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 June 30, 201928, 2020
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 |
| 60606 | |
(Address of Principal Executive Offices) |
| (Zip Code) |
Registrant’s Telephone Number, Including Area Code: (312) 951-0600
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
| Trading Symbol(s) |
| Name of each exchange on which registered |
Common Stock, $0.01 par value |
| PBPB |
| The NASDAQ Stock Market LLC |
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| (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 |
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|
Emerging growth company |
| ☐ |
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|
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 registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ☒ No ☐
As of July 28, 2019,26, 2020, the registrant had 23,768,37523,899,000 shares of common stock, $0.01 par value per share, outstanding.
Potbelly Corporation and Subsidiaries
Table of Contents
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PART I. |
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Item 1. |
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Item 2. |
| Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3. |
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Item 4. |
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PART II. |
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Item 1. |
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Item 1A. |
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Item 2. |
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Item 3. |
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Item 4. |
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Item 5. |
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Item 6. |
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2
PART I. FINANCIALFINANCIAL 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)
|
| June 30, |
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| December 30, |
|
| June 28, |
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| December 29, |
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| 2019 |
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| 2018 |
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| 2020 |
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| 2019 |
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Assets |
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Current assets |
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Cash and cash equivalents |
| $ | 18,066 |
|
| $ | 19,775 |
|
| $ | 29,092 |
|
| $ | 18,806 |
|
Accounts receivable, net of allowances of $131 and $113 as of June 30, 2019 and December 30, 2018, respectively |
|
| 4,545 |
|
|
| 4,737 |
| ||||||||
Accounts receivable, net of allowances of $58 and $202 as of June 28, 2020 and December 29, 2019, respectively |
|
| 3,357 |
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|
| 4,257 |
| ||||||||
Inventories |
|
| 3,357 |
|
|
| 3,482 |
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|
| 2,823 |
|
|
| 3,473 |
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Prepaid expenses and other current assets |
|
| 8,182 |
|
|
| 11,426 |
|
|
| 8,448 |
|
|
| 5,687 |
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Total current assets |
|
| 34,150 |
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| 39,420 |
|
|
| 43,720 |
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| 32,223 |
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Property and equipment, net |
|
| 81,628 |
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| 87,782 |
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|
| 68,492 |
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|
| 79,032 |
|
Right-of-use assets for operating leases |
|
| 216,540 |
|
|
| — |
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|
| 205,131 |
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|
| 211,988 |
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Indefinite-lived intangible assets |
