UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
| | | | | |
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended June 25, 2023March 31, 2024
OR
| | | | | |
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Transition Period from ____to ____
Commission File Number: 001-36104
Potbelly Corporation
(Exact name of registrant as specified in its charter)
| | | | | | | | |
Delaware | | 36-4466837 |
(State or Other Jurisdiction of Incorporation) | | (IRS Employer Identification Number) |
111 N. Canal Street, Suite 325 Chicago, Illinois | | 60606 |
(Address of Principal Executive Offices) | | (Zip Code) |
Registrant’s Telephone Number, Including Area Code: (312) 951-0600
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | | | | | | | |
Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered |
Common Stock, $0.01 par value | | PBPB | | The NASDAQ Stock Market LLC |
| | | | (Nasdaq Global Select Market) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | | | | |
Large accelerated filer | o | | Accelerated filer | x |
Non-accelerated filer | o | | Smaller reporting company | ox |
Emerging growth company | o | | | |
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. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No x
As of July 23, 2023,April 28, 2024, the registrant had 29,317,74329,841,506 shares of common stock, $0.01 par value per share, outstanding.
Potbelly Corporation and Subsidiaries
Table of Contents
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Potbelly Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
(amounts in thousands, except par value data, unaudited) | | June 25, 2023 | | December 25, 2022 |
| March 31, 2024 | | | March 31, 2024 | | December 31, 2023 |
Assets | Assets | | | |
Current assets | Current assets | |
Current assets | |
Current assets | |
Cash and cash equivalents | Cash and cash equivalents | $ | 34,261 | | | $ | 15,619 | |
Accounts receivable, net of allowances of $24 and $16 as of June 25, 2023 and December 25, 2022, respectively | 8,275 | | | 6,420 | |
Cash and cash equivalents | |
Cash and cash equivalents | |
Accounts receivable, net of allowances of $21 and $26 as of March 31, 2024 and December 31, 2023, respectively | |
Inventories | Inventories | 3,534 | | | 3,990 | |
Prepaid expenses and other current assets | Prepaid expenses and other current assets | 5,110 | | | 4,501 | |
Assets classified as held-for-sale | Assets classified as held-for-sale | 1,237 | | | — | |
Total current assets | Total current assets | 52,417 | | | 30,530 | |
| Property and equipment, net | |
Property and equipment, net | |
Property and equipment, net | Property and equipment, net | 43,485 | | | 44,477 | |
Right-of-use assets for operating leases | Right-of-use assets for operating leases | 151,328 | | | 160,891 | |
Indefinite-lived intangible assets | Indefinite-lived intangible assets | 3,404 | | | 3,404 | |
Goodwill | Goodwill | 2,122 | | | 2,222 | |
Restricted cash | Restricted cash | 749 | | | — | |
Deferred expenses, net and other assets | Deferred expenses, net and other assets | 3,368 | | | 3,647 | |
Total assets | Total assets | $ | 256,873 | | | $ | 245,171 | |
| Liabilities and equity | Liabilities and equity | |
Liabilities and equity | |
Liabilities and equity | |
Current liabilities | Current liabilities | |
Current liabilities | |
Current liabilities | |
Accounts payable | |
Accounts payable | |
Accounts payable | Accounts payable | $ | 9,754 | | | $ | 10,718 | |
Accrued expenses | Accrued expenses | 35,636 | | | 30,826 | |
Short-term operating lease liabilities | Short-term operating lease liabilities | 27,535 | | | 27,395 | |
Current portion of long-term debt | Current portion of long-term debt | 1,250 | | | — | |
Total current liabilities | Total current liabilities | 74,175 | | | 68,939 | |
| Long-term debt, net of current portion | Long-term debt, net of current portion | 21,108 | | | 8,550 | |
Long-term debt, net of current portion | |
Long-term debt, net of current portion | |
Long-term operating lease liabilities | Long-term operating lease liabilities | 150,166 | | | 160,968 | |
Other long-term liabilities | Other long-term liabilities | 4,223 | | | 2,441 | |
Total liabilities | Total liabilities | 249,672 | | | 240,898 | |
| Commitments and contingencies (Note 11) | |
Commitments and contingencies (Note 12) | |
Commitments and contingencies (Note 12) | |
Commitments and contingencies (Note 12) | | | | |
| Equity | Equity | |
Common stock, $0.01 par value—authorized 200,000 shares; outstanding 29,309 and 28,819 shares as of June 25, 2023 and December 25, 2022, respectively | 389 | | | 384 | |
Equity | |
Equity | |
Common stock, $0.01 par value—authorized 200,000 shares; outstanding 29,685 and 29,364 shares as of March 31, 2024 and December 31, 2023, respectively | |
Common stock, $0.01 par value—authorized 200,000 shares; outstanding 29,685 and 29,364 shares as of March 31, 2024 and December 31, 2023, respectively | |
Common stock, $0.01 par value—authorized 200,000 shares; outstanding 29,685 and 29,364 shares as of March 31, 2024 and December 31, 2023, respectively | |
Warrants | Warrants | 2,219 | | | 2,566 | |
Additional paid-in-capital | Additional paid-in-capital | 459,351 | | | 455,831 | |
Treasury stock, held at cost, 10,053 and 9,924 shares as of June 25, 2023, and December 25, 2022, respectively | (116,497) | | | (115,388) | |
Treasury stock, held at cost, 10,131 and 10,077 shares as of March 31, 2024, and December 31, 2023, respectively | |
Accumulated deficit | Accumulated deficit | (338,027) | | | (338,916) | |
Total stockholders’ equity | Total stockholders’ equity | 7,435 | | | 4,477 | |
Non-controlling interest | Non-controlling interest | (234) | | | (204) | |
Total equity | Total equity | 7,201 | | | 4,273 | |
| Total liabilities and equity | Total liabilities and equity | $ | 256,873 | | | $ | 245,171 | |
Total liabilities and equity | |
Total liabilities and equity | |
See accompanying notes to the unaudited condensed consolidated financial statements.
Potbelly Corporation and Subsidiaries
Condensed Consolidated Statements of Operations
(amounts in thousands, except per share data, unaudited)
| | For the Quarter Ended | | For the Year to Date Ended | |
| June 25, 2023 | | June 26, 2022 | | June 25, 2023 | | June 26, 2022 | |
| For the Quarter Ended | |
| For the Quarter Ended | |
| For the Quarter Ended | |
| March 31, 2024 | |
| March 31, 2024 | |
| March 31, 2024 | |
Revenues | |
Revenues | |
Revenues | Revenues | | | | | | | | |
Sandwich shop sales, net | Sandwich shop sales, net | $ | 124,709 | | | $ | 114,992 | | | $ | 241,656 | | | $ | 212,423 | | |
Sandwich shop sales, net | |
Sandwich shop sales, net | |
Franchise royalties, fees and rent income | Franchise royalties, fees and rent income | 1,914 | | | 960 | | | 3,237 | | | 1,750 | | |
Franchise royalties, fees and rent income | |
Franchise royalties, fees and rent income | |
Total revenues | |
Total revenues | |
Total revenues | Total revenues | 126,623 | | | 115,952 | | | 244,893 | | | 214,173 | | |
| Expenses | Expenses | | |
| Expenses | |
| Expenses | |
Sandwich shop operating expenses, excluding depreciation | |
Sandwich shop operating expenses, excluding depreciation | |
Sandwich shop operating expenses, excluding depreciation | Sandwich shop operating expenses, excluding depreciation | | |
Food, beverage and packaging costs | Food, beverage and packaging costs | 34,903 | | | 32,830 | | | 67,523 | | | 60,138 | | |
Food, beverage and packaging costs | |
Food, beverage and packaging costs | |
Labor and related expenses | |
Labor and related expenses | |
Labor and related expenses | Labor and related expenses | 37,866 | | | 36,121 | | | 74,368 | | | 69,374 | | |
Occupancy expenses | Occupancy expenses | 13,083 | | | 13,805 | | | 26,393 | | | 27,650 | | |
Occupancy expenses | |
Occupancy expenses | |
Other operating expenses | |
Other operating expenses | |
Other operating expenses | Other operating expenses | 20,925 | | | 19,128 | | | 41,409 | | | 37,233 | | |
Franchise support, rent and marketing expenses | Franchise support, rent and marketing expenses | 1,215 | | | 126 | | | 1,806 | | | 246 | | |
Franchise support, rent and marketing expenses | |
Franchise support, rent and marketing expenses | |
General and administrative expenses | |
General and administrative expenses | |
General and administrative expenses | General and administrative expenses | 11,695 | | | 8,827 | | | 21,664 | | | 17,345 | | |
Depreciation expense | Depreciation expense | 2,887 | | | 3,030 | | | 5,857 | | | 6,167 | | |
Depreciation expense | |
Depreciation expense | |
Pre-opening costs | |
Pre-opening costs | |
Pre-opening costs | Pre-opening costs | 33 | | | — | | | 55 | | | — | | |
Loss on Franchise Growth Acceleration Initiative activities | Loss on Franchise Growth Acceleration Initiative activities | 14 | | | — | | | 963 | | | — | | |
Loss on Franchise Growth Acceleration Initiative activities | |
Loss on Franchise Growth Acceleration Initiative activities | |
Impairment, loss on disposal of property and equipment and shop closures | Impairment, loss on disposal of property and equipment and shop closures | 658 | | | 1,044 | | | 1,703 | | | 2,363 | | |
Total expenses | 123,279 | | | 114,911 | | | 241,741 | | | 220,516 | | |
Impairment, loss on disposal of property and equipment and shop closures | |
Impairment, loss on disposal of property and equipment and shop closures | |
Total operating expenses | |
Total operating expenses | |
Total operating expenses | |
Income (loss) from operations | |
Income (loss) from operations | |
Income (loss) from operations | Income (loss) from operations | 3,344 | | | 1,041 | | | 3,152 | | | (6,343) | | |
| Interest expense, net | Interest expense, net | 1,011 | | | 357 | | | 1,678 | | | 683 | | |
| Interest expense, net | |
| Interest expense, net | |
Loss on extinguishment of debt | Loss on extinguishment of debt | — | | | — | | | 239 | | | — | | |
Income (loss) before income taxes | 2,333 | | | 684 | | | 1,235 | | | (7,026) | | |
Income tax expense (benefit) | (48) | | | (24) | | | 57 | | | 153 | | |
Net income (loss) | 2,381 | | | 708 | | | 1,178 | | | (7,179) | | |
Loss on extinguishment of debt | |
Loss on extinguishment of debt | |
Loss before income taxes | |
Loss before income taxes | |
Loss before income taxes | |
Income tax expense | |
Income tax expense | |
Income tax expense | |
Net loss | |
Net loss | |
Net loss | |
Net income attributable to non-controlling interest | Net income attributable to non-controlling interest | 165 | | | 134 | | | 288 | | | 160 | | |
Net income (loss) attributable to Potbelly Corporation | $ | 2,216 | | | $ | 574 | | | $ | 890 | | | $ | (7,339) | | |
Net income attributable to non-controlling interest | |
Net income attributable to non-controlling interest | |
Net loss attributable to Potbelly Corporation | |
Net loss attributable to Potbelly Corporation | |
Net loss attributable to Potbelly Corporation | |
| Net income (loss) per common share attributable to common stockholders: | | |
Net income per common share attributable to common stockholders: | |
| Net income per common share attributable to common stockholders: | |
| Net income per common share attributable to common stockholders: | |
Basic | |
Basic | |
Basic | Basic | $ | 0.08 | | | $ | 0.02 | | | $ | 0.03 | | | $ | (0.26) | | |
Diluted | Diluted | $ | 0.07 | | | $ | 0.02 | | | $ | 0.03 | | | $ | (0.26) | | |
Diluted | |
Diluted | |
Weighted average shares outstanding: | |
Weighted average shares outstanding: | |
Weighted average shares outstanding: | Weighted average shares outstanding: | | |
Basic | Basic | 29,199 | | | 28,565 | | | 29,053 | | | 28,481 | | |
Basic | |
Basic | |
Diluted | Diluted | 30,088 | | | 29,117 | | | 29,776 | | | 28,481 | | |
Diluted | |
Diluted | |
See accompanying notes to the unaudited condensed consolidated financial statements.
Potbelly Corporation and Subsidiaries
Condensed Consolidated Statements of Equity (Deficit)
(amounts and shares in thousands, unaudited)
| | Common Stock | | Treasury Stock | | Warrants | | Additional Paid-In- Capital | | Accumulated Deficit | | Non- Controlling Interest | | Total Equity (Deficit) |
| | Shares | | Amount | |
Balance at December 26, 2021 | | 28,380 | | | $ | 380 | | | $ | (114,577) | | | $ | 2,566 | | | $ | 452,570 | | | $ | (343,261) | | | $ | (95) | | | $ | (2,417) | |
| | Common Stock | | | | Common Stock | | Treasury Stock | | Warrants | | Additional Paid-In- Capital | | Accumulated Deficit | | Non- Controlling Interest | | Total Equity |
| | Shares | |
Balance at December 25, 2022 | |
Balance at December 25, 2022 | |
Balance at December 25, 2022 | |
Net income (loss) | Net income (loss) | | — | | | — | | | — | | | — | | | — | | | (7,913) | | | 26 | | | (7,887) | |
Shares issued under equity compensation plan | | 81 | | | 1 | | | (279) | | | — | | | — | | | — | | | — | | | (278) | |
Stock-based compensation plans | |
Proceeds from exercise of warrants | |
Distributions to non-controlling interest | Distributions to non-controlling interest | | — | | | — | | | — | | | — | | | — | | | — | | | (120) | | | (120) | |
Stock-based compensation expense | Stock-based compensation expense | | — | | | — | | | — | | | 675 | | | — | | | — | | | 675 | |
Balance at March 27, 2022 | | 28,461 | | | 381 | | | (114,856) | | | 2,566 | | | 453,245 | | | (351,174) | | | (189) | | | (10,027) | |
Net income (loss) | | — | | | — | | | — | | | — | | | — | | | 574 | | | 134 | | | 708 | |
Shares issued under equity compensation plan | | 235 | | | 2 | | | (325) | | | — | | | (3) | | | — | | | — | | | (326) | |
Distributions to non-controlling interest | | — | | | — | | | — | | | — | | | — | | | — | | | (56) | | | (56) | |
Stock-based compensation expense | | — | | | — | | | — | | | — | | | 820 | | | — | | | — | | | 820 | |
Balance at June 26, 2022 | | 28,696 | | | $ | 383 | | | $ | (115,181) | | | $ | 2,566 | | | $ | 454,062 | | | $ | (350,600) | | | $ | (111) | | | $ | (8,881) | |
Balance at March 26, 2023 (unaudited) | |
| Balance at December 25, 2022 | | 28,819 | | | $ | 384 | | | $ | (115,388) | | | $ | 2,566 | | | $ | 455,831 | | | $ | (338,916) | | | $ | (204) | | | $ | 4,273 | |
Balance at December 31, 2023 | |
Balance at December 31, 2023 | |
Balance at December 31, 2023 | |
Net income (loss) | Net income (loss) | | — | | | — | | | — | | | — | | | — | | | (1,327) | | | 123 | | | (1,204) | |
Shares issued under equity compensation plan | Shares issued under equity compensation plan | | 70 | | | 1 | | | (337) | | | — | | | (1) | | | — | | | — | | | (337) | |
Proceeds from exercise of warrants | Proceeds from exercise of warrants | | 159 | | | 1 | | | — | | | (313) | | | 1,177 | | | — | | | — | | | 865 | |
Distributions to non-controlling interest | Distributions to non-controlling interest | | — | | | — | | | — | | | — | | | — | | | — | | | (152) | | | (152) | |
Stock-based compensation expense | Stock-based compensation expense | | — | | | — | | | — | | | — | | | 911 | | | — | | | — | | | 911 | |
Balance at March 26, 2023 | | 29,048 | | | $ | 386 | | | $ | (115,725) | | | $ | 2,253 | | | $ | 457,918 | | | $ | (340,243) | | | $ | (233) | | | $ | 4,356 | |
Net income (loss) | | — | | | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 2,216 | | | $ | 165 | | | $ | 2,381 | |
Shares issued under equity compensation plan | | 243 | | | 3 | | | (772) | | | — | | | (2) | | | — | | | — | | | (771) | |
Proceeds from exercise of warrants | | 18 | | | — | | | — | | | (34) | | | 130 | | | — | | | — | | | 96 | |
Distributions to non-controlling interest | | — | | | — | | | — | | | — | | | — | | | — | | | (166) | | | (166) | |
Stock-based compensation expense | | — | | | — | | | — | | | — | | | 1,305 | | | — | | | — | | | 1,305 | |
Balance at June 25, 2023 | | 29,309 | | | $ | 389 | | | $ | (116,497) | | | $ | 2,219 | | | $ | 459,351 | | | $ | (338,027) | | | $ | (234) | | | $ | 7,201 | |
Balance at March 31, 2024 (unaudited) | |
See accompanying notes to the unaudited condensed consolidated financial statements.
