had 14 operating weeks.

Overview

Noodles & Company is a restaurant concept offering lunch and dinner within the fast casual segment of the restaurant industry. We
opened our first location in 1995, offering noodle and pasta dishes, staples of many cuisines, with the goal of delivering fresh
ingredients and flavors from around the world under one roof. Today, our globally inspired menu includes a wide variety of high
quality, cooked-to-order dishes, including noodles and pasta, soups, salads and appetizers. We believe we offer our customers value
with per person spend of approximately $8.81 in 2017.

Recent Trends, Risks and Uncertainties

Restaurant Development. New restaurants have historically contributed substantially to our revenue growth. In 2017, we opened 12
company-owned restaurants and our franchisees opened three restaurants for a total of 15 restaurants opened system-wide. We closed
57 company-owned restaurants and our franchisees closed 12 restaurants in 2017. As of January 2, 2018, we had 412 company-owned
restaurants and 66 franchise restaurants in 29 states and the District of Columbia.

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. In 2017, we opened 12 company-owned
restaurants, and in 2018, we plan to open between one and four company-owned restaurants. We did not open restaurants in new
markets in 2017 and do not intend to open restaurants in new markets in 2018; our openings in 2017 were, and in 2018 will be,
primarily in well-established markets where we maintain strong brand awareness and restaurant-level financial performance that
exceeds company averages. We believe this more moderate growth strategy will enhance our ability to focus on improving restaurant
operations and profitability. We will continue to evaluate our company-owned restaurant growth rate based on our operational and
financial performance, capital resources and real estate opportunities.

Restaurant Closings. 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. Many of these restaurants were open for only

the last three or four years in newer markets where brand awareness of our restaurants was not as strong and where it has been more
difficult to adequately staff our restaurants. We believe closing these restaurants will favorably affect our future restaurant contribution,
restaurant contribution margin, adjusted EBITDA and net income.

Comparable Restaurant Sales and Restaurant Contribution Margin. In fiscal 2017, comparable restaurant sales decreased 2.4%
system-wide, decreased 2.7% for company-owned restaurants and decreased 0.5% for franchise restaurants. Comparable restaurant
sales represent year-over-year sales comparisons for restaurants open for at least 18 full periods.

Increased Labor Costs. Similar to much of the restaurant industry, our labor costs have risen in recent years 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.

Franchising. We look for experienced, well-capitalized franchise partners who are able to leverage their existing infrastructure and
local knowledge in a manner that benefits both our franchisees and ourselves. As of January 2, 2018, a total of nine area developers
have signed development agreements providing for the opening of 64 additional restaurants in their respective territories. We expect to
continue to offer development rights in markets where we do not intend to build company-owned restaurants. We may offer such rights
to larger developers who commit to open 10 or more units, or to smaller developers who may commit to open significantly fewer
restaurants. We do not currently intend to offer single-unit franchises.

Data Breach Liabilities. On June 28, 2016, we 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. In the fourth quarter of 2016,
we recorded a charge of $10.6 million, at the low end of an estimated range, for 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 expect to be liable (the “Data Breach Liabilities”). However, we may ultimately be subject to Data Breach Liabilities that are
up to $5.5 million greater than that amount.

Restaurant Closing Liabilities. We have closed restaurants in 2017 and 2015 and as a result have recorded liabilities to landlords for
estimated termination fees. In 2017, we paid approximately $11.0 million relating to the termination of leases, including related fees
and expenses, and in 2018 we expect to pay out approximately $6.0 million to $10.0 million. We may recognize accounting charges as
lease terminations occur.

Impairment of Long-lived Assets. Over the past several years we have recognized significant impairment charges. During 2017, 2016
and 2015, 34 restaurants, 54 restaurants and 39 restaurants were identified as impaired, respectively. Impairment is based on our
current assessment of the expected future cash flows of various restaurants based on recent results and other specific market factors.
Many of these restaurants we had opened in the last three to four years in newer markets where brand awareness of our restaurants is
not as strong and where it has been more difficult to adequately staff our restaurants. While we expect impairment charges to
meaningfully decline in 2018 versus prior years, we may recognize impairment charges in the future.

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, 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 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”)

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 multiplied by the number of operating days
we have in a typical year, which is equal to 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. As of the end of 2017, 2016 and 2015, there were 385, 393 and
322 restaurants, respectively, in our comparable restaurant base for company-owned locations. 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;

local competition;

trade area dynamics;

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

opening of 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 above), comparable restaurant sales are only
one measure of how we evaluate our performance.

Restaurant Contribution and Restaurant Contribution Margin

Restaurant contribution is defined as 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. Fluctuations in restaurant contribution margin can also be attributed to those factors discussed above for the
components of restaurant operating costs.

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, data breach liabilities, certain litigation
settlements, severance costs and stock-based compensation.

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 (loss) income to EBITDA and adjusted EBITDA:

Net loss

Depreciation and amortization

Interest expense, net

(Benefit) provision for income taxes

EBITDA

Restaurant impairments, closure costs and asset disposals

Data breach liabilities

Litigation settlement (1)

Fees and costs related to the registration statement and related transactions (2)

Severance costs (3)

Stock-based compensation expense (4)

Adjusted EBITDA

Fiscal Year Ended

January 2, 2018

January 3, 2017

(in thousands)

December 29,
2015

(37,482) $

24,613

3,839

(207)

(9,237) $

37,446

(421)

679

581

1,513

30,581 $

(71,677) $
28,134
2,916
1,233
(39,394) $
47,311
10,622
3,000
—
2,034
2,319
25,892 $

(13,765)

27,802

1,432

(8,734)

6,735

29,616

—

200

—

1,469

38,020

_____________
(1)

Fiscal year 2017 includes a gain on an employment-related litigation settlement due to final settlement being less than what the Company had previously
accrued. Fiscal year 2016 includes the initial charge of $3.0 million recorded to cover the estimated costs of the employment-related litigation settlement.

(2)

(3)

(4)

Includes expenses related to the registration statement the Company filed in the first quarter of 2017, which registration statement was later withdrawn.

Fiscal year 2017 includes severance costs related to the departure of our Chief Operations Officer and additional changes to operations departmental
structure. Fiscal year 2016 includes severance costs related to the departures of our Chief Executive Officer and Chief Marketing Officer and from a
reduction in headcount as a result of reducing new restaurant development.

Fiscal year 2016 includes a $0.7 million charge for modifying the outstanding stock options for Kevin Reddy, who resigned from his positions as the
Chairman of the Board and Chief Executive Officer of the Company in July 2016.

Key Financial Definitions

Cost of Sales

Cost of sales includes the direct costs associated with the food, beverage and packaging of our menu items. Cost of sales also includes
any costs related to discounted menu items. Cost of sales is a substantial expense and can be expected to change proportionally as our
restaurant revenue changes. Fluctuations in cost of sales are caused primarily by volatility in the cost of commodity food items and

related contracts for such items. Other important factors causing fluctuations in cost of sales include seasonality, discounting activity
and restaurant level management of food waste.

Labor Costs

Labor costs include wages, payroll taxes, workers’ compensation expense, benefits and incentives paid to our restaurant teams. Similar
to certain other expense items, we expect labor costs to change proportionally as our restaurant revenue changes. Factors that influence
fluctuations in our labor costs include minimum wage and payroll tax legislation, the frequency and severity of workers’ compensation
claims, health care costs and the performance of our restaurants.

Occupancy Costs

Occupancy costs include rent, common area maintenance charges and real estate tax expense related to our restaurants and are
expected to grow proportionally as we open new restaurants.

Other Restaurant Operating Costs

Other restaurant operating costs include the costs of repairs and maintenance, utilities, restaurant-level marketing, credit card
processing fees, restaurant supplies and other restaurant operating costs. Similar to certain other costs, they are expected to grow
proportionally as restaurant revenue grows.

General and Administrative Expense

General and administrative expense is composed of payroll, other compensation, travel, marketing, accounting and legal fees,
insurance and other expenses related to the infrastructure required to support our restaurants. General and administrative expense also
includes the non-cash stock compensation expense related to our stock incentive plan.

Depreciation and Amortization

Our principal depreciation and amortization charges relate to depreciation of long-lived assets, such as property, equipment and
leasehold improvements, from restaurant construction and ongoing maintenance.

Pre-Opening Costs

Pre-opening costs relate to the costs incurred prior to the opening of a restaurant. These include management labor costs, staff labor
costs during training, food and supplies utilized during training, marketing costs and other pre-opening related costs. Pre-opening costs
also include rent recorded between the date of possession and the opening date for our restaurants.

Restaurant impairments, closure costs and asset disposals

Restaurant impairments, closure costs and asset disposals include the net gain or loss on disposal of long-lived assets related to
retirements and replacement of equipment or leasehold improvements, restaurant closures and impairment charges.

Interest Expense

Interest expense consists primarily of interest on our outstanding indebtedness and amortization of debt issuance costs over the life of
the related debt reduced by capitalized interest.

Provision (Benefit) for Income Taxes

Provision (benefit) for income taxes consists of federal, foreign, state and local taxes on our income.

Restaurant Openings, Closures and Relocations

The following table shows restaurants opened or closed in the years indicated:

Company-Owned Restaurant Activity
Beginning of period
Openings
Acquisitions(1)
Closures
Restaurants at end of period
Franchise Restaurant Activity
Beginning of period
Openings
Divestitures(1)
Closures
Restaurants at end of period
Total restaurants

_____________
(1)

Represents one franchise restaurant acquired by us in 2015.

Fiscal Year Ended

January 2, 2018

January 3, 2017

December 29,
2015

457
12
—
(57)
412

75
3
—
(12)
66
478

422
38
—
(3)
457

70
6
—
(1)
75
532

386
51
1
(16)
422

53
19
(1)
(1)
70
492

Results of Operations

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
years 2017 and 2015 each contained 52 operating weeks, and fiscal year 2016 contained 53 operating weeks.

Revenue:

Restaurant revenue
Franchising royalties and fees

Total revenue
Costs and expenses:

Restaurant operating costs (exclusive of depreciation and amortization, shown

separately below):(1)
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

Interest expense, net
Loss before income taxes

(Benefit) provision for income taxes
Net loss

_____________
(1)

As a percentage of restaurant revenue.

Fiscal Year Ended

January 2,
2018

January 3,
2017

December 29,
2015

98.9 %
1.1 %
100.0 %

99.0 %
1.0 %
100.0 %

98.9 %
1.1 %
100.0 %

26.9 %
33.3 %
11.5 %
14.2 %
8.7 %
5.4 %
0.2 %
8.2 %
107.4 %
(7.4)%
0.8 %
(8.3)%
(0.1)%
(8.2)%

27.1 %
33.4 %
11.6 %
15.1 %
11.4 %
5.8 %
0.6 %
9.7 %
113.9 %
(13.9)%
0.6 %
(14.5)%
0.2 %
(14.7)%

26.7 %
31.8 %
11.2 %
14.1 %
8.2 %
6.1 %
1.0 %
6.5 %
104.6 %
(4.6)%
0.3 %
(4.9)%
(1.9)%
(3.0)%

Fiscal Year Ended January 2, 2018 compared to Fiscal Year Ended January 3, 2017

Fiscal year 2017 contained 52 operating weeks and fiscal year 2016 contained 53 operating weeks. The table below presents our
operating results for 2017 and 2016, and the related year-over-year changes:

Fiscal Year Ended

Increase / (Decrease)

January 2,
2018

January 3,
2017

(in thousands)

451,599
4,893
456,492

482,544
4,930
487,474

(30,945 )
(37)
(30,982)

(6.4)%
(0.8)%
(6.4)%

121,473
150,161
51,877
64,091
39,746
24,613
935

37,446
490,342
(33,850)
3,839
(37,689)
(207)
(37,482)

1,072

(2.7)%

130,630
161,219
55,912
73,011
55,654
28,134
3,131

47,311
555,002
(67,528)
2,916
(70,444)
1,233
(71,677)

1,075

(0.9)%

(9,157)
(11,058)
(4,035)
(8,920)
(15,908)
(3,521)
(2,196)

(9,865)
(64,660)
33,678
923
32,755
(1,440)
34,195

(7.0)%
(6.9)%
(7.2)%
(12.2)%
(28.6)%
(12.5)%
(70.1)%

(20.9)%
(11.7)%
49.9 %
31.7 %
46.5 %
*
47.7 %

(3 )

(0.3)%

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

Interest expense, net
Loss before income taxes
(Benefit) provision for income taxes
Net loss

Company-owned:

Average unit volumes
Comparable restaurant sales

_____________
*

Not meaningful.

Revenue

Total revenue decreased by $31.0 million, or 6.4%, in 2017, to $456.5 million compared to $487.5 million in 2016. This decrease was
due to the impact of closing 55 company-owned restaurants in the first quarter of 2017 and a decline in comparable company-owned
restaurant sales (as described below), partially offset by additional restaurant openings since the beginning of 2016. Total revenue in
the prior fiscal year was also higher by approximately $8.1 million due to the impact of an additional operating week in 2016.

Comparable restaurant sales decreased by 2.7% at company-owned restaurants, decreased by 0.5% at franchise-owned restaurants and
decreased by 2.4% system-wide in 2017.

Cost of Sales

Cost of sales decreased by $9.2 million, or 7.0%, in 2017 compared to 2016, due primarily to the decrease in restaurant revenue in
2017 due to restaurant closures in the first quarter of 2017. As a percentage of restaurant revenue, cost of sales decreased to 26.9% in
2017 from 27.1% in 2016. The decrease as a percentage of restaurant revenue was primarily due to less promotional activity.

Labor Costs

Labor costs decreased by $11.1 million, or 6.9%, in 2017 compared to 2016, due primarily to the decrease in restaurant revenue in
2017 due to restaurant closures in the first quarter of 2017. As a percentage of restaurant revenue, labor costs marginally decreased to
33.3% in 2017 from 33.4% in 2016. The decrease is due to the benefit of restaurant closures during the first quarter of 2017 and labor
initiatives, mostly offset by labor inflation.

Occupancy Costs

Occupancy costs decreased by $4.0 million, or 7.2%, in 2017 compared to 2016, due primarily to the favorable impact of restaurant
closures in the first quarter of 2017. As a percentage of restaurant revenue, occupancy costs decreased to 11.5% in 2017 from 11.6% in
2016.

Other Restaurant Operating Costs

Other restaurant operating costs decreased by $8.9 million, or 12.2%, in 2017 compared to 2016, due primarily to decreased restaurant
revenue due to restaurant closures in the first quarter of 2017 and lower marketing expense in 2017. As a percentage of restaurant
revenue, other restaurant operating costs decreased to 14.2% in 2017 from 15.1% in 2016, due primarily to a reduction in marketing
spending.