|
| 3,404 |
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| 3,404 |
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| 3,404 |
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| 3,404 |
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Goodwill |
|
| 2,222 |
|
|
| 2,222 |
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| 2,222 |
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|
| 2,222 |
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Deferred income taxes |
|
| — |
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|
| 13,385 |
| ||||||||
Deferred expenses, net and other assets |
|
| 6,898 |
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|
| 7,002 |
|
|
| 4,303 |
|
|
| 4,010 |
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Total assets |
| $ | 344,842 |
|
| $ | 153,215 |
|
| $ | 327,272 |
|
| $ | 332,879 |
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Liabilities and Equity |
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Current liabilities |
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Accounts payable |
| $ | 4,222 |
|
| $ | 3,835 |
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| $ | 6,691 |
|
| $ | 3,886 |
|
Accrued expenses |
|
| 21,303 |
|
|
| 25,029 |
|
|
| 18,041 |
|
|
| 20,398 |
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Short-term operating lease liabilities |
|
| 29,126 |
|
|
| — |
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|
| 38,653 |
|
|
| 29,319 |
|
Accrued income taxes |
|
| 162 |
|
|
| 162 |
|
|
| 171 |
|
|
| 171 |
|
Total current liabilities |
|
| 54,813 |
|
|
| 29,026 |
|
|
| 63,556 |
|
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| 53,774 |
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Deferred rent and landlord allowances |
|
| — |
|
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| 22,905 |
| ||||||||
Debt from revolving credit facility |
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| 23,086 |
|
|
| — |
| ||||||||
Long-term operating lease liabilities |
|
| 210,898 |
|
|
| — |
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| 201,754 |
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| 206,726 |
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Other long-term liabilities |
|
| 6,255 |
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|
| 5,751 |
|
|
| 4,223 |
|
|
| 3,210 |
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Total liabilities |
|
| 271,966 |
|
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| 57,682 |
|
|
| 292,619 |
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| 263,710 |
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Commitments and contingencies (Note 9) |
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Commitments and contingencies (Note 10) |
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Equity |
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Common stock, $0.01 par value—authorized 200,000,000 shares; outstanding 23,768,375 and 24,142,586 shares as of June 30, 2019 and December 30, 2018, respectively |
|
| 331 |
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| 330 |
| ||||||||
Common stock, $0.01 par value—authorized 200,000 shares; outstanding 23,898 and 23,638 shares as of June 28, 2020 and December 29, 2019, respectively |
|
| 334 |
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| 331 |
| ||||||||
Additional paid-in-capital |
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| 434,407 |
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| 432,771 |
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| 436,536 |
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| 435,278 |
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Treasury stock, held at cost, 9,291,732 and 8,801,154 shares as of June 30, 2019, and December 30, 2018, respectively |
|
| (111,874 | ) |
|
| (108,372 | ) | ||||||||
Treasury stock, held at cost, 9,490 and 9,465 shares as of June 28, 2020, and December 29, 2019, respectively |
|
| (112,757 | ) |
|
| (112,680 | ) | ||||||||
Accumulated deficit |
|
| (250,394 | ) |
|