Potbelly Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(amounts in thousands, unaudited)
| | For the Year to Date Ended |
| June 25, 2023 | | June 26, 2022 |
| For the Quarter to Date Ended | | | For the Quarter to Date Ended |
| March 31, 2024 | | | March 31, 2024 | | March 26, 2023 |
Cash flows from operating activities: | Cash flows from operating activities: | | | |
Net income (loss) | $ | 1,178 | | | $ | (7,179) | |
Adjustments to reconcile net loss to net cash used in operating activities: | |
Net loss | |
Net loss | |
Net loss | |
Adjustments to reconcile net income to net cash provided by operating activities: | |
Depreciation expense | |
Depreciation expense | |
Depreciation expense | Depreciation expense | 5,857 | | | 6,167 | |
Noncash lease expense | Noncash lease expense | 12,386 | | | 13,020 | |
Deferred income tax | Deferred income tax | (81) | | | 9 | |
Stock-based compensation expense | Stock-based compensation expense | 2,216 | | | 1,495 | |
Asset impairment, loss on disposal of property and equipment and shop closures | Asset impairment, loss on disposal of property and equipment and shop closures | 1,061 | | | 2,363 | |
Loss on Franchise Growth Acceleration Initiative activities | Loss on Franchise Growth Acceleration Initiative activities | 936 | | | — | |
Loss on extinguishment of debt | Loss on extinguishment of debt | 224 | | | — | |
Other operating activities | Other operating activities | 209 | | | 139 | |
Changes in operating assets and liabilities: | Changes in operating assets and liabilities: | |
Accounts receivable, net | Accounts receivable, net | (1,862) | | | (1,379) | |
Accounts receivable, net | |
Accounts receivable, net | |
Inventories | Inventories | 281 | | | (121) | |
Prepaid expenses and other assets | Prepaid expenses and other assets | (240) | | | 12 | |
Accounts payable | Accounts payable | (1,222) | | | 455 | |
Operating lease liabilities | Operating lease liabilities | (13,707) | | | (14,183) | |
Accrued expenses and other liabilities | Accrued expenses and other liabilities | 4,786 | | | 1,180 | |
Net cash provided by operating activities: | 12,022 | | | 1,978 | |
Net cash provided by (used in) operating activities: | |
| Cash flows from investing activities: | Cash flows from investing activities: | |
Cash flows from investing activities: | |
Cash flows from investing activities: | |
Purchases of property and equipment | Purchases of property and equipment | (7,281) | | | (3,115) | |
Proceeds from sale of refranchised shops | 1,362 | | | — | |
Purchases of property and equipment | |
Purchases of property and equipment | |
Proceeds from sale of refranchised shops and other assets | |
Net cash used in investing activities: | Net cash used in investing activities: | (5,919) | | | (3,115) | |
| | | | |
Cash flows from financing activities: | Cash flows from financing activities: | |
Cash flows from financing activities: | |
Cash flows from financing activities: | |
Borrowings under Revolving Facility | |
Borrowings under Revolving Facility | |
Borrowings under Revolving Facility | |
Borrowings under Term Loan | Borrowings under Term Loan | 25,000 | | | — | |
Principal payments made for Term Loan | (625) | | | — | |
Borrowings under revolving credit facility | 14,600 | | | 15,000 | |
Repayments under revolving credit facility | (23,150) | | | (12,800) | |
Borrowings under Former Credit Facility | |
Repayments under Revolving Facility | |
Repayments under Term Loan | |
Repayments under Former Credit Facility | |
Payment of debt issuance costs | Payment of debt issuance costs | (2,204) | | | (76) | |
Proceeds from exercise of warrants | Proceeds from exercise of warrants | 961 | | | — | |
Employee taxes on certain stock-based payment arrangements | Employee taxes on certain stock-based payment arrangements | (976) | | | (507) | |
Distributions to non-controlling interest | Distributions to non-controlling interest | (318) | | | (176) | |
Net cash provided by financing activities: | 13,288 | | | 1,441 | |
Principal payments made for Term Loan | |
Net cash provided by (used in) financing activities: | |
| Net increase (decrease) in cash and cash equivalents and restricted cash | |
Net increase (decrease) in cash and cash equivalents and restricted cash | |
Net increase (decrease) in cash and cash equivalents and restricted cash | Net increase (decrease) in cash and cash equivalents and restricted cash | 19,391 | | | 304 | |
Cash and cash equivalents and restricted cash at beginning of period | Cash and cash equivalents and restricted cash at beginning of period | 15,619 | | | 14,353 | |
Cash and cash equivalents and restricted cash at end of period | Cash and cash equivalents and restricted cash at end of period | $ | 35,010 | | | $ | 14,657 | |
| Supplemental cash flow information: | Supplemental cash flow information: | |
Supplemental cash flow information: | |
Supplemental cash flow information: | |
Income taxes paid | |
Income taxes paid | |
Income taxes paid | Income taxes paid | $ | 245 | | | $ | 132 | |
Interest paid | Interest paid | $ | 1,446 | | | $ | 236 | |
| Supplemental non-cash investing and financing activities: | Supplemental non-cash investing and financing activities: | |
Supplemental non-cash investing and financing activities: | |
Supplemental non-cash investing and financing activities: | |
Unpaid liability for purchases of property and equipment | |
Unpaid liability for purchases of property and equipment | |
Unpaid liability for purchases of property and equipment | Unpaid liability for purchases of property and equipment | $ | 1,035 | | | $ | 591 | |
Unpaid liability for employee taxes on certain stock-based payment arrangements | Unpaid liability for employee taxes on certain stock-based payment arrangements | $ | 149 | | | $ | 97 | |
|
See accompanying notes to the unaudited condensed consolidated financial statements
Potbelly Corporation and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (unaudited)
(Dollars and shares in thousands, except per share amounts or where noted)
(1) Organization and Other Matters
Business
Potbelly Corporation, a Delaware corporation, together with its subsidiaries (collectively referred to as the "Company", "Potbelly", "we","Company," "Potbelly," "we," "us" or "our"), owns and operates 372 company-owned345 company-operated shops in the United States as of June 25, 2023.March 31, 2024. Additionally, Potbelly franchisees operate 5582 shops domestically.
Basis of Presentation
The unaudited condensed consolidated financial statements and notes herein should be read in conjunction with the audited consolidated financial statements of Potbelly and its subsidiaries and the notes thereto included in our Annual Report on Form 10-K for the year ended December 25, 2022.31, 2023. The unaudited condensed consolidated financial statements included herein have been prepared by us without audit, pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the "SEC") regarding interim financial reporting. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America ("U.S. GAAP") have been condensed or omitted pursuant to the SEC rules and regulations. In the opinion of management, the accompanying condensed consolidated financial statements contain all adjustments which are of a normal and recurring nature (except as otherwise noted), that are necessary to present fairly our balance sheet as of June 25, 2023 and December 25, 2022, our statementthe financial position, results of operations for the quarter and year to date ended June 25, 2023 and June 26, 2022, the statement of equity for the quarter and year to date ended June 25, 2023 and June 26, 2022, and our statement of cash flows for the quarter and year to date ended June 25, 2023 and June 26, 2022 have been included.interim periods reported within. The condensed consolidated statements of operations for the interim periods presented herein are not necessarily indicative of the results to be expected for the full year.
We do not have any components of other comprehensive income recorded within our consolidated financial statements and therefore, do not separately present a statement of comprehensive income in our condensed consolidated financial statements.
Principles of Consolidation
The unaudited condensed consolidated financial statements include the accounts of Potbelly; its wholly ownedwholly-owned subsidiary, Potbelly Illinois, Inc. (“PII”); PII’s wholly ownedwholly-owned subsidiaries, Potbelly Franchising, LLC and Potbelly Sandwich Works, LLC (“PSW”); seven of PSW’s wholly ownedwholly-owned subsidiaries and PSW’s six joint ventures, collectively, the “Company.” All intercompany balances and transactions have been eliminated in consolidation. For our six consolidated joint ventures, "non-controlling interest" represents the non-controlling partner’s share of the assets, liabilities and operations related to the joint venture investments. Potbelly has ownership interests ranging from 51-80% in these consolidated joint ventures.
Fiscal Year
We use a 52/53-week fiscal year that ends on the last Sunday of the calendar period. Approximately every five or six years a 53rd week is added. Fiscal year 20232024 consists of 5352 weeks and fiscal year 2022 consists2023 consisted of 5253 weeks. The fiscal quarters ended June 25,March 31, 2024 and March 26, 2023 and June 26, 2022 each consisted of 13 weeks. The year to date periods ended June 25, 2023 and June 26, 2022 each consisted of 26 weeks.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses and the disclosure of contingent assets and liabilities. Significant estimates include amounts for long-lived assets and income taxes. Actual results could differ from those estimates.
Franchise Growth Acceleration InitiativeRecent Accounting Pronouncements
On March 2, 2022, we announcedIn November 2023, the Financial Accounting Standard Board ("FASB") issued guidance to expand annual and interim disclosure requirements for reportable segments, primarily through additional disclosures on segment expenses. We will adopt the accounting guidance in our Franchise Growth Acceleration Initiative, which included a plan to grow our franchise units domestically through multi-unit shop development area agreements, which may include refranchising certain company-operated shops. Deals for refranchised shops typically include cash considerationAnnual Report on Form 10-K for the sale ofyear ended December 29, 2024. We do not anticipate the current shops as well as development agreement fees for commitments to develop new shops to fully penetrate existing markets. On an ongoing basis, we collect additional cash consideration for royalties and lease payments.updated standard will have a material impact on our financial statement disclosures.
All losses recognizedIn December 2023, the FASB issued guidance to enhance transparency of income tax disclosures. The updated guidance requires additional disclosures on sales of shopsincome tax rate reconciliation and income taxes paid, among other expenses incurred to execute a refranchising transactionthings. We will adopt the accounting guidance in our Annual Report on Form 10-K for the year ended December 27, 2025. We are included in Loss on Franchising Growth Acceleration Initiative activities incurrently evaluating the condensed consolidated statement of operations. Development agreement fees received are recorded inimpact that the consolidated balance sheets as accrued expenses or other long-term liabilities, and amortized over the term of the franchise agreement once the shops are opened. During the first quarter of 2023, we executed our first refranchising transaction. On July 17, 2023, we closedupdated standard will have on our second refranchising transaction. Both transactions are further discussed in Note 8. The second refranchising transaction is also discussed in Note 12.financial statement disclosures.
2) Restricted Cash
As of June 25, 2023,March 31, 2024, we had restricted cash related to funds held in a money market account as collateral for letters of credit to certain lease agreements.
The reconciliation of cash and cash equivalents and restricted cash presented in the condensed consolidated balance sheets to the total amount shown in our condensed consolidated statements of cash flows is as follows:
| | | | | | | | | | | | | | |
| | June 25, 2023 | | December 25, 2022 |
| | |
Reconciliation of cash, cash equivalents and restricted cash: | | | | |
Cash and cash equivalents | | $ | 34,261 | | | $ | 15,619 | |
Restricted cash, noncurrent | | 749 | | | — | |
Total cash, cash equivalents and restricted cash shown on statement of cash flows | | $ | 35,010 | | | $ | 15,619 | |
Potbelly Brand Fund
We maintain the Potbelly Brand Fund (the "Brand Fund") for the purpose of collecting and administering funds to be used for advertising, customer research, marketing technology, agencies, and other activities that promote the Potbelly brand in order to deliver sales at our shops. Company-operated and franchised shops both contribute to the Brand Fund based on a percentage of sales.
Beginning in the first quarter of fiscal year 2022, we manage these advertising and marketing expenses through the Brand Fund using the funds contributed by our shops. We manage these funds separately from our general operating expenses, but we are not obligated to maintain the funds in separate accounts or entities. We may spend more or less in any fiscal period than the amounts contributed to the Brand Fund, and we may choose to roll over any unused contributions to the following fiscal period or return them to our shops.
Brand Fund contributions made by company-operated shops are eliminated from the consolidated financial statements. Franchisee contributions are included within franchise royalties and fees in the condensed consolidated statements of operations.
Expenses incurred by the Brand Fund are recorded to company-operated and franchised shops based on a percentage of sales. Company-operated Brand Fund expense is included within other operating expenses in our condensed consolidated statements of operations. Franchisee Brand Fund expense is presented within franchise support, rent and marketing expenses in our condensed consolidated statements of operations.
Recent Accounting Pronouncements
We reviewed all recently issued accounting pronouncements and concluded that they were either not applicable or not expected to have a significant impact on the condensed consolidated financial statements. | | | | | | | | | | | | | | |
| | March 31, 2024 | | December 31, 2023 |
| | |
Reconciliation of cash, cash equivalents and restricted cash: | | | | |
Cash and cash equivalents | | $ | 12,723 | | | $ | 33,788 | |
Restricted cash, noncurrent | | 749 | | | 749 | |
Total cash, cash equivalents and restricted cash shown on statement of cash flows | | $ | 13,472 | | | $ | 34,537 | |
(2)(3) Revenue
We primarily earn revenue at a point in time for sandwich shop sales, which can occur in person at thea shop, overthrough our online or app platform, or through a third-party platform. Sales taxes collected from customers are excluded from revenues and the obligation is included in accrued liabilities until the taxes are remitted to the appropriate taxing authorities. We have other revenue generating activities where revenue is generally recognized over time, as outlined below.
For the yearquarter to date ended June 25,March 31, 2024, revenue recognized from all revenue sources on point in time sales was $110.6 million, and revenue recognized from sales over time was $0.6 million. For the quarter to date ended March 26, 2023, revenue recognized from all revenue sources on point in time sales was $243.7$117.9 million and revenue recognized from sales over time was $1.2 million. For the year to date ended June 26, 2022, revenue recognized from all revenue sources on point in time sales was $213.5 million and revenue recognized from sales over time was $0.7$0.4 million.
Franchise Revenue, including Rent IncomeRoyalties and Fees
We earn an initial franchise fee, a franchise development agreement fee and ongoing royalty fees for royalties and Brand Fund contributionssupport fees under our franchise agreements. Initial franchise fees are considered highly dependent upon and interrelated with the franchise right granted in the franchise agreement. As such, these franchise fees are recognized over the contractual term of the franchise agreement. We record a contract liability for the unearned portion of the initial franchise fees. Franchise development agreement fees represent the exclusivity rights for a geographical area paid by a third party to develop Potbelly shops for a certain period of time. Franchise development agreement fee payments received by us are recorded in the consolidated balance sheets as accrued expenses or other long-term liabilities, and amortized over the term of the franchise agreement once the shops are opened. RoyaltiesThese franchise fees are considered highly dependent upon and interrelated with the franchise right granted in the franchise agreement. Royalty fees and Brand Fund contributions are based on a percentage of sales and are recorded as revenue as they are earned and become receivable from the franchisee.
We also earn rent income Other support fees, which primarily include fees for software and technology, are recorded as revenue as the fees are earned and the service is provided to the franchise. Revenue from properties leased by Potbelly and subleasedsupport fees are recognized gross of the related expenses since we are the principal in the arrangement to franchisees. Rent income is recognized on a straight-line basis over the operating lease terms. See Note 6 for further detail.provide those services.
Gift Card Redemptions / Breakage Revenue
Potbelly sells gift cards to customers, records the sale as a contract liability and recognizes the associated revenue as the gift card is redeemed. A portion of these gift cards are not redeemed by the customer ("breakage"), which is recognized as revenue as a percentage of customers gift card redemptions. The expected breakage amount recognized is determined by a historical data analysis on gift card redemption patterns. We recognize gift card breakage income within net sandwich shop sales, net in the condensed consolidated statements of operations.
We recognized gift card breakage income of $0.4$0.3 million and $0.3$0.2 million for the yearquarter to date ended June 25,March 31, 2024 and March 26, 2023, and June 26, 2022, respectively, which is recorded within net sandwich shop sales in our condensed consolidated statementsrespectively.
Loyalty Program
We offer a customer loyalty program for customers using the Potbelly Perks application at the point of sale. TheIn January 2024, we enhanced our Potbelly Perks program to provide more reward options and flexibility for members. Under the original program, the customer will typicallywould earn 10 points for every dollar spent, and the customer willwould earn a free entrée after earning 1,000 points. Once a customer earned a free entrée, that entrée reward expires after 30 days. Under the enhanced program, Perks members will earn 10 or more coins, the equivalent of points under the legacy program, for every dollar they spend. The number of coins earned per dollar is dependent on each member's annual spend with Potbelly. Coins can be redeemed for a variety of items across the Potbelly menu. The coins expire one year after they are earned. The change in program did not have a material impact on our financial statements.
