UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

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

For the Quarterly Period Ended September 30, 201829, 2019

OR

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

For the Transition Period from                     to                     

Commission File Number: 001-36104

 

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 850

Chicago, Illinois

111 N. Canal Street, Suite 850

Chicago, Illinois 60606

(Address including Zip Code, of Principal Executive Offices)

(Zip Code)

Registrant’s telephone number, including area code: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      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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

 

 

  

Accelerated filer

 

Non-accelerated filer

 

  

  

Smaller reporting company

 

Emerging growth company

 

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

Indicate by check mark whether the number of shares outstanding of eachregistrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the issuer’s classesSecurities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.     Yes      No  

As of October 27, 2019, the registrant had 23,607,518 shares of common stock, as of the latest practicable date:

Common stock, $0.01 Par Value – 24,844,824 shares as of October 28, 2018

par value per share, outstanding.

 

 

 


Potbelly Corporation and Subsidiaries

Table of Contents

 

 

 

 

 

Page

PART I.

 

FINANCIAL INFORMATION

 

 

 

 

 

 

Item 1.

 

Financial Statements

 

3

 

 

 

 

 

 

Condensed Consolidated Balance Sheets

 

3

 

 

 

 

 

 

Condensed Consolidated Statements of Operations

 

4

 

 

 

 

 

 

Condensed Consolidated Statements of Equity

 

5

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows

 

67

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

78

 

 

 

 

Item 2.

 

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

 

1317

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

2125

 

 

 

 

Item 4.

 

Controls and Procedures

 

2125

 

 

 

 

PART II.

 

OTHER INFORMATION

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

2226

 

 

 

 

Item 1A.

 

Risk Factors

 

2226

 

 

 

 

Item 2.

 

Unregistered Sale of Equity Securities and Use of Proceeds

 

2226

Item 3.

Defaults Upon Senior Securities

26

Item 4.

Mine Safety Disclosures

26

Item 5.

Other Information

26

 

 

 

 

Item 6.

 

Exhibits

 

2327

 

 

 

 

 

 

Signature

 

2428

 

2



PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

Potbelly Corporation and Subsidiaries

Condensed Consolidated Balance Sheets

(amounts in thousands, except share and par value data, unaudited)

 

 

September 30,

 

 

December 31,

 

 

September 29,

 

 

December 30,

 

 

2018

 

 

2017

 

 

2019

 

 

2018

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

26,711

 

 

$

25,530

 

 

$

15,758

 

 

$

19,775

 

Accounts receivable, net of allowances of $124 and $129 as of September 30, 2018

and December 31, 2017, respectively

 

 

5,353

 

 

 

5,087

 

Accounts receivable, net of allowances of $204 and $113 as of September 29, 2019

and December 30, 2018, respectively

 

 

5,084

 

 

 

4,737

 

Inventories

 

 

3,459

 

 

 

3,525

 

 

 

3,317

 

 

 

3,482

 

Prepaid expenses and other current assets

 

 

10,980

 

 

 

11,061

 

 

 

7,934

 

 

 

11,426

 

Total current assets

 

 

46,503

 

 

 

45,203

 

 

 

32,093

 

 

 

39,420

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

 

94,237

 

 

 

103,859

 

 

 

79,626

 

 

 

87,782

 

Right-of-use assets for operating leases

 

 

212,261

 

 

 

 

Indefinite-lived intangible assets

 

 

3,404

 

 

 

3,404

 

 

 

3,404

 

 

 

3,404

 

Goodwill

 

 

2,222

 

 

 

2,222

 

 

 

2,222

 

 

 

2,222

 

Deferred income taxes, noncurrent

 

 

12,612

 

 

 

11,202

 

Deferred income taxes

 

 

 

 

 

13,385

 

Deferred expenses, net and other assets

 

 

7,064

 

 

 

4,840

 

 

 

3,957

 

 

 

7,002

 

Total assets

 

$

166,042

 

 

$

170,730

 

 

$

333,563

 

 

$

153,215

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

3,380

 

 

$

3,903

 

 

$

4,607

 

 

$

3,835

 

Accrued expenses

 

 

23,597

 

 

 

23,273

 

 

 

19,421

 

 

 

25,029

 

Short-term operating lease liabilities

 

 

28,998

 

 

 

 

Accrued income taxes

 

 

 

 

 

176

 

 

 

177

 

 

 

162

 

Total current liabilities

 

 

26,977

 

 

 

27,352

 

 

 

53,203

 

 

 

29,026

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred rent and landlord allowances

 

 

22,998

 

 

 

22,987

 

 

 

 

 

 

22,905

 

Long-term operating lease liabilities

 

 

207,196

 

 

 

 

Other long-term liabilities

 

 

5,983

 

 

 

3,153

 

 

 

2,988

 

 

 

5,751

 

Total liabilities

 

 

55,958

 

 

 

53,492

 

 

 

263,387

 

 

 

57,682

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

 

 

Common stock, $0.01 par value—authorized 200,000,000 shares; outstanding

25,102,339 and 24,999,688 shares as of September 30, 2018 and December 31,

2017, respectively

 

 

329

 

 

 

318

 

Commitments and contingencies (Note 10)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

 

 

 

Common stock, $0.01 par value—authorized 200,000,000 shares; outstanding

23,607,518 and 24,142,586 shares as of September 29, 2019 and December 30,

2018, respectively

 

 

331

 

 

 

330

 

Additional paid-in-capital

 

 

432,329

 

 

 

421,657

 

 

 

434,853

 

 

 

432,771

 

Treasury stock, held at cost, 7,804,519 and 6,831,508 shares as of

September 30, 2018, and December 31, 2017, respectively

 

 

(97,792

)

 

 

(85,262

)

Treasury stock, held at cost, 9,453,894 and 8,801,154 shares as of

September 29, 2019, and December 30, 2018, respectively

 

 

(112,624

)

 

 

(108,372

)

Accumulated deficit

 

 

(225,195

)

 

 

(219,990

)

 

 

(252,749

)

 

 

(229,558

)

Total stockholders’ equity

 

 

109,671

 

 

 

116,723

 

 

 

69,811

 

 

 

95,171

 

Non-controlling interest

 

 

413

 

 

 

515

 

 

 

365

 

 

 

362

 

Total stockholders' equity

 

 

110,084

 

 

 

117,238

 

Total equity

 

 

70,176

 

 

 

95,533

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities and equity

 

$

166,042

 

 

$

170,730

 

 

$

333,563

 

 

$

153,215

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.


3


Potbelly Corporation and Subsidiaries

Condensed Consolidated Statements of Operations

(amounts in thousands, except share and per share data, unaudited)

 

 

For the 13 Weeks Ended

 

 

For the 39 Weeks Ended

 

 

For the 13 Weeks Ended

 

 

For the 39 Weeks Ended

 

 

September 30,

 

 

September 24,

 

 

September 30,

 

 

September 24,

 

 

September 29,

 

 

September 30,

 

 

September 29,

 

 

September 30,

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sandwich shop sales, net

 

$

106,238

 

 

$

105,327

 

 

$

317,866

 

 

$

313,568

 

 

$

103,560

 

 

$

106,238

 

 

$

305,619

 

 

$

317,866

 

Franchise royalties and fees

 

 

758

 

 

 

800

 

 

 

2,394

 

 

$

2,394

 

 

 

678

 

 

 

758

 

 

 

2,336

 

 

$

2,394

 

Total revenues

 

 

106,996

 

 

 

106,127

 

 

 

320,260

 

 

 

315,962

 

 

 

104,238

 

 

 

106,996

 

 

 

307,955

 

 

 

320,260

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sandwich shop operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of goods sold, excluding depreciation

 

 

28,455

 

 

 

28,405

 

 

 

83,730

 

 

 

83,703

 

 

 

27,540

 

 

 

28,455

 

 

 

81,782

 

 

 

83,730

 

Labor and related expenses

 

 

32,376

 

 

 

31,187

 

 

 

96,367

 

 

 

93,213

 

 

 

32,430

 

 

 

32,376

 

 

 

96,517

 

 

 

96,367

 

Occupancy expenses

 

 

15,076

 

 

 

14,354

 

 

 

44,787

 

 

 

42,792

 

 

 

14,850

 

 

 

15,076

 

 

 

44,457

 

 

 

44,787

 

Other operating expenses

 

 

13,357

 

 

 

12,464

 

 

 

38,650

 

 

 

36,349

 

 

 

13,274

 

 

 

13,357

 

 

 

37,235

 

 

 

38,650

 

General and administrative expenses

 

 

10,087

 

 

 

12,104

 

 

 

35,715

 

 

 

33,375

 

 

 

11,256

 

 

 

10,087

 

 

 

37,808

 

 

 

35,715

 

Depreciation expense

 

 

5,847

 

 

 

6,315

 

 

 

17,531

 

 

 

18,960

 

 

 

5,365

 

 

 

5,847

 

 

 

16,486

 

 

 

17,531

 

Pre-opening costs

 

 

109

 

 

 

336

 

 

 

245

 

 

 

955

 

 

 

16

 

 

 

109

 

 

 

26

 

 

 

245

 

Impairment and loss on disposal of property and equipment

 

 

4,386

 

 

 

1,536

 

 

 

8,467

 

 

 

5,762

 

 

 

1,650

 

 

 

4,386

 

 

 

1,978

 

 

 

8,467

 

Total expenses

 

 

109,693

 

 

 

106,701

 

 

 

325,492

 

 

 

315,109

 

 

 

106,381

 

 

 

109,693

 

 

 

316,289

 

 

 

325,492

 

Income (loss) from operations

 

 

(2,697

)

 

 

(574

)

 

 

(5,232

)

 

 

853

 

Loss from operations

 

 

(2,143

)

 

 

(2,697

)

 

 

(8,334

)

 

 

(5,232

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

54

 

 

 

32

 

 

 

109

 

 

 

101

 

 

 

28

 

 

 

54

 

 

 

95

 

 

 

109

 

Income (loss) before income taxes

 

 

(2,751

)

 

 

(606

)

 

 

(5,341

)

 

 

752

 

Loss before income taxes

 

 

(2,171

)

 

 

(2,751

)

 

 

(8,429

)

 

 

(5,341

)

Income tax expense (benefit)

 

 

(909

)

 

 

(487

)

 

 

(1,111

)

 

 

252

 

 

 

66

 

 

 

(909

)

 

 

13,931

 

 

 

(1,111

)

Net income (loss)

 

 

(1,842

)

 

 

(119

)

 

 

(4,230

)

 

 

500

 

Net loss

 

 

(2,237

)

 

 

(1,842

)

 

 

(22,360

)

 

 

(4,230

)

Net income attributable to non-controlling interest

 

 

119

 

 

 

121

 

 

 

285

 

 

 

195

 

 

 

118

 

 

 

119

 

 

 

300

 

 

 

285

 

Net income (loss) attributable to Potbelly Corporation

 

$

(1,961

)

 

$

(240

)

 

$

(4,515

)

 

$

305

 

Net loss attributable to Potbelly Corporation

 

$

(2,355

)

 

$

(1,961

)

 

$

(22,660

)

 

$

(4,515

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per common share attributable to common

stockholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per common share attributable to common

stockholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.08

)

 

$

(0.01

)

 

$

(0.18

)

 

$

0.01

 

 

$

(0.10

)

 

$

(0.08

)

 

$

(0.95

)

 

$

(0.18

)

Diluted

 

$

(0.08

)

 

$

(0.01

)

 

$

(0.18

)

 

$

0.01

 

 

$

(0.10

)

 

$

(0.08

)

 

$

(0.95

)

 

$

(0.18

)

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

25,369,281

 

 

 

24,959,023

 

 

 

25,355,174

 

 

 

25,030,951

 

 

 

23,740,005

 

 

 

25,369,281

 

 

 

23,927,046

 

 

 

25,355,174

 

Diluted

 

 

25,369,281

 

 

 

24,959,023

 

 

 

25,355,174

 

 

 

25,857,083

 

 

 

23,740,005

 

 

 

25,369,281

 

 

 

23,927,046

 

 

 

25,355,174

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.