General and Administrative Expense

General and administrative expense decreased by $15.9 million, or 28.6%, in 2017 compared to 2016, primarily due to the recognition
in 2016 of a $10.6 million charge for estimated losses associated with claims and anticipated claims by payment card companies from
the data security incident, a $2.7 million charge for severance expenses and a $3.0 million charge for an employment-related litigation
settlement. As a percentage of revenue, general and administrative expense decreased to 8.7% in 2017 from 11.4% in 2016, due
primarily to the charges recognized in 2016 discussed above.

Depreciation and Amortization

Depreciation and amortization decreased by $3.5 million, or 12.5%, in 2017 compared to 2016, due primarily to restaurants closed or
impaired since 2015. As a percentage of revenue, depreciation and amortization decreased to 5.4% in 2017 from 5.8% in 2016.

Pre-Opening Costs

Pre-opening costs decreased by $2.2 million, or 70.1%, in 2017 compared to 2016 due to fewer restaurants under construction
compared to the comparable period in the prior year. As a percentage of revenue, pre-opening costs decreased to 0.2% in 2017 from
0.6% in 2016.

Restaurant Impairments, Closure Costs and Asset Disposals

Restaurant impairments, closure costs and asset disposals decreased by $9.9 million, or 20.9%, in 2017 compared to 2016. In 2017, we
recognized $20.1 million of closure costs related to the closure of 55 restaurants in the first quarter of 2017 and ongoing costs of
restaurants closed in the fourth quarter of 2015, compared to $2.3 million of closure costs recognized in 2016 for ongoing costs of
restaurants closed in the fourth quarter of 2015.

Additionally, in 2017, we recognized $16.2 million of impairment charges related to the impairment of 34 restaurants, compared to
$41.6 million of impairment charges recognized in 2016 related to the impairment of 54 restaurants. Many of these restaurants were
opened in the last three to four years in newer markets where brand awareness of our restaurants is not as strong and where it has been
more difficult to adequately staff our restaurants. The underperformance of these restaurants, compounded by the higher than average
construction costs of some of these restaurants, resulted in the recording of an impairment of fixed assets in both 2017 and 2016.

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.

Interest Expense

Interest expense increased by $0.9 million in 2017 compared to 2016. The increase was the result of an increase in the average interest
rate on our credit facility and higher amortization of debt issuance costs, partially offset by lower average debt balances during 2017
compared to 2016.

Provision for Income Taxes

In 2016, we determined that it was appropriate to record a valuation allowance against U.S. deferred tax assets due to uncertainty
regarding the realizability of future tax benefits, after which there was no material tax benefit or provision. We reported a benefit from
income taxes of $(0.2) million in 2017 compared to a provision for income taxes of $1.2 million in 2016. The change in tax provision
is primarily related to the U.S. valuation allowance that was initially recorded to tax expense in 2016. As a result, the effective tax rate
changed to 0.5% in 2017 from (1.8)% in 2016. We will continue to maintain a valuation allowance against U.S. deferred tax assets
until there is sufficient evidence to support a full or partial reversal. Due to the valuation allowance recorded, we do not expect
material impacts from the tax cut and Jobs Act in 2018.

During 2017, we closed all Canadian restaurants and discontinued foreign business operations. As a result, all Canadian deferred tax
assets were written off against the previously recorded Canadian valuation allowance and did not impact tax expense or the effective
tax rate.

Fiscal Year Ended January 3, 2017 compared to Fiscal Year Ended December 29, 2015

Fiscal year 2016 contained 53 operating weeks and fiscal year 2015 contained 52 operating weeks. The table below presents our
operating results for 2016 and 2015, and the related year-over-year changes:

Fiscal Year Ended

Increase / (Decrease)

January 3,
2017

December 29,
2015

(in thousands)

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

Interest expense, net
Loss before income taxes
Provision (benefit) for income taxes
Net loss

Company-owned:

Average unit volumes
Comparable restaurant sales

_____________
*

Not meaningful.

Revenue

482,544
4,930
487,474

450,482
4,969
455,451

32,062
(39)
32,023

120,455
143,145
50,300
63,549
37,244
27,802
4,407

29,616
476,518
(21,067)
1,432
(22,499)
(8,734)
(13,765)

10,175
18,074
5,612
9,462
18,410
332
(1,276)

17,695
78,484
(46,461)
1,484
(47,945)
9,967
(57,912 )

130,630
161,219
55,912
73,011
55,654
28,134
3,131

47,311
555,002
(67,528)
2,916
(70,444)
1,233
(71,677)

1,075

(0.9)%

7.1 %
(0.8)%
7.0 %

8.4 %
12.6 %
11.2 %
14.9 %
49.4 %
1.2 %
(29.0)%

59.7 %
16.5 %
*
*
*
*
*

1,103

$
(0.2)%

(28 )

(2.5)%

Restaurant revenue increased by $32.1 million, or 7.1%, in 2016 compared to 2015. Restaurants not in the comparable restaurant base
accounted for $27.5 million of this increase, partially offset by a slight decline in comparable restaurant sales, as well as the impact of
closing 16 restaurants in the fourth quarter of 2015. Comparable restaurant sales decreased by $2.9 million, or 0.9%, in 2016 due to a
decrease in traffic, partially offset by a modest price increase. AUV’s decreased $28,000 due primarily to lower AUVs at our
restaurants that have been open for less than 18 full periods compared to our system-wide average.

The impact of an additional operating week in 2016 on total revenue was approximately $8.1 million.

Cost of Sales

Cost of sales increased by $10.2 million, or 8.4%, in 2016 compared to 2015, due primarily to the increase in restaurant revenue in
2016. As a percentage of restaurant revenue, cost of sales increased to 27.1% in 2016 from 26.7% in 2015. This increase was primarily
the result of modest commodity inflation.

Labor Costs

Labor costs increased by $18.1 million, or 12.6%, in 2016 compared to 2015, due primarily to the increase in restaurant revenue in
2016. As a percentage of restaurant revenue, labor costs increased to 33.4% in 2016 from 31.8% in 2015. The increase as a percentage
of restaurant revenue resulted from an increase in wage rates and benefit costs, as well as the deleveraging impact of lower AUVs.

Occupancy Costs

Occupancy costs increased by $5.6 million, or 11.2%, in 2016 compared to 2015, due primarily to the opening of new restaurants. As a
percentage of restaurant revenue, occupancy costs increased to 11.6% in 2016 from 11.2% in 2015. The slight increase was due
primarily to the deleveraging impact of lower AUVs.

Other Restaurant Operating Costs

Other restaurant operating costs increased by $9.5 million, or 14.9%, in 2016 compared to 2015, due primarily to the increase in
restaurant revenue in 2016. As a percentage of restaurant revenue, other restaurant operating costs increased to 15.1% in 2016 from
14.1% in 2015. The increase in other restaurant operating cost percentage was primarily due to increased marketing initiatives, the
deleveraging impact of lower AUVs and additional maintenance costs in 2016.

General and Administrative Expense

General and administrative expense increased by $18.4 million, or 49.4%, in 2016 compared to 2015, primarily due to a $10.6 million
charge for estimated losses associated with claims and anticipated claims by payment card companies from the data security incident, a
$2.7 million charge for severance expenses and a $3.0 million charge for an employment-related litigation settlement. As a percentage
of revenue, general and administrative expense increased to 11.4% in 2016 from 8.2% in 2015, due primarily to the charges discussed
above.

Depreciation and Amortization

Depreciation and amortization increased by $0.3 million, or 1.2%, in 2016 compared to 2015, due primarily to an increased number of
restaurants mostly offset by the impairment of 54 restaurants throughout 2016 and restaurants impaired or closed in 2015. As a
percentage of revenue, depreciation and amortization decreased to 5.8% in 2016 from 6.1% in 2015.

Pre-Opening Costs

Pre-opening costs decreased by $1.3 million, or 29.0%, in 2016 compared to 2015 due to fewer restaurants under construction
compared to the comparable period in the prior year. As a percentage of revenue, pre-opening costs decreased to 0.6% in 2016 from
1.0% in 2015.

Restaurant Impairments, Closure Costs and Asset Disposals

Restaurant impairments, closure costs and asset disposals increased by $17.7 million, or 59.7%, in 2016 compared to 2015 due
primarily to the impairment of 54 restaurants in 2016, as a result of our current assessment of expected future cash flows, compared to
the impairment of 39 restaurants in 2015. Our financial performance has been adversely impacted by a subset of our restaurants that
have significantly underperformed our restaurant averages, as measured by AUVs, restaurant contribution margin and cash flow. Many
of these restaurants were opened in the last two to three years in newer markets where brand awareness of our restaurants is not as
strong and where it has been more difficult to adequately staff our restaurants. The underperformance of these 54 restaurants,
compounded by the higher than average construction costs of some of these restaurants, resulted in the recording of an impairment of
fixed assets in 2016.

Additionally, 16 restaurants were closed in the fourth quarter of 2015, of which 15 were previously impaired during 2015. During
2016, we recognized $2.2 million of ongoing closure costs associated with the restaurants closed in the fourth quarter of 2015 and a
$1.1 million charge to reduce capitalized labor and overhead as a result of the reduced growth for new restaurant development.

Interest Expense

Interest expense increased by $1.5 million in 2016 compared to 2015. The increase was the result of higher average borrowings and an
increase in the interest rate on our credit facility during 2016 compared to 2015.

Provision (Benefit) for Income Taxes

For the year ended January 3, 2017, we determined that it was appropriate to record a valuation allowance of $27.4 million against
U.S. and Canadian deferred tax assets due to uncertainty regarding the realizability of future tax benefits. We will maintain a valuation
allowance against deferred tax assets until there is sufficient evidence to support a full or partial reversal. The effective tax rate for the
year ended January 3, 2017 reflects the impact of a valuation allowance on deferred tax assets, which valuation allowance was not
recorded for the year ended December 29, 2015.

We reported a provision for income taxes of $1.2 million in 2016 compared to a benefit from income taxes of $8.7 million in 2015. The
change in tax provision is primarily related to the valuation allowance recorded in 2016. As a result, the effective tax rate decreased to
(1.8)% in 2016 from 38.8% in 2015.

Quarterly Financial Data

The following table presents select historical quarterly consolidated statements of operations data and other operations data for fiscal
years 2017 and 2016. The operating results for any quarter are not necessarily indicative of the results for any subsequent quarter.
Results from the quarters ended January 2, 2018, October 3, 2017, July 4, 2017, April 4, 2017, January 3, 2017, and June 28, 2016
include the impact of significant impairments described elsewhere in this report and these impairments may or may not impact our
results in future quarters. Each fiscal quarter contained 13 operating weeks, with the exception of the fourth quarter of 2016, which had
14 operating weeks.

January 2,
2018

October 3,
2017

July 4, 2017

April 4,
2017

January 3,
2017

September 27,
2016

June 28,
2016

March 29,
2016

(in thousands, except restaurants, unaudited)

Quarter Ended

Revenue:

Restaurant revenue

Franchising royalties and fees

Total revenue

Net loss(1)(2)(3)(4)

Selected Operating Data:

$ 111,424
1,350
$ 112,774

$
(487) $

113,020

111,628

1,191

114,211

(8,335)

$ 115,527
1,188

1,164

112,792

$ 116,715

(1,815)

(26,845)

128,033

1,367

129,400

(45,376)

121,442
1,239
122,681
(9,841) $

$ 120,204
1,203
$ 121,407
(14,087)

112,865

1,121

113,986

(2,373)

Company-owned restaurants at end of period

Franchise-owned restaurants at end of period

412

413

409

457

455

443

436

Company-owned:

Average unit volumes

1,072

1,066

1,065

1,067

1,075

1,087

1,092

1,101

Comparable restaurant sales

(0.9)%

(3.8)%

(3.9)%

(2.5)%

(1.8)%

(0.9)%

—%

Restaurant contribution as a percentage of

restaurant revenue(5)

15.1 %

15.6 %

15.0 %

11.0 %

11.9 %

12.4 %

13.7 %

13.3%

_____________
(1)

The first quarter of 2017 includes $19.9 million of closure costs primarily related to the 55 restaurants closed during the first quarter of 2017. See Note 6, Restaurant Impairments,
Closure Costs and Asset Disposals, for additional disclosure on closures.

(2)

(3)

(4)

(5)

Includes the impact of impairing three restaurants in the fourth quarter of 2017, 18 restaurants in the third quarter of 2017, nine restaurants in the second quarter of 2017 and four
restaurants in the first quarter of 2017. The impairment costs recognized were $1.1 million in the fourth quarter of 2017, $9.1 million in the third quarter of 2017, $4.0 million in
the second quarter of 2017 and $1.9 million in the first quarter of 2017. See Note 6, Restaurant Impairments, Closure Costs and Asset Disposals, for additional disclosure on
impairments.

Includes the impact of impairing 42 restaurants in the fourth quarter of 2016, 11 restaurants in the second quarter of 2016 and one restaurant in the first quarter of 2016. The
impairment costs recognized were $31.1 million in the fourth quarter of 2016, $10.3 million in the second quarter of 2016 and $0.2 million in the first quarter of 2016. See Note 6,
Restaurant Impairments, Closure Costs and Asset Disposals, for additional disclosure on impairments.

The fourth quarter of 2016 includes charges of $10.6 million for estimated losses associated with claims and anticipated claims by payment card companies from our data security
incident, and the third quarter of 2016 includes a $2.5 million charge for severance expenses and a $3.0 million charge for an employment-related litigation settlement.

A reconciliation of income (loss) from operations to restaurant contribution is presented below:

January 2,
2018

October 3,
2017

July 4, 2017

April 4,
2017

January 3,
2017

September 27,
2016

June 28,
2016

March 29,
2016

Quarter Ended

Income (loss) from operations

Less: Franchising royalties and fees

Add: General and administrative

Depreciation and amortization

Pre-opening

Restaurant impairments, closure costs
and asset disposals

87 $

1,350
9,880
5,884
75

2,299

(in thousands, unaudited)

(7,483) $

(808) $

(25,646) $

(44,315) $

1,191

9,807

6,183

1,164

9,393

6,279

246

1,188

10,666

6,267

545

1,367

20,526

7,151

442

(9,062) $
1,239
15,251
7,006
856

1,203

9,840

7,071

796

10,263

2,830

22,054

32,764

2,283

11,248

1,121

10,037

6,906

1,037

1,016

(11,312) $

(2,839)

Restaurant contribution

16,875 $

17,648

16,776

12,698

15,201

15,095 $

16,440

15,036

Liquidity and Capital Resources

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 expect to be liable (the “Data Breach Liabilities”). We executed the following transactions in 2017 to provide us
with additional liquidity: (i) we completed two private placement transactions for aggregate gross proceeds to us of $50.0 million, and
(ii) we amended our credit agreement to increase our flexibility under the credit facility. In 2017, we paid approximately $11.0 million
for the termination of leases related to closed restaurants, including related fees and expenses. We expect to pay approximately $6.0
million to $10.0 million for such purposes over the next three to nine months.