We defer revenue associated with the estimated selling price of points and coins earned by Potbelly Perks members towards free entrées as each point isthey are earned, and a corresponding deferred revenue liability is established in deferred revenue.accrued expenses. The deferral is based on the estimated value of the product for whichunredeemed points and rewards. The estimated value and the reward is expected to be redeemed, net of estimated unredeemed points. Once a customer earns a free entrée, that entrée reward will expire after 30 days. Any point in a customer’s account that does not go toward earning a full entrée will expire after the customer's account has been inactive for a year. The breakage amount recognized is estimatedredemption rates are based on a historical data analysis of loyalty reward redemptions andredemptions. Estimated breakage is recognized in net shop sandwich sales in the consolidated statement of operations. When points and coins are redeemed, we recognize revenue for the redeemed product and reduce accrued expenses.
Contract Liabilities
We record current and noncurrent contract liabilities in accrued expenses and other long-term liabilities, respectively, for initial franchise fees, gift cards, and loyalty programs. We have no other contract liabilities or contract assets recorded.
The opening and closing balances of our current and noncurrent contract liabilities from contracts with customers were as follows:
| | | | | | | | | | | |
| Current Contract Liability | | Noncurrent Contract Liability |
| (Thousands) | | (Thousands) |
Beginning balance as of December 25, 2022 | $ | 7,008 | | | $ | 1,677 | |
Ending balance as of June 25, 2023 | 6,626 | | | 3,400 | |
Increase (Decrease) in contract liability | $ | (382) | | | $ | 1,723 | |
| | | | | | | | | | | |
| Current Contract Liability | | Noncurrent Contract Liability |
Beginning balance as of December 31, 2023 | $ | 8,028 | | | $ | 4,397 | |
Ending balance as of March 31, 2024 | 8,077 | | | 5,318 | |
Increase in contract liability | $ | 49 | | | $ | 921 | |
The aggregate value of remaining performance obligations on outstanding contracts was $10.0$13.4 million as of June 25, 2023.March 31, 2024. We expect to recognize revenue related to contract liabilities as follows, (in thousands), which may vary based upon franchise activity as well as gift card and loyalty program redemption patterns:
| Years Ending | Years Ending | | Amount | Years Ending | | Amount |
2023 | | $ | 5,733 | |
2024 | 2024 | | 459 | |
2025 | 2025 | | 465 | |
2026 | 2026 | | 211 | |
2027 | 2027 | | 147 | |
2028 | |
Thereafter | Thereafter | | 3,011 | |
Total revenue recognized | Total revenue recognized | | $ | 10,026 | |
For the quarter and yearended March 31, 2024, the amount of revenue recognized related to datethe December 31, 2023 liability ending balance was $1.8 million. For the quarter ended June 25,March 26, 2023, the amount of revenue recognized related to the December 25, 2022 liability ending balance was $0.6 million and $2.0 million, respectively. For quarter ended June 26, 2022, the amount of revenue recognized related to the December 26, 2021 liability ending balance was $0.7 million and $1.8$1.3 million. This revenue is related to the recognition of gift card redemptions and upfront franchise fees. For the quarterquarters ended June 25,March 31, 2024 and March 26, 2023, and June 26, 2022, we did not recognize any revenue from obligations satisfied (or partially satisfied) in prior periods.
Contract Costs
(3)Deferred contract costs, which include sales commissions and market planning costs, totaled $1.0 million and $0.9 millionas of March 31, 2024 and December 31, 2023, respectively. Amortization expense for deferred costs was $26.2
thousand and $27.9 thousandfor the quarters ended March 31, 2024 and March 26, 2023, respectively. There was no impairment loss in relation to the costs capitalized for the periods presented.
(4) Fair Value Measurement
The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and all other current liabilities approximate fair values due to the short maturities of these balances.
We apply fair value accounting for all financial assets and liabilities and nonfinancial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis. Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities that are required to be recorded at fair value, we assume the highest and best use of the asset by market participants in which we would transact and the market-based risk measurements or assumptions that market participants would use in pricing the asset or liability, such as inherent risk, transfer restrictions, and credit risk.
We apply the following fair value hierarchy, which prioritizes the inputs used to measure fair value into three levels, and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:
•Level 1 — Quoted prices in active markets for identical assets or liabilities.
•Level 2 — Observable inputs other than quoted prices in active markets for identical assets or liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
•Level 3 — Inputs that are both unobservable and significant to the overall fair value measurement reflect an entity’s estimates of assumptions that market participants would use in pricing the asset or liability.
The following table presents information about our financial assets that were measured at fair value on a recurring basis and indicates the level of the fair value hierarchy used to determine such fair values:
| | | | | | | | | | | | | | |
| | March 31, 2024 | | December 31, 2023 |
| | |
Assets - Level 1 | | | | |
Money market funds | | $ | — | | | $ | 6,398 | |
Financial assets measured at fair value on recurring basis | | $ | — | | | $ | 6,398 | |
The book value of the long-term and short-term debt under the Credit Agreement, which is further discussed in Note 7, is8, was considered to approximate its fair value as of June 25, 2023March 31, 2024, as the interest rates are considered in line with current market rates.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Assets recognized or disclosed at fair value on the condensed consolidated financial statements on a nonrecurring basis include items such as leasehold improvements, property and equipment, operating lease assets, goodwill, and other intangible assets. These assets are measured at fair value if determined to be impaired.
We assess potential impairments to our long-lived assets, which includes property and equipment and lease right-of-use assets, on a quarterly basis or whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. Shop-level assets and right-of-use assets are grouped at the individual shop-level for the purpose of the impairment assessment. Recoverability of an asset group is measured by a comparison of the carrying amount of an asset group to its estimated undiscounted future cash flows expected to be generated by the asset group. If the carrying amount of the asset group exceeds its estimated undiscounted future cash flows, an impairment charge is recognized as the amount by which the carrying amount of the asset group exceeds the fair value of the asset group. The fair value of the shop assets is determined using the discounted future cash flow method of anticipated cash flows through the shop’s lease-end date using fair value measurement inputs classified as Level 3. The fair value of right-of-use assets is estimated using market comparative information for similar properties. Level 3 inputs are derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable. After performing a periodic review of our shops during the
quarter and year to date ended June 25, 2023,March 31, 2024, it was determined that indicators of impairment were present for certain shops as a result of continued underperformance. We performed an impairment analysis related to these shops and recorded an impairment charge of $0.1 million and $0.7$0.2 million for the quarter and year to date ended June 25, 2023.March 31, 2024.
(4)(5) Earnings (Loss) Per Share
Basic and diluted income (loss) per common share attributable to common stockholders are calculated using the weighted average number of common shares outstanding for the period. Diluted income (loss) per common share attributable to common stockholders is computed by dividing the income (loss) allocated to common stockholders by the weighted average number of fully diluted common shares outstanding. In periods of a net loss, no potential common shares
are included in diluted shares outstanding as the effect is anti-dilutive. For the year to date ended June 26, 2022, we had a loss per share, and therefore potentially dilutive shares were excluded from the calculation.
The following table summarizes the earnings (loss) per share calculation:
| | For the Quarter Ended | | For the Year to Date Ended | |
| June 25, 2023 | | June 26, 2022 | | June 25, 2023 | June 26, 2022 | |
Net income (loss) attributable to Potbelly Corporation | $ | 2,216 | | | $ | 574 | | | $ | 890 | | $ | (7,339) | | |
| For the Quarter Ended | |
| For the Quarter Ended | |
| For the Quarter Ended | |
| March 31, 2024 | |
| March 31, 2024 | |
| March 31, 2024 | |
Net loss attributable to Potbelly Corporation | |
Net loss attributable to Potbelly Corporation | |
Net loss attributable to Potbelly Corporation | |
Weighted average common stock outstanding-basic | |
Weighted average common stock outstanding-basic | |
Weighted average common stock outstanding-basic | Weighted average common stock outstanding-basic | 29,199 | | | 28,565 | | | 29,053 | | 28,481 | | |
Plus: Effect of potentially dilutive stock-based compensation awards | Plus: Effect of potentially dilutive stock-based compensation awards | 467 | | | 451 | | | 360 | | — | | |
Plus: Effect of potentially dilutive stock-based compensation awards | |
Plus: Effect of potentially dilutive stock-based compensation awards | |
Plus: Effect of potential warrant exercise | |
Plus: Effect of potential warrant exercise | |
Plus: Effect of potential warrant exercise | Plus: Effect of potential warrant exercise | 422 | | | 101 | | | 363 | | — | | |
Weighted average common shares outstanding-diluted | Weighted average common shares outstanding-diluted | 30,088 | | | 29,117 | | | 29,776 | | 28,481 | | |
Income (loss) per share available to common stockholders-basic | $ | 0.08 | | | $ | 0.02 | | | $ | 0.03 | | $ | (0.26) | | |
Income (loss) per share available to common stockholders-diluted | $ | 0.07 | | | $ | 0.02 | | | $ | 0.03 | | $ | (0.26) | | |
Weighted average common shares outstanding-diluted | |
Weighted average common shares outstanding-diluted | |
Income per share available to common stockholders-basic | |
Income per share available to common stockholders-basic | |
Income per share available to common stockholders-basic | |
Income per share available to common stockholders-diluted | |
Income per share available to common stockholders-diluted | |
Income per share available to common stockholders-diluted | |
Potentially dilutive shares that are considered anti-dilutive: | |
Potentially dilutive shares that are considered anti-dilutive: | |
Potentially dilutive shares that are considered anti-dilutive: | Potentially dilutive shares that are considered anti-dilutive: | | |
Shares | Shares | 433 | | | 637 | | | 633 | | 1,906 | | |
Shares | |
Shares | |
Warrants | |
Warrants | |
Warrants | |
(5)(6) Income Taxes
The interim tax provision is determined using an estimated annual effective tax rate and is adjusted for discrete taxable events that occur during the quarter. We regularly assess the need for a valuation allowance related to our deferred tax assets, which includes consideration of both positive and negative evidence related to the likelihood of realization of such deferred tax assets to determine, based on the weight of the available evidence, whether it is more-likely-than-not that some or all of our deferred tax assets will not be realized. In our assessment, we consider recent financial operating results, projected future taxable income, the reversal of existing taxable differences, and tax planning strategies. We recorded a full valuation allowance against our net deferred tax assets during the first quarter of 2019, resulting in a non-cash charge to income tax expense of $13.6 million. We continue to maintain a valuation allowance against all of our deferred tax assets as of June 25, 2023.March 31, 2024. We did not provide for an income tax expense or benefit on our pre-tax income (loss) for the quarter ended March 31, 2024 and yearMarch 26, 2023.
Given the recent trend in our earnings and forecasted future earnings, we believe there is a reasonable possibility that sufficient positive evidence may become available in the next several quarters to date ended June 25, 2023 and June 26, 2022. We assess the likelihoodconclude that all or a portion of the realizationvaluation allowance will no longer be needed. This would result in the recognition of our deferred tax assets each quarteron our consolidated balance sheet and a decrease to tax expense on our consolidated statement of operations in the period when the release is recorded. However, the exact timing and amount of any valuation allowance is adjusted accordingly.releases are subject to change based on the earnings achieved in future periods.
(6)(7) Leases
We determine if an arrangement is a lease at inception of the arrangement. We lease retail shops and warehouse and office space under operating leases. Our leases generally have terms of ten years and most include options to extend the leases for additional five-year periods. For leases with renewal periods at our option, we determine the expected lease period based on whether the renewal of any options are reasonably assured at the inception of the lease. In addition, we lease certain properties from third parties that we sublease to franchisees. We remain primarily liable to the landlord for the
performance of all obligations in the event that the sublessee does not perform its obligations under the lease. All of our subleases are classified as operating leases with fixed and variable income.
Lessee Disclosures
We did not terminate anyThe gains and losses recognized upon lease terminations are recorded in impairment, loss on disposal of property and equipment and shop closures in the consolidated statement of operations. The right-of use assets, liabilities and gains/losses recognized upon termination of lease contracts were as follows (in thousands, except for number of leases during the quarter and year to date ended June 25, 2023.terminated):
Operating
| | | | | | | | | | | |
| Fiscal Year Ended |
| March 31, 2024 | | March 26, 2023 |
Leases terminated | 1 | | | — | |
Lease termination fees | $ | 200 | | | — | |
Right-of-use assets derecognized upon lease termination | $ | 416 | | | — | |
Lease liabilities derecognized upon lease termination | $ | 506 | | | — | |
Gain (loss) recognized upon lease termination | $ | (110) | | | $ | — | |
The weighted average operating lease term and discount rate were as follows:
| | | | | | | | | | | |
| |
| June 25, 2023 | | June 26, 2022 |
Weighted average remaining lease term (years) | 6.35 | | 6.89 |
Weighted average discount rate | 8.44 | % | | 8.11 | % |
| | | | | | | | | | | |
| |
| March 31, 2024 | | March 26, 2023 |
Weighted average remaining lease term (years) | 6.07 | | 6.54 |
Weighted average discount rate | 9.28 | % | | 8.37 | % |
Certain of our operating lease agreements include variable payments that are passed through by the landlord, such as common area maintenance and real estate taxes, as well as variable payments based on percentage rent for certain of our shops. Pass-through charges and payments based on percentage rent are included within variable lease cost.
The components of lease cost were as follows, (in thousands), which are included in occupancy, general and administrative and franchise support, rent and marketing expense: | | For the Quarter Ended | | For the Year Ended | |
| June 25, 2023 | | June 26, 2022 | | June 25, 2023 | | June 26, 2022 | |
| For the Quarter Ended | |
| For the Quarter Ended | |
| For the Quarter Ended | |
| March 31, 2024 | |
| March 31, 2024 | |
| March 31, 2024 | |
Operating lease cost | |
Operating lease cost | |
Operating lease cost | Operating lease cost | $ | 9,982 | | | 10,092 | | | $ | 20,175 | | | 20,397 | | |
Variable lease cost | Variable lease cost | 3,824 | | | 3,692 | | | 7,364 | | | 7,044 | | |
Variable lease cost | |
Variable lease cost | |
Short-term lease cost | |
Short-term lease cost | |
Short-term lease cost | Short-term lease cost | 62 | | | 104 | | | 157 | | | 214 | | |
Total lease cost | Total lease cost | $ | 13,868 | | | 13,888 | | | $ | 27,696 | | | 27,655 | | |
Total lease cost | |
Total lease cost | |
Supplemental disclosures of cash flow information related to leases were as follows (in thousands):follows:
| | For the Quarter Ended | | For the Year Ended | |
| June 25, 2023 | | June 26, 2022 | | June 25, 2023 | | June 26, 2022 | |
| For the Quarter Ended | |
| For the Quarter Ended | |
| For the Quarter Ended | |
| March 31, 2024 | |
| March 31, 2024 | |
| March 31, 2024 | |
Operating cash flows rent paid for operating lease liabilities | |
Operating cash flows rent paid for operating lease liabilities | |
Operating cash flows rent paid for operating lease liabilities | Operating cash flows rent paid for operating lease liabilities | $ | 10,508 | | | 10,804 | | | $ | 21,206 | | | 21,398 | | |
Operating right-of-use assets obtained in exchange for new operating lease liabilities | Operating right-of-use assets obtained in exchange for new operating lease liabilities | 1,368 | | | 6,794 | | | 4,252 | | | 10,176 | | |
Reduction in operating right-of-use assets due to lease terminations and modifications | $ | 859 | | | 1,264 | | | $ | 859 | | | 1,264 | | |
Operating right-of-use assets obtained in exchange for new operating lease liabilities | |
Operating right-of-use assets obtained in exchange for new operating lease liabilities | |
Reduction in operating right-of-use assets due to lease modifications | |
Reduction in operating right-of-use assets due to lease modifications | |
Reduction in operating right-of-use assets due to lease modifications | |
Maturities of lease liabilities were as follows (in thousands) as of June 25, 2023:March 31, 2024: | | Operating Leases |
Remainder of 2023 | $ | 20,469 | |
2024 | 41,337 | |
| Operating Leases | | | Operating Leases |
Remainder of 2024 | |
2025 | 2025 | 38,586 | |
2026 | 2026 | 34,641 | |
2027 | 2027 | 28,906 | |
2028 | 2028 | 22,311 | |
2029 | |
Thereafter | Thereafter | 46,159 | |
Total lease payments | Total lease payments | 232,409 | |
Less: imputed interest | Less: imputed interest | (54,709) | |
Present value of lease liabilities | Present value of lease liabilities | $ | 177,700 | |
As of June 25, 2023,March 31, 2024, we had no significant real estate leases entered into that had not yet commenced.