4


Potbelly Corporation and Subsidiaries

Condensed Consolidated Statements of Equity

(amounts in thousands, except share data, unaudited)

 

 

 

Common Stock

 

 

Treasury

 

 

 

 

 

 

Additional

Paid-In-

 

 

Accumulated

 

 

Non-

Controlling

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Stock

 

 

Warrants

 

 

Capital

 

 

Deficit

 

 

Interest

 

 

Total Equity

 

Balance at December 25, 2016

 

 

25,139,127

 

 

$

309

 

 

$

(72,321

)

 

$

909

 

 

$

407,622

 

 

$

(213,034

)

 

$

751

 

 

$

124,236

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

305

 

 

 

195

 

 

 

500

 

Stock-based compensation plans

 

 

168,930

 

 

 

2

 

 

 

 

 

 

 

 

 

1,179

 

 

 

 

 

 

 

 

 

1,181

 

Exercise of stock warrants

 

 

241,704

 

 

 

2

 

 

 

 

 

 

(909

)

 

 

2,879

 

 

 

 

 

 

 

 

 

1,972

 

Repurchases of common

   stock

 

 

(745,496

)

 

 

 

 

 

(8,853

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(8,853

)

Distributions to non-

   controlling interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(354

)

 

 

(354

)

Contributions from non-

   controlling interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11

 

 

 

11

 

Amortization of

   stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,263

 

 

 

 

 

 

 

 

 

3,263

 

Balance at September 24, 2017

 

 

24,804,265

 

 

$

313

 

 

$

(81,174

)

 

$

 

 

$

414,943

 

 

$

(212,729

)

 

$

603

 

 

$

121,956

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2017

 

 

24,999,688

 

 

$

318

 

 

$

(85,262

)

 

$

 

 

$

421,657

 

 

$

(219,990

)

 

$

515

 

 

$

117,238

 

Cumulative impact of Topic

   606 at 1/1/2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(690

)

 

 

 

 

 

(690

)

Net income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,515

)

 

 

285

 

 

 

(4,230

)

Stock-based compensation plans

 

 

1,075,662

 

 

 

11

 

 

 

 

 

 

 

 

 

8,156

 

 

 

 

 

 

 

 

 

8,167

 

Repurchases of common

   stock

 

 

(964,240

)

 

 

 

 

 

(12,414

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(12,414

)

Contributions from non-

   controlling interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

20

 

 

 

20

 

Distributions to non-

   controlling interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(407

)

 

 

(407

)

Treasury shares used for

    stock-based plans

 

 

(8,771

)

 

 

 

 

 

(116

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(116

)

Amortization of

   stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,516

 

 

 

 

 

 

 

 

 

2,516

 

Balance at September 30, 2018

 

 

25,102,339

 

 

$

329

 

 

$

(97,792

)

 

$

 

 

$

432,329

 

 

$

(225,195

)

 

$

413

 

 

$

110,084

 

For the 13 weeks ended:

 

Common Stock

 

 

Treasury

 

 

Additional

Paid-In-

 

 

Accumulated

 

 

Non-

Controlling

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Stock

 

 

Capital

 

 

Deficit

 

 

Interest

 

 

Total Equity

 

Balance at July 1, 2018

 

 

25,651,953

 

 

 

327

 

 

 

(88,827

)

 

 

430,643

 

 

 

(223,234

)

 

 

425

 

 

$

119,334

 

Net income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,961

)

 

 

119

 

 

 

(1,842

)

Stock-based compensation plans

 

 

150,287

 

 

 

2

 

 

 

 

 

 

1,421

 

 

 

 

 

 

 

 

 

1,423

 

Repurchases of common stock

 

 

(699,901

)

 

 

 

 

 

(8,965

)

 

 

 

 

 

 

 

 

 

 

 

(8,965

)

Distributions to non-controlling

   interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(151

)

 

 

(151

)

Contributions from non-controlling

   interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

20

 

 

 

20

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

265

 

 

 

 

 

 

 

 

 

265

 

Balance at September 30, 2018

 

 

25,102,339

 

 

$

329

 

 

$

(97,792

)

 

$

432,329

 

 

$

(225,195

)

 

$

413

 

 

$

110,084

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at June 30, 2019

 

 

23,768,375

 

 

$

331

 

 

$

(111,874

)

 

$

434,407

 

 

$

(250,394

)

 

$

406

 

 

$

72,876

 

Net income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,355

)

 

 

118

 

 

 

(2,237

)

Stock-based compensation plans

 

 

1,305

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Repurchases of common stock

 

 

(162,162

)

 

 

 

 

 

(750

)

 

 

 

 

 

 

 

 

 

 

 

(750

)

Distributions to non-controlling

   interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(159

)

 

 

(159

)

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

446

 

 

 

 

 

 

 

 

 

446

 

Balance at September 29, 2019

 

 

23,607,518

 

 

$

331

 

 

$

(112,624

)

 

$

434,853

 

 

$

(252,749

)

 

$

365

 

 

$

70,176

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.


5


Potbelly Corporation and Subsidiaries

Condensed Consolidated Statements of Equity

(amounts in thousands, except share data, unaudited)

For the 39 weeks ended:

 

Common Stock

 

 

Treasury

 

 

Additional

Paid-In-

 

 

Accumulated

 

 

Non-

Controlling

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Stock

 

 

Capital

 

 

Deficit

 

 

Interest

 

 

Total Equity

 

Balance at December 31, 2017

 

 

24,999,688

 

 

 

318

 

 

 

(85,262

)

 

 

421,657

 

 

 

(219,990

)

 

 

515

 

 

$

117,238

 

Cumulative impact of Topic 606, net

   of tax of $250

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(690

)

 

 

 

 

 

(690

)

Net income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,515

)

 

 

285

 

 

 

(4,230

)

Stock-based compensation plans

 

 

1,075,662

 

 

 

11

 

 

 

 

 

 

8,156

 

 

 

 

 

 

 

 

 

8,167

 

Repurchases of common stock

 

 

(964,240

)

 

 

 

 

 

(12,414

)

 

 

 

 

 

 

 

 

 

 

 

(12,414

)

Distributions to non-controlling

   interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(407

)

 

 

(407

)

Contributions from non-controlling

   interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

20

 

 

 

20

 

Treasury shares used for stock-based

   plans

 

 

(8,771

)

 

 

 

 

 

(116

)

 

 

 

 

 

 

 

 

 

 

 

(116

)

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

2,516

 

 

 

 

 

 

 

 

 

2,516

 

Balance at September 30, 2018

 

 

25,102,339

 

 

$

329

 

 

$

(97,792

)

 

$

432,329

 

 

$

(225,195

)

 

$

413

 

 

$

110,084

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 30, 2018

 

 

24,142,586

 

 

$

330

 

 

$

(108,372

)

 

$

432,771

 

 

$

(229,558

)

 

$

362

 

 

$

95,533

 

Cumulative impact of Topic 842, net

   of tax of $196

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(531

)

 

 

 

 

$

(531

)

Net income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(22,660

)

 

 

300

 

 

 

(22,360

)

Stock-based compensation plans

 

 

117,672

 

 

 

1

 

 

 

 

 

 

172

 

 

 

 

 

 

 

 

 

173

 

Repurchases of common stock

 

 

(647,821

)

 

 

 

 

 

(4,217

)

 

 

 

 

 

 

 

 

 

 

 

(4,217

)

Distributions to non-controlling

   interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(336

)

 

 

(336

)

Contributions from non-controlling

   interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

39

 

 

 

39

 

Treasury shares used for stock-based

   plans

 

 

(4,919

)

 

 

 

 

 

(35

)

 

 

 

 

 

 

 

 

 

 

 

(35

)

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

1,910

 

 

 

 

 

 

 

 

 

1,910

 

Balance at September 29, 2019

 

 

23,607,518

 

 

$

331

 

 

$

(112,624

)

 

$

434,853

 

 

$

(252,749

)

 

$

365

 

 

$

70,176

 

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 39 Weeks Ended

 

 

For the 39 Weeks Ended

 

 

September 30,

 

 

September 24,

 

 

September 29,

 

 

September 30,

 

 

2018

 

 

2017

 

 

2019

 

 

2018

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(4,230

)

 

$

500

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation

 

 

17,531

 

 

 

18,960

 

Net loss

 

$

(22,360

)

 

$

(4,230

)

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

 

 

 

 

 

 

 

 

Depreciation expense

 

 

16,486

 

 

 

17,531

 

Noncash lease expense

 

 

21,246

 

 

 

 

Deferred income tax

 

 

(98

)

 

 

 

 

 

13,804

 

 

 

(98

)

Deferred rent and landlord allowances

 

 

12

 

 

 

1,924

 

Amortization of stock compensation expense

 

 

2,516

 

 

 

3,263

 

Excess tax deficiency from stock-based compensation

 

 

651

 

 

 

292

 

Stock-based compensation expense

 

 

1,910

 

 

 

2,516

 

Asset impairment, store closure and disposal of property and equipment

 

 

8,666

 

 

 

5,922

 

 

 

2,012

 

 

 

8,666

 

Amortization of debt issuance costs

 

 

28

 

 

 

28

 

Other operating activities

 

 

33

 

 

 

691

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable, net

 

 

(516

)

 

 

(1,422

)

 

 

(347

)

 

 

(516

)

Inventories

 

 

65

 

 

 

54

 

 

 

165

 

 

 

65

 

Prepaid expenses and other assets

 

 

(2,015

)

 

 

(2,650

)

 

 

3,565

 

 

 

(2,015

)

Accounts payable

 

 

(201

)

 

 

699

 

 

 

763

 

 

 

(201

)

Accrued and other liabilities

 

 

244

 

 

 

798

 

Operating lease liabilities

 

 

(23,046

)

 

 

 

Accrued expenses and other liabilities

 

 

(4,368

)

 

 

244

 

Net cash provided by operating activities:

 

 

22,653

 

 

 

28,368

 

 

 

9,863

 

 

 

22,653

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

$

(16,722

)

 

$

(23,526

)

 

$

(9,533

)

 

$

(16,722

)

Net cash used in investing activities:

 

 

(16,722

)

 

 

(23,526

)

 

 

(9,533

)

 

 

(16,722

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt issuance costs

 

$

(40

)

 

$

 

Proceeds from exercise of stock options

 

$

8,167

 

 

$

1,181

 

 

 

173

 

 

 

8,167

 

Proceeds from exercise of stock warrants

 

 

 

 

 

1,972

 

Employee taxes on certain stock-based payment arrangements

 

 

(116

)

 

 

 

 

 

(35

)

 

 

(116

)

Treasury stock repurchases

 

 

(12,414

)

 

 

(8,853

)

 

 

(4,147

)

 

 

(12,414

)

Distributions to non-controlling interest

 

 

(337

)

 

 

(407

)

Contributions from non-controlling interest

 

 

20

 

 

 

11

 

 

 

39

 

 

 

20

 

Distributions to non-controlling interest

 

 

(407

)

 

 

(354

)

Net cash used in financing activities:

 

 

(4,750

)

 

 

(6,043

)

 

 

(4,347

)

 

 

(4,750

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

 

1,181

 

 

 

(1,201

)

 

 

(4,017

)

 

 

1,181

 

Cash and cash equivalents at beginning of period

 

 

25,530

 

 

 

23,379

 

 

 

19,775

 

 

 

25,530

 

Cash and cash equivalents at end of period

 

$

26,711

 

 

$

22,178

 

 

$

15,758

 

 

$

26,711

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income taxes paid

 

$

249

 

 

$

3,346

 

 

$

180

 

 

$

249

 

Interest paid

 

 

85

 

 

 

73

 

 

 

66

 

 

 

85

 

Supplemental non-cash investing and financing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unpaid liability for purchases of property and equipment

 

$

1,178

 

 

$

2,752

 

 

$

433

 

 

$

1,178

 

 

See accompanying notes to the unaudited condensed consolidated financial statements

 

 


Potbelly Corporation and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements (unaudited)

 

(1) Organization and Other Matters

Business

Potbelly Corporation (the “Company” or “Potbelly”), through its wholly owned subsidiaries, owns or operates more than 400 company-owned shops in the United States. Additionally, Potbelly franchisees operate more than 50over 40 shops domestically, in the Middle East, Canada and India.United States.

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 Corporation and its subsidiaries and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.30, 2018. The unaudited condensed consolidated financial statements included herein have been prepared by the Company 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, all adjustments, which are of a normal and recurring nature (except as otherwise noted), that are necessary to present fairly the Company’s financial positionbalance sheet as of September 30, 201829, 2019 and December 31, 2017,30, 2018, its statement of operations for the 13 and 39 weeks ended September 29, 2019 and September 30, 2018, the statement of equity for the 13 and 39 weeks ended September 29, 2019 and September 24, 201730, 2018, and its statement of cash flows for the 39 weeks ended September 30, 201829, 2019 and September 24, 201730, 2018 have been included. The consolidated statements of operations for the interim periods presented herein are not necessarily indicative of the results to be expected for the full year.

The Company does not have any components of other comprehensive income recorded within its consolidated financial statements and therefore, does not separately present a statement of comprehensive income in its condensed consolidated financial statements.

Principles of Consolidation

The unaudited condensed consolidated financial statements include the accounts of Potbelly Corporation; its wholly owned subsidiary, Potbelly Illinois, Inc. (“PII”); PII’s wholly owned subsidiaries, Potbelly Franchising, LLC and Potbelly Sandwich Works, LLC (“LLC”); seven of LLC’s wholly owned subsidiaries and LLC’s seven joint ventures, collectively, the “Company.” All intercompany balances and transactions have been eliminated in consolidation. For consolidated joint ventures, non-controlling interest represents a non-controlling partner’s share of the assets, liabilities and operations related to the seven joint venture investments. The Company has ownership interests ranging from 51-80% in these consolidated joint ventures.

Fiscal Year

The Company uses 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 2019 and 2018 consistsboth consist of 52 weeks and 2017 consisted of 53 weeks. The fiscal quarters ended September 30, 201829, 2019 and September 24, 201730, 2018 each consisted of 13 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.