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, the
proceeds received from the private placement transactions and existing borrowing capacity under our credit facility are adequate to
fund debt service requirements, operating lease obligations, capital expenditures, the Restaurant Closing Liabilities, the Data Breach
Liabilities and working capital obligations for the next year.

Our total capital expenditures for 2017 were $20.8 million, and we expect to incur capital expenditures of approximately $10.0 million
in 2018, of which approximately $2.0 million relates to our construction of new restaurants before any reductions for landlord
reimbursements, and the remainder relates primarily to reinvestment in existing restaurants and investments in technology.
Additionally, we anticipate paying approximately $8.0 million for the remaining Data Breach Liabilities. However, we may ultimately
be subject to Data Breach Liabilities that are up to $5.5 million greater than that amount.

Cash flows from operating, investing and financing activities are shown in the following table:

Net cash provided by operating activities
Net cash used in investing activities
Net cash provided by financing activities
Effect of exchange rate changes on cash
Net increase (decrease) in cash and cash equivalents

Operating Activities

Fiscal Year Ended

January 2,
2018

January 3,
2017

December 29,
2015

(in thousands)

4,102 $

(20,828)
18,265
(15)
1,524 $

24,737 $
(42,757)
17,904
41
(75) $

44,506
(50,721)
6,355
(134)
6

Net cash provided by operating activities in 2017 decreased $20.6 million compared to 2016. The decrease resulted primarily from
payments of approximately $11.0 million for the termination of leases related to closed restaurants, including related fees and
expenses, a litigation settlement payment of $2.6 million, a payment for the Data Breach Liabilities of $4.0 million and other working
capital changes due primarily to timing.

Net cash provided by operating activities in 2016 decreased $19.8 million compared to 2015. The decrease resulted primarily from the
net loss during 2016 compared to 2015, adjusted for non-cash items such as depreciation and amortization, restaurant impairments,
closure costs and asset disposals and stock-based compensation expense, as well as changes in certain working capital accounts for
recording accruals for a litigation settlement and Data Breach Liabilities in 2016.

Investing Activities

Net cash used in investing activities was primarily related to new restaurant capital expenditures for the opening of 12, 38 and 51
company-owned restaurants in 2017, 2016 and 2015, respectively, as well as infrastructure improvements. The decrease in investing
activities in 2017 from 2016, and 2016 from 2015 was a result of our decision to reduce new restaurant development during the second
half of 2016, partially offset by increased spending in our information technology infrastructure.

Financing Activities

Net cash provided by financing activities increased $0.4 million in 2017 compared to 2016. The increase is primarily due to the net
proceeds received from the private placement transactions that occurred during the first quarter of 2017, net of repayments on long-
term debt.

Net cash provided by financing activities increased $11.5 million in 2016 compared to 2015. The increase in 2016 over 2015 was
primarily due to repurchases of our common stock of $35.0 million in 2015 and lower operating cash flows during 2016, which
resulted in the need to increase our borrowings on our revolving line of credit.

Credit Facility

We maintain a $97.5 million revolving line of credit under our credit facility. The revolving line of credit includes a swing line loan of
$10.0 million used to fund working capital requirements. The credit facility matures in June 2019.

On November 8, 2017, the Company entered into an amendment to its credit facility. Among other things, the amendment (i) increased
the lease adjusted leverage ratios and decreased the fixed charge coverage ratios, (ii) increased the interest rate margin applicable to the
total lease adjusted leverage levels at and above 3.75:1.00, (iii) added automatic and permanent reduction to the revolving credit
facility by $2.5 million per quarter beginning with the fourth quarter of 2017, (iv) provided for a maturity date of June 4, 2019, (v)
modified the capital expenditure covenant so that it applies to the capital expenditures and not only growth capital expenditures and
permits total capital expenditures of up to $22.0 million in 2017 and $10.0 million per year thereafter, and (vi) made certain other
changes.

As of January 2, 2018, we had $58.8 million of outstanding indebtedness and $3.3 million of outstanding letters of credit under our
revolving line of credit. Borrowings under the agreement as amended bear interest, at the Company’s option, at either (i) LIBOR plus
2.50% to 3.75%, based on the lease-adjusted leverage ratio or (ii) the highest of the following rates plus 1.50% to 2.75%: (a) the
federal funds rate plus 0.50%; (b) the Bank of America prime rate or (c) the one-month LIBOR plus 1.00%. The credit facility includes
a commitment fee of 0.35% to 0.55%, based on the lease-adjusted leverage ratio, per year on any unused portion of the credit facility.
We also maintain outstanding letters of credit to secure obligations under our workers’ compensation program and certain lease
obligations.

Availability of borrowings under the revolving line of credit is conditioned on our compliance with specified covenants, including a
maximum lease-adjusted leverage ratio and a minimum consolidated fixed charge coverage ratio. We are subject to a number of other
customary covenants, including limitations on additional borrowings, acquisitions, dividend payments and lease commitments. As of
January 2, 2018, we were in compliance with all of our debt covenants.

We expect that we will meet all applicable financial covenants in our credit facility, including the maximum 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 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.

Contractual Obligations

Our contractual obligations at January 2, 2018 were as follows:

Total

1 Year

Payments Due by Period

2 - 3
Years

4 - 5
Years

After 5
Years

(in thousands)

Lease obligations (1)
Purchase obligations (2)
Long-term debt (3)
Other liabilities (4)

Total contractual obligations

$ 244,651 $
31,412
58,818
790

$ 335,671 $

44,371 $
20,392
—
67

75,888 $ 59,810 $
6,936
58,818
683
64,830 $ 142,325 $ 63,914 $

4,084
—
20

64,582
—
—
20
64,602

_____________
(1)

We are obligated under non-cancellable leases for our restaurants, administrative offices and equipment. Some restaurant leases provide for contingent rental
payments based on sales thresholds, which are excluded from this table. We also include capital leases for computer equipment of approximately $0.5
million.

(2)

(3)

We enter into various purchase obligations in the ordinary course of business. Our binding purchase obligations relate to volume commitments for beverage
and food products, as well as binding commitments for the construction of new restaurants.

Reflects full payment of our long-term debt at maturity of our credit facility in 2019. Interest payments associated with variable-rate long-term debt have not
been included in the table. Assuming that our $58.8 million of variable-rate long-term debt as of January 2, 2018 is held to maturity and utilizing interest
rates in effect as of January 2, 2018, our annual interest payments (including commitment fees and letter of credit fees) on variable-rate long-term debt as of
January 2, 2018 is anticipated to be approximately $3.3 million for 2018 and approximately $1.4 million for 2019. The future annual interest obligations
noted herein are estimated only in relation to debt outstanding as of January 2, 2018 and do not reflect interest obligations on potential future debt. See
“Liquidity and Capital Resources” for a discussion of the terms of the revolving credit facility.

(4)

Reflects the expected payments associated with severance expense and our commitment under our non-qualified deferred compensation plan.

The amount recorded for Data Breach Liabilities is an estimate and the timing of the future payments is not known, and therefore
not included in the table above.

Off-Balance Sheet Arrangements

We had no off-balance sheet arrangements or obligations as of January 2, 2018.

Critical Accounting Policies and Estimates

Our 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 Note 1, Business and Summary of Significant Accounting Policies, to our consolidated financial statements.
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. We believe the critical accounting policies described
below affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

Impairment of Long-Lived Assets

We review long-lived assets, such as property and equipment and intangibles, subject to amortization, for impairment when events or
circumstances indicate the carrying value of the assets may not be recoverable. In determining the recoverability of the asset value, an
analysis is performed at the individual restaurant level and primarily includes an assessment of historical cash flows and other relevant
factors and circumstances. The other factors and circumstances include changes in the economic environment, changes in the manner
in which assets are used, unfavorable changes in legal factors or business climate, incurring excess costs in construction of the asset,
overall restaurant operating performance and projections for future performance. These estimates result in a wide range of variability
on a year to year basis due to the nature of the criteria. Negative restaurant-level cash flow over the previous 24 to 36 periods is
considered a potential impairment indicator. In such situations, we evaluate future undiscounted cash flow projections in conjunction
with qualitative factors and future operating plans. Our impairment assessment process requires the use of estimates and assumptions
regarding the future undiscounted cash flows and operating outcomes, which are based upon a significant degree of management’s
judgment.

In performing our impairment testing, we forecast our future undiscounted cash flows by looking at recent restaurant level
performance, restaurant level operating plans, sales trends and cost trends for cost of sales, labor and operating expenses. We believe
that this combination of information gives us a fair benchmark to estimate future undiscounted cash flows. We compare this cash flow
forecast to the asset’s carrying value at the restaurant. Based on this analysis, if the carrying amount of the assets is greater than the
estimated future undiscounted cash flows, an impairment charge is recognized, measured as the amount by which the carrying amount
exceeds the fair value of the asset.

Self-Insurance Programs

We are self-insured for health, workers’ compensation, general and liability and property damage. Predetermined loss limits have been
arranged with insurance companies to limit our per occurrence cash outlay. Estimated costs to settle reported claims and incurred but
unreported claims for health and workers’ compensation self-insured plans are recorded in accrued payroll and benefits and for general
and liability and property damage in accrued expenses and other liabilities in the Consolidated Balance Sheets.

Restaurant Closing Costs

We record restaurant closing costs consisting of future lease commitments, net of anticipated sublease rentals and expected ancillary
costs. We record a liability for the net present value of any remaining lease obligations, net of estimated sublease income, at the date
we cease using a property. Subsequent adjustments to the liability as a result of changes in estimates of sublease income or lease
terminations are recorded in the period incurred. The estimates we make related to sublease income are subject to a high degree of
judgment and may differ from actual sublease income due to changes in economic conditions, desirability of the sites and other factors.

Leases

We lease all of our restaurant locations. We record rent expense for our leases, which generally have escalating rentals over the term of
the lease, on a straight-line basis over the lease term. The lease term includes renewal options that are reasonably assured. Rent
expense begins when we have the right to control the use of the property, which is typically before rent payments are due under the
lease. We record the difference between the rent expense and rent paid as deferred rent in the Consolidated Balance Sheets. Rent
expense for the period prior to the restaurant opening is reported as pre-opening expense in the Consolidated Statements of Operations.
Tenant incentives used to fund leasehold improvements are recorded in deferred rent and amortized as reductions of rent expense over
the term of the lease.

Certain of our operating leases contain clauses that provide additional contingent rent based on a percentage of sales greater than
certain specified target amounts. We recognize contingent rent expense when the achievement of specified targets is considered
probable.

Recently Issued Accounting Pronouncements

Refer to Note 1, Business and Summary of Significant Accounting Policies, of Notes to Consolidated Financial Statements of this
report.

JOBS Act

We qualify as an “emerging growth company” pursuant to the provisions of the 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, shareholder advisory votes on golden parachute compensation and the extended transition period for
complying with the new or revised accounting standards. We will cease to be an “emerging growth company” at the end of our 2018
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 have chosen to “opt out” of such extended transition period and, as a result, we will 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 is irrevocable.

ITEM 7A.

Quantitative and Qualitative Disclosure 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 January 2, 2018 there was $58.8 million in outstanding borrowings
under our credit facility. A plus or minus 1.0% in the effective interest rate applied on these loans would have resulted in a pre-tax
interest expense fluctuation of approximately $0.6 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 directly affect our labor costs. Many of our leases require us to pay taxes,
maintenance, repairs, insurance and utilities, all of which are generally subject to inflationary increases. Finally, the cost of
constructing our restaurants is subject to inflationary increases in the costs of labor and material. Over the past five years, inflation has
not significantly affected our operating results with the exception of increased wage inflation that affected our results in 2015 through
2017. We expect wage inflation to continue to affect our results in the near future. We anticipate modest commodity inflation to affect
our results in the near future as well.

ITEM 8. Financial Statements and Supplementary Data

Noodles & Company

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Financial Statements
Consolidated Balance Sheets as of January 2, 2018 and January 3, 2017 ............................................................................
Consolidated Statements of Operations for the years ended January 2, 2018, January 3, 2017 and December 29, 2015 .....
Consolidated Statements of Comprehensive Income (Loss) for the years ended January 2, 2018, January 3, 2017 and
December 29, 2015 ...............................................................................................................................................................
Consolidated Statements of Stockholders’ Equity for the years ended January 2, 2018, January 3, 2017 and
December 29, 2015 ...............................................................................................................................................................
Consolidated Statements of Cash Flows for the years ended January 2, 2018, January 3, 2017 and December 29, 2015 ...
Notes to Consolidated Financial Statements .........................................................................................................................
Report of Independent Registered Public Accounting Firm .................................................................................................

48
49

51
52
53
73

See accompanying notes to consolidated financial statements.

Noodles & Company
Consolidated Balance Sheets
(in thousands, except share data)

January 2, 2018

January 3, 2017

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

Total current liabilities

Long-term debt, net

Deferred rent

Deferred tax liabilities, net

Other long-term liabilities

Total liabilities

Commitments and contingencies

Stockholders’ equity:

Preferred stock—$0.01 par value, 1,000,000 shares authorized and undesignated as

of January 2, 2018 and January 3, 2017; no shares issued or outstanding

Common stock—$0.01 par value, authorized 180,000,000 shares as of January 2,
2018 and January 3, 2017; 43,550,329 issued and 41,126,458 outstanding as of
January 2, 2018 and 30,300,925 issued and 27,877,054 outstanding as of January
3, 2017

Treasury stock, at cost, 2,423,871 shares as of January 2, 2018 and January 3, 2017,

respectively

Additional paid-in capital

Accumulated other comprehensive loss

Accumulated deficit

Total stockholders’ equity

Total liabilities and stockholders’ equity

3,361 $
2,434
9,929
6,258
76
22,058
152,593
6,400
1,565
2,617
163,175
185,233 $

10,929 $
11,719
21,221
43,869
57,624
38,872
416
8,591
149,372

—

436

(35,000)
171,613
—
(101,188)
35,861
185,233 $

1,837

5,438

11,285

6,972

256

25,788

173,533

6,400

1,715

2,025

183,673

209,461

10,601

10,723

27,709

49,033

84,676

44,929

435

4,570

183,643

—

303

(35,000)

124,272

(51)

(63,706)

25,818

209,461

See accompanying notes to consolidated financial statements.