Lessor Disclosures
We recognized $0.5$1.4 million and $0.6$0.1 million in franchise rent income during the quarter ended March 31, 2024 and year to date ended June 25,March 26, 2023, respectively, which is included in franchise royalties, fees and rent income in the condensed consolidated statement of operations. DuringWe incurred $1.4 million and $0.1 million in expenses during the quarter ended March 31, 2024 and year to date ended June 25,March 26, 2023, we incurred $0.6 million and $0.7 million
in expensesrespectively associated with these leases, which are included in franchise support, rent and marketing expenses in the condensed consolidated statement of operations.operations from the inception of the related sublease agreements. The components of lease income were as follows (in thousands)(amount in thousands, except number of subleases):
| | For the Quarter Ended | | For the Year Ended |
| June 25, 2023 | | June 26, 2022 | | June 25, 2023 | | June 26, 2022 |
| For the Quarter Ended | |
| For the Quarter Ended | |
| For the Quarter Ended | |
| March 31, 2024 | |
| March 31, 2024 | |
| March 31, 2024 | |
Number of subleases | |
Number of subleases | |
Number of subleases | Number of subleases | 8 | | | — | | | 8 | | | — | |
| Operating lease income | Operating lease income | $ | 480 | | | $ | — | | | $ | 600 | | | $ | — | |
| Operating lease income | |
| Operating lease income | |
Variable lease income | |
Variable lease income | |
Variable lease income | Variable lease income | 25 | | | — | | | 38 | | | — | |
Franchise rent income | Franchise rent income | $ | 505 | | | $ | — | | | $ | 638 | | | $ | — | |
Franchise rent income | |
Franchise rent income | |
Future expected fixed sublease payments from franchisees to Potbelly were as follows at March 31, 2024:
| | | | | |
| Operating Leases |
Remainder of 2024 | $ | 3,086 | |
2025 | 3,931 | |
2026 | 3,113 | |
2027 | 2,095 | |
2028 | 1,704 | |
Thereafter | 3,687 | |
Total sublease payments | $ | 17,616 | |
(8) Debt and Credit Facilities
The components of long-term debt were as follows (in thousands):follows:
| | June 25, 2023 | | December 25, 2022 |
Revolving credit facility | $ | — | | | $ | 8,550 | |
Term loan credit facility | 24,375 | | | — | |
| March 31, 2024 | | | March 31, 2024 | | December 31, 2023 |
Revolving Facility | |
Term Loan | |
Unamortized debt issuance costs | Unamortized debt issuance costs | (2,017) | | | — | |
Less: current portion of long-term debt | Less: current portion of long-term debt | (1,250) | | | — | |
Total long-term debt | Total long-term debt | $ | 21,108 | | | $ | 8,550 | |
Revolving Facility
On February 7, 2024, Potbelly Sandwich Works, LLC (the “Borrower”) entered into a credit agreement (the “Credit Agreement”) with Wintrust Bank, N.A. as administrative agent (the “Agent”), the other loan parties party thereto and the lenders party thereto. The Credit Agreement provides for a revolving loan facility with an aggregate commitment of $30,000,000 (the “Revolving Facility”, the commitments thereunder, the “Revolving Commitments”). Concurrently with entry into the Credit Agreement, we repaid in full and terminated the obligations and commitments of the lenders under our Term Loan. Proceeds from the Revolving Facility will be used for general corporate and working capital purposes.
The Revolving Commitments expire on February 7, 2027.
Loans under the Credit Agreement will initially bear interest, at our option, at either one-month term secured overnight financing rate ("SOFR") or the base rate plus, in each case, an applicable rate per annum, based upon the Consolidated Adjusted Leverage Ratio (as defined in the Credit Agreement). The applicable rate may vary between 3.75% and 2.75% with respect to borrowings which are based upon the one-month term SOFR and between 2.25% and 1.25% with respect to borrowings which are based upon the base rate. Initially, the applicable rate with respect to one-month term SOFR borrowings is 3.25% and the applicable rate with respect to base rate borrowings is 1.75% until the Agent receives a compliance certificate for the fiscal quarter ending on March 31, 2024.
We may prepay the Revolving Commitments at any time and from time to time in whole or in part without premium or penalty, subject to prior notice in accordance with the Credit Agreement.
Subject to certain customary exceptions, obligations under the Credit Agreement are guaranteed by the Company and all of the Company’s current and future wholly-owned material domestic subsidiaries and are secured by a first-priority security interest in substantially all of the assets of the Company and its subsidiary guarantors.
The Credit Agreement contains customary representations and affirmative and negative covenants. Among other things, these covenants restrict our ability to incur certain indebtedness and liens, undergo certain mergers, consolidations and certain other fundamental changes, make certain investments, make certain dispositions and acquisitions, enter into sale and leaseback transactions, enter into certain swap transactions, make certain restricted payments (including certain payment of dividends, repurchases of stock and payments on certain indebtedness), engage in certain transactions with affiliates, enter into certain types of restricted agreements, make certain changes to its organizational documents and indebtedness, and use the proceeds of the Revolving Commitments for certain non-permitted uses. In addition, the Credit Agreement requires that we maintain compliance with certain minimum fixed charge coverage ratios and maximum consolidated leverage ratios as set forth in the Credit Agreement.
The Credit Agreement also contains customary events of default. If an event of default occurs, the Agent and lenders are entitled to take various actions, including the acceleration of amounts due under the Credit Agreement, termination of commitments thereunder and all other actions permitted to be taken by a secured creditor.
Term Loan Credit Facility
On February 7, 2023 (the “Closing Date”), we entered into a credit and guaranty agreement (the “Credit“Term Loan Credit Agreement”) with Sagard Holdings Manager LP as administrative agent (the “Administrative Agent”). The Term Loan Credit Agreement provides for a term loan facility with an aggregate commitment of $25 million (the “Term Loan”). Concurrent with entry into the Term Loan Credit Agreement, we repaid in full and terminated the obligations and commitments under our existingformer senior secured credit facility (the “Former Credit Facility”). Upon terminationIn connection with entering
into the FormerTerm Loan Credit Facility,Agreement, we recognized a loss on extinguishmentpaid $2.2 million in debt issuance costs, all of debt of $0.2 million.which were capitalized. The remaining proceeds from the Term Loan were used to pay related transaction fees and expenses, and for general corporate purposes.
The Term Loan Credit Agreement iswas scheduled to mature on February 7, 2028. We arewere required to make principal payments equal to 1.25% of the initial principal of the Term Loan on the last business day of each fiscal quarter. If not previously paid, any remaining principal balance mustwould be repaiddue on the maturity date.
Loans under the Term Loan Credit Agreement will initially bearbore interest, at the Company’s option, at either the term SOFR plus 9.25% per annum or base rate plus 8.25% per annum.
As of June 25, 2023, the effective interest rate was 15.00%.
We may prepay theThe Term Loan could be prepaid in agreed-upon minimum principal amounts, subject to prepayment fees equal to (a) if the prepayment occursoccurred on or prior to the one (1) year anniversary of the Closing Date, a customary make-whole amount plus 3.00% of the outstanding principal balance of the Term Loan, (b) if the prepayment occursoccurred after such one (1) year anniversary and prior to the two (2) year anniversary of the Closing Date, 3.00% of the outstanding principal balance of the Term Loan, (c) if the prepayment occursoccurred after such second anniversary of the Closing Date and prior to the three (3) year anniversary of the Closing Date 1.00% of the outstanding principal balance of the Term Loan and (d) thereafter, no prepayment fee.
Subject to certain customary exceptions,
On February 7, 2024, we repaid in full and terminated the obligations and commitments under the Credit Agreement are guaranteed by the Company and all of the Company’s current and future wholly owned material domestic subsidiaries and are secured by a first-priority security interest in substantially all of the assets of the Company and its subsidiary guarantors.
The Credit Agreement contains customary representations and affirmative and negative covenants. Among other things, these covenants restrict the Company’s and certain of its subsidiaries’ ability to incur indebtedness, make certain investments, pay dividends or repurchase stock, and make dispositions and acquisitions. In addition, the Credit Agreement requires that the Company and its wholly-owned subsidiaries maintain certain total net leverage ratios as set forth in the Credit Agreement, an average liquidity amount that shall not be less than $10 million, maximum capital expenditures per year as set forth in the Credit Agreement and fixed charge coverage ratios as set forth in theTerm Loan Credit Agreement.
The Credit Agreement also contains customary events As a result of default. If an eventrepaying and terminating the Term Loan, we recognized a loss on extinguishment of default occurs, the Administrative Agent and lenders are entitled to take various actions, including the accelerationdebt of amounts due under the Credit Agreement, termination of commitments thereunder and all other actions permitted to be taken by a secured creditor.
In connection with entering into the Credit Agreement, we paid $2.2$2.4 million in debt issuance costs, all of which were capitalized. During the quarter ended JuneMarch 31, 2024.
Former Credit Facility
On August 7, 2019, we entered into a second amended and restated revolving credit facility agreement (the "Former Credit Agreement") with JPMorgan Chase Bank, N.A. (“JPMorgan”). The Former Credit Agreement amends and restates that certain amended and restated revolving credit facility agreement, dated as of December 9, 2015, and amended on May 3, 2019 (collectively, the "Prior Credit Agreement") with JPMorgan. The Former Credit Agreement provided, among other things, for a revolving credit facility in a maximum principal amount $40 million, with possible future increases of up to $20 million under an expansion feature. Borrowings under the credit facility generally bear interest at our option at either (i) a eurocurrency rate determined by reference to the applicable LIBOR rate plus a specified margin or (ii) a prime rate as announced by JP Morgan plus a specified margin. The applicable margin was determined based upon our consolidated total leverage ratio. On the last day of each calendar quarter, we were required to pay a commitment fee of 0.20% per annum in respect of any unused commitments under the credit facility.
As disclosed in our Annual Report on Form 10-K for the fiscal year ended December 25, 2022, we subsequently amended the Former Credit Agreement during fiscal years 2020, 2021 and 2022. The Former Credit Agreement provided for a revolving credit facility in a maximum principal amount of $25 million.
On February 7, 2023, we amortizedrepaid in full and terminated the obligations and commitments under the Former Credit Agreement. Upon termination of the Former Credit Facility, we recognized a loss on extinguishment of debt of $0.2 million of debt issuance costs using the effective interest method, which is included in interest expense in the condensed consolidated statement of operations. As of June 25, 2023, we had $24.4 million outstanding under the Credit Agreement. We are currently in compliance with all financial debt covenants.quarter ended March 26, 2023.
(8)(9) Franchise Growth Acceleration Initiative
On March 2, 2022, we announced our Franchise Growth Acceleration Initiative, which included a plan to grow our franchise units domestically through multi-unit shop development area agreements, which may include refranchising certain company-operated shops. Deals for refranchised shops typically include cash consideration for the sale of the current shops as well as development agreement fees for commitments to develop new shops to fully penetrate existing markets. On an ongoing basis, we collect additional cash consideration for royalties and lease payments.
The following is a summary of the refranchising activities recorded as a result of the Franchise Growth Acceleration initiativeInitiative during the quarter ended March 31, 2024 and year ended June 25,March 26, 2023 and June 26, 2022:(amounts in thousands, except number of shops):
| | For the Quarter Ended | | For the Year to Date Ended |
| June 25, 2023 | | June 26, 2022 | | June 25, 2023 | | June 26, 2022 |
| For the Quarter Ended | |
| For the Quarter Ended | |
| For the Quarter Ended | |
| March 31, 2024 | |
| March 31, 2024 | |
| March 31, 2024 | |
Number of shops sold to franchisees | |
Number of shops sold to franchisees | |
Number of shops sold to franchisees | Number of shops sold to franchisees | — | | | — | | | 8 | | | — | |
| Proceeds from sale of company-operated shops | Proceeds from sale of company-operated shops | $ | — | | | $ | — | | | $ | 100 | | | $ | — | |
| Proceeds from sale of company-operated shops | |
| Proceeds from sale of company-operated shops | |
Net assets sold | |
Net assets sold | |
Net assets sold | Net assets sold | — | | | — | | | (512) | | | — | |
Goodwill related to the company-operated shops sold to franchisee | Goodwill related to the company-operated shops sold to franchisee | — | | | — | | | (21) | | | — | |
Goodwill related to the company-operated shops sold to franchisee | |
Goodwill related to the company-operated shops sold to franchisee | |
Loss on sale of company-operated shops, net | |
Loss on sale of company-operated shops, net | |
Loss on sale of company-operated shops, net | Loss on sale of company-operated shops, net | — | | | — | | | (433) | | | — | |
| Adjustment to recognize held-for-sale assets at fair value | Adjustment to recognize held-for-sale assets at fair value | — | | | — | | | (503) | | | — | |
| Adjustment to recognize held-for-sale assets at fair value | |
| Adjustment to recognize held-for-sale assets at fair value | |
Other expenses (a) | |
Other expenses (a) | |
Other expenses (a) | Other expenses (a) | (14) | | | — | | | (27) | | | — | |
Loss on Franchise Growth Acceleration Initiative activities | Loss on Franchise Growth Acceleration Initiative activities | $ | (14) | | | $ | — | | | $ | (963) | | | $ | — | |
Loss on Franchise Growth Acceleration Initiative activities | |
Loss on Franchise Growth Acceleration Initiative activities | |
(a)These costs primarily include professional service fees, repairs and maintenance and travel expenses incurred to execute the refranchise transaction.
Refranchise Transactions
On March 6, 2023, we finalizedAll gains and losses recognized on sales of shops and other expenses incurred to execute a multi-unit developmentrefranchising transaction are included in Loss on Franchising Growth Acceleration Initiative activities in the condensed consolidated statement of operations. Development agreement along with our first refranchising dealfees received are recorded in New York City. This agreement included a development commitment for 13 new shopsthe consolidated balance sheets as accrued expenses or other long-term liabilities, and amortized over the next eight years, and the refranchise of eight shops, the ownership of which was fully transferred to the franchisee on March 6, 2023. We recognized
a loss of $0.4 million related to the sale of these shops calculated based on the purchase priceterm of the assets held atfranchise agreement once the company-operated shops lessare opened. For the net assets disposed of, including an allocated portion of goodwill.quarter ended March 31, 2024, we did not complete any refranchising transactions.
Assets held-for-sale
As of June 25, 2023,March 31, 2024, we had assets held-for-sale of $1.2$0.2 million, primarily consisting of property and equipment held at one company-operated shopsshop that we plan to sell within the next year to new or existing franchisees.was subsequently sold on April 8, 2024. Long-lived assets that meet the held-for-sale criteria are reported at the lower of their carrying value or fair value less estimated costs to sell. During the quarter ended March 26, 2023,31, 2024, we recorded an immaterial adjustment of $0.5 million to recognize the held-for-sale assets at fair value, which is included in loss on Franchising Growth Acceleration Initiative activities in the condensed consolidated statement of operations. The estimated fair value of the assets held-for-sale is based upon Level 2 inputs, which includes a sales agreement. On July 17, 2023, we closed on the sale of these assets and ownership transferred to the franchisee. For the quarter ended June 25, 2023, we received $1.2 million in cash attributable to the sale of these refranchise assets.
(9)(10) Capital Stock
On May 8, 2018, we announced that our Board of Directors authorized a stock repurchase program for up to $65.0 million of our outstanding common stock.stock ("2018 Repurchase Plan"). The program permits us, from time to time, to purchase shares in the open market (including in pre-arranged stock trading plans in accordance with the guidelines specified in Rule 10b5-1 under the Securities and Exchange Act of 1934, as amended) or in privately negotiated transactions. The number of common shares actually repurchased, and the timing and price of repurchases, will depend upon market conditions, SEC requirements and other factors. PurchasesRepurchases may be started or stopped at any time without prior notice depending on market conditions and other factors. For the quarter ended June 25, 2023,March 31, 2024, we did not repurchase any shares of our common stock under the stock repurchase program. We do not have plans to repurchase any common stock underOn May 7, 2024, our Board of Directors authorized a stock repurchase program atfor up to $20.0 million over three years that replaced the 2018 Repurchase Plan, which was terminated upon execution of the new program. Refer to Note 13 for additional information related to this time.transaction.
On February 9, 2021, we closed on a Securities Purchase Agreement (the "SPA") for the sale by us of 3,249,668 shares of our common stock at a par value of $0.01 per share and the issuance of warrants to purchase 1,299,861 shares of common stock at an exercise price of $5.45 per warrant for gross proceeds of $16.0 million, before deducting placement agent fees and offering expenses of approximately $1.0 million. The warrants are initiallycurrently exercisable commencing August 13, 2021 through their expiration date ofuntil August 12, 2026. The proceeds received from the SPA were allocated between shares and warrants based on their relative fair values at closing. The warrants were valued utilizing the Black-Scholes method. During the quarter and year to date ended June 25, 2023, 17,505 and 176,272March 31, 2024, 240,187 warrants were exercised at the exercise price of $5.45 per warrant. As of June 25, 2023,March 31, 2024, we had 1,123,589883,402 warrants outstanding that are exercisable through August 12, 2026.
On November 3, 2021, we entered into a certain Equity Sales Agreement (the "Sales Agreement") with William Blair & Company, L.L.C., as agent ("William Blair") pursuant to which we may sell shares of our common stock having an aggregate offering price of up to $40.0 million (the "Shares"), from time to time, in our sole discretion, through an "at the market" equity offering program under which William Blair will act as sales agent. As of June 25, 2023,March 31, 2024, we have not sold any shares under the Sales Agreement.