 


Recent Accounting Pronouncements

In May 2014,On December 31, 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, “Revenue from ContractsCompany adopted ASU 2016-02, “Leases (Topic 842),” along with Customers.” Therelated clarifications and improvements. This pronouncement was issuedrequires lessees to clarifyrecognize a liability for lease obligations, which represents the principles for recognizing revenuediscounted obligation to make future lease payments, and to develop a common revenue standard and disclosure requirements for U.S. GAAP and International Financial Reporting Standards (IFRS). In addition, the FASB issued ASU 2016-08, ASU 2016-10 and ASU 2016-12 in March 2016, April 2016 and May 2016, respectively, to help provide interpretive clarificationscorresponding right-of-use asset on the newbalance sheet. The guidance in Accounting Standards Codification (ASC) Topic 606. Potbelly adoptedrequires disclosure of key information about leasing arrangements that is intended to give financial statement users the standard effective January 1, 2018 usingability to assess the modified retrospectiveamount, timing, and potential uncertainty of cash flows related to leases. We elected the optional transition method applied to contracts that were not completedapply the standard as of the effective date of adoption.and therefore, prior period amounts have not been adjusted and continue to be reported in accordance with our historical accounting under previous lease guidance, ASC Topic 840: Leases (Topic 840). The adoption does not haveof Topic 842 had a material impact on sandwich shop sales, but impacted the recognitionconsolidated balance sheets and an immaterial impact on the consolidated statements of franchise revenueoperations, consolidated statements of equity and gift card breakage. Potbelly licenses intellectual property and trademarks to franchisees through franchise arrangements. As partconsolidated statements of these agreements, Potbelly receives an initial franchise fee payment, which historically was recognizedcash flows.


Our practical expedients were as revenuefollows:

Implications as of December 31, 2018

Practical expedient package

We have not reassessed whether any expired or existing contracts are, or contain, leases.

We have not reassessed the lease classification for any expired or existing leases.

We have not reassessed initial direct costs for any expired or existing leases.

Hindsight practical expedient

We have not elected the hindsight practical expedient, which permits the use of hindsight when determining lease term and impairment of operating lease assets.

The impact on the shop opened. Under the new guidance, these 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. Effective for the annual period beginning January 1, 2018, initial franchise fees are recognizedconsolidated balance sheet is as revenue over the contractual term. Potbelly sells gift cards to customers and records the sale as a liability. The liability is released once the card is redeemed. Historically, a portion of these gift card sales were not redeemed by the customer (“breakage”) and Potbelly would recognize breakage two years after the period of sale. Effective for the annual period beginning January 1, 2018, expected breakage is recognized as customers redeem the gift cards. Upon adoption of the standard, Potbelly’s accumulated deficit increased by $0.7 million (net of tax). The franchise revenue adjustment impacted accrued expenses, other long-term liabilities and deferred income taxes. The breakage adjustment impacted accrued expenses and deferred income taxes. For the 13 weeks ended September 30, 2018, revenue recognized was $0.1 million higher than it would have been under the previous methodology, and for the 39 weeks ended September 30, 2018, revenue recognized was $0.3 million higher than it would have been under the previous methodology.follows:

In February 2016, the FASB issued ASU No. 2016-02, “Leases,” which will replace the existing guidance in ASC 840, “Leases.” The pronouncement requires a dual approach for lessee accounting under which a lessee would account for leases as finance leases or operating leases. Both finance leases and operating leases will result in the lessee recognizing a right-of-use asset and a corresponding lease liability. For finance leases, the lessee would recognize interest expense and amortization of the right-of-use asset, while for operating leases, the lessee would recognize a straight-line total lease expense. The pronouncement is effective for fiscal years beginning after December 15, 2018, including annual and interim periods thereafter. In July 2018, the FASB issued Accounting Standards Update No. 2018-11 “Leases (Topic 842):  Targeted Improvements” (“ASU 2018-11”), which permits companies to initially apply the new leases standard at the date of adoption and not restate periods prior to adoption. The Company plans to adopt ASU 2018-11. The Company is currently evaluating the impact of ASU 2016-02 and anticipates it will be able to complete its analysis of all potential impacts of the standard, implement any system and process changes that might be necessary and educate the appropriate employees with respect to the new standard in order to effectively adopt the standard beginning in the first quarter of 2019.

 

 

 

 

 

Adjustments Due

 

 

 

 

 

 

December 30,

 

 

to the Adoption of

 

 

December 31,

 

 

2018

 

 

Topic 842

 

 

2018

 

Assets

 

 

 

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

19,775

 

 

$

 

 

$

19,775

 

Accounts receivable, net of allowances of $113 as of December 30, 2018

 

4,737

 

 

 

 

 

 

4,737

 

Inventories

 

3,482

 

 

 

 

 

 

3,482

 

Prepaid expenses and other current assets

 

11,426

 

 

 

 

 

 

11,426

 

Total current assets

 

39,420

 

 

 

 

 

 

39,420

 

 

 

 

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

87,782

 

 

 

 

 

 

87,782

 

Right-of-use assets for operating leases

 

 

 

 

232,477

 

 

 

232,477

 

Indefinite-lived intangible assets

 

3,404

 

 

 

 

 

 

3,404

 

Goodwill

 

2,222

 

 

 

 

 

 

2,222

 

Deferred income taxes, noncurrent

 

13,385

 

 

 

195

 

 

 

13,580

 

Deferred expenses, net and other assets

 

7,002

 

 

 

 

 

 

7,002

 

Total assets

$

153,215

 

 

$

232,672

 

 

$

385,887

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Equity

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

$

3,835

 

 

$

 

 

$

3,835

 

Accrued expenses(1)

 

25,029

 

 

 

(1,124

)

 

 

23,905

 

Short-term operating lease liabilities

 

 

 

 

28,826

 

 

 

28,826

 

Accrued income taxes

 

162

 

 

 

 

 

 

162

 

Total current liabilities

 

29,026

 

 

 

27,702

 

 

 

56,728

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred rent and landlord allowances(1)

 

22,905

 

 

 

(22,905

)

 

 

 

Long-term operating lease liabilities

 

 

 

 

228,406

 

 

 

228,406

 

Other long-term liabilities

 

5,751

 

 

 

 

 

 

5,751

 

Total liabilities

 

57,682

 

 

 

233,203

 

 

 

290,885

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

 

 

 

 

 

Common stock, $0.01 par value—authorized 200,000,000 shares;

   outstanding 24,142,586 shares as of December 30, 2018

 

330

 

 

 

 

 

 

330

 

Additional paid-in-capital

 

432,771

 

 

 

 

 

 

432,771

 

Treasury stock, held at cost,  8,801,154 shares as of December 30, 2018

 

(108,372

)

 

 

 

 

 

(108,372

)

Accumulated deficit(2)

 

(229,558

)

 

 

(531

)

 

 

(230,089

)

Total stockholders’ equity

 

95,171

 

 

 

(531

)

 

 

94,640

 

Non-controlling interest

 

362

 

 

 

 

 

 

362

 

Total stockholders' equity

 

95,533

 

 

 

(531

)

 

 

95,002

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities and equity

$

153,215

 

 

$

232,672

 

 

$

385,887

 

(1)

Adjustment to reclassify deferred rent and tenant improvement allowance to right-of-use assets for operating leases upon the adoption of Topic 842.

(2)

The Company recorded a net reduction of $0.5 million to opening accumulated deficit as of December 31, 2018, due to the cumulative impact of adopting Topic 842.


(2) Revenue

Potbelly primarily earns revenue at a point in time through sales at our sandwich shop locations and records such revenue net of sales-related taxes collected from customers. The payment on these sales is due at the time of the customer’s purchase. The Company also receives royalties from franchisees on their respective sales, which are recognized at the point in time the sale is made and invoiced weekly. Potbelly also records revenue from sales over time related to upfront franchise fees, gift card redemptions and breakage. For the 13 and 39 weeks ended September 29, 2019, revenue recognized from all revenue sources on point in time sales was $103.9 million and $307.2 million, respectively, and revenue recognized from sales over time was $0.4 million and $0.8 million, respectively. For the 13 and 39 weeks ended September 30, 2018, revenue recognized from all revenue sources on point in time sales was $106.9 million and $319.8 million, respectively, and revenue recognized from sales over time was $0.1 million and $0.5 million.million, respectively.

Franchise Revenue

Potbelly licenses intellectual property and trademarks to franchisees through franchise agreements. As part of these franchise agreements, Potbelly receives an upfront payment from the franchisee, which the Company recognizes over the term of the franchise agreement. The Company records a contract liability for the unearned portion of the upfront franchise payments.

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, which is recognized by the Company 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.


Contract Liabilities

As described above, the Company records current and noncurrent contract liabilities for upfront franchise fees as well asand gift cards.  There are no other contract liabilities or contract assets recorded by the Company. The opening and closing balances of the Company’s current and noncurrent contract liabilities from contracts with customers were as follows:

 

 

 

Current Contract

Liability

 

 

Noncurrent Contract

Liability

 

 

 

(Thousands)

 

 

(Thousands)

 

Beginning balance as of January 1, 2018

 

$

(2,325

)

 

$

(2,144

)

Ending balance as of September 30, 2018

 

 

(1,375

)

 

 

(1,809

)

Decrease in contract liability

 

$

(950

)

 

$

(335

)

 

 

Current Contract

Liability

 

 

Noncurrent Contract

Liability

 

 

 

(Thousands)

 

 

(Thousands)

 

Beginning balance as of December 31, 2018

 

$

(2,184

)

 

$

(1,631

)

Ending balance as of September 29, 2019

 

 

(1,632

)

 

 

(1,755

)

Increase (decrease) in contract liability

 

$

(552

)

 

$

124

 

 

The aggregate value of remaining performance obligations on outstanding contracts was $3.2$3.4 million as of September 30, 2018. The decrease in the liability during the 39 weeks ended September 30, 2018 was a result of gift card redemptions offset by purchases of new gift cards and recognition of franchise fees.29, 2019. The Company expects to recognize revenue related to contract liabilities as follows (in thousands), which may vary based upon franchise activity as well as gift card redemption patterns:

 

Years Ending

 

Amount

 

 

Amount

 

2018

 

$

692

 

2019

 

 

752

 

 

$

481

 

2020

 

 

212

 

 

 

581

 

2021

 

 

206

 

 

 

266

 

2022

 

 

199

 

 

 

211

 

2023

 

 

204

 

Thereafter

 

 

1,123

 

 

 

1,644

 

Total revenue recognized

 

$

3,184

 

 

$

3,387

 

 

For the 13 and 39 weeks ended September 29, 2019, the amount of revenue recognized related to the December 31, 2018 liability ending balance was $0.2 million and $1.7 million, respectively. For the 13 and 39 weeks ended September 30, 2018, the amount of revenue recognized related to the January 1, 2018 liability ending balance was $0.3 million and $1.8 million, respectively. This revenue related to the recognition of gift card redemptions and upfront franchise fees. For the 39 weeks ended September 29, 2019 and the 39 weeks ended September 30, 2018, the Company did not recognize any revenue from obligations satisfied (or partially satisfied) in prior periods.


(3) 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.

The Company assesses potential impairments to its 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.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.asset group. The fair value of the shop assets wasis 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. At transition of adoption to ASC 842, the Company impaired $0.7 million of pre-tax right-of-use assets related to previously impaired shops. This amount is recorded, net of tax, as an opening reduction to retained earnings. After performing a periodic review of the Company’s shops during the 13 weeks and 39 weeks ended September 30, 2018,29, 2019, it was determined that indicators of impairment were present for certain shops as a result of continued underperformance. The Company performed an impairment analysis related to these shops and recorded an impairment charge of $1.5 million and $1.7 million for the 13 and 39 weeks ended September 29, 2019.  The Company recorded an impairment charge of $4.4 million and $8.5 million for the 13 and 39 weeks ended September 30, 2018, respectively. The Company recorded an impairment charge of $1.5 million

Assets and $5.8 million forLiabilities Measured at Fair Value on a Nonrecurring Basis

Assets recognized or disclosed at fair value on the 13consolidated financial statements on a nonrecurring basis include items such as leasehold improvements, property and 39 weeks ended September 24, 2017, respectively. Included within the impairment charge for the 13equipment, operating lease assets, goodwill, and 39 weeks ended September 24, 2017, impairment charges of $0.7 million were recorded in relationother intangible assets. These assets are measured at fair value if determined to Hurricane Harvey, with insurance recoveries of $0.7 million also recorded within the same caption.be impaired.


(4) Earnings (Loss)Loss Per Share

Basic and diluted income per common share attributable to common stockholders wereare calculated using the weighted average number of common shares outstanding for the period. Diluted income per common share attributable to common stockholders is computed by dividing the income 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 13 and 39 weeks ended September 29, 2019, and September 30, 2018, the Company had a loss per share, and therefore potentially dilutive shares were excluded for potential stock option exercises.from the calculation.