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

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

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 Class A and Class B common stock, combined

Basic

Diluted

Weighted average Class A and Class B common stock outstanding, combined

Basic

Diluted

Fiscal Year Ended

January 2,
2018

January 3,
2017

December 29,
2015

451,599 $
4,893
456,492

482,544 $

450,482

4,930

487,474

4,969

455,451

121,473
150,161
51,877
64,091
39,746
24,613
935
37,446
490,342
(33,850)
3,839
(37,689)
(207)
(37,482)
(7,967)
(45,449) $

130,630

161,219

55,912

73,011

55,654

28,134

3,131

47,311

555,002

(67,528)

2,916

(70,444)

1,233

(71,677)

—

120,455

143,145

50,300

63,549

37,244

27,802

4,407

29,616

476,518

(21,067)

1,432

(22,499)

(8,734)

(13,765)

—

(71,677) $

(13,765)

(1.20) $
(1.20) $

(2.58) $

(0.48)

37,759,497
37,759,497

27,808,708

28,938,901

See accompanying notes to consolidated financial statements.

Noodles & Company
Consolidated Statements of Comprehensive Income (Loss)
(in thousands)

Net loss

Other comprehensive (loss) income:

Foreign currency translation adjustments

Other comprehensive (loss) income

Comprehensive loss

Fiscal Year Ended

January 2,
2018

January 3,
2017

December 29,
2015

(37,482) $

(71,677) $

(13,765)

(109)
(109)
(37,591) $

(134)

(71,594) $

(13,899)

See accompanying notes to consolidated financial statements.

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

Operating activities
Net loss
Adjustments to reconcile net loss to net cash provided by operating activities:

Fiscal Year Ended

January 2,
2018

January 3,
2017

December 29,
2015

(37,482) $

(71,677) $

(13,765)

Depreciation and amortization
Deferred income taxes, net
Restaurant impairments, closure costs and asset disposals
Amortization of debt issuance costs
Stock-based compensation
Loss on liquidation of Canadian subsidiary
Gain on insurance proceeds received for property damage
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 operating activities
Investing activities
Purchases of property and equipment
Acquisitions of franchise restaurants
Insurance proceeds received for property damage
Net cash used in investing activities
Financing activities
Net (repayments) borrowings from swing line loan
Proceeds from borrowings on long-term debt
Payments on long-term debt
Debt issuance costs
Issuance of preferred stock and common stock warrants, net of transaction
expenses (see Note 8)
Issuance of common stock, net of transaction expenses (see Note 8)
Acquisition of treasury stock
Proceeds from exercise of stock options and employee stock purchase plan
Other financing activities
Net cash provided by financing activities
Effect of exchange rate changes on cash
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents
Beginning of year
End of year

24,613
(228)
30,859
465
1,514
70
—

2,976
(387)
332
(1,302)
1,597
180
(19,105)
4,102

(20,828)
—
—
(20,828)

(96)
10,532
(37,015)
(938)

16,589
29,110
—
83
—
18,265
(15)
1,524

28,134
1,099
45,536
140
2,319
—
(494)

(443)
(790)
162
(2,440)
5,328
564
17,299
24,737

(43,335)
—
578
(42,757)

(1,649)
19,800
(1,000)
(347)

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17,904
41
(75)

27,802
(8,878)
28,927
98
1,469
—
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(437)
(1,058)
(1,025)
2,794
7,143
(193)
1,629
44,506

(50,093)
(628)
—
(50,721)

1,846
55,600
(16,700)
(249)

—
—
(35,000)
952
(94)
6,355
(134)
6

1,837
3,361 $

1,912
1,837 $

1,906
1,912

See accompanying notes to consolidated financial statements.

NOODLES & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Business and Summary of Significant Accounting Policies

Business

Noodles & Company (the “Company” or “Noodles & Company”), a Delaware corporation, develops and operates fast casual
restaurants that serve globally inspired noodle and pasta dishes, soups, salads and appetizers. As of January 2, 2018, the Company had
412 company-owned restaurants and 66 franchise restaurants in 29 states and the District of Columbia. The Company operates its
business as one operating and reportable segment.

Principles of Consolidation and Basis of Presentation

The accompanying consolidated financial statements include the accounts of Noodles & Company and its subsidiaries. All
intercompany balances and transactions are eliminated in consolidation.

As permitted by the SEC under Release No. 34-78041, the Company has used Inline eXtensible Business Reporting Language (Inline
XBRL) to provide its consolidated financial statements to the SEC. This information is not part of the financial statements and is
unaudited.

Fiscal Year

The Company operates on a 52- or 53-week fiscal year ending on the Tuesday closest to December 31. Fiscal year 2017 and 2015,
which ended on January 2, 2018 and December 29, 2015, respectively, each contained 52 weeks, and fiscal year 2016, which ended on
January 3, 2017, contained 53 weeks.

Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America
(“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those estimates.

Cash and Cash Equivalents

The Company considers all highly liquid investment instruments with an initial maturity of three months or less when purchased to be
cash equivalents. Amounts receivable from credit card processors are converted to cash shortly after the related sales transaction and
are considered to be cash equivalents because they are both short-term and highly liquid in nature. Amounts receivable from credit card
processors as of January 2, 2018 and January 3, 2017 were $1.0 million and $1.1 million, respectively, and were offset on the
Consolidated Balance Sheets by outstanding checks. Book overdrafts, which are outstanding checks in excess of cash and cash
equivalents, are recorded within accounts payable in the accompanying Consolidated Balance Sheets and within operating activities in
the accompanying Consolidated Statements of Cash Flows.

Accounts Receivable

Accounts receivable consists primarily of tenant improvement receivables and vendor rebates, as well as amounts due from franchisees
and other miscellaneous receivables arising from the normal course of business. The Company believes all amounts to be collectible.
Accordingly, no allowance for doubtful accounts has been recorded as of January 2, 2018 or January 3, 2017.

Inventories

Inventories consist of food, beverages, supplies and smallwares, and are stated at the lower of cost (first-in, first-out method) or
market. Smallwares inventory, which consist of the plates, silverware and cooking utensils used in the restaurants, are frequently
replaced and are therefore considered current assets. Replacement costs of smallwares inventory are recorded as other restaurant
operating costs in the Consolidated Statements of Operations and are expensed as incurred. As of January 2, 2018 and January 3, 2017,
smallwares inventory of $6.7 million and $7.3 million, respectively, were included in the accompanying Consolidated Balance Sheets.

NOODLES & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Property and Equipment

Property and equipment are stated at cost, less accumulated depreciation. Expenditures for major renewals and improvements are
capitalized, while expenditures for minor replacements and maintenance and repairs are expensed as incurred. Upon retirement or
disposal of assets, the accounts are relieved of cost and accumulated depreciation and the related gain or loss is reflected in earnings.
Depreciation is calculated using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are
amortized over the shorter of the estimated useful life or the lease term, which generally includes option periods that are reasonably
assured to be exercised. Depreciation and amortization expense on property and equipment, including assets under capital lease, was
$24.5 million, $28.0 million and $27.7 million in 2017, 2016 and 2015, respectively.

The estimated useful lives for property and equipment are:

Property and Equipment
Leasehold improvements

Furniture and fixtures
Equipment

Estimated Useful Lives
Shorter of lease term or estimated useful life, not to exceed
20 years
3 to 15 years
3 to 7 years

The Company capitalizes internal payroll and payroll-related costs directly related to the successful acquisition, development, design
and construction of its new restaurants. Capitalized internal costs were $0.9 million, $2.4 million and $3.0 million in 2017, 2016 and
2015, respectively. Interest incurred on funds used to construct company-owned restaurants is capitalized and amortized over the
estimated useful life of the related assets. Capitalized interest totaled $0.2 million in 2017 and $0.3 million in both 2016 and 2015.

Goodwill

Goodwill represents the excess of purchase price over the fair value of identifiable net assets acquired. Goodwill is not subject to
amortization, but instead is tested for impairment at least annually (or more often, if necessary) as of the first day of the Company’s
fourth fiscal quarter.

Goodwill is evaluated at the level of the Company’s single operating segment, which also represents the Company’s only reporting
unit. Step one of the impairment test is based upon a comparison of the carrying value of net assets, including goodwill balances, to the
fair value of net assets. Fair value is measured using a combination of the income approach and the market approach. The income
approach consists of utilizing the discounted cash flow method that incorporates the Company’s estimates of future revenues and costs,
discounted using a risk-adjusted discount rate. The Company’s estimates used in the income approach are consistent with the plans and
estimates used to manage operations. The market approach utilizes multiples of profit measures to estimate the fair value of the assets.
The Company evaluates all methods to ensure reasonably consistent results. Additionally, the Company evaluates the key input factors
in the model used to determine whether a moderate change in any input factor or combination of factors would significantly change the
results of the tests. Based on the Company’s analysis, no impairment charges were recognized on goodwill for the fiscal years ended
2017, 2016 and 2015.

However, an impairment charge may be triggered in the future if cash flows of the Company’s restaurants decline significantly, or if
there are significant adverse changes in the operating environment of the restaurant industry.

Intangibles, net

Intangibles, net consists primarily of reacquired franchise rights, favorable lease agreements, trademarks and transferable liquor
licenses. The Company amortizes the fair value of reacquired franchise rights over the remaining contractual terms of the reacquired
franchise area development agreements at the time of acquisition, which ranged from approximately eight years to 16 years as of
January 2, 2018. The Company amortizes the fair value of favorable lease agreements over the remaining related lease terms at the
time of the acquisition, which ranged from approximately two years to seven years as of January 2, 2018. Trademark rights are
considered indefinite-lived intangible assets, the carrying value of which are analyzed for impairment at least annually (or more often,
if necessary). Transferable liquor licenses are carried at the lower of cost or fair value and are evaluated annually for impairment or
whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.

NOODLES & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Impairment of Long-Lived Assets

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. Recoverability of assets is measured by a comparison of the carrying amount of the assets to the future
undiscounted net cash flows expected to be generated by the assets. Identifiable cash flows are measured at the lowest level for which
they are largely independent of the cash flows of other groups of assets and liabilities, generally at the restaurant level. If the assets are
determined to be impaired, the amount of impairment recognized is measured by the amount by which the carrying amount of the
assets exceeds their fair value. Estimates of future cash flows are based on the Company’s experience and knowledge of local
operations. During 2017, 2016 and 2015, the Company recorded impairment charges of certain long-lived assets which are included in
restaurant impairments, closure costs and asset disposals in the Consolidated Statements of Operations. See Note 6, Restaurant
Impairments, Closure Costs and Asset Disposals. Fair value of the restaurant assets was determined using Level 3 inputs (as described
in Note 5, Fair Value Measurements).

Debt Issuance Costs

Certain fees and costs incurred to obtain long-term financing are capitalized and included as a reduction in the net carrying value of
long-term debt, net of accumulated amortization. These costs are amortized to interest expense over the term of the related debt. When
debt is extinguished prior to its maturity date, the amortization of the remaining unamortized debt issuance costs, or pro-rata portion
thereof, is charged to loss on extinguishment of debt. Debt issuance costs of $1.2 million and $0.7 million, net of accumulated
amortization, as of January 2, 2018 and January 3, 2017, respectively, are included as a reduction of long-term debt in the Consolidated
Balance Sheets.

Self-Insurance Programs

The Company self-insures for health, workers’ compensation, general liability and property damage. Predetermined loss limits have
been arranged with insurance companies to limit the Company’s per occurrence cash outlay. Estimated costs to settle reported claims
and incurred but unreported claims for health and workers’ compensation self-insured plans are recorded in accrued payroll and
benefits and for general liability and property damage in accrued expenses and other liabilities in the Consolidated Balance Sheets.

Concentrations of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash
equivalents and accounts receivable. The Company’s cash balances may exceed federally insured limits. Credit card transactions at the
Company’s restaurants are processed by one service provider. Concentration of credit risk related to accounts receivable are limited, as
the Company’s receivables are primarily amounts due from landlords for the reimbursement of tenant improvements and the Company
generally has the right to offset rent due for tenant improvement receivables.

Revenue Recognition

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 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 6% of gift cards will not be redeemed, which is recognized ratably over the estimated redemption period of the gift card,
approximately 18 months. The Company recognized gift card breakage in restaurant revenue of approximately $0.3 million in each of
the fiscal years ended 2017, 2016 and 2015.

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 when all material services or conditions relating to the sale of the franchise have been substantially
performed or satisfied by the Company. Both franchise fees and development fees will generally be recognized upon the opening of a
franchise restaurant or upon termination of the agreement(s) between the Company and the franchisee.

As of January 2, 2018, January 3, 2017 and December 29, 2015, there were 66, 75 and 70 franchise restaurants in operation,
respectively. Franchisees opened three, six and 19 restaurants in 2017, 2016 and 2015, respectively.

NOODLES & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Pre-Opening Costs

Pre-opening costs, including rent, wages, benefits and travel for the training and opening teams, food, beverage and other restaurant
operating costs, are expensed as incurred prior to a restaurant opening for business.

Advertising and Marketing Costs

Advertising and marketing costs are expensed as incurred and aggregated $5.7 million, $10.0 million and $8.0 million in 2017, 2016
and 2015, respectively. These costs are included in restaurant operating costs, general and administrative expenses and pre-opening
costs based on the nature of the advertising and marketing costs incurred.

Rent

Rent expense for the Company’s leases, which generally have escalating rentals over the term of the lease, is recorded on a straight-
line basis over the lease term. The lease term includes renewal options which are reasonably assured of being exercised and begins
when the Company has control and possession of the leased property, which is typically before rent payments are due under the lease.
The difference between the rent expense and rent paid is recorded as deferred rent in the Consolidated Balance Sheets. Rent expense
for the period prior to the restaurant opening is reported in pre-opening costs in the Consolidated Statements of Operations. Tenant
incentives used to fund leasehold improvements are recorded in deferred rent and amortized as a reduction of rent expense over the
term of the lease. Certain leases contain rental provisions based on the sales of the underlying restaurants; the Company has determined
that the amount of these provisions is immaterial.