(10)(11) Stock-Based Compensation
Stock options
We have awarded stock options to certain employees including our senior leadership team. The number of options and exercise price of each option is determined by an independent committee designated by our Board of Directors. The options granted are generally exercisable over a 10-year period from the date of the grant. Outstanding options expire on various dates through the year 2028. The range of exercise prices for the outstanding options as of June 25, 2023March 31, 2024 is $10.59$12.90 and $20.53$13.73 per option, and the options generally vest in one-fourth and one-fifth increments over four and five-year periods, respectively.
A summary of stock option activity for the year to datequarter ended June 25, 2023March 31, 2024 is as follows:
| Options | Options | | Shares (Thousands) | | Weighted Average Exercise Price | | Aggregate Intrinsic Value (Thousands) | | Weighted Average Remaining Term (Years) | Options | | Shares | | Weighted Average Exercise Price | | Aggregate Intrinsic Value | | Weighted Average Remaining Term (Years) |
Outstanding—December 25, 2022 | | 473 | | | $ | 12.22 | | | $ | — | | | 1.46 |
Outstanding—December 31, 2023 | | Outstanding—December 31, 2023 | | 122 | | | $ | 13.71 | | | $ | — | | | 1.44 |
Granted | Granted | | — | | | — | | |
Exercised | Exercised | | — | | | $ | — | | |
Exercised | |
Exercised | |
Canceled | Canceled | | (67) | | | 9.77 | | |
Outstanding—June 25, 2023 | | 406 | | | $ | 12.62 | | | $ | — | | | 1.06 |
Exercisable—June 25, 2023 | | 406 | | | 12.62 | | | $ | — | | | 1.06 |
Canceled | |
Canceled | |
Outstanding—March 31, 2024 | |
Outstanding—March 31, 2024 | |
Outstanding—March 31, 2024 | | | 58 | | | $ | 13.16 | | | $ | — | | | 2.62 |
Exercisable—March 31, 2024 | | Exercisable—March 31, 2024 | | 58 | | | 13.16 | | | $ | — | | | 2.62 |
Stock-based compensation related to stock options is measured at the grant date based on the calculated fair value of the award, and is recognized as expense over the requisite employee service period, which is generally the vesting period of the grant with a corresponding increase to additional paid-in capital. We did not recognize stock-based compensation expense related to stock options for the quarter or year to date ended June 25, 2023March 31, 2024 or the quarter ended JuneMarch 26, 2022. For the year to date ended June 26, 2022, we recognized stock-based compensation expense related to stock options of $0.1 million.2023. As of June 25, 2023,March 31, 2024, we do not havehad no unrecognized stock-based compensation expense related to stock options. We record stock-based compensation expense within general and administrative expenses in the condensed consolidated statements of operations.
Restricted stock units
We award restricted stock units ("RSUs") to certain employees and certain non-employee members of our Board of Directors. Grants of RSUs to our Board of DirectorDirectors fully vest on the first anniversary of the grant date, or upon termination from the Board of Directors for any reason other than for cause, a pro rata portion of the shares vest on the termination date. The employee grants generally vest in one-third increments over a three-year period.
A summary of RSU activity for the year to datequarter ended June 25, 2023March 31, 2024 is as follows:
| RSUs | RSUs | | Number of RSUs (Thousands) | | Weighted Average Fair Value per Share | RSUs | | Number of RSUs | | Weighted Average Fair Value per Share |
Non-vested as of December 25, 2022 | | 908 | | | $ | 4.25 | |
Non-vested as of December 31, 2023 | |
Granted | Granted | | 591 | | | 7.41 | |
Vested | Vested | | (551) | | | 5.08 | |
Canceled | Canceled | | (49) | | | 6.34 | |
Non-vested as of June 25, 2023 | | 899 | | | $ | 6.95 | |
Non-vested as of March 31, 2024 | |
For the quarter and yearended March 31, 2024, we recognized stock-based compensation expense related to dateRSUs of $0.8 million. For the quarter ended June 25,March 26, 2023, we recognized stock-based compensation expense related to RSUs of $1.0 million and $1.6 million, respectively. For the quarter and year to date ended June 26, 2022, we recognized stock-based compensation expense related to RSUs of $0.7 million and $1.3 million, respectively.$0.6 million. As of June 25, 2023,March 31, 2024, unrecognized stock-based compensation expense for RSUs was $6.7$3.7 million, which will be recognized through fiscal year 2024.the first quarter of 2027.
Performance stock units
We award performance share units ("PSUs") to certain of our employees. We have PSUs that have certain vesting conditions based upon our stock price and relative stock performance. We also have PSUs that are based solely on stock price.
Because these PSUs are subject to service and market vesting conditions, we determine the fair market value of each grant using a Monte Carlo simulation model. Participants are entitled to receive a specified number of shares of our common stock contingent on achievement of a stock return on our common stock. For the quarter and year to date ended June 25,March 31, 2024, we recognized stock-based compensation expense for PSUs with market vesting conditions of $0.9 million. For the quarter ended March 26, 2023, we recognized stock-based compensation expense for PSUs with market vesting conditions of $0.3 million
and $0.6 million, respectively. For the quarter and year to date ended June 26, 2022, we recognizedMarch 31, 2024, unrecognized stock-based compensation expense for PSUs with market vesting conditionswas $2.5 million, which will be recognized through the second quarter of $0.1 million and $0.2 million, respectively.2026.
A summary of activity for PSUs with market vesting conditions for the year to datequarter ended June 25, 2023March 31, 2024 is as follows:
| PSUs | PSUs | | Number of PSUs (Thousands) | | Weighted Average Fair Value per Share | PSUs | | Number of PSUs | | Weighted Average Fair Value per Share |
Non-vested as of December 25, 2022 | | 275 | | | 9.34 | |
Non-vested as of December 31, 2023 | |
Granted | Granted | | 297 | | | 7.68 | |
Vested | Vested | | (18) | | | 4.30 | |
Canceled | Canceled | | (40) | | | 6.24 | |
Non-vested as of June 25, 2023 | | 514 | | | $8.44 |
Non-vested as of March 31, 2024 | |
(11)(12) Commitments and Contingencies
We are subject to legal proceedings, claims and liabilities, such as employment-related claims and slip and fall cases, which arise in the ordinary course of business and are generally covered by insurance. We accrue for such liabilities when it is probable that future costs will be incurred and such costs can be reasonably estimated. Such accruals are based on developments to date, our estimates of the outcomes of these matters and our experience in contesting, litigating and settling other similar matters. In the opinion of management, the amount of ultimate liability with respect to those actions should not have a material adverse impact on our financial position or results of operations and cash flows.
Many of the food products we purchase are subject to changes in the price and availability of food commodities, including, among other things, beef, poultry, grains, dairy and produce. We work with our suppliers and use a mix of forward pricing protocols for certain items including agreements with our supplier on fixed prices for deliveries at a time in the future and agreements on a fixed price with our suppliers for the duration of those protocols. We also utilize formula pricing protocols under which the prices we pay are based on a specified formula related to the prices of the goods, such as spot prices. Our use of any forward pricing arrangements varies substantially from time to time and these arrangements tend to cover relatively short periods (i.e., typically twelve months or less). Such contracts are used in normal purchases of our food products and not for speculative purposes, and as such are not required to be evaluated as derivative instruments.
(12) Subsequent Events
On July 17, 2023,During the quarter ended March 31, 2024, we finalizedexecuted a multi-unit developmentsettlement agreement with a third-party software provider. The settlement resulted in a gain of approximately $1.1 million in our consolidated statement of operations which is included in both Labor and Related Expenses and Other Operating Expenses since the settlement related to develop 15 new Potbelly shopscosts that had previously been reported in the next eight years. The transaction included refranchising 12 existing shops. Refer to Note 8 for additional information.those categories.
(13) Subsequent Events
On April 8, 2024 we executed a multi-unit development agreement which included the refranchising of one shop in Salt Lake City, Utah, which was recorded in assets held-for-sale March 31, 2024. We do not expect this transaction to have a material impact on our financial statements.
On May 7, 2024, our Board of Directors authorized a stock repurchase program for up to $20.0 million of our outstanding common stock at any time during the next three years. This program replaces the 2018 Repurchase Plan described further in Note 10, which was terminated upon execution of the new stock repurchase program. The program permits us, from time to time, to purchase shares in the open market (including in pre-arranged stock trading plans in accordance with the guidelines specified in Rule 10b5-1 under the Securities and Exchange Act of 1934, as amended) or in privately negotiated transactions. The number of common shares actually repurchased, and the timing and price of repurchases, will depend upon market conditions, SEC requirements and other factors. Repurchases may be started or stopped at any time without prior notice depending on market conditions and other factors. Currently, we have not repurchased any shares of our common stock under the new stock repurchase program.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
The following discussion of our financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q and with our audited consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 25, 2022.31, 2023. This discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the Private Securities Litigation Reform Act of 1995, and involves numerous risks and uncertainties. Forward-looking statements may include, among others, statements relating to our future financial position and results of operations, our ability to grow our brand in new and existing markets, and the implementation and results of strategic initiatives, including our "Traffic-Driven Profitability" Five-Pillar strategic plan. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts and generally contain words such as "believes," "expects," "may," "will," "should," "seeks," "intends," "plans," "strives," "goal," "estimates," "forecasts," "projects" or "anticipates" and the negative of these terms or similar expressions. Our forward-looking statements are subject to risks and uncertainties, which may cause actual results to differ materially from those projected or implied by the forward-looking statement, due to reasons including, but not limited to, compliance with covenants in our credit facility; competition; general economic conditions including any impact from inflation; our ability to successfully implement our business strategy; the success of our initiatives to increase sales and traffic, including the success of our franchising initiatives; changes in commodity, energy, labor and other costs; our ability to attract and retain management and employees and adequately staff our restaurants; consumer reaction to industry-related public health issues and perceptions of food safety; our ability to manage our growth; reputational and brand issues; price and availability of commodities; consumer confidence and spending patterns; and weather conditions. Forward-looking statements are based on current expectations and assumptions and currently available data and are neither predictions nor guarantees of future events or performance. You should not place undue reliance on forward-looking statements, which speak only as of the date hereof. See "Risk Factors" and "Cautionary Note Regarding Forward-Looking Statements" included in our Annual Report on Form 10-K for the fiscal year ended December 25, 2022,31, 2023, for a discussion of factors that could cause our actual results to differ from those expressed or implied by forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law.
Business
Potbelly is a neighborhood sandwich concept that has been feeding customers’ smiles with warm, toasty sandwiches, signature salads, hand-dipped shakes and other fresh menu items, customized just the way customers want them, for more than 40 years. Potbelly ownspromises Fresh, Fast & Friendly service in a welcoming environment that reflects the local neighborhood. Our employees are trained to engage with our customers in a genuine way to provide a personalized experience. We believe the combination of our great food, people and operates Potbelly Sandwich Shop concepts in the United States. We also have domestic franchise operationsatmosphere creates a devoted base of Potbelly Sandwich Shop concepts. Potbelly’s chief operating decision maker is our Chief Executive Officer. Based on how our Chief Executive Officer reviews financial performance and allocates resources on a recurring basis, we have one operating segment and one reportable segment.customers.
We strive to be proactive and deliberate in our efforts to drive profitable growth in our existing business. Our "Traffic-Driven Profitability" Five-Pillar strategic plan includes a prioritized set of low-cost strategic investments that we believe will deliver strong returns. The five pillars are:
•Craveable QualityCraveable-Quality Food at a Great Value
•People Creating Good Vibes
•Customer Experiences that Drive Traffic Growth
•Digitally DrivenDigitally-Driven Awareness, Connection and Traffic
•Franchise FocusedFranchise-Focused Development
Our shop model is designed to generate, and has generated, strong cash flow, attractive shop-level financial results and high returns on investment. We operate our shops successfully in a wide range of geographic markets, population densities and real estate settings. We aim to generate average shop-level profit margins, a non-GAAP measure, that range from the mid to high teens. Our ability to achieve such margins and returns depends on a number of factors.factors, including consumer behaviors, the economy, and labor and commodity costs. For example, we face increasing labor and commodity costs, which we have partially offset by increasing menu prices. Although there is no guarantee that we will be able to
no guarantee that we will be able to maintain these returns, we believe our attractive shop economics support our ability to profitably grow our brand in new and existing markets.
We are actively executing against our Franchise Growth Acceleration Initiative which includes the goal of refranchising approximately 25% of our company-operated shops over the next three years and executing area development agreements with franchisees to develop additional Potbelly shops in specific markets.
The table below sets forth a rollforward of company-operated and franchise operated activities:
| | Company- Operated | | Franchise- Operated | | Total Company |
Shops as of December 26, 2021 | 397 | | | 46 | | | 443 | |
Shops opened | — | | | 1 | | | 1 | |
Shops closed | (4) | | | — | | | (4) | |
Shops refranchised | — | | | — | | | — | |
Shops as of June 26, 2022 | 393 | | | 47 | | | 440 | |
| | Company- Operated | | | Company- Operated | | Franchise- Operated | | Total Company |
Shops as of December 25, 2022 | Shops as of December 25, 2022 | 384 | | | 45 | | | 429 | |
Shops opened | Shops opened | — | | | 2 | | | 2 | |
Shops closed | Shops closed | (4) | | | —�� | | | (4) | |
Shops refranchised | Shops refranchised | (8) | | | 8 | | | — | |
Shops as of June 25, 2023 | 372 | | | 55 | | | 427 | |
Shops as of March 26, 2023 | |
| Shops as of December 31, 2023 | |
Shops as of December 31, 2023 | |
Shops as of December 31, 2023 | |
Shops opened | |
Shops closed | |
Shops refranchised | |
Shops as of March 31, 2024 | |
Key Performance Indicators
In assessing the performance of our business, we consider a variety of performance and financial measures. The key measures for determining how the business is performing are comparable store sales, number of company-operated shop openings, shop-level profit margins, and Adjusted EBITDA.
Company-Operated Comparable Store Sales
Comparable store sales reflect the change in year-over-year sales for the comparable company-operated store base. We define the comparable company-operated store base to include those shops open for 15 months or longer. As of the quarters ended June 25,March 31, 2024 and March 26, 2023, and June 26, 2022, there were 369342 and 379376 shops, respectively, in our comparable company-operated store base. Comparable store sales growth can be generated by an increase in number of transactions and/or by increases in the average check amount resulting from a shift in menu mix and/or increase in price. This measure highlights performance of existing shops as the impact of new shop openings is excluded. For purposes of the comparable store sales calculation, a transaction is defined as an entrée, which includes sandwiches, salads and bowls of soup or mac and cheese. In fiscal years that include a 53rd week, the last week of the fourth quarter and fiscal year is excluded from the year-over-year comparisons so that the time periods are consistent. In fiscal years that follow a 53-week year, the current period sales are compared to the trailing 52-week sales to compare against the most closely comparable weeks from the prior calendar year.
Number of Company-Operated Shop Openings
The number of company-operated shop openings reflects the number of shops opened during a particular reporting period. Before we open new shops, we incur pre-opening costs. Often, new shops open with an initial start-up period of higher-than-normal sales volumes, which subsequently decrease to stabilized levels. While sales volumes are generally higher during the initial opening period, new shops typically experience normal inefficiencies in the form of higher cost of sales, labor and other direct operating expenses and as a result, shop-level profit margins are generally lower during the start-up period of operation. The average start-up period is 10 to 13 weeks. With our focus on franchise shop development, we expect company shop development to be limited in 2023.for the foreseeable future.
Number of Franchise-Operated Shop Openings
The number of franchise-operated shop openings during a particular reporting period may have an impact on our franchise revenue during that period and subsequent periods. For each franchise-operated shop, we collect an initial franchise fee that is recognized as revenue over the term of the franchise agreement, beginning with the shop opening date. We also collect royalties and other fees from the franchisee after their shop opens and they begin generating sales. We enter into development agreements with some franchisees to open a certain number of shops over a specified development schedule, and we expect the number of franchise-operated shop openings to increase as franchisees make progress on their development commitments.
Shop-Level Profit Margin
Shop-level profit margin is defined as net company-operated sandwich shop sales less company-operated sandwich shop operating expenses, excluding depreciation, which consists of food, beverage and packaging costs, labor and related expenses, occupancy expenses, and other operating expenses, as a percentage of net company-operated sandwich shop sales. Other operating expenses include all other shop-level operating costs, excluding depreciation, the major components of which are credit card fees, fees to third-party marketplace partners, marketing and advertising, shop technology and
software, supply chain costs, operating supplies, utilities, and repair and maintenance costs. Shop-level profit margin is not required by, or presented in accordance with U.S. GAAP. We believe shop-level profit margin is important in evaluating shop-level productivity, efficiency and performance.
Adjusted EBITDA
We define Adjusted EBITDA as net income attributable to Potbelly before depreciation and amortization, interest expense and the provision for income taxes, adjusted for the impact of the following items that we do not consider representative of ongoing operating performance: stock-based compensation expense, impairment and shop closure expenses, gain or loss on disposal of property and equipment, and gain or loss on Franchise Growth Acceleration Initiative activities, as well as other one-time, non-recurring charges. Adjusted EBITDA is not required by or presented in accordance with U.S. GAAP. We believe that Adjusted EBITDA is a useful measure of operating performance, as it provides a picture of operating results by eliminating expenses that management does not believe are reflective of underlying business performance.