The following table summarizes the earnings (loss)loss per share calculation:

 

 

For the 13 Weeks Ended

 

 

For the 39 Weeks Ended

 

 

For the 13 Weeks Ended

 

 

For the 39 Weeks Ended

 

 

September 30,

 

 

September 24,

 

 

September 30,

 

 

September 24,

 

 

September 29,

 

 

September 30,

 

 

September 29,

 

 

September 30,

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Net income (loss) attributable to Potbelly Corporation

 

$

(1,961

)

 

$

(240

)

 

$

(4,515

)

 

$

305

 

Net loss attributable to Potbelly Corporation

 

$

(2,355

)

 

$

(1,961

)

 

$

(22,660

)

 

$

(4,515

)

Weighted average common shares outstanding-basic

 

 

25,369,281

 

 

 

24,959,023

 

 

 

25,355,174

 

 

 

25,030,951

 

 

 

23,740,005

 

 

 

25,369,281

 

 

 

23,927,046

 

 

 

25,355,174

 

Plus: Effect of potential stock options exercise

 

 

 

 

 

 

 

 

 

 

 

770,965

 

 

 

 

 

 

 

 

 

 

 

 

 

Plus: Effect of potential warrant exercise

 

 

 

 

 

 

 

 

 

 

 

55,167

 

Weighted average common shares outstanding-diluted

 

 

25,369,281

 

 

 

24,959,023

 

 

 

25,355,174

 

 

 

25,857,083

 

 

 

23,740,005

 

 

 

25,369,281

 

 

 

23,927,046

 

 

 

25,355,174

 

Income (loss) per share available to common stockholders-basic

 

$

(0.08

)

 

$

(0.01

)

 

$

(0.18

)

 

$

0.01

 

Income (loss) per share available to common stockholders-diluted

 

$

(0.08

)

 

$

(0.01

)

 

$

(0.18

)

 

$

0.01

 

Loss per share available to common stockholders-basic

 

$

(0.10

)

 

$

(0.08

)

 

$

(0.95

)

 

$

(0.18

)

Loss per share available to common stockholders-diluted

 

$

(0.10

)

 

$

(0.08

)

 

$

(0.95

)

 

$

(0.18

)

Potentially dilutive shares that are considered anti-dilutive:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common share options

 

 

2,050,503

 

 

 

4,012,073

 

 

 

2,569,808

 

 

 

1,151,317

 

 

 

2,333,340

 

 

 

2,050,503

 

 

 

2,365,624

 

 

 

2,569,808

 

 


(5) Income Taxes

In accordance with ASC 740, eachOur interim periodtax provision is considered an integral part of the annual period and tax expense or benefit is measureddetermined using an estimated annual effective tax rate.  An enterpriserate and adjusted for discrete taxable events that occur during the quarter. The difference between the effective tax rate in 2019 and 2018 is required,the recording of the valuation allowance in the first quarter of 2019.

The Company regularly assesses the need for a valuation allowance related to its 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 its deferred tax assets will not be realized.  In its assessment, the Company considered recent financial operating results, the change in projected future taxable income for fiscal year 2019, the reversal of existing taxable temporary differences, and tax planning strategies.  As a result of the changes in projected taxable income for 2019, the Company estimated it would be in a cumulative loss position as of December 29, 2019.  Therefore, the Company determined that the negative evidence outweighed the positive evidence and, therefore, recorded a full valuation allowance against its net deferred tax assets during the 13 weeks ended March 31, 2019. The Company recorded a non-cash charge to income tax expense of $13.6 million related to the recognition of the valuation allowance during the first quarter of 2019 and continues to record a valuation allowance against all of our deferred tax assets as of September 29, 2019.  The Company did not provide for an income tax benefit on the pre-tax loss recorded for the 13 weeks and 39 weeks ended September 29, 2019. This accounting treatment has no effect on the Company’s ability to utilize deferred tax assets to reduce future cash tax payments. The Company will continue to assess the likelihood of the realization of its deferred tax assets at the end of each interim reporting period to make its best estimateand the valuation allowance will be adjusted accordingly.  

(6) Leases

We determine if a contract contains a lease at inception. The Company leases retail shops, warehouse and office space under operating leases. For leases with renewal periods at the Company’s option, the Company determines the expected lease period based on whether the renewal of any options are reasonably assured at the inception of the annual effective taxlease.

Operating lease assets and liabilities are recognized at the lease commencement date. Operating lease liabilities represent the present value of lease payments not yet paid. Operating lease assets represent our right to use an underlying asset and are based upon the operating lease liabilities adjusted for prepayments or accrued lease payments, initial direct costs, lease incentives, and impairment of operating lease assets. To determine the present value of lease payments not yet paid, we estimate incremental secured borrowing rates corresponding to the maturities of the leases. As we have no outstanding debt nor committed credit facilities, secured or otherwise, we estimate this rate based on prevailing financial market conditions, comparable company and credit analysis, and management judgment.

We recognize expense for these leases on a straight-line basis over the fulllease term. Additionally, tenant incentives used to fund leasehold improvements are recognized when earned and reduce our right-of-use asset related to the lease. These are amortized through the right-of-use asset as reductions of expense over the lease term.

Related to the adoption of Topic 842, our policy elections were as follows:

Separation of lease and non-lease components

We elected this expedient to account for lease and non-lease components as a single component for our entire population of operating lease assets.

Short-term policy

We have elected the short-term lease recognition exemption for all applicable classes of underlying assets. Short-term disclosures include only those leases with a term greater than one month and 12 months or less, and expense is recognized on a straight-line basis over the lease term. Leases with an initial term of 12 months or less, that do not include an option to purchase the underlying asset that we are reasonably certain to exercise, are not recorded on the balance sheet.

Supplemental balance sheet information related to leases was as follows:

 

 

 

 

September 29,

 

Operating Leases

 

Classification

 

2019

 

Right-of-use assets

 

Right-of-use assets for operating leases

 

$

212,261

 

Short-term lease liabilities

 

Short-term operating lease liabilities

 

 

28,998

 

Long-term lease liabilities

 

Long-term operating lease liabilities

 

 

207,196

 

Total lease liabilities

 

 

 

 

236,194

 


Operating lease term and discount rate were as follows:

September 29,

2019

Weighted average remaining lease term (years)

8.59

Weighted average discount rate

8.00

%

Certain of the Company’s 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:

 

 

 

 

13 weeks ending

 

 

39 weeks ending

 

 

 

 

 

September 29,

 

 

September 29,

 

 

 

Classification

 

2019

 

 

2019

 

Operating lease cost

 

Occupancy and General and administrative expenses

 

 

11,187

 

 

 

33,793

 

Variable lease cost

 

Occupancy

 

 

3,277

 

 

 

10,430

 

Total lease cost

 

 

 

$

14,464

 

 

$

44,223

 

Supplemental disclosures of cash flow information related to leases were as follows:

 

 

13 weeks ending

 

 

39 weeks ending

 

 

 

September 29,

 

 

September 29,

 

 

 

2019

 

 

2019

 

Operating cash flows rent paid for operating lease liabilities

 

 

11,762

 

 

 

35,488

 

Operating right-of-use assets obtained in exchange for new operating lease liabilities

 

 

4,745

 

 

 

8,402

 

Reduction in operating right-of-use assets due to lease terminations

 

 

(659

)

 

 

(6,506

)

As of September 29, 2019, the Company has additional operating lease payments related to shops not yet open of $4.3 million. These operating leases will commence during the next fiscal year with an average lease term of 12 years.

Maturities of lease liabilities were as follows as of September 29, 2019:

  

 

Operating Leases

 

Remainder of 2019

 

 

11,123

 

2020

 

 

46,672

 

2021

 

 

42,581

 

2022

 

 

37,033

 

2023

 

 

32,309

 

2024

 

 

29,207

 

Thereafter

 

 

137,063

 

Total lease payments

 

 

335,988

 

Less: imputed interest

 

 

(99,794

)

Present value of lease liabilities

 

$

236,194

 


As previously disclosed in our 2018 Annual Report on Form 10-K and useunder the previous lease accounting, maturities of lease liabilities were as follows as of December 30, 2018:

 

 

Operating Leases

 

2019

 

 

47,918

 

2020

 

 

45,828

 

2021

 

 

41,497

 

2022

 

 

36,120

 

2023

 

 

31,060

 

Thereafter

 

 

138,928

 

Total minimum lease payments

 

 

341,351

 

(7) Debt and Credit Facilities

On August 7, 2019, the Company entered into a second amended and restated revolving credit facility agreement (the "Credit Agreement") with JPMorgan Chase Bank, N.A. (“JPMorgan”) that expires in July 2022. The 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 Credit Agreement provides, 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 the Company’s option at either (i) a eurocurrency rate determined by reference to provide for income taxesthe applicable LIBOR rate plus a margin ranging from 1.25% to 1.75% or (ii) a prime rate as announced by JP Morgan plus a margin ranging from 0.00% to 0.50%. The applicable margin is determined based upon the Company’s consolidated total leverage ratio. On the last day of each calendar quarter, the Company is required to pay a commitment fee of 0.20% per annum in respect of any unused commitments under the credit facility. So long as certain total leverage ratios, EBITDA thresholds and minimum liquidity requirements are met and no default or event of default has occurred or would result, there is no limit on a current year-to-date basis.  However, when a reliable estimatethe “restricted payments” (primarily distributions and equity repurchases) that the Company may make, provided that proceeds of the annual effective tax rate cannotloans under the Credit Agreement may not be made, the actual effective tax rateused for the year-to-date period may be the best estimatepurposes of making restricted payments. As of the annual effective tax rate. For the 13 and 39 weeks ended September 30, 2018, the actual year-to-date effective tax rate was used to compute the income tax benefit as a reliable estimate of the annual estimated tax rate cannot be made as nominal changes in projected income or loss result in a significant variance in our estimated effective tax rate. The effective tax rate differed from the federal statutory rate primarily due to the impact of ASU 2016-09, state income taxes, federal and state tax credits and certain discrete items.

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) was enacted into law making significant changes to the U.S. tax code, including: (1) reducing the U.S. federal corporate tax rate from 35 percent to 21 percent; (2) implementing bonus depreciation that will allow for full expensing of qualified property; (3) implementing limitations on the deductibility of certain executive compensation; and (4) changing rules related to uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017.

On that same date, the SEC staff also issued Staff Accounting Bulletin (SAB) 118, which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740. A company must reflect the income tax effects of those aspects of the Tax Act for which accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete, but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements.

At September 30, 2018,29, 2019, the Company has not completedhad no amounts outstanding under the accounting for the tax effects of enactment of the Tax Act; however, the Company made a reasonable estimate of the effects and booked a provisional tax expense adjustment in the fiscal year 2017, the period in which the legislation was enacted. During the 13 and 39 weeks ended September 30, 2018, there have been no adjustments made to the provisional amounts previously recorded related to the enactment of the Tax Act.Credit Agreement.


(6)(8) Capital Stock

On May 8, 2018, the Company announced that its Board of Directors authorized a stock repurchase program for up to $65.0 million of its outstanding common stock, replacing the Company’s previous $30.0 million share repurchase program.stock. The current program permits the Company, 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, Securities and Exchange CommissionSEC requirements and other factors. Purchases may be started or stopped at any time without prior notice depending on market conditions and other factors.  For the 3913 weeks ended September 30, 2018,29, 2019, the Company repurchased 959,240162,162 shares of its common stock for approximately $12.3$0.7 million under the new stock repurchase program, including cost and hadcommission, in open market transactions. For the 39 weeks ended September 29, 2019, the Company repurchased 5,000647,821 shares of its common stock for approximately $0.1$4.2 million under the previous sharestock repurchase program, including cost and commission, in open market transactions. Repurchased shares are included as treasury stock in the condensed consolidated balance sheets and the condensed consolidated statements of equity.

On June 14, 2018, the Company registered 1,000,000 additional shares of its common stock, par value $0.01, reserved for issuance under the Amended and Restated 2013 Long-Term Incentive Plan. As a result, the total number of shares registered under the 2013 Long-Term Incentive Plan is 3,500,000.

(7)(9) Stock-Based Compensation

Stock options are awarded under

On May 16, 2019, the 2013Company’s stockholders approved the Potbelly Corporation 2019 Long-Term Incentive Plan to eligible employees (the “2019 Plan”) and, certain non-employee members ofin connection therewith, all equity awards made after that date were made under the Board of Directors.2019 Plan. On June 14, 2018,10, 2019, the Company registered an additional 1,000,0001,200,000 shares of its common stock reserved for issuance under the 2019 Plan. All remaining shares of common stock reserved for issuance under the previous Amended and Restated 2013 Long-Term Incentive Plan and brings the total number of shares registered(the “2013 Plan”) are available for issuance under the plan to 3,500,000.2019 Plan and no future awards will be made under the 2013 Plan. The fair value of stock options is determined using the Black-Scholes option pricing model. The weighted average fair value ofThere were no stock options granted during the 13 weeks and 39 weeks ended September 30, 2018 was $5.24 per share, as estimated using the following weighted average assumptions: expected life of options – 6.25 years; volatility – 35.39%; risk-free interest rate – 2.85%; and dividend yield – 0.00%. The Company used the simplified method for determining the expected life of the options. The expected volatility of the options was calculated using the Company’s historical data.29, 2019.