Provision (Benefit) for Income Taxes

Provision (benefit) for income taxes is accounted for under the asset and liability method. Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the years in which those deferred amounts are expected to
be recovered or settled. Valuation allowances are recorded for deferred tax assets that more likely than not will not be realized. The
effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment
date. The Company’s policy is to recognize interest to be paid on an underpayment of income taxes in interest expense and any related
statutory penalties in provision (benefit) for income taxes in the Consolidated Statements of Operations.

Stock-Based Compensation Expense

Stock-based compensation expense is measured at the grant date based upon the estimated fair value of the portion of the award that is
ultimately expected to vest and is recognized as expense over the applicable vesting period of the award generally using the straight-
line method (see Note 9, Stock-Based Compensation for more information).

Foreign Currency Translation

In 2017, the Company ceased its Canadian operations and liquidated the related assets. The Canadian dollar was the functional
currency for the Company’s Canadian restaurant operations. Assets and liabilities denominated in Canadian dollars were translated into
U.S. dollars at exchange rates in effect as of the balance sheet dates. Income and expense accounts were translated using the average
exchange rates prevailing throughout the period. Translation adjustments from currency exchange were recorded in accumulated other
comprehensive income (loss) as a separate component of stockholders’ equity. Gains or losses from foreign currency transactions were
recognized in the Consolidated Statements of Operations.

Recently Issued 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 (“ASC”) 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 defers the effective date of the new revenue standard by one year, and would allow
entities the option to early adopt the new revenue standard as of the original effective date. There have been multiple standards updates
amending this guidance or providing corrections or improvements on issues in the guidance. The requirements for these standards

NOODLES & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

relating to Topic 606 are effective for interim and annual periods beginning after December 15, 2017. This standard permits adoption
using one of two transition methods, either the retrospective or modified retrospective transition method.

The Company will adopt these standards effective the first quarter of fiscal 2018 using the modified retrospective method.

The adoption of these standards will not impact 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. The adoption of the new revenue recognition standards will impact the
Company’s accounting for initial fees charged to franchisees. The Company’s current accounting policy is to recognize initial franchise
fees when all material services or conditions relating to the sale of the franchise have been substantially performed or satisfied by the
Company, which is generally when a new franchise restaurant opens. In accordance with the new guidance, the initial franchise
services are not distinct from the continuing rights or services offered during the term of the franchise agreement, and will therefore be
treated as a single performance obligation. As such, initial fees received will be recognized over the term of the related franchise
agreement.

Although the standard will impact the manner in which we record revenue from initial fees, the Company does not believe this impact
will be material to the Company’s Consolidated Statements of Operations. The cumulative catch-up adjustment to be recorded as
deferred revenue upon adoption will be approximately $1.5 million. No impact to the Company’s Consolidated Statements of Cash
Flows is expected as the initial fees will continue to be collected upon the restaurant opening date.

The Company is evaluating the impact of the standards on its disclosures of the Company’s revenues. Further, the Company is
currently implementing internal controls related to the recognition and presentation of the Company’s revenues under these new
standards.

In February 2016, the FASB issued ASU No. 2016-06, “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 leases 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 July 2015, the FASB issued ASU No. 2015-11, “Inventory (Topic 330).” The pronouncement was issued to simplify the
measurement of inventory and changes the measurement from lower of cost or market to lower of cost and net realizable value. This
pronouncement is effective for reporting periods beginning after December 15, 2016 (the Company’s first quarter of fiscal 2017) and is
required to be adopted prospectively. The Company adopted this standard at the beginning of fiscal 2017 and the adoption did not have
a material impact on the Company’s financial position or results of operations and cash flows.

In March 2016, the FASB issued ASU No. 2016-09, “Compensation – Stock Compensation (Topic 718): Improvements to Employee
Share-Based Payment Accounting,” which is intended to simplify several aspects of the accounting for share-based payment
transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification of awards
on the statement of cash flows. The pronouncement is effective for annual periods beginning after December 15, 2016 (the Company’s
first quarter of fiscal 2017) and interim periods therein. The Company adopted this standard at the beginning of fiscal 2017 and the
adoption impacted our accounting for excess tax benefits and deficiencies as all excess tax benefits and deficiencies have been
recognized within the provision (benefit) for income taxes line item in the Company’s Consolidated Statements of Operations in the
period in which they occur (see Note 7, Income Taxes). The Company elected the prospective method of transition and, except as
described above, the provisions of ASU 2016-09 did not have an impact on the Company’s consolidated financial position or results of
operations.

NOODLES & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. Supplemental Financial Information

Accounts receivable consist of the following (in thousands):

Tenant improvement receivables
Vendor rebate receivables
Franchise and other receivables

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

Prepaid occupancy related costs
Other prepaid expenses
Other current assets

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

Leasehold improvements
Furniture, fixtures and equipment
Construction in progress

Accumulated depreciation and amortization

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

Accrued payroll and related liabilities
Accrued bonus
Insurance liabilities

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

Gift card liability
Occupancy related
Utilities
Data breach liabilities (Note 14)
Legal settlement
Other accrued expenses

2017

2016

216 $
869
1,349
2,434 $

1,205
1,590
2,643
5,438

2017

2016

4,091 $
2,126
41
6,258 $

4,405
2,364
203
6,972

2017
199,211 $
120,234
2,592
322,037
(169,444)
152,593 $

2016
205,687
120,248
8,044
333,979
(160,446)
173,533

2017

2016

6,594 $
1,947
3,178
11,719 $

6,935
1,460
2,328
10,723

2017

2016

4,078 $
3,733
1,705
7,605
—
4,100
21,221 $

3,857
2,069
1,753
11,622
3,000
5,408
27,709

NOODLES & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

3. Goodwill and Intangible Assets

The following table presents goodwill as of January 2, 2018 and January 3, 2017, (in thousands):

Balance at beginning of year
Acquisitions
Balance at end of year

2017

2016

6,400 $
—
6,400 $

6,400
—
6,400

The Company has had no goodwill impairment losses in fiscal years 2017, 2016 or 2015.

The following table presents intangible assets subject to amortization as of January 2, 2018 and January 3, 2017, (in thousands):

2017

2016

Amortized intangible assets:

Reacquired franchise rights
Favorable leases
Less accumulated amortization

Non-amortized intangible assets:

Trademark rights and transferable liquor licenses

1,271 $
150
(375)
1,046

519
1,565 $

The estimated aggregate future amortization expense as of January 2, 2018 is as follows, (in thousands):

2018
2019
2020
2021
2022
Thereafter

1,306
185
(277)
1,214

501
1,715

107
105
102
102
99
531
1,046

No impairment charges were recorded related to non-amortized intangible assets in fiscal years 2017, 2016 or 2015.

4. Long-Term Debt

The Company has a credit facility consisting of a credit line of $97.5 million, expiring in June 2019. As of January 2, 2018, the
Company had $58.8 million of indebtedness and $3.3 million of letters of credit outstanding under the revolving line of credit. The
Company’s ability to borrow funds pursuant to the revolving line of credit is further limited by the requirement that it comply with the
revolving line of credit’s financial covenants upon the measurement dates specified therein. These financial covenants include a
maximum lease-adjusted leverage ratio and a minimum consolidated fixed charge coverage ratio. The credit agreement also contains
other customary covenants, including limitations on additional borrowings, acquisitions, dividend payments and lease commitments.

On February 8, 2017, the Company entered into an amendment to its credit facility. Among other things, giving effect to the equity
issuances completed during the first quarter of 2017, the amendment increased the interest rate, increased capital expenditure amounts
related to restaurant growth and made certain other changes.

NOODLES & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

total lease adjusted leverage levels at and above 3.75:1.00, (iii) added automatic and permanent reduction to the revolving credit
facility by $2.5 million per quarter beginning with the fourth quarter of 2017, (iv) provided for a maturity date of June 4, 2019, (v)
modified the capital expenditure covenant so that it applies to total capital expenditures and not only growth capital expenditures and
permits total capital expenditures of up to $22.0 million in 2017 and $10.0 million per year thereafter, and (vi) made certain other
changes. Borrowings under the agreement as amended bear interest, at the Company’s option, at either (i) LIBOR plus 2.50% to
3.75%, based on the lease-adjusted leverage ratio or (ii) the highest of the following rates plus 1.50% to 2.75%: (a) the federal funds
rate plus 0.50%; (b) the Bank of America prime rate or (c) the one month LIBOR plus 1.00%. The credit facility includes a
commitment fee of 0.35% to 0.55%, based on the lease-adjusted leverage ratio, per year on any unused portion of the credit facility.

The credit facility bore interest at a range of 3.77% to 7.00% during 2017. The Company recorded interest expense of $3.8 million,
$2.9 million and $1.4 million for 2017, 2016 and 2015, respectively, of which $0.5 million, $0.1 million, and $0.1 million was
amortization of debt issuance costs in each of the respective years.

As of January 2, 2018, the Company was in compliance with all of its debt covenants.

The credit facility is secured by a pledge of stock of substantially all of the Company’s subsidiaries and a lien on substantially all of the
personal property assets of the Company and its subsidiaries.

5. Fair Value Measurements

The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and all other current liabilities approximate
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. Adjustments to the fair value of non-financial assets
measured at fair value on a non-recurring basis as of January 2, 2018 and January 3, 2017 are discussed in Note 6, Restaurant
Impairments, Closure Costs and Asset Disposals.

Assets and Liabilities Measured at Fair Value

The fair values are assigned a level within the fair value hierarchy, depending on the source of the inputs into the calculation.

Level 1—Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or
liabilities.

Level 2—Quoted prices in markets that are not active or inputs that are observable, either directly or indirectly, for substantially the full
term of the asset or liability.

Level 3—Prices or valuation techniques which require inputs that are both significant to the fair value measurement and unobservable
(i.e., supported by little or no market activity).

6. Restaurant Impairments, Closure Costs and Asset Disposals

The following table presents restaurant impairments, closure costs and asset disposals for fiscal years 2017, 2016 and 2015 (in
thousands):

Restaurant impairments(1)
Closure costs(1)
Loss on disposal of assets and other (2)

_____________________________

2017

2016

2015

16,154 $
20,052
1,240
37,446 $

41,615 $
2,251
3,445
47,311 $

25,436
3,076
1,104
29,616

(1)

(2)

Restaurant impairments and closure costs can include expenditures related to restaurants previously impaired or closed.

Included in loss on disposal of assets and other for the fiscal year 2016 is a $1.1 million charge to reduce capitalized labor and overhead as a
result of the reduced growth for new restaurant development and a $0.5 million gain from insurance proceeds received for property damage
in excess of the loss recognized.

NOODLES & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Restaurant Impairments

During 2017, 2016 and 2015, 34 restaurants, 54 restaurants and 39 restaurants were identified as impaired, respectively. Impairment is
based on management’s current assessment of the expected future cash flows of various restaurants based on recent results and other
specific market factors. Impairment expense is a Level 3 fair value measure and was determined by comparing the carrying value of
restaurant assets to the estimated fair market value of the restaurant assets at resale value.

In performing its impairment testing, the Company forecasts the future undiscounted cash flows by looking at recent restaurant level
performance, restaurant level operating plans, sales trends and cost trends for cost of sales, labor and operating expenses. The
Company compares this cash flow forecast to the asset’s carrying value at the restaurant. Based on this analysis, if the carrying amount
of the assets is greater than the estimated future undiscounted cash flows, an impairment charge is recognized, measured as the amount
by which the carrying amount exceeds the fair value of the asset. The fair value is determined based on a discounted cash flows
analysis using a discount rate of 10% or at salvage value if expected cash flows are not material.

Restaurant Closures

During 2017, 2016 and 2015, the Company recognized $20.1 million, $2.3 million and $3.1 million of closure costs, respectively. The
closure costs recognized during 2017 are primarily related to the 55 restaurants closed during the first quarter of 2017 and ongoing
costs of restaurants closed in the fourth quarter of 2015. The closure costs recognized during 2016 are related to the ongoing costs of
restaurants closed during 2015, and closure costs recognized during 2015 relate to the 16 restaurants closed in the fourth quarter of
2015. Closure costs can include fees from real estate advisors and brokers related to terminations of the leases and charges resulting
from final adjustments to liabilities as lease terminations occur.

The measurement of an estimated closed restaurant operating lease liability is a Level 3 fair value measure. The Company provides for
closed restaurant operating lease liabilities using a discount rate of 4.64% to calculate the present value of the remaining non-
cancellable lease payments after the closing date, net of estimated subtenant income. The following table contains a summary of the
changes in the liability for closed restaurants as of January 2, 2018 and January 3, 2017 (in thousands):

Closed restaurant reserves, beginning of period
Additions—restaurant closing costs recognized and accretion
Decreases—payments
Closed restaurant reserves, end of period

2017

2016

1,880 $
18,341
(12,042)

8,179 $

4,746
858
(3,724)
1,880

As of January 2, 2018 and January 3, 2017, the current portion of the liability, $2.4 million and $0.9 million, respectively, is included
in accrued expenses and other current liabilities, and the long-term portion, $5.8 million and $1.0 million, respectively, is included in
other long-term liabilities in the Consolidated Balance Sheets.

7. Income Taxes

The following table presents the domestic and foreign components of income (loss) before income taxes for 2017, 2016 and 2015 (in
thousands):

Domestic loss
Foreign income (loss)

2017

2016

2015

(42,047) $
4,358
(37,689) $

(67,626 ) $
(2,818)
(70,444 ) $

(21,674)
(825)
(22,499)

NOODLES & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The components of the provision (benefit) for income taxes are as follows for 2017, 2016 and 2015 (in thousands):

Current tax provision:

Federal
State
Foreign

Deferred tax (benefit) provision:

Federal
State
Foreign

Total (benefit) provision for income taxes

2017

2016

2015

— $
21
—
21

(252)
24
—
(228)
(207) $

— $
134
—
134

(1,979)
2,854
224
1,099
1,233 $

—
144
—
144

(7,169)
(1,495)
(214)
(8,878)
(8,734)

The reconciliation of income tax provision (benefit) that would result from applying the federal statutory rate to pre-tax income as
shown in the accompanying Consolidated Statements of Operations is as follows for 2017, 2016 and 2015 (in thousands):

Federal income tax benefit at federal rate
State income tax benefit, net of federal tax
Other permanent differences
Foreign rate differential
Tax credits
Change in valuation allowance
Tax rate change
Deferred tax asset write-off
Other items, net
(Benefit) provision for income taxes

Effective income tax rate

2017
(12,814) $
(1,790)
674
(463)
(808)
(159)
13,632
2,618
(1,097)

(207) $

2016
(23,740 )
(2,975)
996
214
(749)

27,353
—
—
134
1,233

2015

(7,650)
(960)
378
66
(423)
—
—
—
(145)
(8,734)

0.5%

(1.8)%

38.8%

In 2017, 2016 and 2015, the Company did not recognize any tax benefits on option exercises at fair value in excess of those utilized to
record stock-based compensation for book purposes.