Quarter Ended June 25, 2023March 31, 2024 Compared to Quarter Ended JuneMarch 26, 20222023
The following table presents information comparing the components of net lossincome for the periods indicated (dollars in thousands):
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| | | For the Quarter Ended | | Increase (Decrease) | | Percent Change | |
| | June 25, 2023 | | % of Revenues | | June 26, 2022 | | % of Revenues | | |
Revenues | Revenues | | | | | | | | | | | | |
Revenues | |
Revenues | |
Sandwich shop sales, net | |
Sandwich shop sales, net | |
Sandwich shop sales, net | Sandwich shop sales, net | $ | 124,709 | | | 98.5 | | | $ | 114,992 | | | 99.2 | | | $ | 9,717 | | | 8.5 | | |
Franchise royalties, fees and rent income | Franchise royalties, fees and rent income | 1,914 | | | 1.5 | | | 960 | | | 0.8 | | | 954 | | | 99.4 | | |
Franchise royalties, fees and rent income | |
Franchise royalties, fees and rent income | |
Total revenues | |
Total revenues | |
Total revenues | Total revenues | 126,623 | | | 100.0 | | | | 115,952 | | | 100.0 | | | | 10,671 | | | 9.2 | | |
| Expenses | Expenses | | |
| Expenses | |
| Expenses | |
(Percentages stated as a percent of sandwich shop sales, net) | |
(Percentages stated as a percent of sandwich shop sales, net) | |
(Percentages stated as a percent of sandwich shop sales, net) | (Percentages stated as a percent of sandwich shop sales, net) | | |
Sandwich shop operating expenses, excluding depreciation | Sandwich shop operating expenses, excluding depreciation | | |
Sandwich shop operating expenses, excluding depreciation | |
Sandwich shop operating expenses, excluding depreciation | |
Food, beverage and packaging costs | |
Food, beverage and packaging costs | |
Food, beverage and packaging costs | Food, beverage and packaging costs | 34,903 | | | 28.0 | | | 32,830 | | | 28.5 | | | 2,073 | | | 6.3 | | |
Labor and related expenses | Labor and related expenses | 37,866 | | | 30.4 | | | 36,121 | | | 31.4 | | | 1,745 | | | 4.8 | | |
Labor and related expenses | |
Labor and related expenses | |
Occupancy expenses | Occupancy expenses | 13,083 | | | 10.5 | | | 13,805 | | | 12.0 | | | (722) | | | (5.2) | | |
Occupancy expenses | |
Occupancy expenses | |
Other operating expenses | |
Other operating expenses | |
Other operating expenses | Other operating expenses | 20,925 | | | 16.8 | | | 19,128 | | | 16.6 | | | 1,797 | | | 9.4 | | |
| (Percentages stated as a percent of total revenues) | (Percentages stated as a percent of total revenues) | | |
| (Percentages stated as a percent of total revenues) | |
| (Percentages stated as a percent of total revenues) | |
Franchise support, rent and marketing expenses | |
Franchise support, rent and marketing expenses | |
Franchise support, rent and marketing expenses | Franchise support, rent and marketing expenses | 1,215 | | | 1.0 | | | 126 | | | 0.1 | | | 1,089 | | | 864.3 | | |
General and administrative expenses | General and administrative expenses | 11,695 | | | 9.2 | | | 8,827 | | | 7.6 | | | 2,868 | | | 32.5 | | |
General and administrative expenses | |
General and administrative expenses | |
Depreciation expense | |
Depreciation expense | |
Depreciation expense | Depreciation expense | 2,887 | | | 2.3 | | | 3,030 | | | 2.6 | | | (143) | | | (4.7) | | |
Pre-opening costs | Pre-opening costs | 33 | | | NM | | — | | | NM | | 33 | | | NM | |
Pre-opening costs | |
Pre-opening costs | |
Loss on Franchise Growth Acceleration Initiative activities | |
Loss on Franchise Growth Acceleration Initiative activities | |
Loss on Franchise Growth Acceleration Initiative activities | Loss on Franchise Growth Acceleration Initiative activities | 14 | | | NM | | — | | | NM | | 14 | | | NM | |
Impairment, loss on disposal of property and equipment and shop closures | Impairment, loss on disposal of property and equipment and shop closures | 658 | | | 0.5 | | | 1,044 | | | 0.9 | | | (386) | | | (37.0) | | |
Total expenses | 123,279 | | | 97.4 | | | | 114,911 | | | 99.1 | | | | 8,368 | | | 7.3 | | |
Impairment, loss on disposal of property and equipment and shop closures | |
Impairment, loss on disposal of property and equipment and shop closures | |
Total operating expenses | |
Total operating expenses | |
Total operating expenses | |
Income (loss) from operations | |
Income (loss) from operations | |
Income (loss) from operations | Income (loss) from operations | 3,344 | | | 2.6 | | | | 1,041 | | | 0.9 | | | | 2,303 | | | 221.2 | | |
| Interest expense, net | Interest expense, net | 1,011 | | | 0.8 | | | 357 | | | 0.3 | | | 654 | | | 183.2 | | |
| Interest expense, net | |
| Interest expense, net | |
Loss on extinguishment of debt | Loss on extinguishment of debt | — | | | NM | | — | | | NM | | — | | | NM | |
Income (loss) before income taxes | 2,333 | | | 1.8 | | | | 684 | | | 0.6 | | | | 1,649 | | | 241.1 | | |
Income tax expense (benefit) | (48) | | | NM | | (24) | | | NM | | (24) | | | NM | |
Net income (loss) | 2,381 | | | 1.9 | | | | 708 | | | 0.6 | | | | 1,673 | | | 236.3 | | |
Loss on extinguishment of debt | |
Loss on extinguishment of debt | |
Loss before income taxes | |
Loss before income taxes | |
Loss before income taxes | |
Income tax expense | |
Income tax expense | |
Income tax expense | |
Net loss | |
Net loss | |
Net loss | |
Net income attributable to non-controlling interest | Net income attributable to non-controlling interest | 165 | | | 0.1 | | | 134 | | | 0.1 | | | 31 | | | 23.1 | | |
Net income (loss) attributable to Potbelly Corporation | $ | 2,216 | | | 1.8 | | | | $ | 574 | | | 0.5 | | | | $ | 1,642 | | | 286.1 | | |
Net income attributable to non-controlling interest | |
Net income attributable to non-controlling interest | |
Net loss attributable to Potbelly Corporation | |
Net loss attributable to Potbelly Corporation | |
Net loss attributable to Potbelly Corporation | |
| | For the Quarter Ended | |
| | For the Quarter Ended | | |
| For the Quarter Ended | |
| | For the Quarter Ended | |
Other Key Performance Indicators | |
Other Key Performance Indicators | |
Other Key Performance Indicators | Other Key Performance Indicators | June 25, 2023 | | | June 26, 2022 | | Increase (Decrease) | |
Comparable store sales | Comparable store sales | 12.9 | % | | 17.2 | % | | (4.3) | % | |
Comparable store sales | |
Comparable store sales | |
Shop-level profit margin(1) | |
Shop-level profit margin(1) | |
Shop-level profit margin(1) | Shop-level profit margin(1) | 14.4 | % | | 11.4 | % | | 3.0 | % | |
Adjusted EBITDA(1) | Adjusted EBITDA(1) | $ | 8,043 | | | $ | 5,801 | | | $ | 2,242 | | |
Adjusted EBITDA(1) | |
Adjusted EBITDA(1) | |
_____________________________________(1) - Reconciliation below for Non-GAAP measures
"NM" - Amount is not meaningful
Sandwich shop sales, net
Revenues
Total revenues increasedSandwich shop sales, net decreased by $10.7$9.4 million, or 9.2%8.0%, to $126.6$107.6 million during the quarter ended June 25, 2023,March 31, 2024, from $116.0$116.9 million during the quarter ended JuneMarch 26, 2022. This increase was primarily2023, driven by the sustained recoveryour refranchising of our shops in central business districts33 company-operated stores.
Franchise royalties, fees and airport locations, improved performance of our catering channel, successful marketing programs, and increased prices to offset cost inflation. Company-operated comparable store sales resulted in an increase in revenue of $14.2 million, or 12.9%. These increases were partially offset by a decrease in sales of $5.0 million from shops that have either permanently closed or were refranchised over the last 12 months. Additionally, revenuerental income
Revenue from franchise royalties, fees and rentrental income increased by $1.0$2.3 million, or 99.4%170.3%, to $3.6 million during the quarter ended March 31, 2024, from $1.3 million during the quarter ended March 26, 2023, primarily driven by our refranchising efforts.an increase in the number of franchised shops due to refranchise transactions, including rental income from new subleases on certain refranchised shops.
Food, Beverage, and Packaging Costs
Food, beverage, and packaging costs increaseddecreased by $2.1$3.4 million, or 6.3%10.3%, to $34.9$29.3 million during the quarter ended June 25, 2023,March 31, 2024, from $32.8$32.6 million during the quarter ended JuneMarch 26, 2022.2023. This increasedecrease was primarily driven by an increase in shop sales volume and increasedlower costs of our foodprotein and paper supplies, specifically proteins and bread.lower costs from refranchised shops over the last 12 months. As a percentage of sandwich shop sales, food, beverage, and packaging costs decreased to 28.0%27.2% during the quarter ended June 25, 2023,March 31, 2024, from 28.5%27.9% during the quarter ended JuneMarch 26, 2022,2023, primarily driven by a decrease in costs, lower inflation and, to a lesser extent, increased menu prices, partially offset by the increased costs as previously noted.prices.
Labor and Related Expenses
Labor and related expenses increaseddecreased by $1.7$4.2 million, or 4.8%11.6%, to $37.9$32.3 million during the quarter ended June 25, 2023,March 31, 2024, from $36.1$36.5 million for the quarter ended JuneMarch 26, 2022,2023, primarily driven by an increaseshops that were refranchised over the last 12 months and the continued optimization of our hours-based labor guide and other labor-saving initiatives. For the quarter ended March 31, 2024, labor and related expenses also benefited from a settlement payment received from a third-party software provider whose issues related to a service disruption impacted the efficiency of our shop operations in shop sales volumes and higher shop labor wage rates as a result of labor availability challenges in certain restaurants.prior quarters. As a percentage of sandwich shop sales, labor and related expenses decreased to 30.4%30.0% during the quarter ended June 25, 2023,March 31, 2024, from 31.4%31.2% for the quarter ended JuneMarch 26, 2022,2023, primarily driven by sales leverage in certain labor related costs not directly variable with sales.the previously noted items.
Occupancy Expenses
Occupancy expenses decreased by $0.7$1.6 million, or 5.2%12.0%, to $13.1$11.7 million during the quarter ended June 25, 2023,March 31, 2024, from $13.8$13.3 million during the quarter ended JuneMarch 26, 2022,2023, primarily due to a decrease in fixed lease expenses as a result of our refranchising efforts, partially offset by an increase in variable lease expenses.efforts. As a percentage of sandwich shop sales, occupancy expenses decreased to 10.5%10.9% for the quarter ended June 25, 2023,March 31, 2024, from 12.0%11.4% for the quarter ended JuneMarch 26, 2022,2023, primarily due to increased sales leverage in certain occupancy related costs which are not variable with sales.our refranchising efforts noted above.
Other Operating Expenses
Other operating expenses increaseddecreased by $1.8$0.7 million, or 9.4%3.2%, to $20.9$19.8 million during the quarter ended June 25, 2023,March 31, 2024, from $19.1$20.5 million during the quarter ended JuneMarch 26, 2022.2023. The increasedecrease was primarily related to a decrease in controllable expenses, such as food equipment, coupled with a benefit from a settlement payment received from a third-party software provider whose issues related to a service disruption impacted the efficiency of our shop operations in prior quarters. The decrease was partially offset by an increase in marketing and advertising spend and certain items variable with sales, including fees to third-party delivery partners and credit card fees. As a percentage of sandwich shop sales, other operating expenses increased to 16.8%18.4% for the quarter ended June 25, 2023,March 31, 2024, from 16.6%17.5% for the quarter ended JuneMarch 26, 2022,2023, primarily driven by the increase in marketing and advertising spend.
Franchise Support, Rent and Marketing Expenses
Franchise support, rent and marketing expenses increased by $1.1$1.9 million, or 329.3%,to $1.2$2.5 million during the quarter ended June 25, 2023March 31, 2024 compared to $0.1$0.6 million during the quarter ended JuneMarch 26, 2022,2023, driven by an increase in franchise rent expensesexpense as a result of the refranchising transactiontransactions executed in the first quarterthroughout fiscal year 2023 as well as increased marketing and advertising expenses.
General and Administrative Expenses
General and administrative expenses increased by $2.9$1.6 million, or 32.5%15.8%, to $11.7$11.5 million during the quarter ended June 25, 2023,March 31, 2024, from $8.8$10.0 million during the quarter ended JuneMarch 26, 2022.2023. This increase was primarily driven by an
increase in bonus accrual expensepayroll costs due to an increase in employees, and stock-based compensation expense. As a percentage of revenues, general and administrative expenses increased to 9.2%10.4% for the quarter ended June 25, 2023,March 31, 2024, from 7.6%8.4% for the quarter ended JuneMarch 26, 2022,2023, primarily driven by the costs noted above.
an increase in corporate headcount to support our growth and development initiatives. Depreciation Expense
Depreciation expense decreased by $0.1 million, or 4.7%, to $2.9 million duringdid not materially change for the quarter ended June 25, 2023,March 31, 2024 from $3.0 million during the quarter ended JuneMarch 26, 2022. The decrease was driven primarily by a lower depreciable base related to a decrease in the number of company-operated shops and impairment charges taken in prior periods.2023. As a percentage of revenues, depreciation was 2.3%2.7% during the quarter ended June 25, 2023, a decrease from 2.6%March 31, 2024, which is consistent with the quarter ended March 26, 2023.
Pre-Opening costs
Pre-opening costs did not materially change for the quarter ended JuneMarch 31, 2024 from the quarter ended March 26, 2022.2023.
Loss on Franchise Growth Acceleration and Initiative activities
Loss on Franchise Growth Acceleration and Initiative activities decreased by $0.8 million, or 86.0%, to $0.1 million for the quarter ended March 31, 2024, from $0.9 million during the quarter ended March 26, 2023 as eight shops were refranchised in the quarter ended March 26, 2023 and none were refranchised in the quarter ended March 31, 2024.
Impairment, Loss on Disposal of Property and Equipment and Shop Closures
Impairment, loss on disposal of property and equipment and shop closures decreased by $0.4$0.3 million, or 37.0%29.1%, to $0.7 million during the quarter ended June 25, 2023,March 31, 2024, from $1.0 million during the quarter ended JuneMarch 26, 2022.2023.
After performing a periodic review of our shops duringDuring the quarter ended June 25, 2023, it was determined that indicators of impairmentMarch 31, 2024, we incurred $0.2 million in lease termination fees, which were present for certain shops as a result of continued underperformance. We performed an impairment analysis related to these shops and recorded an impairment charge of $0.1 million forpartially offset with gains on the termination. During the quarter ended June 25, 2023.
During the quarters ended June 25, 2023 and JuneMarch 26, 2022, we did not incur any lease termination fees.
Interest Expense, Net
Net interest expense was $1.0 million during the quarter ended June 25, 2023 compared to $0.4 million during the quarter ended June 26, 2022, due to higher interest rates and average borrowings outstanding as a result of the Term Loan entered into in February 2023.
Income Tax Expense
We recognized income tax benefit of $48.0 thousand and $24.0 thousand for the quarters ended June 25, 2023 and June 26, 2022, respectively.