 


A summary of stock option activity for the 39 weeks ended September 30, 201829, 2019 is as follows:

 

Options

 

Shares

(Thousands)

 

 

Weighted

Average

Exercise

Price

 

 

Aggregate

Intrinsic

Value

(Thousands)

 

 

Weighted

Average

Remaining

Term

(Years)

 

 

Shares

(Thousands)

 

 

Weighted

Average

Exercise

Price

 

 

Aggregate

Intrinsic

Value

(Thousands)

 

 

Weighted

Average

Remaining

Term

(Years)

 

Outstanding—December 31, 2017

 

 

3,309

 

 

$

10.71

 

 

$

7,699

 

 

 

4.90

 

Outstanding—December 30, 2018

 

 

2,150

 

 

$

11.49

 

 

$

378

 

 

 

5.13

 

Granted

 

 

102

 

 

 

13.05

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercised

 

 

(984

)

 

 

8.30

 

 

 

 

 

 

 

 

 

 

 

(22

)

 

 

7.93

 

 

 

 

 

 

 

 

 

Canceled

 

 

(347

)

 

 

13.61

 

 

 

 

 

 

 

 

 

 

 

(260

)

 

 

13.15

 

 

 

 

 

 

 

 

 

Outstanding—September 30, 2018

 

 

2,080

 

 

$

11.60

 

 

$

3,615

 

 

 

5.60

 

Exercisable—September 30, 2018

 

 

1,573

 

 

$

11.04

 

 

$

3,533

 

 

 

4.62

 

Outstanding—September 29, 2019

 

 

1,868

 

 

$

11.30

 

 

$

 

 

 

4.78

 

Exercisable—September 29, 2019

 

 

1,489

 

 

$

11.03

 

 

$

 

 

 

3.89

 

 

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. For the 13 weeks and 39 weeks ended September 29, 2019, the Company recognized stock-based compensation expense related to stock options of $0.1 million and $0.7 million, respectively. For the 13 weeks and 39 weeks ended September 30, 2018, the Company recognized stock-based compensation expense related to stock options of $0.2$0.1 million and $2.5$1.1 million, respectively. For the 13 weeks ended September 24, 2017, the Company recognized stock-based compensation expense of $1.4 million. For the 39 weeks ended September 24, 2017, the Company recognized stock-based compensation expense of $3.3 million. As of September 30, 2018,29, 2019, unrecognized stock-based compensation expense for stock options was $2.8$1.1 million, which will be recognized through fiscal year 2022. The Company records stock-based compensation expense within general and administrative expenses in the condensed consolidated statements of operations.

Restricted stock units

(8)The Company awards restricted stock units (“RSUs”) to certain employees of the Company and certain non-employee members of its Board of Directors. The Board of Director grants have a vesting schedule of 50% on the first anniversary of the grant date and 50% on the second anniversary of the grant date. The employee grants vest in one-third increments over a three-year period. For the 13 weeks and 39 weeks ended September 29, 2019, the Company recognized stock-based compensation expense related to RSUs of $0.3 million and $1.2 million, respectively. For the 13 weeks and 39 weeks ended September 30, 2018, the Company recognized stock-based compensation expense related to RSUs of $0.1 million and $1.4 million, respectively. As of September 29, 2019, unrecognized stock-based compensation expense for RSUs was $1.8 million, which will be recognized though fiscal year 2022.

A summary of RSU activity for the 39 weeks ended September 29, 2019 is as follows:

RSUs

 

Number of RSUs

(Thousands)

 

 

Weighted Average

Fair Value per Share

 

Non-vested as of December 30, 2018

 

 

247

 

 

$

11.99

 

Granted

 

 

331

 

 

 

6.80

 

Vested

 

 

(94

)

 

 

6.10

 

Canceled

 

 

(23

)

 

 

7.55

 

Non-vested as of September 29, 2019

 

 

461

 

 

$

8.48

 

Performance stock units

The Company awards performance share units (“PSUs”) to eligible employees; the PSUs are subject to service and performance vesting conditions. In March of 2019 the Company issued 188,414 PSUs with a grant date fair value of $8.46 per share. The PSUs will vest based on the Company’s achievement of certain targets related to adjusted EBITDA and same store sales goals. The PSUs will vest fully on the third anniversary of the grant date. The quantity of shares that will vest ranges from 0% to 200% of the targeted number of shares. If the defined minimum targets are not met, then no shares will vest. For the 13 weeks and 39 weeks ended September 29, 2019, the expense associated with the PSUs was not material.


(10) Commitments and Contingencies

The Company is 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. In the opinion of management, the amount of ultimate liability with respect to those actions should not have a material adverse impact on the Company’s financial position or results of operations and cash flows.


In October 2017, plaintiffs filed a purported collective and class action lawsuit (the “Complaint”) in the United States District Court for the Southern District of New York against the Company alleging violations of the Fair Labor Standards Act (FLSA) and New York Labor Law (NYLL). The plaintiffs allege that the Company violated the FLSA and NYLL by not paying overtime compensation to our assistant managers and violated NYLL by not paying spread-of-hours pay. Potbelly believesThe Complaint was brought as a nationwide “collective action” under the assistant managers were properly classifiedFLSA and as a “class action” under state and federal law. The Company intends to vigorously defend this action. This case is at an early stage, and Potbelly is therefore unable to make a reasonable estimateNYLL. Since the filing of the probable loss or rangeComplaint, the plaintiffs filed a proposed amended complaint removing the NYLL class claim, but adding a proposed Illinois state law class action. In May 2019, the parties participated in a mediation and resolved the claims, subject to court approval. All charges related to the claims are reflected in the statement of losses, if any, that might arise from this matter.

operations.

 


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 31, 2017.30, 2018. 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, business strategy, budgets, projectedestimated costs associated with our closure of underperforming shops, and plansthe implementation and objectivesresults of management for future operations.strategic initiatives. 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, competition; general economic conditions; our ability to manage our growth and successfully implement our business strategy; pricethe success of our initiatives to increase sales and availability of commodities;traffic; changes in laborcommodity, energy and other costs; consumer confidenceour ability to attract and spending patterns;retain management and employees; 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 31, 2017,30, 2018, 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.

Overview

Potbelly Corporation (the “Company” or “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 promises Fresh, Fast & Friendly service in an environment that reflects the local neighborhood. Our employees are trained to engage with our customers in a genuine way to provide a personalized experience. Our shops feature vintage design elements and locally-themed décor inspired by the neighborhood that we believe create a lively atmosphere. Through this combination, we believe we are creating a devoted base of Potbelly fans that return again and again.

We believe that a key to our past and future success is our culture. It is embodied in The Potbelly Advantage, which is an expression of our Vision, Mission Passion and Values, and the foundation of everything we do. Our Vision is forto create an experience people love to share thanks to our customers to feel that we are their “Neighborhood Sandwich Shop”craveable food, quirky personality and to tell others about their great experience.amazing people. Our Mission is to makehelp people really happy, to make more money and to improve every day. Our Passion is to be “The Best Place for Lunch.”love lunch again. Our Values embody both how we lead and how we behave and form the cornerstone of our culture. We use simple language that resonates from the frontline associate to the most senior levels of the organization, creating shared expectations and accountabilities in how we approach our day-to-day activities. We strive to be a fun, friendly and hardworking group of people who enjoy taking care of our customers, while at the same time taking care of each other.

The table below sets forth a rollforward of company-operated and franchise operated activities:

 

 

Company-

 

 

Franchise-Operated

 

 

Total

 

 

Company-

 

 

Franchise-Operated

 

 

Total

 

 

Operated

 

 

Domestic

 

 

International

 

 

Total

 

 

Company

 

Shops as of December 25, 2016

 

 

411

 

 

 

30

 

 

 

13

 

 

 

43

 

 

 

454

 

Shops opened

 

 

22

 

 

 

10

 

 

 

3

 

 

 

13

 

 

 

35

 

Shops closed

 

 

(7

)

 

 

 

 

 

 

 

 

 

 

 

(7

)

Shops as of September 24, 2017

 

 

426

 

 

 

40

 

 

 

16

 

 

 

56

 

 

 

482

 

 

 

          

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operated

 

 

Domestic

 

 

International

 

 

Total

 

 

Company

 

Shops as of December 31, 2017

 

 

437

 

 

 

39

 

 

 

16

 

 

 

55

 

 

 

492

 

 

 

437

 

 

 

39

 

 

 

16

 

 

 

55

 

 

 

492

 

Shops opened

 

 

6

 

 

 

2

 

 

 

2

 

 

 

4

 

 

 

10

 

 

 

6

 

 

 

2

 

 

 

2

 

 

 

4

 

 

 

10

 

Shops closed

 

 

(8

)

 

 

(2

)

 

 

(4

)

 

 

(6

)

 

 

(14

)

 

 

(8

)

 

 

(2

)

 

 

(4

)

 

 

(6

)

 

 

(14

)

Shops as of September 30, 2018

 

 

435

 

 

 

39

 

 

 

14

 

 

 

53

 

 

 

488

 

 

 

435

 

 

 

39

 

 

 

14

 

 

 

53

 

 

 

488

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shops as of December 30, 2018

 

 

437

 

 

 

41

 

 

 

8

 

 

 

49

 

 

 

486

 

Shops opened

 

 

1

 

 

 

6

 

 

 

 

 

 

6

 

 

 

7

 

Shops closed

 

 

(11

)

 

 

(2

)

 

 

(8

)

 

 

(10

)

 

 

(21

)

Shops as of September 29, 2019

 

 

427

 

 

 

45

 

 

 

 

 

 

45

 

 

 

472

 

 


13 Weeks Ended September 30, 201829, 2019 Compared to 13 Weeks Ended September 24, 201730, 2018

The following table presents information comparing the components of net income for the periods indicated (dollars in thousands):

 

 

For the 13 Weeks Ended

 

 

 

 

 

 

 

 

 

 

For the 13 Weeks Ended

 

 

 

 

 

 

 

 

 

 

September 30, 2018

 

 

% of

Revenues

 

 

September 24, 2017

 

 

% of

Revenues

 

 

Increase

(Decrease)

 

 

Percent

Change

 

 

September 29, 2019

 

 

% of

Revenues

 

 

September 30, 2018

 

 

% of

Revenues

 

 

Increase

(Decrease)

 

 

Percent

Change

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sandwich shop sales, net

 

$

106,238

 

 

 

99.3

%

 

$

105,327

 

 

 

99.2

%

 

$

911

 

 

 

0.9

%

 

$

103,560

 

 

 

99.3

%

 

$

106,238

 

 

 

99.3

%

 

$

(2,678

)

 

 

(2.5

)%

Franchise royalties and fees

 

 

758

 

 

 

0.7

 

 

 

800

 

 

 

0.8

 

 

 

(42

)

 

 

(5.3

)

 

 

678

 

 

 

0.7

 

 

 

758

 

 

 

0.7

 

 

 

(80

)

 

 

(10.6

)

Total revenues

 

 

106,996

 

 

 

100.0

 

 

 

106,127

 

 

 

100.0

 

 

 

869

 

 

 

0.8

 

 

 

104,238

 

 

 

100.0

 

 

 

106,996

 

 

 

100.0

 

 

 

(2,758

)

 

 

(2.6

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Percentages stated as a percent of sandwich shop sales, net)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sandwich shop operating

expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of goods sold, excluding

depreciation

 

 

28,455

 

 

 

26.6

 

 

 

28,405

 

 

 

26.8

 

 

 

50

 

 

 

0.2

 

 

 

27,540

 

 

 

26.6

 

 

 

28,455

 

 

 

26.8

 

 

 

(915

)

 

 

(3.2

)

Labor and related expenses

 

 

32,376

 

 

 

30.3

 

 

 

31,187

 

 

 

29.4

 

 

 

1,189

 

 

 

3.8

 

 

 

32,430

 

 

 

31.3

 

 

 

32,376

 

 

 

30.5

 

 

 

54

 

 

 

0.2

 

Occupancy expenses

 

 

15,076

 

 

 

14.1

 

 

 

14,354

 

 

 

13.5

 

 

 

722

 

 

 

5.0

 

 

 

14,850

 

 

 

14.3

 

 

 

15,076

 

 

 

14.2

 

 

 

(226

)

 

 

(1.5

)

Other operating expenses

 

 

13,357

 

 

 

12.5

 

 

 

12,464

 

 

 

11.7

 

 

 

893

 

 

 

7.2

 

 

 

13,274

 

 

 

12.8

 

 

 

13,357

 

 

 

12.6

 

 

 

(83

)

 

 

(0.6

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Percentages stated as a percent of total revenues)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General and administrative

expenses

 

 

10,087

 

 

 

9.4

 

 

 

12,104

 

 

 

11.4

 

 

 

(2,017

)

 

 

(16.7

)

 

 

11,256

 

 

 

10.8

 

 

 

10,087

 

 

 

9.4

 

 

 

1,169

 

 

 

11.6

 

Depreciation expense

 

 

5,847

 

 

 

5.5

 

 

 

6,315

 

 

 

6.0

 

 

 

(468

)

 

 

(7.4

)

 

 

5,365

 

 

 

5.1

 

 

 

5,847

 

 

 

5.5

 

 

 

(482

)

 

 

(8.2

)

Pre-opening costs

 

 

109

 

 

 

0.1

 

 

 

336

 

 

 

0.3

 

 

 

(227

)

 

 

(67.6

)

 

 

16

 

 

*

 

 

 

109

 

 

 

0.1

 

 

 

(93

)

 

 

(85.3

)

Impairment and loss on disposal

of property and equipment

 

 

4,386

 

 

 

4.1

 

 

 

1,536

 

 

 

1.4

 

 

 

2,850

 

 

>100

 

 

 

1,650

 

 

 

1.6

 

 

 

4,386

 

 

 

4.1

 

 

 

(2,736

)

 

 

(62.4

)

Total expenses

 

 

109,693

 

 

 

102.5

 

 

 

106,701

 

 

 

100.5

 

 

 

2,992

 

 

 

2.8

 

 

 

106,381

 

 

>100

 

 

 

109,693

 

 

>100

 

 

 

(3,312

)

 

 

(3.0

)

Loss from operations

 

 

(2,697

)

 

 

(2.5

)

 

 

(574

)

 

 

(0.5

)

 

 

(2,123

)

 

>100

 

 

 

(2,143

)

 

 

(2.1

)

 

 

(2,697

)

 

 

(2.5

)

 

 

554

 

 

 

(20.5

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

54

 

 

 

0.1

 

 

 

32

 

 