The Company’s total deferred tax assets and liabilities are as follows (in thousands):

Deferred tax assets
Deferred tax liabilities
Total deferred tax liabilities
Valuation allowance
Net deferred tax liabilities

2017

2016

47,027 $
(11,632)
35,395
(35,811)

(416 ) $

43,853
(16,935)
26,918
(27,353)
(435)

NOODLES & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Deferred income taxes arise because of the differences in the book and tax bases of certain assets and liabilities. Deferred income tax
liabilities and assets consist of the following (in thousands):

Deferred tax assets (liabilities):

Loss carry forwards
Deferred rent and franchise revenue
Property, equipment and intangible assets
Stock-based compensation
Tax credit carry forwards
Inventory smallwares
Other accrued expenses
Other

Total net deferred tax assets
Valuation allowance
Net deferred tax liabilities

2017

2016

26,991 $
10,486
(9,858)
1,086
3,123
(1,774)
4,320
1,021
35,395
(35,811)

(416 ) $

14,046
17,753
(14,130)
2,802
2,636
(2,805)
5,022
1,594
26,918
(27,353)
(435)

For the year ended January 2, 2018, the Company determined that it was appropriate to maintain a valuation allowance of $35.8
million against U.S. deferred tax assets due to uncertainty regarding the realizability of future tax benefits. The valuation allowance is
recorded against net deferred tax assets, exclusive of indefinite-lived intangibles. The Company will maintain this valuation allowance
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 to the effective tax rate.

The Company closed all Canadian restaurants and discontinued foreign business operations during the year ended January 2, 2018. As
a result, all Canadian deferred tax assets were written off against the previously recorded Canadian valuation allowance.

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (“Tax Act”) was signed into law making significant changes to the Internal
Revenue Code that will impact the Company. For tax years after December 31, 2017, the corporate income tax rate is reduced from
34% to 21%. As a result of the change in the future income tax rate, the Company revalued its deferred tax assets and liabilities using
a 21% federal tax rate for the year ended January 2, 2018.

On the same date, Staff Accounting Bulletin No. 118 (“SAB 118”) was issued by the SEC to address the application of US GAAP in
situations where a registrant does not have the necessary information available, prepared, or analyzed (including computations) in
reasonable detail to complete the accounting for certain income tax effects of the Tax Act. The Company is still analyzing the changes
to deferred tax assets and liabilities and other aspects of the Tax Act. While the amount recorded for the year ended January 2, 2018 is
provisional, the Company expects that any material changes required by the Tax Act will be offset by the U.S. valuation allowance.
The Company will continue to evaluate this, and other aspects of the Tax Act, to determine if any adjustments are required to be made
during the measurement period provided by SAB 118.

As of January 2, 2018 and January 3, 2017, net operating loss (“NOL”) carry forwards for federal income tax purposes of
approximately $106.7 million and $60.5 million, respectively, were available to offset future taxable income through the years 2037
and 2036, respectively. The Internal Revenue Code Section 382 generally limits the utilization of NOLs when there is an ownership
change. The Company has not completed an analysis of ownership changes through January 2, 2018. Prior to the utilization of NOLs
in the future, the Company will complete a Section 382 study to determine whether there are any limitations. If such a limitation exists,
it is possible that a portion of the NOLs may not be available for use before expiration. The Company adopted ASU 2016-09 during the
year ended January 2, 2018, which resulted in a cumulative increase of $8.6 million to GAAP basis NOL.

Uncertain tax positions are recognized if it is more likely than not that the Company will be able to sustain the tax position taken, and
the measurement of the benefit is calculated as the largest amount that is more than 50% likely to be realized upon resolution of the
benefit. The Company has analyzed filing positions in all of the federal and state jurisdictions where it is required to file income tax
returns, as well as all open tax years in these jurisdictions.

NOODLES & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

There were no uncertain tax positions for the years ended January 2, 2018 or January 3, 2017. The only periods subject to examination
for the Company’s federal, foreign and state returns are 2013 through 2016.

8. Stockholders’ Equity

Common Stock

The Company has 181,000,000 shares of stock authorized, consisting of 150,000,000 shares of Class A common stock, par value $0.01
per share; 30,000,000 shares of Class B common stock, par value $0.01 and 1,000,000 shares of preferred stock, par value $0.01 per
share. Preferred stock rights will be determined by the Company’s Board of Directors in the event that preferred shares are issued. The
following summarizes the rights of common stock:

Voting—Shares of Class A common stock and Class B common stock are entitled to one vote per share in all voting matters, with the
exception that Class B common stock does not vote on the election or removal of directors.

Conversion—Each share of Class A common stock held by either one of L Catterton Partners or Argentia Private Investments Inc.
(“Argentia”) or their affiliates the (“Equity Sponsors”) is convertible, at the option of the holder, into one share of Class B common
stock. Each share of Class B common stock is convertible, at the option of the holder, into one share of Class A common stock.

Dividends—A Class C dividend agreement was entered in connection with the Merger Agreement between one of the Equity Sponsors
and the Company, which provided that the new investor would receive, in the form of a dividend, an amount equal to the compensation
payable to the other new investor under a management services agreement. In connection with the Initial Public Offering (“IPO”), the
management services agreement expired, and the one share of Class C common stock was redeemed. See additional information in
Note 15, Related Party Transactions. Class A common stock and Class B common stock share equally if a dividend is declared or paid
to either class, but they do not have rights to any special dividend.

Liquidation, Dissolution or Winding Up—Class A common stock and Class B common stock share equally in distributions in
liquidation, dissolution or winding up of the corporation.

Registration Rights—The Equity Sponsors have the right to demand registration of 10% or more of the shares of the Company’s
common stock held by them. A few shareholders who are also Executive Officers of the Company or members of the Company’s
Board of Directors have piggyback registration rights, but they are not required to exercise these rights.

Share Repurchase Program

On June 4, 2015, the Company announced a share repurchase program of up to $35.0 million of the Company’s Class A common
stock. Under this program, the Company purchased shares of the Company’s Class A common stock in the open market (including in
pre-arranged stock trading plans in accordance with the guidelines specified in Rule 10b5-1 under the Exchange Act) or in privately
negotiated transactions. During fiscal year 2015, the Company repurchased 2,423,871 shares of its common stock for approximately
$35.0 million in open market transactions, thereby completing the repurchase program. Repurchased shares are included as treasury
stock in the Consolidated Balance Sheets.

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
proceeds have been, and will continue to be used, in conjunction with cash flow from the Company’s operations and the proceeds
received from the transaction with Mill Road (see below), to satisfy existing and anticipated liabilities and to fund, in part, certain
capital expenditures related to business initiatives in its company-owned restaurants. Any remaining proceeds are expected to be used
for general corporate purposes. The funding of the private placement occurred on February 9, 2017 and the net proceeds from the
transaction were $16.6 million, 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

NOODLES & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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 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. The amortized discount was $8.0 million for the year ended January 2, 2018.

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, after $2.4 million of transaction expenses.

Reclassification of Cumulative Translation Adjustments

During the year ended January 2, 2018, the Company closed all Canadian restaurants and liquidated the Canadian foreign subsidiary.
As a result, the Company recognized a loss of approximately $0.2 million in operations for the translation adjustments from currency
exchange that were previously recorded in accumulated other comprehensive income (loss) as a separate component of stockholders’
equity. The Company recognized this charge within Restaurant impairments, closure costs and asset disposals in the Consolidated
Statements of Operations.

9. Stock-Based Compensation

The Company’s Stock Incentive Plan (the “Plan”), as amended and restated in May of 2013, authorizes the grant of nonqualified stock
options, incentive stock options, stock appreciation rights (“SARs”), restricted stock, restricted stock units (“RSUs”) and incentive
bonuses to employees, officers, non-employee directors and other service providers. The number of shares of common stock available
for issuance pursuant to awards granted under the Plan on or after the IPO shall not exceed 3,750,500 shares. The Plan is administered
by the Compensation Committee of the Company’s Board of Directors (the “Board”) or another committee designated by the Board, or
in the absence of any such committee, the Board itself (the “administrator”). Stock options are granted at a price determined by the
administrator at an exercise price that is not less than the fair market value of the underlying stock on the date of grant. The
administrator may also grant SARs and RSUs with terms determined by the administrator in accordance with the Plan. The fair market
value of shares prior to the IPO was determined by the Compensation Committee of the Board, or the Board using historical or then
current transactions, comparable public company valuations, third-party valuations and other factors. All share-based awards (except
for RSUs) granted under the Plan have a life of ten years. Most awards vest ratably over four years; however, some have been granted
with different vesting schedules. Of the awards outstanding, none have been granted to non-employees (except those granted to non-
employee members of the Board of Directors of the Company) under the Plan. At January 2, 2018, approximately 4.2 million share-
based awards were available to be granted under the Plan.

Stock-based compensation expense is generally recognized on a straight-line basis over the service period of the awards. In 2017, 2016
and 2015, non-cash stock-based compensation expense of $1.7 million, $2.5 million and $1.7 million, respectively, was included in
general and administrative expense. Stock-based compensation of approximately $178,000, $222,000 and $229,000 was included in
capitalized internal costs in 2017, 2016 and 2015, respectively. Stock-based compensation expense also includes approximately
$29,000 related to the Employee Stock Purchase Plan, see Note 11, Employee Benefit Plans.

Included in stock-based compensation expense during the year ended January 3, 2017 was a $0.7 million charge for modifying the
outstanding stock options granted to Kevin Reddy, who resigned from his position as the Chairman of the Board and from his position
as the Company’s Chief Executive Officer in July 2016. In connection with Mr. Reddy’s termination from the Company, the Company

NOODLES & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

extended the exercise period of Mr. Reddy’s vested options and, as a result, he had the right to exercise his vested options to purchase
the Company’s Class A common stock through October 23, 2017. These vested options expired unexercised.

The estimated fair value of each option granted is calculated using the Black-Scholes option-pricing model. Expected volatilities are
based on the historical Company volatility, as well as volatilities from publicly traded companies operating in the Company’s industry.
The Company uses historical data to estimate expected employee forfeiture of stock options. The expected life of options granted is
management’s best estimate using recent and expected transactions. The risk-free rate for periods within the expected life of the option
is based on the U.S. Treasury yield curve in effect at the time of grant.

The weighted-average assumptions used in the model were as follows:

Risk-free interest rate
Expected term (average in years)
Expected dividend yield
Expected volatility
Weighted-average Black-Scholes fair value per share at date of grant

2017

2016

2015

2.0%
6.1
—
39.6%
1.74

1.2%
5.0
—
37.0%
2.85

1.6%
5.0
—
36.8%
5.04

The Company has estimated forfeiture rates that range from 0% to 10% based upon the class of employees receiving stock-based
compensation in its calculation of stock-based compensation expense for the year ended January 2, 2018. These estimates are based on
historical forfeiture behavior exhibited by employees of the Company.

A summary of aggregate option award activity under the Plan as of January 2, 2018, and changes during the fiscal year then ended is
presented below:

Outstanding—January 3, 2017

Granted
Forfeited or expired
Exercised

Outstanding—January 2, 2018

Vested and expected to vest
Exercisable as of January 2, 2018
_____________
(1)

Awards
2,574,932 $
232,000
(1,474,797)
—

1,332,135 $

1,305,060 $
788,873 $

Weighted-
Average
Exercise Price
12.34
4.25
11.16
—
12.23

12.20
13.75

Weighted-Average
Remaining
Contractual Term

Aggregate
Intrinsic Value (1)
(in thousands)

6.50 $

6.47 $
5.14 $

—

219
—

Aggregate intrinsic value represents the amount by which fair value of the Company’s stock exceeds the exercise price of the option as of January 2,
2018.

The weighted-average grant-date fair value of options granted during the years ended January 2, 2018, January 3, 2017 and
December 29, 2015 was $1.74, $2.85 and $5.04, respectively. The intrinsic value associated with options exercised was zero, $0.2
million and $4.2 million for the fiscal years ended January 2, 2018, January 3, 2017 and December 29, 2015, respectively. The
Company had 177,491, 271,457 and 346,235 options that vested during the years ended January 2, 2018, January 3, 2017 and
December 29, 2015, respectively. These awards had a total estimated fair value of $0.8 million, $2.7 million and $3.4 million at the
date of vesting for the years ended January 2, 2018, January 3, 2017 and December 29, 2015, respectively.

NOODLES & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

A summary of the status of the Company’s non-vested restricted share units as of January 2, 2018 and changes during the year then
ended is presented below:

Outstanding at January 3, 2017
Granted
Vested
Forfeited
Non-vested at January 2, 2018

Awards

Weighted-
Average
Grant Date Fair Value

122,765 $
328,106
(100,871)
(21,641)
328,359 $

10.20
3.42
6.87
9.15
5.44

The Company granted 328,106 restricted stock units during the year ended January 2, 2018 with a weighted-average grant-date
estimated fair value of $3.42. The Company had 100,871 restricted stock units that vested during the year ended January 2, 2018.
These units had a total estimated fair value of $0.5 million at the date of vesting for the year ended January 2, 2018.

The restricted stock units granted during the year ended January 2, 2018 include 100,000 performance-vesting restricted stock units
which were granted to the Company’s Chief Executive Officer and Executive Chairman. These restricted stock units will only vest
upon the achievement of certain performance and market conditions including; the Company’s Class A common stock reaching a
certain average closing price for two consecutive calendar quarters prior to December 31, 2020, or upon a change in control prior to
December 31, 2020 if the stock price is equal to or higher than certain thresholds. The estimated fair value of the performance-vesting
restricted stock units was calculated using a Monte Carlo simulation pricing model, using the following assumptions: (i) risk-free
interest rate of 1.7%, (ii) expected term of 3.4 years, (iii) dividend yield of 0%, and (iv) volatility of 55.0%.

As of January 2, 2018, there was $2.5 million of unrecognized compensation cost related to non-vested share-based compensation
arrangements granted under the Plan, which is expected to be recognized over 2.49 years.

10. (Loss) Earnings Per Share

Basic earnings per share (“EPS”) is calculated by dividing net income (loss) available to common shareholders 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 and restricted common stock. Diluted EPS considers the
impact of potentially dilutive securities except in periods in which there is a loss because the inclusion of the potential common shares
would have an anti-dilutive effect.