| (229,558 | ) |
|
| (289,638 | ) |
|
| (254,081 | ) |
Total stockholders’ equity |
|
| 72,470 |
|
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| 95,171 |
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| 34,475 |
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| 68,848 |
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Non-controlling interest |
|
| 406 |
|
|
| 362 |
|
|
| 178 |
|
|
| 321 |
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Total equity |
|
| 72,876 |
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| 95,533 |
|
|
| 34,653 |
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| 69,169 |
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Total liabilities and equity |
| $ | 344,842 |
|
| $ | 153,215 |
|
| $ | 327,272 |
|
| $ | 332,879 |
|
See accompanying notes to the unaudited condensed consolidated financial statements.
Potbelly Corporation and Subsidiaries
Condensed Consolidated Statements of Operations
(amounts in thousands, except per share data, unaudited)
|
| For the 13 Weeks Ended |
|
| For the 26 Weeks Ended |
| ||||||||||
|
| June 28, |
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| June 30, |
|
| June 28, |
|
| June 30, |
| ||||
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Revenues |
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Sandwich shop sales, net |
| $ | 55,863 |
|
| $ | 104,801 |
|
| $ | 142,824 |
|
| $ | 202,059 |
|
Franchise royalties and fees |
|
| 299 |
|
|
| 829 |
|
|
| 928 |
|
| $ | 1,658 |
|
Total revenues |
|
| 56,162 |
|
|
| 105,630 |
|
|
| 143,752 |
|
|
| 203,717 |
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Expenses |
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Sandwich shop operating expenses |
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Cost of goods sold, excluding depreciation |
|
| 16,108 |
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| 28,264 |
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| 40,282 |
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|
| 54,242 |
|
Labor and related expenses |
|
| 21,884 |
|
|
| 32,114 |
|
|
| 52,281 |
|
|
| 64,087 |
|
Occupancy expenses |
|
| 14,649 |
|
|
| 15,230 |
|
|
| 29,677 |
|
|
| 29,607 |
|
Other operating expenses |
|
| 10,990 |
|
|
| 11,816 |
|
|
| 23,755 |
|
|
| 23,961 |
|
General and administrative expenses |
|
| 8,164 |
|
|
| 13,843 |
|
|
| 18,898 |
|
|
| 26,552 |
|
Depreciation expense |
|
| 4,955 |
|
|
| 5,585 |
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|
| 10,411 |
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|
| 11,121 |
|
Pre-opening costs |
|
| — |
|
|
| — |
|
|
| 64 |
|
|
| 10 |
|
Impairment and loss on disposal of property and equipment |
|
| 1,299 |
|
|
| 246 |
|
|
| 7,256 |
|
|
| 328 |
|
Total expenses |
|
| 78,049 |
|
|
| 107,098 |
|
|
| 182,624 |
|
|
| 209,908 |
|
Loss from operations |
|
| (21,887 | ) |
|
| (1,468 | ) |
|
| (38,872 | ) |
|
| (6,191 | ) |
|
|
|
|
|
|
|
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|
|
|
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Interest expense |
|
| 388 |
|
|
| 35 |
|
|
| 462 |
|
|
| 67 |
|
Loss before income taxes |
|
| (22,275 | ) |
|
| (1,503 | ) |
|
| (39,334 | ) |
|
| (6,258 | ) |
Income tax expense (benefit) |
|
| 41 |
|
|
| 246 |
|
|
| (3,668 | ) |
|
| 13,865 |
|
Net loss |
|
| (22,316 | ) |
|
| (1,749 | ) |
|
| (35,666 | ) |
|
| (20,123 | ) |
Net income (loss) attributable to non-controlling interest |
|
| (100 | ) |
|
| 117 |
|
|
| (114 | ) |
|
| 182 |
|
Net loss attributable to Potbelly Corporation |
| $ | (22,216 | ) |
| $ | (1,866 | ) |
| $ | (35,552 | ) |
| $ | (20,305 | ) |
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|
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Net loss per common share attributable to common stockholders: |
|
|
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|
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Basic |
| $ | (0.93 | ) |
| $ | (0.08 | ) |
| $ | (1.50 | ) |
| $ | (0.85 | ) |
Diluted |
| $ | (0.93 | ) |
| $ | (0.08 | ) |
| $ | (1.50 | ) |
| $ | (0.85 | ) |