*

 

 

 

22

 

 

 

68.8

 

 

 

28

 

 

*

 

 

 

54

 

 

*

 

 

 

(26

)

 

 

(48.1

)

Loss before income taxes

 

 

(2,751

)

 

 

(2.6

)

 

 

(606

)

 

 

(0.6

)

 

 

(2,145

)

 

>100

 

 

 

(2,171

)

 

 

(2.1

)

 

 

(2,751

)

 

 

(2.6

)

 

 

580

 

 

 

(21.1

)

Income tax benefit

 

 

(909

)

 

 

(0.8

)

 

 

(487

)

 

 

(0.5

)

 

 

(422

)

 

 

86.7

 

Income tax benefit (expense)

 

 

66

 

 

*

 

 

 

(909

)

 

 

(0.8

)

 

 

975

 

 

>(100)

 

Net loss

 

 

(1,842

)

 

 

(1.7

)

 

 

(119

)

 

 

(0.1

)

 

 

(1,723

)

 

>100

 

 

 

(2,237

)

 

 

(2.1

)

 

 

(1,842

)

 

 

(1.7

)

 

 

(395

)

 

 

21.4

 

Net income attributable to

non-controlling interest

 

 

119

 

 

 

0.1

 

 

 

121

 

 

 

0.1

 

 

 

(2

)

 

 

(1.7

)

Net income attributable to non-

controlling interest

 

 

118

 

 

 

0.1

 

 

 

119

 

 

 

0.1

 

 

 

(1

)

 

 

(0.8

)

Net loss attributable to

Potbelly Corporation

 

$

(1,961

)

 

 

(1.8

)%

 

$

(240

)

 

 

(0.2

)%

 

$

(1,721

)

 

>100%

 

 

$

(2,355

)

 

 

(2.3

)%

 

$

(1,961

)

 

 

(1.8

)%

 

$

(394

)

 

 

20.1

%

 

*

Amount is less than 0.1%

Revenues

Total revenues increaseddecreased by $0.9$2.8 million, or 0.8%2.6%, to 107.0$104.2 million during the 13 weeks ended September 29, 2019, from $107.0 million during the 13 weeks ended September 30, 2018, from $106.1 million during the 13 weeks ended September 24, 2017.2018. The revenue growthdecrease was driven by a $3.1 million, or 3.0%, decrease in sales from company-operated comparable store shops and a decrease in sales of $1.6 million from shops that have closed. These decreases were partially offset by an increase in sales of $3.0 million from shops not yet in our company-operated comparable store sales base. These increases were partially offset by a decrease in sales of $0.2 million, or 0.2%, from company-operated comparable storesbase and a decrease in sales of $1.9 million from shops that have closed. The decreaseopened in company-operated comparable store sales resulted from a decrease in traffic, partially offset by an increase in average transaction size.2019.  


Cost of Goods Sold

Cost of goods sold increaseddecreased by $50 thousand,$0.9 million, or 0.2%3.2%, to $27.5 million during the 13 weeks ended September 29, 2019, from $28.5 million during the 13 weeks ended September 30, 2018, from $28.4 million during the 13 weeks ended September 24, 2017.2018. This decrease was primarily driven by a decrease in shop revenue. As a percentage of revenues,sandwich shop sales, cost of goods sold decreased to 26.6% during the 13 weeks ended September 30, 2018,29, 2019, from 26.8% during the 13 weeks ended September 24 2017,30, 2018, primarily driven by certain menu price increases.increases, partially offset by cost inflation in certain products.


Labor and Related Expenses

Labor and related expenses increased by $1.2 million, or 3.8%, toremained at $32.4 million during the 13 weeks ended September 30, 2018, from $31.2 million during29, 2019, compared to the 13 weeks ended September 24, 2017,30 2018, primarily due to new shop openings and inflationary wage increases in certain states which was partially offset by a decrease in expense from closed shops. As a percentage of revenues,sandwich shop sales, labor and related expenses increased to 30.3%31.3% during the 13 weeks ended September 29, 2019, from 30.5% during the 13 weeks ended September 30, 2018, from 29.4% during the 13 weeks ended September 24, 2017, primarily driven by new shop openings and inflationary wage increases in certain states which wasand sales deleverage in certain labor related costs not directly variable with sales, partially offset by a decrease in expense from closed shops.

Occupancy Expenses

Occupancy expenses increaseddecreased by $0.7$0.2 million, or 5.0%1.5%, to $14.9 million during the 13 weeks ended September 29, 2019, from $15.1 million during the 13 weeks ended September 30, 2018 from $14.4 million during the 13 weeks ended September 24, 2017 primarily due to shop closures, partially offset by inflation in certain occupancy related costs, including lease renewals, real estate taxes and common area maintenance.  These increases were partially offset by a decrease in occupancy expenses related to closed shops. As a percentage of revenues,sandwich shop sales, occupancy expenses increased to 14.1%14.3% during the 13 weeks ended September 29, 2019, from 14.2% during the 13 weeks ended September 30, 2018, from 13.5% during the 13 weeks ended September 24, 2017, primarily due to sales deleverage and inflation in certain occupancy related costs, including lease renewals, real estate taxes and common area maintenance.

Other Operating Expenses

Other operating expenses increaseddecreased by $0.9$0.1 million, or 7.2%0.6%, to $13.3 million during the 13 weeks ended September 29, 2019, from $13.4 million during the 13 weeks ended September 30, 2018, from $12.5 million2018. The decrease was primarily attributable to a decrease in music and certain items variable with sales, partially offset by higher expenses related to third-party delivery partnerships driven by increased sales in that channel. As a percentage of sandwich shop sales, other operating expenses increased slightly to 12.8% during the 13 weeks ended September 24, 2017. The increase was primarily attributable to items such as repairs, credit card fees, utilities and other expenses not directly variable with sales. As a percentage of revenues, other operating expenses increased to 12.5%29, 2019, from 12.6% during the 13 weeks ended September 30, 2018, from 11.7% during the 13 weeks ended September 24, 2017, primarily driven by sales deleverage in operating expense items such as repairs, credit card fees, utilities and other expenses not directly variable with sales.

General and Administrative Expenses

General and administrative expenses decreasedincreased by $2.0$1.2 million, or 16.7%11.6%, to $11.3 million during the 13 weeks ended September 29, 2019, from $10.1 million during the 13 weeks ended September 30, 2018, from $12.12018. The increase was driven primarily by an increase in nonrecurring professional services fees, share-based compensation expense, and lease exit costs, partially offset by a decrease in advertising expenses. Regarding the nonrecurring professional service fees, $2.3 million was incurred during the 13 weeks ended September 24, 2017. The decrease was driven primarily by a decrease29, 2019, and $0.8 million will be recognized in stock-based compensation expense and performance-based incentive expenses.the following quarter. As a percentage of revenues, general and administrative expenses decreasedincreased to 10.8% during the 13 weeks ended September 29, 2019, from 9.4% during the 13 weeks ended September 30, 2018, from 11.4% during the 13 weeks ended September 24, 2017, primarily due to an increase in professional services as well as sales deleverage and lease exit costs, partially offset by a decrease in stock-based compensation expense and performance-based incentiveadvertising expenses.

Depreciation Expense

Depreciation expense decreased by $0.5 million, or 7.4%8.2%, to $5.4 million during the 13 weeks ended September 29, 2019, from $5.8 million during the 13 weeks ended September 30, 2018, from $6.3 million during the 13 weeks ended September 24, 2017.2018. The decrease was driven primarily by a lower depreciable base related to impairment charges taken subsequent to the 13 weeks ended September 24, 2017,30, 2018, as well as lower depreciation associated with longer expected useful lives for leasehold improvements at new shops and leasehold improvements at legacy shops with shorter expected useful lives being fully depreciated. These decreases were partially offset by existing shop capital investments and investments in technology such as the mobile application, which increased the depreciable base. As a percentage of revenues, depreciation decreased towas 5.1% during the 13 weeks ended September 29, 2019 and was 5.5% for the 13 weeks ended September 30, 2018.

Pre-Opening Costs

Pre-opening costs were $16 thousand during the 13 weeks ended September 29, 2019 and $109 thousand during the 13 weeks ended September 30, 2018, from 6.0% during the 13 weeks ended September 24, 2017. This2018. The decrease was driven by a lower depreciable base relateddue to impairment charges taken subsequent tono new company-owned shop openings in the 13 weeks ended September 24, 2017, as well as lower depreciation associated with longer expected useful lives for leasehold improvements and leasehold improvements at legacy shops with shorter expected useful lives being fully depreciated.

Pre-Opening Costs

Pre-opening costs decreased by $0.2 million, or 67.6%, to $0.1 million during the 13 weeks ended September 30, 2018, from $0.3 million during the 13 weeks ended September 24, 2017. As a percentagethird quarter of revenues, pre-opening costs decreased to 0.1% during the 13 weeks ended September 24, 2018, from 0.3% during the 13 weeks ended September 24, 2017. These decreases were driven primarily by fewer shops opened during the 13 weeks ended September 30, 2018 compared to the 13 weeks ended September 24, 2017.2019.


Impairment and Loss on Disposal of Property and Equipment and Right-of-Use Lease Assets

Impairment and loss on disposal of property and equipment increasedand right-of-use lease assets decreased to $1.7 million during the 13 weeks ended September 29, 2019, from $4.4 million during the 13 weeks ended September 30, 2018, from $1.5 million during the 13 weeks ended September 24, 2017.2018. After performing periodic reviews of Company shops during the third quarter of 2018,2019, it was determined that indicators of impairment were present for certain shops as a result of continued underperformance.shops. The Company performed impairment analyses related to these shops and recorded an impairment charge of $4.4$1.7 million for the excess of the carrying amount recorded on the balance sheet over the shops’ estimated fair value. The Company performs impairment analyses on a quarterly basis, which involveinvolves significant judgment by management including estimates of future cash flows and future growth rates, among other assumptions. Based on the Company’s current projections, no impairment beyond what has already been recorded has been identified. However, given the current challenges facing the industry and our business, future evaluations could result in additional impairment charges.

Interest Expense

Interest expense was $28 thousand during the 13 weeks ended September 29, 2019 and $54 thousand during the 13 weeks ended September 30, 2018 and $322018.

Income Tax Expense

Income tax expense was $66 thousand duringfor the 13 weeks ended September 24, 2017.

Income Tax Expense

In accordance with ASC 740, each interim period is considered29, 2019, compared to an integral part of the annual period and tax expense or benefit is measured using an estimated annual effective tax rate.  An enterprise is required, at the end of each interim reporting period, to make its best estimate of the annual effective tax rate for the full fiscal year and use that rate to provide for income taxes on a current year-to-date-basis.  However, when a reliable estimate of the annual effective tax rate cannot be made, the actual effective tax rate for the year-to-date period may be the best estimate of the annual effective tax rate.  For the 13 and 39 weeks ended September 30, 2018, the actual year-to-date effective tax rate was used to compute the income tax benefit, as a reliable estimate of the annual estimated tax rate cannot be made as nominal changes in projected income or loss result in a significant variance in our estimated effective tax rate. The effective tax rate differed from the federal statutory rate primarily due to the impact of ASU 2016-09, state income taxes, federal and state tax credits and certain discrete items.

Income tax benefit increased by $0.4 million, or 86.7%, to a benefit of $0.9 million for the 13 weeks ended September 30, 2018, from a benefit of $0.5 million for the 13 weeks ended September 24, 2017, primarily attributable to the increase in the pre-tax book loss, offset by certain discrete items.  For the 13 weeks ended September 30, 2018, the effective tax rate was 33.0%, compared to 80.4% for the 13 weeks ended September 24, 2017.  The change in the effective tax rate was driven by the increase in the pre-tax book loss, offset by certain discrete items.2018.