The following table sets forth the computations of basic and diluted EPS (in thousands, except share and per share data):

Net loss attributable to common stockholders
Shares:

Basic weighted average shares outstanding
Effect of dilutive securities
Diluted weighted average number of shares outstanding

Loss per share:

Basic loss earnings per share
Diluted loss earnings per share

2017

2016

2015

(45,449) $

(71,677 ) $

(13,765)

37,759,497
—
37,759,497

27,808,708
—
27,808,708

28,938,901
—
28,938,901

$
$

(1.20) $
(1.20) $

(2.58 ) $
(2.58 ) $

(0.48)
(0.48)

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 (loss) per share when the effect would be anti-dilutive.
All potential common shares are anti-dilutive in periods of net loss. The number of shares issuable on the exercise of share based
awards and common stock warrants excluded from the calculation of diluted earnings (loss) per share because the effect of their
inclusion would have been anti-dilutive totaled 4,154,778, 2,697,697 and 3,184,949 for 2017, 2016 and 2015, respectively.

NOODLES & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

11. Employee Benefit Plans

Defined Contribution Plan

In October 2003, the Company adopted a defined contribution plan, The Noodles & Company 401(k) Plan (the “401(k) Plan”).
Company employees aged 21 or older, are eligible to participate in the 401(k) Plan beginning on the first day of the calendar month
following 30 days of employment. Under the provisions of the plan, the Company may, at its discretion, make contributions to the
401(k) Plan. Participants are 100% vested in their own contributions. The Company made no contributions during 2017, 2016 and
2015.

Deferred Compensation Plan

The Company’s deferred compensation plan, under which compensation deferrals began in 2013, is a non-qualified deferred
compensation plan which allows highly compensated employees to defer a portion of their base salary and variable compensation each
plan year. To offset its obligation, the Company purchases Company-owned whole-life insurance contracts on certain team members.
As of January 2, 2018 and January 3, 2017, $1.9 million and $1.6 million, respectively, were included in other assets, net, which
represents the cash surrender value of the associated life insurance policies, and $1.3 million and $1.5 million, respectively, were
included in other long-term liabilities, which represents the carrying value of the liability for deferred compensation.

Employee Stock Purchase Plan

In 2013, the Company adopted an Employee Stock Purchase Plan (the “ESPP”) under which eligible team members may voluntarily
contribute up to 15% of their salaries, subject to limitations, to purchase common stock at a price equal to 85% of the fair market value
of a share of the Company’s common stock on the first day of each offering period or 85% of the fair market value of a share of the
Company’s common stock on the last day of each offering period, whichever amount is less. In general, all non-highly compensated
employees who have been employed by the Company for at least 30 days prior to the offering period and who are regularly scheduled
to work more than 20 hours per week and for more than five months in any calendar year, are eligible to participate in the ESPP which
operates in-line with the Company’s fiscal quarters. A total of 750,000 shares of common stock are available for issuance under the
ESPP. The Company has issued a total of 117,381 shares under this plan, of which 37,069 shares were issued during 2017. A total of
632,619 shares remain available for future issuance. For 2017, in accordance with the guidance for accounting for stock compensation,
the Company estimated the fair value of the stock purchase plan using the Black-Scholes multiple-option pricing model. The average
assumptions used in the model included a 1.07% risk-free interest rate; 0.25 years year expected life; expected volatility of 38.3%; and
a zero percent dividend yield. The weighted average fair value per share at grant date was $0.77. In 2017, the Company recognized
$29,000 of compensation expense related to the ESPP.

12. Leases

The Company leases restaurant facilities, office space and certain equipment under operating leases that expire on various dates
through January 2032. Lease terms for traditional shopping centers generally include a base term of 10 years, with options to extend
these leases for additional periods of five to 15 years. Typically, the lease includes rent escalations, which are expensed on a straight-
line basis over the expected lease term. The difference between rent expense and cash paid for rent is recognized as deferred rent. Total
rent expense for 2017, 2016 and 2015 was approximately $43.9 million, $48.5 million and $44.6 million, respectively.

Future minimum lease payments required under existing leases as of January 2, 2018 are as follows (in thousands):

2018
2019
2020
2021
2022
Thereafter

44,371
40,090
35,798
32,234
27,576
64,582
244,651

NOODLES & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

13. Supplemental Disclosures to Consolidated Statements of Cash Flows

The following table presents the supplemental disclosures to the Consolidated Statements of Cash Flows for fiscal years 2017, 2016
and 2015 (in thousands):

Interest paid (net of amounts capitalized)
Income taxes (refunded) paid
Changes in purchases of property and equipment accrued in accounts
payable, net
Conversion of Series A convertible preferred stock to common stock

2017

2016

2015

3,482 $
(158)

(842)
18,500

2,394 $
(427)

(1,431)
—

839
354

(1,414)
—

14. 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 continues to implement 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, 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 expects to be liable (the “Data Breach Liabilities”). However, the Company may
ultimately be subject to Data Breach Liabilities that are up to $5.5 million greater than that amount.

Data Security Litigation

In addition to claims by payment card companies with respect to the data security incident, the Company was a defendant in a
purported class action lawsuit in the United States District Court for the District of Colorado (the “Court”), Selco Community Credit
Union vs. Noodles & Company, alleging that the Company negligently failed to provide adequate security to protect the payment card
information of customers of the plaintiffs and those of other similarly situated credit unions, banks and other financial institutions
alleged to be part of the putative class, causing those institutions to suffer financial losses (the “Selco Litigation”). The complaint in the
Selco Litigation also claimed the Company was negligent per se based on alleged violations of Section 5 of the Federal Trade
Commission Act and sought monetary damages, injunctive relief and attorneys’ fees. On July 21, 2017, the Court granted a Motion to
Dismiss in the Selco Litigation in favor of the Company. A notice of appeal of the dismissal was filed on August 15, 2017. On
November 2, 2017 a mediation was held and a settlement, which was funded entirely by insurance proceeds, was reached, which
resulted in a dismissal of the appeal and a resolution of the Selco Litigation on November 20, 2017.

Fees and Costs

The Company has incurred fees and costs associated with this data security incident, including legal fees, investigative fees, other
professional fees and costs of communications with customers. The Company expects to continue to incur significant fees and costs
associated with the data security incident in future periods, consisting primarily of liabilities to a payment card company that are not
covered by insurance for which the Company has already recorded a charge of $10.6 million of which a portion remains to be paid (see
Note 2, Supplemental Financial Information).

NOODLES & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Insurance Coverage

As discussed above, to limit its exposure to losses arising from matters such as the data security incident, the Company maintained at
the time of the incident and continues to maintain data privacy liability insurance coverage. This coverage, and certain other customary
business insurance coverage, has reduced the Company’s exposure related to the data security incident.

General

It is possible that losses associated with the data security incident could have a material adverse effect on the Company’s results of
operations in future periods. The Company will continue to evaluate information as it becomes known and will record an estimate for
additional losses at the time or times when it is probable that an additional loss, if any, will be incurred and the amount of any such loss
is reasonably estimable.

Delaware Gift Card Litigation

As previously disclosed in prior reports filed with the SEC, the Company is 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 alleges 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 seeks 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. On November 23, 2015, the Court ruled on a motion to dismiss the complaint.
While the Court granted the motion to dismiss with respect to a claim alleging that the defendants intended to defraud the government
or willfully concealed property owed to the government and for which a certificate or receipt was provided, it did not dismiss the other
claims alleging that the defendants knowingly made false statements to avoid transmitting money to the government. The trial date
with respect to this matter is set for May 21, 2018. The defendants have filed a motion for summary judgment in the case. A motion
and supplemental motion for summary judgment have been filed on behalf of the Company. Oral argument on the motion for summary
judgment was held on November 8, 2017 and the motion is now with the Court for ruling. 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. However, the Company may ultimately be subject to greater losses
resulting from the litigation. The Company intends to continue to vigorously defend this action.

Other Matters

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 January 2, 2018. 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.

Employment Agreements

In July 2017, the Company entered into an employment agreement with its Executive Chairman, Paul Murphy (the “Murphy
Agreement”). The agreement does not have an initial term, the agreement will be effective until Mr. Murphy’s employment is
terminated by the Company with or without “cause” or by Mr. Murphy for any reason. If Mr. Murphy's employment is terminated by
the Company without “cause” (as defined in the Murphy Agreement) prior to the fourth anniversary of the effective date, he is entitled
to receive compensation equal to 12 months of his then-current base salary, payable in equal installments over 12 months and
reimbursement of “COBRA” premiums for as long as he and, if applicable, his dependents are eligible for COBRA from the Company.
The severance payments are conditioned upon Mr. Murphy entering into a mutual release of claims with the Company.

NOODLES & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

In September 2017, the Company entered into an employment agreement with its Chief Executive Officer, Dave Boennighausen (the
“Boennighausen Agreement”). The agreement has an initial term of three years and automatically renews at the end of the initial term
and on each anniversary thereafter for a period of one year unless canceled by either party within 90 days of the end of the initial term
or anniversaries thereof. Under the Boennighausen Agreement, if Mr. Boennighausen’s employment is terminated by the Company
without “cause” or by Mr. Boennighausen with “good reason,” (as such terms are defined in the Boennighausen Agreement) he is
entitled to receive compensation equal to 12 months of his then-current base salary, payable in equal installments over 12 months, a pro
rata bonus for the year of termination and reimbursement of “COBRA” premiums for as long as he and, if applicable, his dependents
are eligible for COBRA from the Company. The severance payments are conditioned upon Mr. Boennighausen entering into a mutual
release of claims with the Company.

15. Related Party Transactions

Stockholders Agreement

In connection with the IPO, the Company entered into a stockholders agreement (the “2013 Stockholders Agreement”) with L
Catterton and Argentia (the “Equity Sponsors”) which grants them the right, subject to certain conditions, to nominate representatives
to the Company’s Board of Directors and committees of the Board of Directors. L Catterton and Argentia each have the right to
designate two members to the Company’s Board of Directors and the parties to the stockholders agreement agree to vote to elect such
director designees.

If at any time an Equity Sponsor owns more than 10.0% and less than 20.0% of our outstanding Class A and Class B common stock,
such Equity Sponsor has the right to designate one nominee for election to our Board of Directors. If an Equity Sponsor’s ownership
level falls below 10.0% of our outstanding Class A and Class B common stock, such Equity Sponsor will no longer have a right to
designate a nominee. In addition, for so long as L Catterton and Argentia together hold at least 35.0% of the voting power of the
Company’s outstanding common stock, certain actions may not be taken without the approval of L Catterton (so long as it holds at
least 5.0% of the voting power of our outstanding common stock) and Argentia (so long as it holds at least 5.0% of the voting power of
our outstanding common stock).

Securities Purchase Agreements

See Note 8, Stockholders’ Equity for discussion of the securities purchase agreements entered into with L Catterton and Mill Road
during 2017. Under the securities purchase agreement with Mill Road, if at any time Mill Road owns 10.0% or more of our
outstanding Class A and Class B common stock, Mill Road has the right to designate one nominee for election to our Board of
Directors. If Mill Road’s ownership level falls below 10.0% of our outstanding Class A and Class B common stock, Mill Road will no
longer have a right to designate a nominee.

NOODLES & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

16. Selected Quarterly Financial Data (unaudited)

The following table presents selected unaudited quarterly financial data for the periods indicated. Each fiscal quarter contained 13
weeks, with the exception of the fourth quarter of 2016, which had 14 operating weeks (in thousands, except per share data):

Fiscal 2017

Revenue
Operating income (loss) (1)(2)
Net loss
Net loss attributable to common stockholders (3)
Basic loss per share
Diluted loss per share

Revenue
Operating loss (4)(5)
Net loss
Basic loss per share
Diluted loss per share

$
$
$
$
$
$

$
$
$
$
$

January 2,
2018

October 3,
2017

112,774 $
87 $
(487) $
(487) $
(0.01) $
(0.01) $

July 4, 2017 April 4, 2017
116,715
(25,646)
(26,845)
(27,810)
(0.99)
(0.99)

112,792 $
(808) $
(1,815) $
(8,816) $
(0.22) $
(0.22) $

114,211 $
(7,483) $
(8,335) $
(8,335) $
(0.20) $
(0.20) $

Fiscal 2016

January 3,
2017

September
27, 2016

129,400 $
(44,315) $
(45,376) $
(1.63) $
(1.63) $

122,681 $
(9,062) $
(9,841) $
(0.35) $
(0.35) $

June 28,
2016
121,407 $
(11,312) $
(14,087) $
(0.51) $
(0.51) $

March 29,
2016

113,986
(2,839)
(2,373)
(0.09)
(0.09)

_____________
(1)

The first quarter of 2017 includes $19.9 million of closure costs primarily related to the 55 restaurants closed during the first quarter of 2017. See Note 6,
Restaurant Impairments, Closure Costs and Asset Disposals, for additional disclosure on closures.

(2)

(3)

(4)

(5)

Includes the impact of impairing three restaurants in the fourth quarter of 2017, 18 restaurants in the third quarter of 2017, nine restaurants in the second
quarter of 2017 and four restaurants in the first quarter of 2017. The impairment costs recognized were $1.1 million in the fourth quarter of 2017, $9.1
million in the third quarter of 2017, $4.0 million in the second quarter of 2017 and $1.9 million in the first quarter of 2017. See Note 6, Restaurant
Impairments, Closure Costs and Asset Disposals, for additional disclosure on impairments.

Represents net loss after accretion of the preferred stock issued to L Catterton to its full redemption value. See Note 8, Stockholders’ Equity for additional
information.

Includes the impact of impairing 42 restaurants in the fourth quarter of 2016, 11 restaurants in the second quarter of 2016 and one restaurant in the first
quarter of 2016. The impairment costs recognized were $31.1 million in the fourth quarter of 2016, $10.3 million in the second quarter of 2016 and $0.2
million in the first quarter of 2016. See Note 6, Restaurant Impairments, Closure Costs and Asset Disposals, for additional disclosure on impairments.

The fourth quarter of 2016 includes charges of $10.6 million for estimated losses associated with claims and anticipated claims by payment card companies
from our data security incident, and the third quarter of 2016 includes a $2.5 million charge for severance expenses and a $3.0 million charge for an
employment-related litigation settlement.

Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors of Noodles & Company

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Noodles & Company (and subsidiaries) (the Company) as of
January 2, 2018 and January 3, 2017, the related consolidated statements of operations, comprehensive income (loss), stockholders’
equity, and cash flows for each of the three years in the period ended January 2, 2018, and the related notes (collectively referred to as
the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects,
the financial position of the Company at January 2, 2018 and January 3, 2017, and the results of its operations and its cash flows for
each of the three years in the period ended January 2, 2018, in conformity with U.S. generally accepted accounting principles.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the
Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting
Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the
U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. As part
of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such
opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error
or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence
regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used
and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe
that our audits provide a reasonable basis for our opinion.