Weighted average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Basic |
|
| 23,773 |
|
|
| 23,908 |
|
|
| 23,709 |
|
|
| 24,021 |
|
Diluted |
|
| 23,773 |
|
|
| 23,908 |
|
|
| 23,709 |
|
|
| 24,021 |
|
See accompanying notes to the unaudited condensed consolidated financial statements.
Potbelly Corporation and Subsidiaries
Condensed Consolidated Statements of Equity
(amounts and shares in thousands, unaudited)
For the 13 weeks ended: |
| Common Stock |
|
| Treasury |
|
| Additional Paid-In- |
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| Accumulated |
|
| Non- Controlling |
|
|
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| |||||||||
|
| Shares |
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| Amount |
|
| Stock |
|
| Capital |
|
| Deficit |
|
| Interest |
|
| Total Equity |
| |||||||
Balance at March 31, 2019 |
|
| 24,038 |
|
|
| 330 |
|
|
| (109,541 | ) |
|
| 433,400 |
|
|
| (248,528 | ) |
|
| 427 |
|
| $ | 76,088 |
|
Net income (loss) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,866 | ) |
|
| 117 |
|
|
| (1,749 | ) |
Stock-based compensation plans |
|
| 83 |
|
|
| 1 |
|
|
| — |
|
|
| 2 |
|
|
| — |
|
|
| — |
|
|
| 3 |
|
Repurchases of common stock |
|
| (351 | ) |
|
| — |
|
|
| (2,323 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (2,323 | ) |
Distributions to non-controlling interest |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (177 | ) |
|
| (177 | ) |
Contributions from non-controlling interest |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 39 |
|
|
| 39 |
|
Treasury shares used for stock-based plans |
|
| (2 | ) |
|
| — |
|
|
| (10 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (10 | ) |
Stock-based compensation expense |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,005 |
|
|
| — |
|
|
| — |
|
|
| 1,005 |
|
Balance at June 30, 2019 |
|
| 23,768 |
|
| $ | 331 |
|
| $ | (111,874 | ) |
| $ | 434,407 |
|
| $ | (250,394 | ) |
| $ | 406 |
|
| $ | 72,876 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 29, 2020 |
|
| 23,684 |
|
| $ | 331 |
|
| $ | (112,751 | ) |
| $ | 435,768 |
|
| $ | (267,422 | ) |
| $ | 278 |
|
| $ | 56,204 |
|
Net income (loss) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (22,216 | ) |
|
| (100 | ) |
|
| (22,316 | ) |
Stock-based compensation plans |
|
| 86 |
|
|
| 2 |
|
|
| — |
|
|
| (2 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
Shares issued for proxy-related expenses |
|
| 130 |
|
|
| 1 |
|
|
| — |
|
|
| 388 |
|
|
| — |
|
|
| — |
|
|
| 389 |
|
Treasury shares used for stock-based plans |
|
| (2 | ) |
|
| — |
|
|
| (6 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (6 | ) |
Distributions to non-controlling interest |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Contributions from non-controlling interest |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Stock-based compensation expense |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 382 |
|
|
| — |
|
|
| — |
|
|
| 382 |
|
Balance at June 28, 2020 |
|
| 23,898 |
|
| $ | 334 |
|
| $ | (112,757 | ) |
| $ | 436,536 |
|
| $ | (289,638 | ) |
| $ | 178 |
|
| $ | 34,653 |
|
See accompanying notes to the unaudited condensed consolidated financial statements.
3
Potbelly Corporation and Subsidiaries
Condensed Consolidated Statements of OperationsEquity
(amounts and shares in thousands, except share and per share data, unaudited)
|
| For the 13 Weeks Ended |
|
| For the 26 Weeks Ended |
| ||||||||||
|
| June 30, |
|
| July 1, |
|
| June 30, |
|
| July 1, |
| ||||
|
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sandwich shop sales, net |
| $ | 104,801 |
|
| $ | 109,381 |
|
| $ | 202,059 |
|
| $ | 211,628 |
|
Franchise royalties and fees |
|
| 829 |
|
|
| 966 |
|
|
| 1,658 |
|
| $ | 1,636 |
|
Total revenues |
|
| 105,630 |
|
|
| 110,347 |
|
|
| 203,717 |
|
|
| 213,264 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sandwich shop operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold, excluding depreciation |
|
| 28,264 |
|
|
| 28,639 |
|
|
| 54,242 |
|
|
| 55,275 |
|
Labor and related expenses |
|
| 32,114 |
|
|
| 32,412 |
|
|
| 64,087 |
|
|
| 63,991 |
|
Occupancy expenses |
|