39 Weeks Ended September 30, 201829, 2019 Compared to 39 Weeks Ended September 24, 201730, 2018

The following table presents information comparing the components of net income for the periods indicated (dollars in thousands):

 

 

For the 39 Weeks Ended

 

 

 

 

 

 

 

 

 

 

For the 39 Weeks Ended

 

 

 

 

 

 

 

 

 

 

September 30, 2018

 

 

% of

Revenues

 

 

September 24, 2017

 

 

% of

Revenues

 

 

Increase

(Decrease)

 

 

Percent

Change

 

 

September 29, 2019

 

 

% of

Revenues

 

 

September 30, 2018

 

 

% of

Revenues

 

 

Increase

(Decrease)

 

 

Percent

Change

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sandwich shop sales, net

 

$

317,866

 

 

 

99.3

%

 

$

313,568

 

 

 

99.2

%

 

$

4,298

 

 

 

1.4

%

 

$

305,619

 

 

 

99.2

%

 

$

317,866

 

 

 

99.3

%

 

$

(12,247

)

 

 

(3.9

)%

Franchise royalties and fees

 

 

2,394

 

 

 

0.7

 

 

 

2,394

 

 

 

0.8

 

 

 

0

 

 

*

 

 

 

2,336

 

 

 

0.8

 

 

 

2,394

 

 

 

0.7

 

 

 

(58

)

 

 

(2.4

)

Total revenues

 

 

320,260

 

 

 

100.0

 

 

 

315,962

 

 

 

100.0

 

 

 

4,298

 

 

 

1.4

 

 

 

307,955

 

 

 

100.0

 

 

 

320,260

 

 

 

100.0

 

 

 

(12,305

)

 

 

(3.8

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Percentages stated as a percent of sandwich shop sales, net)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sandwich shop operating

expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of goods sold, excluding

depreciation

 

 

83,730

 

 

 

26.1

 

 

 

83,703

 

 

 

26.5

 

 

 

27

 

 

*

 

 

 

81,782

 

 

 

26.8

 

 

 

83,730

 

 

 

26.3

 

 

 

(1,948

)

 

 

(2.3

)

Labor and related expenses

 

 

96,367

 

 

 

30.1

 

 

 

93,213

 

 

 

29.5

 

 

 

3,154

 

 

 

3.4

 

 

 

96,517

 

 

 

31.6

 

 

 

96,367

 

 

 

30.3

 

 

 

150

 

 

 

0.2

 

Occupancy expenses

 

 

44,787

 

 

 

14.0

 

 

 

42,792

 

 

 

13.5

 

 

 

1,995

 

 

 

4.7

 

 

 

44,457

 

 

 

14.5

 

 

 

44,787

 

 

 

14.1

 

 

 

(330

)

 

 

(0.7

)

Other operating expenses

 

 

38,650

 

 

 

12.1

 

 

 

36,349

 

 

 

11.5

 

 

 

2,301

 

 

 

6.3

 

 

 

37,235

 

 

 

12.2

 

 

 

38,650

 

 

 

12.2

 

 

 

(1,415

)

 

 

(3.7

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Percentages stated as a percent of total revenues)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General and administrative

expenses

 

 

35,715

 

 

 

11.2

 

 

 

33,375

 

 

 

10.6

 

 

 

2,340

 

 

 

7.0

 

 

 

37,808

 

 

 

12.3

 

 

 

35,715

 

 

 

11.2

 

 

 

2,093

 

 

 

5.9

 

Depreciation expense

 

 

17,531

 

 

 

5.5

 

 

 

18,960

 

 

 

6.0

 

 

 

(1,429

)

 

 

(7.5

)

 

 

16,486

 

 

 

5.4

 

 

 

17,531

 

 

 

5.5

 

 

 

(1,045

)

 

 

(6.0

)

Pre-opening costs

 

 

245

 

 

 

0.1

 

 

 

955

 

 

 

0.3

 

 

 

(710

)

 

 

(74.3

)

 

 

26

 

 

*

 

 

 

245

 

 

*

 

 

 

(219

)

 

 

(89.4

)

Impairment and loss on disposal

of property and equipment

 

 

8,467

 

 

 

2.6

 

 

 

5,762

 

 

 

1.8

 

 

 

2,705

 

 

 

46.9

 

 

 

1,978

 

 

 

0.6

 

 

 

8,467

 

 

 

2.6

 

 

 

(6,489

)

 

 

(76.6

)

Total expenses

 

 

325,492

 

 

 

101.6

 

 

 

315,109

 

 

 

99.7

 

 

 

10,383

 

 

 

3.3

 

 

 

316,289

 

 

>100

 

 

 

325,492

 

 

>100

 

 

 

(9,203

)

 

 

(2.8

)

Income (loss) from operations

 

 

(5,232

)

 

 

(1.6

)

 

 

853

 

 

 

0.3

 

 

 

(6,085

)

 

>(100)

 

Loss from operations

 

 

(8,334

)

 

 

(2.7

)

 

 

(5,232

)

 

 

(1.6

)

 

 

(3,102

)

 

 

59.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

109

 

 

*

 

 

 

101

 

 

*

 

 

 

8

 

 

 

7.9

 

 

 

95

 

 

*

 

 

 

109

 

 

*

 

 

 

(14

)

 

 

(12.8

)

Income (loss) before income taxes

 

 

(5,341

)

 

 

(1.7

)

 

 

752

 

 

 

0.2

 

 

 

(6,093

)

 

>(100)

 

Loss before income taxes

 

 

(8,429

)

 

 

(2.7

)

 

 

(5,341

)

 

 

(1.7

)

 

 

(3,088

)

 

 

57.8

 

Income tax expense (benefit)

 

 

(1,111

)

 

 

(0.3

)

 

 

252

 

 

 

0.1

 

 

 

(1,363

)

 

>(100)

 

 

 

13,931

 

 

 

4.5

 

 

 

(1,111

)

 

 

(0.3

)

 

 

15,042

 

 

>(100)

 

Net income (loss)

 

 

(4,230

)

 

 

(1.3

)

 

 

500

 

 

 

0.2

 

 

 

(4,730

)

 

>(100)

 

Net loss

 

 

(22,360

)

 

 

(7.3

)

 

 

(4,230

)

 

 

(1.3

)

 

 

(18,130

)

 

>100

 

Net income attributable to non-

controlling interests

 

 

285

 

 

 

0.1

 

 

 

195

 

 

 

0.1

 

 

 

90

 

 

 

46.2

 

 

 

300

 

 

*

 

 

 

285

 

 

*

 

 

 

15

 

 

 

5.3

 

Net income (loss) attributable to

Potbelly Corporation

 

$

(4,515

)

 

 

(1.4

)%

 

$

305

 

 

 

0.1

%

 

$

(4,820

)

 

>(100)%

 

Net loss attributable to Potbelly

Corporation

 

$

(22,660

)

 

 

(7.4

)%

 

$

(4,515

)

 

 

(1.4

)%

 

$

(18,145

)

 

>100

 

 

*

Amount is less than 0.1%

Revenues

Total revenues increaseddecreased by $4.3$12.3 million, or 1.4%3.8%, to $308.0 million during the 39 weeks ended September 29, 2019, from $320.3 million during the 39 weeks ended September 30, 2018, from $316.0 million during the 39 weeks ended September 24, 2017.2018. The revenue growthdecrease was driven by a $12.2 million, or 3.9%, decrease in sales from company-operated comparable store shops and a decrease in sales of $5.5 million from shops that have closed. These decreases were partially offset by an increase in sales of $15.5 million from shops not yet in our company-operated comparable store sales base. This increase was partially offset by a decrease in sales of $3.9 million, or 1.3%, from company-operated comparable storesbase and a decline of $7.3 million from shops that have closed. The decreaseopened in company-operated comparable store sales resulted from a decrease in traffic, partially offset by an increase in average transaction size.2019.


Cost of Goods Sold

Cost of goods sold increaseddecreased by $27 thousand,$1.9 million, or less than 0.1%2.3%, to $81.8 million during the 39 weeks ended September 29, 2019, from $83.7 million during the 39 weeks ended September 30, 2018, from $83.7 million2018. This decrease was primarily driven by a decrease in shop revenue. As a percentage of sandwich shop sales, cost of goods sold increased to 26.8% during the 39 weeks ended September 24, 2017. As a percentage of revenues, cost of goods sold decreased to 26.1%29, 2019, from 26.3% during the 39 weeks ended September 30, 2018, from 26.5% during the 39 weeks ended September 24, 2017, primarily driven by higher discounting and cost inflation in certain products, partially offset by certain menu price increases.


Labor and Related Expenses

Labor and related expenses increased by $3.2$0.2 million, or 3.4%0.2%, to $96.5 million during the 39 weeks ended September 29, 2019, from $96.4 million during the 39 weeks ended September 30, 2018, from $93.2 million2018. As a percentage of sandwich shop sales, labor and related expenses increased to 31.6% during the 39 weeks ended September 24, 2017,29, 2019, from 30.3% during the 39 weeks ended September 30, 2018. These increases were primarily due to new shop openings anddriven by inflationary wage increases in certain states and sales deleverage in certain labor related costs not directly variable with sales, which waswere partially offset by a decrease in expense from closed shops. As a percentage of revenues,shops and labor and relatedmanagement.

Occupancy Expenses

Occupancy expenses increaseddecreased by $0.3 million, or 0.7%, to 30.1%$44.5 million during the 39 weeks ended September 30, 2018,29, 2019, from 29.5% during the 39 weeks ended September 24, 2017, primarily driven by a decrease in company-operated comparable store revenue and inflationary wage increases in certain states, which was partially offset by a decrease in expense from closed shops.

Occupancy Expenses

Occupancy expenses increased by $2.0 million, or 4.7%, to $44.8 million during the 39 weeks ended September 30, 2018, from $42.8 million during the 39 weeks ended September 24, 2017, primarily due to a decrease in occupancy expenses related to closed shops. This decrease was partially offset by inflation in certain occupancy related costs, including lease renewals, real estate taxes and common area maintenance. These increases were partially offset by a decrease in occupancy expenses related to closed shops. As a percentage of revenues,sandwich shop sales, occupancy expenses increased to 14.0%14.5% during the 39 weeks ended September 29, 2019, from 14.1% during the 39 weeks ended September 30, 2018, from 13.5% during the 39 weeks ended September 24, 2017, primarily due to sales deleverage and inflation in certain occupancy related costs, including lease renewals, real estate taxes and common area maintenance.

Other Operating Expenses

Other operating expenses increaseddecreased by $2.3$1.4 million, or 6.3%3.7%, to $37.2 million during the 39 weeks ended September 29, 2019, from $38.7 million during the 39 weeks ended September 30, 2018, from $36.3 million during the 39 weeks ended September 24, 2017.2018. The increasedecrease was primarily attributable to items such as repairs, credit card fees, utilitiesmusic and other expenses not directlycertain items variable with sales.sales, partially offset by higher expenses related to third-party delivery partnerships driven by increased sales in that channel. As a percentage of revenues,sandwich shop sales, other operating expenses increased to 12.1%were unchanged at 12.2% during both the 39 weeks ended September 29, 2019 and the 39 weeks ended September 30, 2018, from 11.5% during the 39 weeks ended September 24, 2017. This increase was primarily driven by sales deleverage in operating expense items such as repairs, credit card fees, utilities and other expenses not directly variable with sales.2018.

General and Administrative Expenses

General and administrative expenses increased by $2.3$2.1 million, or 7.0%5.9%, to $37.8 million during the 39 weeks ended September 29, 2019, from $35.7 million during the 39 weeks ended September 30, 2018, from $33.4 million during the 39 weeks ended September 24, 2017. The increase was driven primarily by restructuring costs of $1.6 million, proxy related costs of $0.8 million and an increase in advertising costs. This increase was partially offset by a decrease in stock-based compensation expense.2018. As a percentage of revenues, general and administrative expenses increased to 12.3% during the 39 weeks ended September 29, 2019, from 11.2% during the 39 weeks ended September 30, 2018, from 10.6%2018. These increases were driven primarily by an increase in advertising, nonrecurring professional services fees, and lease exit costs, partially offset by a decrease in restructuring costs, stock-based compensation expense and performance-based incentive expenses.  Regarding the nonrecurring professional service fees, $2.3 million was incurred during the 39 weeks ended September 24, 2017. The increase was driven primarily by restructuring costs of $1.6 million, proxy related costs of29, 2019, and $0.8 million and an increasewill be recognized in advertising costs. This increase was partially offset by a decrease in stock-based compensation expense.the following quarter.

Depreciation Expense

Depreciation expense decreased by $1.4$1.0 million, or 7.5%6.0%, to $16.5 million during the 39 weeks ended September 29, 2019, from $17.5 million during the 39 weeks ended September 30, 2018, from $19.0 million during the 39 weeks ended September 24, 2017, driven primarily by a lower depreciable base related to impairment charges taken subsequent to the 39 weeks ended September 24, 2017,30, 2018, as well as lower depreciation associated with longer expected useful lives for leasehold improvements and leasehold improvements at legacy shops with shorter expected useful lives being fully depreciated. These decreases were partially offset by existing shop capital investments and investments in technology such as the mobile application, which increased the depreciable base. As a percentage of revenues, depreciation was 5.4% during the 39 weeks ended September 29, 2019, and 5.5% for the 39 weeks ended September 30, 2018.

Pre-Opening Costs

Pre-opening costs decreased to 5.5%$26 thousand during the 39 weeks ended September 29, 2019, from $245 thousand during the 39 weeks ended September 30, 2018, from 6.0% during the 39 weeks ended September 24, 2017, driven primarily by a lower depreciable base related to impairment charges taken subsequent to the 39 weeks ended September 24, 2017, as well as lower depreciation associated with all shops with longer expected useful lives for leasehold improvements and leasehold improvements at legacy shops with shorter expected useful lives being fully depreciated.

Pre-Opening Costs

Pre-opening costs decreased by $0.7 million, or 74.3%, to $0.2 million during the 39 weeks ended September 30, 2018, from $1.0 million during the 39 weeks ended September 24, 2017. As a percentage of revenues, pre-opening costs decreased to 0.1% during the 39 weeks ended September 30, 2018, from 0.3% during the 39 weeks ended September 24, 2017. These decreases were2018. The decrease was driven primarily by fewer shops opened during the 39 weeks ended September 30, 201829, 2019 compared to the 39 weeks ended September 24, 2017.30, 2018.


Impairment and Loss on Disposal of Property and Equipment

Impairment and loss on disposal of property and equipment increaseddecreased to $2.0 million during the 39 weeks ended September 29, 2019, compared to $8.5 million during the 39 weeks ended September 30, 2018, compared to $5.8 million during the 39 weeks ended September 24, 2017.2018. After performing periodic reviews of Company shops during the first, second, and third quarter of 2018,2019, it was determined that indicators of impairment were present for certain shops as a result of continued underperformance. We performed impairment analyses related to these shops and recorded impairment charges of $8.5$2.0 million for the excess of the carrying amount recorded on our balance sheet over the shops’ estimated fair value. We perform impairment analyses on a quarterly basis, which involve significant judgment by management including estimates of future cash flows and future growth rates, among other assumptions. Based on our current projections, no impairment beyond what has already been recorded has been identified. However, given the current challenges facing the industry and our business, future evaluations could result in additional impairment charges.