/s/ Ernst & Young LLP

We have served as the Company’s auditor since 2009.
Denver, Colorado
March 15, 2018

ITEM 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

ITEM 9A.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and interim
Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule
13a-15(e) of the Exchange Act) as of the end of the period covered by this report. Based on this evaluation, our Chief Executive
Officer and interim Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the
period covered by this annual report.

Management’s Annual Report on Internal Control Over Financial Reporting

The management of Noodles & Company is responsible for establishing and maintaining adequate internal control over financial
reporting. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally
accepted in the United States of America. Our internal control over financial reporting includes those policies and procedures that (i)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our
assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with accounting principles generally accepted in the United State of America, and that our receipts and expenditures are
being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of assets that could have a material effect on our
financial statements.

Under the supervision and with the participation of our management, including our Chief Executive Officer and interim Chief
Financial Officer, we carried out an evaluation of the effectiveness of our internal control over financial reporting as of January 2, 2018
based on the criteria in “Internal Control - Integrated Framework (the 2013 framework)” issued by the Committee of Sponsoring
Organizations of the Treadway Commission (“COSO”). Based on this evaluation, our management concluded that our internal control
over financial reporting was effective as of January 2, 2018.

This Annual Report on Form 10-K does not include an attestation report of our independent registered public accounting firm, because
as an “emerging growth company” under the JOBS Act our independent registered public accounting firm is not required to issue such
an attestation report. We will cease to be an “emerging growth company” at the end of our 2018 fiscal year and are currently an
“accelerated filer” under the Exchange Act; therefore, we will be subject to independent auditor attestation for our 2018 fiscal year.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting 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.

ITEM 9B.

Other Information

None.

ITEM 10.

Directors, Executive Officers and Corporate Governance

PART III

Information regarding our executive officers is set forth in Item 1. of Part 1 of this Report under the caption “Executive Officers of the
Registrant.”

We have adopted a Code of Business Conduct and Ethics that applies to our directors and a Code of Business Conduct and Ethics that
applies to our officers and employees (collectively, the “Codes”), including our principal executive, financial and accounting officers,
and persons performing similar functions. These Codes are published on our corporate governance website located at
investor.noodles.com/corporate-governance.cfm. We intend to disclose future amendments to provisions of our Codes, or waivers of
provisions of the Codes granted to executive officers and directors, on the website within four business days following the date of such
amendment or waiver.

The remaining information required by this item is incorporated herein by reference to the sections entitled “Proposal No. 1 - Election
of Directors,” “Section 16(a) Beneficial Ownership Reporting Compliance,” “Board Committees—Policy Regarding Stockholder
Recommendations” and “Board Committees—Audit Committee” in our definitive Proxy Statement for the Annual Meeting of
Shareholders to be held on May 16, 2018 (the “Proxy Statement”).

ITEM 11.

Executive Compensation

The information required by this item is incorporated by reference to the sections entitled “Executive Compensation,” “Director
Compensation” and “Board Committees—Compensation Committee Interlocks and Insider Participation” in the Proxy Statement.

ITEM 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information required by this item is incorporated by reference to the sections entitled “Equity Compensation Plan Information”
and “Security Ownership of Certain Beneficial Owners and Management” in the Proxy Statement.

ITEM 13.

Certain Relationships and Related Transactions, and Director Independence

The information required by this item is incorporated by reference to the sections entitled “Transactions with Related Persons” and
“Directors and Corporate Governance—Board Independence” in the Proxy Statement.

ITEM 14.

Principal Accounting Fees and Services

The information required by this item is incorporated by reference to the section entitled “Proposal No. 2 - Ratification of Appointment
of Independent Registered Public Accounting Firm for 2018” in the Proxy Statement.

ITEM 15.

Exhibits, Financial Statement Schedules

PART IV

Our Consolidated Financial Statements and Notes thereto are included in Item 8, “Financial Statements and Supplementary
Data,” of this Annual Report on Form 10-K.

All financial schedules have been omitted either because they are not applicable or because the required information is
provided in our Consolidated Financial Statements and Notes thereto, included in Item 8 of this Annual Report on Form 10-
K.

The Index to Exhibits is incorporated herein by reference and is filed as part of this 10-K.

Exhibit Description

Form

File No.

Amended and Restated
Certificate of Incorporation
Second Amended and Restated
Bylaws

S-1

8-K

333-192402

001-35987

Specimen Stock Certificate

S-1/A

333-188783

EXHIBITS

Description of Exhibit Incorporated Herein by Reference

Filing
Date

Exhibit
Number

Filed
Herewith

November
19, 2013
August 24,

2015

June 17,
2013

February 9,

2017

February 9,

2017

June 17,
2013

3.1

4.1

4.2

10.1

10.2

10.3

8-K

001-35987

8-K

001-35987

S-1/A

333-188783

S-1/A

333-188783

S-1/A

333-188783

Exhibit
Number

3.1

3.2

4.1

4.2

4.3

10.1

10.2

10.3

10.4

10.5

10.6

10.7

Certificate of Designations for
Series A Convertible Preferred
Stock
Form of Warrant to Purchase
Class A Common Stock

Noodles & Company Amended
and Restated 2010 Stock
Incentive Plan
Noodles & Company 2013
Employee Stock Purchase Plan

Registration Rights Agreement,
dated December 27, 2010, by and
among Noodles & Company and
certain of its stockholders

Amendment No. 1 to
Registration Rights Agreement,
dated as of July 8, 2014, among
Noodles & Company and certain
of its stockholders
Amended and Restated Credit
Agreement, dated as of
November 22, 2013, among
Noodles & Company, the other
Loan Parties thereto, Bank of
America, N.A., as Administrative
Agent, L/C Issuer and Swing
Line Lender and the other lenders
party thereto
Amendment No.1 to the
Amended and Restated Credit
Agreement, dated as of June 4,
2015, among Noodles &
Company, the other Loan Parties
party thereto, the lenders thereto
and Bank of America, N.A., as
Administrative Agent, L/C Issuer
and Swingline Lender

Amendment No.2 to the
Amended and Restated Credit
Agreement, dated as of
November 24, 2015, by and
among Noodles & Company,
each of the Guarantors signatory
thereto, Bank of America, N.A.,
as administrative agent and the
lenders signatory thereto

10-Q

001-35987

November
6, 2014

10.1

8-K

001-35987

November
26, 2013

10.1

8-K

001-35987

June 5,
2015

10.10

8-K

001-35987

November
24, 2015

10.10

10.8

10.9

10.10

10.11

10.12

10.13

10.14

10.15

10.16

10.17

10.18

10.19

10.20

10.21

Amendment No. 3 to Amended and
Restated Credit Agreement, dated
as of August 2, 2016, by and
among Noodles & Company, each
of the Guarantors signatory thereto,
Bank of America, N.A., as
administrative agent and the
lenders signatory thereto

Amendment No. 4 to Amended and
Restated Credit Agreement, dated
as of November 4, 2016, by and
among Noodles & Company, each
of the Guarantors signatory thereto,
Bank of America, N.A., as
administrative agent and the
lenders signatory thereto

Amendment No. 5 to Amended and
Restated Credit Agreement, dated
as of February 9, 2017, by and
among Noodles & Company, each
of the Guarantors signatory thereto,
Bank of America, N.A., as
administrative agent and the
lenders signatory thereto

Amendment No. 6 to Amended and
Restated Credit Agreement, dated
as of November 8, 2017, by and
among Noodles & Company, each
of the Guarantors signatory thereto,
Bank of America, N.A., as
administrative agent and the
lenders signatory thereto

Security Agreement, dated
February 28, 2011, by and
between Noodles & Company
and Bank of America, N.A., as
administrative agent
Pledge Agreement, dated
February 28, 2011, by and
between Noodles & Company
and Bank of America, N.A., as
administrative agent
Form of Indemnification
Agreement by and between
Noodles & Company and each of
its directors

Form of Area Development
Agreement

Form of Restricted Stock Unit
Agreement

Form of Restricted Stock Unit
Agreement for Nonemployee
Directors

Amended and Restated Noodles &
Company Compensation Plan For
Non-Employee Directors, dated
July 26, 2017

The Executive Nonqualified
“Excess” Plan Adoption
Agreement, adopted by Noodles
& Company on May 16, 2013

10-Q

001-35987

August 5,
2016

10.2

10-Q

001-35987

November
7, 2016

10.3

8-K

001-35987

February 9,
2017

10.2

10-Q

001-35987

November
9, 2017

10.10

S-1

333-188783

May 23,
2013

10.13

S-1

333-188783

May 23,
2013

10.14

S-1/A

333-188783

June 17,
2013

10-K

001-35987

February
24, 2015
February
24, 2015
November
9, 2017
November
9, 2017
November
9, 2017

August 11,

2017

10.15

10.9

10.10

10.7

10.8

10.9

10.1

10.22

10-Q

001-35987

10-Q

001-35987

10-Q

001-35987

S-1/A

333-188783

June 17,
2013

Form of Franchise Agreement

10-K

001-35987

Form of Stock Option Agreement
(Nonqualified Stock Options)

10-Q

001-35987

10.22

10.23

10.24

10.25

10.26

10.27

10.28

10.29

10.30

10.31

10.32

10.33

10.34

10.35

10.36

10.37

Amended and Restated
Stockholders Agreement, dated
as of July 2, 2013, among
Noodles & Company, L
Catterton-Noodles, LLC and
Argentia Private Investments Inc.
Severance Agreement with Paul
Strasen, dated January 24, 2011

Transition Agreement, dated
December 4, 2017, between
Noodles & Company and Paul
Strasen

Employment Agreement, dated
September 21, 2017, between
Noodles & Company and Dave
Boennighausen

Interim Chief Financial Officer
Letter Agreement, dated June 13,
2017, between Noodles &
Company and Susan Daggett

Release Agreement, dated July 25,
2016, between Noodles &
Company and Kevin Reddy

Letter Agreement, dated February
8, 2017, between Noodles &
Company and Argentia Private
Investments Inc.

Letter Agreement, dated February
15, 2017, between Noodles &
Company and Mill Road Capital
Management LLC

Securities Purchase Agreement,
dated March 13, 2017, between
Noodles & Company and Mill
Road Capital Management LLC

Employment Agreement, dated
June 13, 2017, between Noodles &
Company and Paul Murphy

Stock Option Agreement
(Nonqualified Stock Options),
dated July 10, 2017, between
Noodles & Company and Paul J.B.
Murphy, III

Restricted Stock Unit Agreement,
dated July 10, 2017, between
Noodles & Company and Paul J.B.
Murphy, III

Stock Option Agreement
(Nonqualified Stock Options),
dated September 21, 2017, between
Noodles & Company and Dave
Boennighausen

Restricted Stock Unit Agreement,
dated September 21, 2017, between
Noodles & Company and Dave
Boennighausen

S-1

333-192402

November
19, 2013

10.18

10-K

001-35987

8-K

001-35987

March 1,
2016

December 6,

2017

10.20

10.1

8-K

001-35987

September
25, 2017

10.1

10-Q

001-35987

August 11,
2017

10.2

8-K

001-35987

July 26,
2016

8-K

001-35987

February 9,

2017

8-K

001-35987

8-K

001-35987

10-Q

001-35987

10-Q

001-35987

March 14,
2017

August 11,

2017

November
9, 2017

10.3

10.2

10.1

10.3

10.1

10-Q

001-35987

November
9, 2017

10.2

10-Q

001-35987

November
9, 2017

10.3

10-Q

001-35987

November
9, 2017

10.4

10-Q

001-35987

November
9, 2017

10.5

10-Q

001-35987

November
9, 2017

10.6

21.1

23.1
24.1

31.1

32.1

101.INS

101.SCH

101.CAL

101.DEF

101.LAB

101.PRE

List of Subsidiaries of Noodles &
Company

Consent of Ernst & Young LLP
Power of Attorney (included on
signature page of this report)

Certification of Principal
Executive Officer and Principal
Financial Officer pursuant to
Section 302 of the Sarbanes-
Oxley Act of 2002
Certification of Chief Executive
Officer and Chief Financial
Officer Section 906 of the
Sarbanes-Oxley Act of 2002

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

XBRL Taxonomy Extension
Schema Document

XBRL Taxonomy Extension
Calculation Linkbase Document

XBRL Taxonomy Extension
Definition Linkbase Document

XBRL Taxonomy Extension
Label Linkbase Document

XBRL Taxonomy Extension
Presentation Linkbase Document

X
X

ITEM 16.

Form 10-K Summary.

None.

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, on March 15, 2018.

SIGNATURES

NOODLES & COMPANY

By: /s/ DAVE BOENNIGHAUSEN

Dave Boennighausen
Chief Executive Officer

POWER OF ATTORNEY

Know all persons by these presents, that each person whose signature appears below constitutes and appoints Dave Boennighausen or
Melissa M. Heidman, or any of them, as such person’s true and lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for such person and in such person’s name, place and stead, in any and all capacities, to sign any and all amendments to
this Report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorney-in-fact and agent, and each of them, full power and authority to do and perform
each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as such
person might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or any of them or their or
such person’s substitute or substitutes, may lawfully do or cause to be done by virtue thereof.

Pursuant to the requirements of the Securities Act of 1934, this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

Signature

Title

Date

/s/ DAVE BOENNIGHAUSEN
Dave Boennighausen

Director, Chief Executive Officer
(principal executive officer and principal financial officer)

March 15, 2018

/s/ KATHY LOCKHART
Kathy Lockhart

/s/ PAUL MURPHY
Paul Murphy

/s/ ROBERT HARTNETT
Robert Hartnett

Vice President and Controller
(principal accounting officer)

March 15, 2018

Chairman

March 15, 2018

Director

March 15, 2018

/s/ SCOTT DAHNKE
Scott Dahnke

/s/ FRANÇOIS DUFRESNE
François Dufresne

/s/ MARY EGAN
Mary Egan

/s/ JEFFREY JONES

Jeffrey Jones

/s/ THOMAS LYNCH
Thomas Lynch

/s/ DREW MADSEN
Drew Madsen

/s/ ANDREW TAUB
Andrew Taub

Director

March 15, 2018

Director

March 15, 2018

Director

March 15, 2018

Director

March 15, 2018

Director

March 15, 2018

Director

March 15, 2018

Director

March 15, 2018