Year to Date Ended June 25, 2023 Compared to Year to Date Ended June 26, 2022
The following table presents information comparing the components of net loss for the periods indicated (dollars in thousands):
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| For the Year to Date Ended | | | Increase (Decrease) | | Percent Change |
| June 25, 2023 | | % of Revenues | | | June 26, 2022 | | % of Revenues | | | |
Revenues | | | | | | | | | | | | | |
Sandwich shop sales, net | $ | 241,656 | | | 98.7 | % | % | | $ | 212,423 | | | 99.2 | | % | | $ | 29,233 | | | 13.8 | |
Franchise royalties, fees and rent income | $ | 3,237 | | | 1.3 | | | | $ | 1,750 | | | 0.8 | | | | 1,487 | | | 85.0 | |
Total revenues | 244,893 | | | 100.0 | | | | $ | 214,173 | | | 100.0 | | | | 30,720 | | | 14.3 | |
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Expenses | | | | | | | | | | | | | |
(Percentages stated as a percent of sandwich shop sales, net) | | | | | | | | | | | | | |
Sandwich shop operating expenses, excluding depreciation | | | | | | | | | | | | | |
Food, beverage and packaging costs | 67,523 | | | 27.9 | | | | 60,138 | | | 28.3 | | | | 7,385 | | | 12.3 | |
Labor and related expenses | 74,368 | | | 30.8 | | | | 69,374 | | | 32.7 | | | | 4,994 | | | 7.2 | |
Occupancy expenses | 26,393 | | | 10.9 | | | | 27,650 | | | 13.0 | | | | (1,257) | | | (4.5) | |
Other operating expenses | 41,409 | | | 17.1 | | | | 37,233 | | | 17.5 | | | | 4,176 | | | 11.2 | |
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(Percentages stated as a percent of total revenues) | | | | | | | | | | | | | |
Franchise support, rent and marketing expenses | 1,806 | | | 0.7 | | | | 246 | | | 0.1 | | | | 1,560 | | | 634.1 | |
General and administrative expenses | 21,664 | | | 8.8 | | | | 17,345 | | | 8.1 | | | | 4,319 | | | 24.9 | |
Depreciation expense | 5,857 | | | 2.4 | | | | 6,167 | | | 2.9 | | | | (310) | | | (5.0) | |
Pre-opening costs | 55 | | | NM | | | — | | | NM | | | 55 | | | NM |
Loss on Franchise Growth Acceleration Initiative activities | 963 | | | 0.4 | | | | — | | | NM | | | 963 | | | NM |
Impairment, loss on disposal of property and equipment and shop closures | 1,703 | | | 0.7 | | | | 2,363 | | | 1.1 | | | | (660) | | | (27.9) | |
Total expenses | 241,741 | | | 98.7 | | | | 220,516 | | | 103.0 | | | | 21,225 | | | 9.6 | |
Income (loss) from operations | 3,152 | | | 1.3 | | | | (6,343) | | | (3.0) | | | | 9,495 | | | NM |
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Interest expense, net | 1,678 | | | 0.7 | | | | 683 | | | 0.3 | | | | 995 | | | 145.7 | |
Gain on extinguishment of debt | 239 | | | 0.1 | | | | — | | | NM | | | 239 | | | NM |
Income (loss) before income taxes | 1,235 | | | 0.5 | | | | (7,026) | | | (3.3) | | | | 8,261 | | | NM |
Income tax expense (benefit) | 57 | | | NM | | | 153 | | | NM | | | (96) | | | (62.7) | |
Net income (loss) | 1,178 | | | 0.5 | | | | (7,179) | | | (3.4) | | | | 8,357 | | | NM |
Net income attributable to non-controlling interest | 288 | | | 0.1 | | | | 160 | | | NM | | | 128 | | | 80.0 | |
Net income (loss) attributable to Potbelly Corporation | $ | 890 | | | 0.4 | | % | | $ | (7,339) | | | (3.4) | | % | | $ | 8,229 | | | NM |
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| For the Year to Date Ended | | | | | |
Other Key Performance Indicators | June 25, 2023 | | | June 26, 2022 | | | Increase (Decrease) |
Comparable store sales | 17.2 | % | | | 20.4 | % | | | (3.2) | % |
Shop-level profit margin(1) | 13.2 | % | | | 8.5 | % | | | 4.7 | % |
Adjusted EBITDA(1) | $ | 13,603 | | | | $ | 3,522 | | | | $ | 10,081 | |
(1) - Reconciliation below for Non-GAAP measures
"NM" - Amount is not meaningful
Revenues
Total revenues increased by $30.7 million, or 14.3%, to $244.9 million during the year to date ended June 25, 2023, from $214.2 million during the year to date ended June 26, 2022. This increase was primarily driven by the sustained recovery of our shops in central business district and airport locations, improved performance of our catering channel, successful marketing programs, and increased prices to offset cost inflation. Company-operated comparable store sales resulted in an increase of $35.5 million, or 17.2% for the year to date ended June 25, 2023. The increase in revenue also included sales from shops that were temporarily closed in 2022. These increases were partially offset by a decrease in sales of $7.1 million from shops that have permanently closed or refranchised during the last year. Additionally, revenue from franchise royalties and fees increased by $1.5 million, or 85.0%.
Food, Beverage, and Packaging Costs
Food, beverage, and packaging costs increased by $7.4 million, or 12.3%, to $67.5 million during the year to date ended June 25, 2023, from $60.1 million during the year to date ended June 26, 2022. This increase was primarily driven by an increase in shop sales volume and increased costs of our food and paper supplies, partially due to commodity inflation. As a percentage of sandwich shop sales, food, beverage, and packaging costs decreased to 27.9% during the year to date ended June 25, 2023, from 28.3% during the year to date ended June 26, 2022, primarily driven by increased menu prices partially offset by increased costs noted above.
Labor and Related Expenses
Labor and related expenses increased by $5.0 million, or 7.2%, to $74.4 million during the year to date ended June 25, 2023, from $69.4 million for the year to date ended June 26, 2022, primarily driven by an increase in shop sales volumes and higher shop labor wage rates as a result of labor availability challenges in certain restaurants. As a percentage of sandwich shop sales, labor and related expenses decreased to 30.8% during the year to date ended June 25, 2023, from 32.7% for the year to date ended June 26, 2022, primarily driven by sales leverage in certain fixed labor related costs not directly variable with sales.
Occupancy Expenses
Occupancy expenses decreased by $1.3 million, or 4.5%, to $26.4 million during the year to date ended June 25, 2023, from $27.7 million during the year to date ended June 26, 2022, primarily due to our refranchising efforts. As a percentage of sandwich shop sales, occupancy expenses decreased to 10.9% for the year to date ended June 25, 2023, from 13.0% for the year to date ended June 26, 2022, primarily due to increased sales leverage in certain fixed occupancy related costs and the refranchising of shops in New York City, as noted above.
Other Operating Expenses
Other operating expenses increased by $4.2 million, or 11.2%, to $41.4 million during the year to date ended June 25, 2023, from $37.2 million during the year to date ended June 26, 2022. The increase was primarily related to an increase in marketing and advertising spend and certain variable costs, including fees to third-party delivery partners and credit card fees. As a percentage of sandwich shop sales, other operating expenses decreased to 17.1% for the year to date ended June 25, 2023, from 17.5% for the year to date ended June 26, 2022, primarily driven by a decrease in utilities as energy prices have declined year-over-year.
Franchise Support, Rent and Marketing Expenses
Franchise support, rent and marketing expenses increased by $1.6 million to $1.8 million during the year to date ended June 25, 2023 compared to $0.2 million during the year to date ended June 26, 2022, driven by increased rent expense from our refranchise efforts and increased marketing and advertising expenses.
General and Administrative Expenses
General and administrative expenses increased by $4.3 million, or 24.9%, to $21.7 million during the year to date ended June 25, 2023, from $17.3 million during the year to date ended June 26, 2022. This increase was primarily driven by an increase in bonus expense and payroll costs. As a percentage of revenues, general and administrative expenses increased to 8.8% for the year to date ended June 25, 2023, from 8.1% for the year to date ended June 26, 2022, primarily driven by an increase in corporate headcount to support our growth and development initiatives.
Depreciation Expense
Depreciation expense decreased by $0.3 million, or 5.0%, to $5.9 million during year to date ended June 25, 2023, from $6.2 million during the year to date ended June 26, 2022. The decrease was driven primarily by a lower depreciable base related to a decrease in the number of company-operated shops and impairment charges taken in prior periods. As a percentage of revenues, depreciation was 2.4% during the year to date ended June 25, 2023 and was 2.9% for the year to date ended June 26, 2022.
Impairment, Loss on Disposal of Property and Equipment and Shop Closures
Impairment, loss on disposal of property and equipment and shop closures decreased by $0.7 million, or 27.9%, to $1.7 million during the year to date ended June 25, 2023, from $2.4 million during the year to date ended June 26, 2022.
After performing a periodic review of our shops during the year to date ended June 25, 2023, it was determined that indicators of impairment were present for certain shops as a result of continued underperformance. We performed an impairment analysis related to these shops and recorded an impairment charge of $0.7 million for the year to date ended June 25, 2023.
During the year to date ended June 25, 2023, we did not incur any lease termination fees.
Interest Expense, Net
Net interest expense was $1.7$0.4 million during the year to datequarter ended June 25, 2023March 31, 2024 compared to $0.7 million during the yearquarter ended March 26, 2023. The decrease was due to date ended June 26, 2022, as a result of higher borrowings outstanding and higherlower interest rates on ourthe Revolving Facility as compared with the Term Loan entered intoand lower average borrowings outstanding once the Revolving Facility was executed and the Term Loan was repaid.
Loss on Extinguishment of Debt
Loss on extinguishment of debt was $2.4 million, during the quarter ended March 31, 2024 compared to $0.2 millionduring quarter ended March 26, 2023. The increase was due to an the extinguishment of the Term Loan in February 2023.the first quarter of 2024, which was subject to a prepayment penalty and required the company to write-off of debt issuance costs originally capitalized when the Term Loan was executed.
Income Tax Expense
We recognized income tax expense of $0.1 million$51 thousand for the year to datequarter ended June 25, 2023March 31, 2024 compared to expense of $0.2 million$105 thousand for the yearquarter ended March 26, 2023.
Non-Controlling Interests
The portion of income attributable to datenon-controlling interests decreased by $29 thousand for the quarter ended JuneMarch 31, 2024 compared with the quarter ended March 26, 2022.2023 primarily due to the temporary closure of one of our joint venture shops, which was closed for remodeling during a portion of the first quarter of 2024.
Non-GAAP Financial Measures
Shop-Level Profit (Loss) Margin
Shop-level profit (loss) margin was 14.4% and 13.2%13.5% for the quarter and yearended March 31, 2024, due to date ended June 25, 2023, respectively.the changes discussed above. Shop-level profit (loss) margin is not required by, or presented in accordance with U.S. GAAP. We believe shop-level profit (loss) margin is important in evaluating shop-level productivity, efficiency and performance. | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Quarter Ended | | For the Year to Date Ended | | |
| June 25, 2023 | | June 26, 2022 | | June 25, 2023 | | June 26, 2022 | | | | |
| ($ in thousands) | | ($ in thousands) | | |
Income (loss) from operations | $ | 3,344 | | | $ | 1,041 | | | $ | 3,152 | | | $ | (6,343) | | | | | |
Less: Franchise royalties, fees and rent income | 1,914 | | | 960 | | | 3,237 | | | 1,750 | | | | | |
Franchise support, rent and marketing expenses | 1,215 | | | 126 | | | 1,806 | | | 246 | | | | | |
General and administrative expenses | 11,695 | | | 8,827 | | | 21,664 | | | 17,345 | | | | | |
Pre-opening costs | 33 | | | — | | | 55 | | | — | | | | | |
Loss on Franchise Growth Acceleration Initiative activities | 14 | | | — | | | 963 | | | — | | | | | |
Depreciation expense | 2,887 | | | 3,030 | | | 5,857 | | | 6,167 | | | | | |
Impairment, loss on disposal of property and equipment and shop closures | 658 | | | 1,044 | | | 1,703 | | | 2,363 | | | | | |
Shop-level profit (loss) [Y] | $ | 17,932 | | | $ | 13,108 | | | $ | 31,963 | | | $ | 18,028 | | | | | |
Total revenues | $ | 126,623 | | | $ | 115,952 | | | $ | 244,893 | | | $ | 214,173 | | | | | |
Less: Franchise royalties, fees and rent income | 1,914 | | | 960 | | | 3,237 | | | 1,750 | | | | | |
Sandwich shop sales, net [X] | $ | 124,709 | | | $ | 114,992 | | | $ | 241,656 | | | $ | 212,423 | | | | | |
Shop-level profit (loss) margin [Y÷X] | 14.4 | % | | 11.4 | % | | 13.2 | % | | 8.5 | % | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| For the Quarter Ended | | | | |
| March 31, 2024 | | March 26, 2023 | | | | | | | | |
| ($ in thousands) | | | | |
Income (loss) from operations [A] | $ | 118 | | | $ | (193) | | | | | | | | | |
Income (loss) from operations margin [A÷B] | 0.1 | % | | (0.2) | % | | | | | | | | |
Less: Franchise royalties, fees and rental income | 3,576 | | | 1,323 | | | | | | | | | |
Franchise support, rent and marketing expenses | 2,537 | | | 591 | | | | | | | | | |
General and administrative expenses | 11,547 | | | 9,969 | | | | | | | | | |
Depreciation expense | 3,011 | | | 2,971 | | | | | | | | | |
Pre-opening costs | — | | | 22 | | | | | | | | | |
Loss on Franchise Growth Acceleration Initiative activities | 133 | | | 949 | | | | | | | | | |
Impairment, loss on disposal of property and equipment and shop closures | 741 | | | 1,045 | | | | | | | | | |
Shop-level profit [C] | $ | 14,511 | | | $ | 14,031 | | | | | | | | | |
Total revenues [B] | $ | 111,153 | | | $ | 118,270 | | | | | | | | | |
Less: Franchise royalties, fees and rental income | 3,576 | | | 1,323 | | | | | | | | | |
Sandwich shop sales, net [D] | $ | 107,577 | | | $ | 116,947 | | | | | | | | | |
Shop-level profit margin [C÷D] | 13.5 | % | | 12.0 | % | | | | | | | | |
| | | | | | | | | | | |
Adjusted EBITDA Adjusted EBITDA was $8.0 million and $13.6$5.7 million for the quarter and yearended March 31, 2024 due to date ended June 25, 2023, respectively.the changes discussed above. Adjusted EBITDA is not required by, or presented in accordance with U.S. GAAP. We believe that Adjusted EBITDA is a useful measure of operating performance, as it provides a picture of operating results by eliminating expenses that management does not believe are reflective of underlying business performance.
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Quarter Ended | | For the Year to Date Ended | | |
| June 25, 2023 | | June 26, 2022 | | June 25, 2023 | | June 26, 2022 | | | | |
| ($ in thousands) | | ($ in thousands) | | |
Net income (loss) attributable to Potbelly Corporation | $ | 2,216 | | | $ | 574 | | | $ | 890 | | | $ | (7,339) | | | | | |
Depreciation expense | 2,887 | | | 3,030 | | | 5,857 | | | 6,167 | | | | | |
Interest expense | 1,011 | | | 357 | | | 1,678 | | | 683 | | | | | |
Income tax expense | (48) | | | (24) | | | 57 | | | 153 | | | | | |
EBITDA | $ | 6,066 | | | $ | 3,937 | | | $ | 8,482 | | | $ | (336) | | | | | |
Impairment, loss on disposal of property and equipment, and shop closures (a) | 658 | | | 1,044 | | | 1,703 | | | 2,363 | | | | | |
Stock-based compensation | 1,305 | | | 820 | | | 2,216 | | | 1,495 | | | | | |
Loss on extinguishment of debt | — | | | — | | | 239 | | | — | | | | | |
Loss on Franchise Growth Acceleration Initiative activities (b) | 14 | | | — | | | 963 | | | | | | | |
Adjusted EBITDA | $ | 8,043 | | | $ | 5,801 | | | $ | 13,603 | | | $ | 3,522 | | | | | |
| | | | | | | | | | | | | | | | | | | |
| For the Quarter Ended | | | | |
| March 31, 2024 | | March 26, 2023 | | | | | | | | |
| ($ in thousands) | | | | |
Net loss attributable to Potbelly Corporation | $ | (2,767) | | | $ | (1,327) | | | | | | | | | |
Depreciation expense | 3,011 | | | 2,971 | | | | | | | | | |
Interest expense | 364 | | | 667 | | | | | | | | | |
Income tax expense | 51 | | | 105 | | | | | | | | | |
EBITDA | $ | 659 | | | $ | 2,416 | | | | | | | | | |
Impairment, loss on disposal of property and equipment, and shop closures (a) | 741 | | | 1,045 | | | | | | | | | |
Stock-based compensation | 1,771 | | | 911 | | | | | | | | | |
Loss on extinguishment of debt | 2,376 | | | 239 | | | | | | | | | |
Loss on Franchise Growth Acceleration Initiative activities (b) | 133 | | | 949 | | | | | | | | | |
Adjusted EBITDA | $ | 5,680 | | | $ | 5,560 | | | | | | | | | |
(a)This adjustment includes costs related to impairment of long-lived assets, loss on disposal of property and equipment and shop closure expenses.
(b)This adjustment includes costs related to our plan to grow our franchise units domestically through multi-unit shop development area agreements, which may include refranchising certain company-operated shops.
Liquidity and Capital Resources
General
Our ongoing primary sources of liquidity and capital resources are cash provided from operating activities, existing cash and cash equivalents, and our Term Loan.Revolving Facility. In the short term, our primary requirements for liquidity and capital are existing shop capital investments, maintenance, lease obligations, working capital and general corporate needs. Our requirement for working capital is not significant since our customers pay for their food and beverage purchases in cash or payment cards (credit or debit) at the time of sale. Thus, we are able to sell certain inventory items before we need to pay our suppliers for such items. CompanyCompany-operated shops do not require significant inventories or receivables.