Interest Expense

Interest expense was $0.1$95 thousand for the 39 weeks ended September 29, 2019 and $109 thousand for the 39 weeks ended September 30, 2018.

Income Tax Expense (Benefit)

Income tax expense increased by $15.0 million to $13.9 million for the 39 weeks ended September 30, 2018 and September 24, 2017.

Income Tax Expense

In accordance with ASC 740, each interim period is considered an integral part of the annual period and tax expense or benefit is measured using an estimated annual effective tax rate. An enterprise is required, at the end of each interim reporting period, to make its best estimate of the annual effective tax rate for the full fiscal year and use that rate to provide for income taxes on a current year-to-date basis. However, when a reliable estimate of the annual effective tax rate cannot be made, the actual effective tax rate for the year-to-date period may be the best estimate of the annual effective tax rate. For the 13 and 39 weeks ended September 30, 2018, the actual year-to-date effective tax rate was used to compute the income tax benefit, as a reliable estimate of the annual estimated tax rate cannot be made as nominal changes in projected income or loss result in a significant variance in our estimated effective tax rate. The effective tax rate differed29, 2019, from the federal statutory rate primarily due to the impact of ASU 2016-09, state income taxes, federal and state tax credits and certain discrete items.

Income tax expense decreased by $1.4 million, or more than 100%, to a benefit of $1.1 million for the 39 weeks ended September 30, 2018, from an2018. The change was primarily attributable to the valuation allowance on deferred tax assets recorded by the Company during the first quarter of 2019, as a result of the changes in projected taxable income for 2019. The Company estimated it would be in a cumulative loss position as of December 29, 2019.  Therefore, the Company determined that the negative evidence outweighed the positive evidence and, therefore, recorded a full valuation allowance against its net deferred tax assets. The Company recorded a non-cash charge to income tax expense of $0.3$13.6 million related to the recognition of the valuation allowance and did not provide for an income tax benefit on the pre-tax loss recorded for the 39 weeks ended September 24, 2017, primarily attributable29, 2019. This accounting treatment has no effect on the Company’s ability to a pre-tax book lossutilize deferred tax assets to reduce future cash tax payments. The Company will continue to assess the likelihood of the realization of its deferred tax assets at the end of each reporting period and the change in the federal tax rate from 35.0 percent to 21.0 percent. For the 39 weeks ended September 30, 2018, the effective tax rate was 20.8%, compared to 33.5% for the 39 weeks ended September 24, 2017. The change in the effective tax rate was driven by a pre-tax book loss and the change in the federal statutory tax rate from 35 percent to 21 percent, as well as certain discrete items.valuation allowance will be adjusted accordingly.

Liquidity and Capital Resources

General

Potbelly’s ongoing primary sources of liquidity and capital resources are cash provided from operating activities, existing cash and cash equivalents and the Company’s credit facility. Potbelly’s primary requirements for liquidity and capital are new shop openings, existing shop capital investments, (maintenance and improvements),maintenance, repurchases of Company common stock, lease obligations, working capital and general corporate needs. Potbelly’s requirement for working capital is not significant since the Company’s customers pay for their food and beverage purchases in cash or payment cards (credit or debit) at the time of sale. Thus, Potbelly is able to sell certain inventory items before the Company needs to pay its suppliers for such items. Company shops do not require significant inventories or receivables. Potbelly believes that these sources of liquidity and capital will be sufficient to finance the Company’s continued operations and expansion plans for at least the next twelve months.

The following table presents summary cash flow information for the periods indicated (in thousands):

 

 

For the 39 Weeks Ended

 

 

For the 39 Weeks Ended

 

 

September 30,

 

 

September 24,

 

 

September 29,

 

 

September 30,

 

 

2018

 

 

2017

 

 

2019

 

 

2018

 

Net cash provided by (used in):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating activities

 

$

22,653

 

 

$

28,368

 

 

$

9,863

 

 

$

22,653

 

Investing activities

 

 

(16,722

)

 

 

(23,526

)

 

 

(9,533

)

 

 

(16,722

)

Financing activities

 

 

(4,750

)

 

 

(6,043

)

 

 

(4,347

)

 

 

(4,750

)

Net increase (decrease) in cash

 

$

1,181

 

 

$

(1,201

)

 

$

(4,017

)

 

$

1,181

 

 


Operating Activities

Net cash provided by operating activities decreased to $9.9 million for the 39 weeks ended September 29, 2019, from $22.7 million for the 39 weeks ended September 30, 2018, from $28.4 million for the 39 weeks ended September 24, 2017.2018. The $5.7$12.8 million decrease was primarily driven by an increase in loss from operations.operations, as well as timing of payment for certain liabilities.


Investing Activities

Net cash used in investing activities decreased to $9.5 million for the 39 weeks ended September 29, 2019, from $16.7 million for the 39 weeks ended September 30, 2018, from $23.5 million for the 39 weeks ended September 24, 2017.2018. The decrease was primarily due to fewer shops opened and under construction during the 39 weeks ended September 30, 201829, 2019 compared to the 39 weeks ended September 24, 2017.30, 2018.

Financing Activities

Net cash used in financing activities wasdecreased to $4.3 million for the 39 weeks ended September 29, 2019, from $4.8 million for the 39 weeks ended September 30, 2018, compared to $6.0 million net cash used in financing activities for the 39 weeks ended September 24, 2017.2018. The change in financing cash was primarily driven by $8.2an $8.3 million decrease in repurchases of treasury stock offset by an $8.0 million decrease in proceeds from the exercise of stock options during the 39 weeks ended September 30, 2018, compared to $1.2 million during the 39 weeks ended September 24, 2017. Additionally, $0.1 million in employee taxes related to stock-based payment arrangements were withheld and paid during the 39 weeks ended September 30, 2018.29, 2019.

Stock Repurchase Program

On May 8, 2018, the Company announced that its Board of Directors authorized a stock repurchase program for up to $65.0 million of its outstanding common stock. The stock repurchase program replaced the previous program, authorized in September 2016. Under the previous program, during the 39 weeks ended September 30, 2018, the Company repurchased 5,000 shares of its common stock for approximately $0.1 million, including costs and commissions, in open market transactions. The current program permits the Company, 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 ActAct) or in privately negotiated transactions. Under the current program, duringfor the 39 weeks ended September 30, 2018,29, 2019, the Company repurchased 959,240647,821 shares of its common stock for approximately $12.3$4.2 million under the stock repurchase program, including costscost and commissions,commission, in open market transactions. The number of shares of common stock repurchased in the future, and the timing and price of repurchases, will depend upon market conditions, Securities and Exchange Commission requirementsliquidity needs and other factors. Purchases may be started or stopped at any time without prior notice depending on market conditions and other factors. Repurchased shares are included as treasury stock in the condensed consolidated balance sheets and the condensed consolidated statements of equity.

Credit Facility

On December 9, 2015,August 7, 2019, the Company entered into ana second amended and restated five-year revolving credit facility agreement (the "Credit Agreement") with JPMorgan Chase Bank, N.A. (“JPMorgan”) that expires in November 2020.July 2022. The 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 Credit Agreement provides, among other things, for a revolving credit facility in a maximum principal amount of $50.0$40 million, with possible future increases of up to $75.0$20 million under an expansion feature. Borrowings under the credit facility generally bear interest at ourthe Company’s option at either (i) a eurocurrency rate determined by reference to the applicable London Interbank Offered Rate (LIBOR)LIBOR rate plus a margin ranging from 1.00%1.25% to 1.75% or (ii) a prime rate as announced by JP Morgan ChaseJPMorgan plus a margin ranging from 0.00% to 0.50%. The applicable margin is determined based upon ourthe Company’s consolidated total leverage ratio. On the last day of each calendar quarter, the Company is required to pay a commitment fee ranging from 0.125% toof 0.20% per annum in respect of any unused commitments under the credit facility, with the specific rate determined based upon our consolidatedfacility. So long as certain total leverage ratio. As long as the leverage ratios, EBITDA thresholds and minimum liquidity requirements are met and no default or event of default has occurred or would result, there is no limit on the “restricted payments” (primarily distributions and equity repurchases) that the Company may make.make, provided that proceeds of the loans under the Credit Agreement may not be used for purposes of making restricted payments. As of September 30, 2018 and for the 39 week periodweeks ended September 30, 2018,29, 2019, the Company had no amounts outstanding under the credit facility.Credit Agreement.

Critical Accounting Policies and Estimates

Our discussion and analysis of our 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. Significant estimates include amounts for long-lived assets and income taxes. Actual results could differ from those estimates. Critical accounting policies 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. The Company bases 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. Potbelly had no significant changes in our critical accounting estimates since the last annual report. The Company’s critical accounting estimates are identified and described in our annual consolidated financial statements and related notes.


Off-Balance Sheet Arrangements

As of September 30, 2018,29, 2019, the Company does not have any off-balance sheet arrangements, synthetic leases, investments in special purpose entities or undisclosed borrowings or debt that would be required to be disclosed pursuant to Item 303 of Regulation S-K under the Exchange Act.

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 31, 2017.30, 2018. Our exposures to market risk have not changed materially since December 31, 2017.30, 2018.

 

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Principal 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 ActAct) as of September 30, 2018.29, 2019. Based upon that evaluation, our Chief Executive Officer and Principal Financial Officer have concluded that, as of September 30, 2018,29, 2019, 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 Principal Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the fiscalthird quarter ended September 30, 201829, 2019 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 810 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 31, 2017.30, 2018. There have been no material changes to our Risk Factors as previously reported.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table contains information regarding purchases of our common stock made by or on behalf of Potbelly Corporation during the 13 weeks ended September 30, 2018:29, 2019:

 

Period

 

Total Number of

Shares

Purchased

 

 

Average Price Paid

per Share (1)

 

 

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)

 

July 2, 2018 - July 29, 2018

 

 

245,000

 

 

$

12.76

 

 

 

245,000

 

 

$

58,492,804

 

July 30, 2018 - August 26, 2018

 

 

204,901

 

 

$

12.74

 

 

 

204,901

 

 

$

55,882,418

 

August 27, 2018 - September 30, 2018

 

 

250,000

 

 

$

12.86

 

 

 

250,000

 

 

$

52,667,634

 

Total:

 

 

699,901

 

 

 

 

 

 

 

699,901

 

 

 

 

 

Period

 

Total Number of

Shares

Purchased

 

 

Average Price Paid

per Share (1)

 

 

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)

 

July 1, 2019 - July 28, 2019

 

 

 

 

$

 

 

 

 

 

$

38,728,687

 

July 29, 2019 - August 25, 2019

 

 

 

 

$

 

 

 

 

 

$

38,728,687

 

August 26, 2019 - September 29, 2019

 

 

162,162

 

 

$

4.60

 

 

 

162,162

 

 

$

37,981,933

 

Total:

 

 

162,162

 

 

 

 

 

 

 

162,162

 

 

 

 

 

 

(1)

Average price paid per share excludes commissions.

(2)

On May 8, 2018, the Company announced that its Board of Directors authorized a stock repurchase program for up to $65.0 million of its outstanding common stock. The stock repurchase program replaced the previous $30.0 million program, authorized in September 2016.  The current program permits the Company, 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.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. See Note 68 for further information regarding the Company’s stock repurchase program.  

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

Not applicable.

 


ITEM 6. EXHIBITS

The following exhibits are either provided with this Quarterly Report on Form 10-Q or are incorporated herein by reference.

 

 

 

 

Exhibit

No.

  

Description

 

 

 

3.1  10.1

 

Second Amended and Restated By-LawsCredit Agreement, dated as of August 7, 2019, among Potbelly CorporationSandwich Works, LLC, the other Loan Parties party thereto, the Lenders party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent, and J.P. Morgan Chase Bank, N.A., as Sole Bookrunner and Sole Lead Arranger (filed as Exhibit 3.110.1 to Form 8-K (File No. 001-36104)10-Q filed on June 12, 2018August 8, 2019 and incorporated by reference).

 

 

 

10.1

Amended and Restated Potbelly Corporation 2013 Long-Term Incentive Plan (filed as Exhibit 10.1 to Form 8-K (File No. 001-36104) filed on June 12, 2018 and incorporated by reference).

31.1

  

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

31.2

  

Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

32.1

 

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

 

 

 

101.INS

  

XBRL Instance Document

 

 

101.SCH

  

XBRL Taxonomy Extension Schema Document

 

 

101.CAL

  

XBRL Taxonomy Extension Calculation Linkbase Document

 

 

101.LAB

  

XBRL Taxonomy Extension Label Linkbase Document

 

 

101.PRE

  

XBRL Taxonomy Extension Presentation Linkbase Document

 

 

101.DEF

  

XBRL Taxonomy Extension Definition Linkbase 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.

 

 

 

 

POTBELLY CORPORATION

 

 

 

 

Date: November 9, 20185, 2019

 

By:

/s/ Christopher CarlsonThomas Fitzgerald

 

 

 

Christopher CarlsonThomas Fitzgerald

 

 

 

Vice President, ControllerChief Financial Officer

 

 

 

(Principal Financial Officer)

 

28

24