We ended the quarter ended June 25, 2023March 31, 2024 with a cash balance of $35.0$13.5 million and total liquidity (cash less restricted cash)cash, plus available cash on Revolving Facility) of $34.3$37.7 million compared to a cash balance of $25.6 million and total liquidity (cash less restricted cash) of $24.8 million at the end of the previous quarter. We believe that cash from our operations and the cash proceeds receivedavailable to us under the Term Loan will be able toRevolving Facility provide us sufficient liquidity for at least the next twelve months.
Cash Flows
The following table presents summary cash flow information for the periods indicated (in thousands):indicated:
| | For the Year to Date Ended |
| June 25, 2023 | | June 26, 2022 |
| For the Year to Date Ended | | | For the Year to Date Ended |
| March 31, 2024 | | | March 31, 2024 | | March 26, 2023 |
| Net cash provided by (used in): | Net cash provided by (used in): | |
Net cash provided by (used in): | |
Net cash provided by (used in): | |
Operating activities | |
Operating activities | |
Operating activities | Operating activities | $ | 12,022 | | | 1,978 | |
Investing activities | Investing activities | (5,919) | | | (3,115) | |
Financing activities | Financing activities | 13,288 | | | 1,441 | |
Net increase (decrease) in cash | Net increase (decrease) in cash | $ | 19,391 | | | $ | 304 | |
Operating Activities
Net cash provided by operating activities increased to $12.0$0.7 million for the yearquarter to date ended June 25, 2023,March 31, 2024, from $2.0cash used in operating activities of $0.7 million for the year to datequarter ended JuneMarch 26, 2022.2023. The $10.0$1.3 million change in operating cash was primarily driven by timing differences in payroll and an increase in income from operations compared to the prior year, and development fees collected from franchisees.which includes the $1.1 million settlement with a third-party software provider.
Investing Activities
Net cash used in investing activities decreasedincreased to $5.9$3.7 million for the yearquarter to date ended June 25, 2023,March 31, 2024, from $3.1$3.2 million for the yearquarter to date ended JuneMarch 26, 2022.2023. The $2.8$0.5 million decreaseincrease in cash outflow was primarily duedriven by additional capital expenditures which primarily related to ongoing investment in our company-owned shops and investment in our digital platforms. This cash outflow was partially offset by $1.2 million cash collected from the sale of refranchised assets.
Financing Activities
Net cash used in financing activities decreased to $18.0 million for the quarter to date ended March 31, 2024 compared to net cash provided by financing activities increased to $13.3of $14.6 million for the yearquarter to date ended June 25, 2023, from $1.4March 26, 2023. The $32.6 million for the year to date ended June 26, 2022. The $11.9 million increasedecrease in financing cash was primarily driven by netrepayment of the Term Loan compared with the prior year when the company had proceeds from the Term Loan executed in the first quarter of 2023 partially offset by repayments under the our senior secured credit facility (the "Former Credit Facility").Loan.
Term LoanRevolving Facility
On February 7, 20232024, Potbelly Sandwich Works, LLC (the “Closing Date”“Borrower”), we entered into a credit and guaranty agreement (the “Credit Agreement”) with Sagard Holdings Manager LPWintrust Bank, N.A. as administrative agent (the “Administrative Agent”“Agent”)., the other loan parties party thereto and the lenders party thereto. The Credit Agreement provides for a termrevolving loan facility with an aggregate commitment of $25 million$30,000,000 (the “Term Loan”“Revolving Facility,” and the commitments thereunder, the “Revolving Commitments”). ConcurrentConcurrently with entry into the Credit Agreement, we repaid in full and terminated the obligations and commitments underof the Formerlenders
Credit Facility. The remaining proceedsunder our Term Loan. Proceeds from the Term Loan wereRevolving Facility will be used to pay related transaction fees and expenses, and for general corporate and working capital purposes.
The Credit Agreement is scheduled to matureRevolving Commitments expire on February 7, 2028. We are required to make principal payments equal to 1.25% of the initial principal of the Term Loan on the last business day of each fiscal quarter. If not previously paid, any remaining principal balance must be repaid on the maturity date.2027.
Loans under the Credit Agreement will initially bear interest, at the Company’sour option, at either theone-month term SOFR plus 9.25% per annum or the base rate plus, 8.25%in each case, an applicable rate per annum.
As of June 25, 2023,annum, based upon the effective interestConsolidated Adjusted Leverage Ratio (as defined in the Credit Agreement). The applicable rate was 15.00%.may vary between 3.75% and 2.75% with respect to borrowings which are based upon the one-month term SOFR and between 2.25% and 1.25% with respect to borrowings which are based upon the base rate. Initially, the applicable rate with respect to one-month term SOFR borrowings is 3.25% and the applicable rate with respect to base rate borrowings is 1.75% until the Agent receives a compliance certificate for the fiscal quarter ending on March 31, 2024.
We may prepay the Term LoanRevolving Commitments at any time and from time to time in agreed-upon minimum principal amounts,whole or in part without premium or penalty, subject to prepayment fees equal to (a) ifprior notice in accordance with the prepayment occurs on or prior to the one (1) year anniversary of the Closing Date, a customary make-whole amount plus 3.00% of the outstanding principal balance of the Term Loan, (b) if the prepayment occurs after such one (1) year anniversary and prior to the two (2) year anniversary of the Closing Date, 3.00% of the outstanding principal balance of the Term Loan, (c) if the prepayment occurs after such second anniversary of the Closing Date and prior to the three (3) year anniversary of the Closing Date 1.00% of the outstanding principal balance of the Term Loan and (d) thereafter, no prepayment fee.Credit Agreement.
Subject to certain customary exceptions, obligations under the Credit Agreement are guaranteed by the Company and all of the Company’s current and future wholly ownedwholly-owned material domestic subsidiaries and are secured by a first-priority security interest in substantially all of the assets of the Company and its subsidiary guarantors.
The Credit Agreement contains customary representations and affirmative and negative covenants. Among other things, these covenants restrict the Company’s and certain of its subsidiaries’our ability to incur certain indebtedness and liens, undergo certain mergers, consolidations and certain other fundamental changes, make certain investments, paymake certain dispositions and acquisitions, enter into sale and leaseback transactions, enter into certain swap transactions, make certain restricted payments (including certain payment of dividends, or repurchaserepurchases of stock and payments on certain indebtedness), engage in certain transactions with affiliates, enter into certain types of restricted agreements, make dispositionscertain changes to its organizational documents and acquisitions.indebtedness, and use the proceeds of the Revolving Commitments for certain non-permitted uses. In addition, the Credit Agreement requires that the Company and its wholly-owned subsidiarieswe maintain compliance with certain total net leverage ratios as set forth in the Credit Agreement, an average liquidity amount that shall not be less than $10 million, maximum capital expenditures per year as set forth in the Credit Agreement andminimum fixed charge coverage ratios and maximum consolidated leverage ratios as set forth in the Credit Agreement.
The Credit Agreement also contains customary events of default. If an event of default occurs, the Administrative Agent and lenders are entitled to take various actions, including the acceleration of amounts due under the Credit Agreement, termination of commitments thereunder and all other actions permitted to be taken by a secured creditor.
Term Loan
On February 7, 2023 (the “Closing Date”), we entered into a credit and guaranty agreement (the “Term Loan Credit Agreement”) with Sagard Holdings Manager LP as administrative agent (the “Administrative Agent”). The Term Loan Credit Agreement provides for a term loan facility with an aggregate commitment of $25 million (the “Term Loan”). Concurrent with entry into the Term Loan Credit Agreement, we repaid in full and terminated the obligations and commitments under our former senior secured credit facility (the “Former Credit Facility”). In connection with entering into the Term Loan Credit Agreement, we paid $2.2 million isin debt issuance costs, all of which were capitalized. Duringcapitalized.. The remaining proceeds from the Term Loan were used to pay related transaction fees and expenses, and for general corporate purposes.
The Term Loan Credit Agreement was scheduled to mature on February 7, 2028. We were required to make principal payments equal to 1.25% of the initial principal of the Term Loan on the last business day of each fiscal quarter. If not previously paid, any remaining principal balance would be due on the maturity date.
Loans under the Term Loan Credit Agreement bore interest, at the Company’s option, at either the term SOFR plus 9.25% per annum or base rate plus 8.25% per annum.
The Term Loan could be prepaid in agreed-upon minimum principal amounts, subject to prepayment fees equal to (a) if the prepayment occurred on or prior to the one (1) year anniversary of the Closing Date, a customary make-whole amount plus 3.00% of the outstanding principal balance of the Term Loan, (b) if the prepayment occurred after such one (1) year anniversary and prior to the two (2) year anniversary of the Closing Date, 3.00% of the outstanding principal balance of the Term Loan, (c) if the prepayment occurred after such second anniversary of the Closing Date and prior to the three (3) year anniversary of the Closing Date 1.00% of the outstanding principal balance of the Term Loan and (d) thereafter, no prepayment fee.
On February 7, 2024, we repaid in full and terminated the obligations and commitments under the Term Loan Credit Agreement. As a result of repaying and terminating the Term Loan, we recognized a loss on extinguishment of debt of $2.4 million in the quarter ended June 25, 2023, we amortized $0.2 million of debt issuance costs, which is included in interest expense in the condensed consolidated statement of operations. As of June 25, 2023, we had $24.4 million outstanding under the Term Loan. We are currently in compliance with all financial debt covenants.
March 31, 2024.
Stock Repurchase Program
On May 8, 2018, we announced that our Board of Directors authorized a stock repurchase program for up to $65.0 million of our outstanding common stock.stock ("2018 Repurchase Plan"). The program permits us, from time to time, to purchase shares in the open market (including in pre-arranged stock trading plans in accordance with the guidelines specified in Rule 10b5-1 under the Securities and Exchange Act of 1934, as amended) or in privately negotiated transactions. The number of common shares actually repurchased, and the timing and price of repurchases, will depend upon market conditions, SEC requirements and other factors. PurchasesRepurchases may be started or stopped at any time without prior notice depending on market conditions and other factors. For the quarter ended June 25, 2023,March 31, 2024, we did not repurchase any shares of our common stock under the stock repurchase program. We do
On May 1, 2024, our Board of Directors authorized a stock repurchase program for up to $20.0 million of our outstanding common stock at any time during the next three years. This program replaces the 2018 Repurchase Plan, which was terminated upon execution of the new stock repurchase program. The program permits us, from time to time, to purchase shares 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. The number of common shares actually repurchased, and the timing and price of repurchases, will depend upon market conditions, SEC requirements and other factors. Repurchases may be started or stopped at any time without prior notice depending on market conditions and other factors. Currently, we have not have plans to repurchaserepurchased any shares of our common stock under ourthe new stock repurchase programprogram.
Securities Purchase Agreement
On February 9, 2021, we closed on a Securities Purchase Agreement (the "SPA") for the sale by us of 3,249,668 shares of our common stock at this time.
a par value of $0.01 per share and the issuance of warrants to purchase 1,299,861 shares of common stock at an exercise price of $5.45 per warrant for gross proceeds of $16.0 million, before deducting placement
agent fees and offering expenses of approximately $1.0 million. The warrants are currently exercisable until August 12, 2026. The proceeds received from the SPA were allocated between shares and warrants based on their relative fair values at closing. The warrants were valued utilizing the Black-Scholes method. During the quarter ended March 31, 2024, 240,187 warrants were exercised. For the quarter to date ended March 31, 2024, 240,187 warrants were exercised at the exercise price of $5.45 per warrant. As of March 31, 2024, we had 883,402 warrants outstanding that are exercisable through August 12, 2026.
Equity Offering Program
On November 3, 2021, we entered into a certain Equity Sales Agreement (the "Sales Agreement") with William Blair & Company, L.L.C., as agent ("William Blair") pursuant to which we may sell shares of our common stock having an aggregate offering price of up to $40.0 million (the "Shares"), from time to time, in our sole discretion, through an "at the market" equity offering program under which William Blair will act as sales agent. As of June 25, 2023,March 31, 2024, we have not sold any shares under the Sales Agreement.
Critical Accounting Estimates
Our discussion and analysis of the financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses and the disclosure of contingent assets and liabilities. Actual results could differ from those estimates. Critical accounting estimates are those that management believes are both most important to the portrayal of our financial condition and operating results, and require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. We base our estimates on historical experience and other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Judgments and uncertainties affecting the application of those policies may result in materially different amounts being reported under different conditions or using different assumptions. We have made no significant changes in our critical accounting estimates since the last annual report. Our critical accounting estimates are identified and described in our annual consolidated financial statements and related notes.
New and Revised Financial Accounting Standards
See Note 1 to the Consolidated Financial Statements for a description of recently issued Financial Accounting Standards.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For quantitative and qualitative disclosures about market risk, see Item 7A, "Quantitative and Qualitative Disclosures About Market Risk," of our Annual Report on Form 10-K for the fiscal year ended December 25, 2022.31, 2023. Our exposures to market risk have not changed materially since December 25, 2022.31, 2023.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of June 25, 2023.March 31, 2024. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of June 25, 2023,March 31, 2024, our disclosure controls and procedures were effective in ensuring that information required to be disclosed in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the quarter ended June 25, 2023March 31, 2024 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Information pertaining to legal proceedings is provided in Note 1112 to the Condensed Consolidated Financial Statements and is incorporated by reference herein.
ITEM 1A. RISK FACTORS
A description of the risk factors associated with our business is contained in Item 1A, "Risk Factors" of our Annual Report on Form 10-K for the fiscal year ended December 25, 2022.31, 2023. There have been no material changes to our Risk Factors as previously reported.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
The following table contains information regarding purchases of our common stock made by or on behalf of Potbelly Corporation during the yearquarter to date ended June 25, 2023March 31, 2024 (in thousands, except per share data):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Period | | Total Number of Shares Purchased (1) | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Program (2) | | Maximum Value of Shares that May Yet be Purchased Under the Program (2) |
December 26, 2022 - January 22, 2023 | | 3 | | | $ | 7.47 | | | — | | | $ | 37,982 | |
January 23, 2023 - February 19, 2023 | | 1 | | | $ | 7.99 | | | — | | | $ | 37,982 | |
February 20, 2023 - March 26, 2023 | | 37 | | | $ | 8.19 | | | — | | | $ | 37,982 | |
March 27, 2023 - April 23, 2023 | | 45 | | | $ | 8.56 | | | — | | | $ | 37,982 | |
April 24, 2023 - May 21, 2023 | | 22 | | | $ | 10.48 | | | — | | | $ | 37,982 | |
May 22, 2023 - June 25, 2023 | | 20 | | | $ | 7.94 | | | — | | | $ | 37,982 | |
Total number of shares purchased: | | 128 | | | | | — | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Period | | Total Number of Shares Purchased (1) | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Program (2) | | Maximum Value of Shares that May Yet be Purchased Under the Program (2) |
January 1, 2024 - January 28, 2024 | | 27 | | | $ | 11.80 | | | | | $ | 37,982 | |
January 29, 2024 - February 25, 2024 | | 24 | | | $ | 12.79 | | | | | $ | 37,982 | |
February 26, 2024 - March 31, 2024 | | 3 | | | $ | 12.92 | | | | | $ | 37,982 | |
Total number of shares purchased: | | 54 | | | | | — | | | |
(1)Represents shares of our common stock surrendered by employees to satisfy withholding obligations resulting from the vesting of equity awards.
(2)On May 8, 2018, we announced that our Board of Directors authorized a stock repurchase program for up to $65.0 million of our outstanding common stock. The program permits us, from time to time, to purchase shares 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). No time limit has been set for the completion of the repurchase program and the program may be suspended or discontinued at any time. We do not have plans to repurchase any common stock under our stock repurchase program at this time. See Note 910 for further information regarding our stock repurchase program.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
During the quarter ended June 25, 2023,March 31, 2024, no director or officer of Potbelly adopted or terminated a "Rule 10b5-1 trading agreement" or "non-Rule 10b5-1 trading agreement," as each term is defined in Item 408(a) of Regulation S-K.
ITEM 6. EXHIBITS
The following exhibits are either provided with this Quarterly Report on Form 10-Q or are incorporated herein by reference.
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Exhibit No. | | Description |
31.1 | | |
| | |
31.2 | | |
| | |
32.1 | | |
| | |
101.INS | | Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document. |
| | |
101.SCH | | Inline XBRL Taxonomy Extension Schema Document |
| | |
101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document |
| | |
101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document |
| | |
101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document |
| | |
101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
| | |
104 | | Cover Page Interactive Data File (embedded within the Inline XBRL document) |
SIGNATURE
Pursuant to the requirements 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.
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| | | POTBELLY CORPORATION |
| | | |
Date: August 3, 2023May 8, 2024 | | By: | /s/ Steven W. Cirulis |
| | | Steven W. Cirulis |
| | | Chief Financial Officer |
| | | (Principal Financial Officer) |