| 15,230 |
|
|
| 14,985 |
|
|
| 29,607 |
|
|
| 29,711 |
|
Other operating expenses |
|
| 11,816 |
|
|
| 12,793 |
|
|
| 23,961 |
|
|
| 25,293 |
|
General and administrative expenses |
|
| 13,843 |
|
|
| 13,440 |
|
|
| 26,552 |
|
|
| 25,628 |
|
Depreciation expense |
|
| 5,585 |
|
|
| 5,858 |
|
|
| 11,121 |
|
|
| 11,684 |
|
Pre-opening costs |
|
| — |
|
|
| 68 |
|
|
| 10 |
|
|
| 136 |
|
Impairment and loss on disposal of property and equipment |
|
| 246 |
|
|
| 2,057 |
|
|
| 328 |
|
|
| 4,081 |
|
Total expenses |
|
| 107,098 |
|
|
| 110,252 |
|
|
| 209,908 |
|
|
| 215,799 |
|
Income (loss) from operations |
|
| (1,468 | ) |
|
| 95 |
|
|
| (6,191 | ) |
|
| (2,535 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
| 35 |
|
|
| 28 |
|
|
| 67 |
|
|
| 55 |
|
Income (loss) before income taxes |
|
| (1,503 | ) |
|
| 67 |
|
|
| (6,258 | ) |
|
| (2,590 | ) |
Income tax expense (benefit) |
|
| 246 |
|
|
| 302 |
|
|
| 13,865 |
|
|
| (202 | ) |
Net loss |
|
| (1,749 | ) |
|
| (235 | ) |
|
| (20,123 | ) |
|
| (2,388 | ) |
Net income attributable to non-controlling interest |
|
| 117 |
|
|
| 125 |
|
|
| 182 |
|
|
| 166 |
|
Net loss attributable to Potbelly Corporation |
| $ | (1,866 | ) |
| $ | (360 | ) |
| $ | (20,305 | ) |
| $ | (2,554 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share attributable to common stockholders: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | (0.08 | ) |
| $ | (0.01 | ) |
| $ | (0.85 | ) |
| $ | (0.10 | ) |
Diluted |
| $ | (0.08 | ) |
| $ | (0.01 | ) |
| $ | (0.85 | ) |
| $ | (0.10 | ) |
Weighted average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
| 23,908,095 |
|
|
| 25,551,386 |
|
|
| 24,020,567 |
|
|
| 25,348,121 |
|
Diluted |
|
| 23,908,095 |
|
|
| 25,551,386 |
|
|
| 24,020,567 |
|
|
| 25,348,121 |
|
For the 26 weeks ended: |
| Common Stock |
|
| Treasury |
|
| Additional Paid-In- |
|
| Accumulated |
|
| Non- Controlling |
|
|
|
|
| |||||||||
|
| Shares |
|
| Amount |
|
| Stock |
|
| Capital |
|
| Deficit |
|
| Interest |
|
| Total Equity |
| |||||||
Balance at December 30, 2018 |
|
| 24,143 |
|
|
| 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) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (20,305 | ) |
|
| 182 |
|
|
| (20,123 | ) |
Stock-based compensation plans |
|
| 116 |
|
|
| 1 |
|
|
| — |
|
|
| 172 |
|
|
| — |
|
|
| — |
|
|
| 173 |
|
Repurchases of common stock |
|
| (486 | ) |
|
| — |
|
|
| (3,467 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (3,467 | ) |
Distributions to non-controlling interest |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (177 | ) |
|
| (177 | ) |
Contributions from non-controlling interest |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 39 |
|
|
| 39 |
|
Treasury shares used for stock-based plans |
|
| (5 | ) |
|
| — |
|
|
| (35 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (35 | ) |
Stock-based compensation expense |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,464 |
|
|
| — |
|
|
| — |
|
|
| 1,464 |
|
Balance at June 30, 2019 |
|
| 23,768 |
|
| $ | 331 |
|
| $ | (111,874 | ) |
| $ | 434,407 |
|
| $ | (250,394 | ) |
| $ | 406 |
|
| $ | 72,876 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 29, 2019 |
|
| 23,638 |
|
| $ | 331 |
|
| $ | (112,680 | ) |
| $ | 435,278 |
|
| $ | (254,081 | ) |
| $ | 321 |
|
| $ | 69,169 |
|
Cumulative impact of Topic 326, net of tax of $2 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (5 | ) |
|
| — |
|
| $ | (5 | ) |
Net income (loss) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (35,552 | ) |
|
| (114 | ) |
|
| (35,666 | ) |
Stock-based compensation plans |
|
| 154 |
|
|
| 2 |
|
|
| — |
|
|
| (2 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
Shares issued for proxy-related expenses |
|
| 130 |
|
|
| 1 |
|
|
| — |
|
|
| 388 |
|
|
| — |
|
|
| — |
|
|
| 389 |
|
Distributions to non-controlling interest |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (172 | ) |
|
| (172 | ) |
Contributions from non-controlling interest |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 143 |
|
|
| 143 |
|
Treasury shares used for stock-based plans |
|
| (24 | ) |
|
| — |
|
|
| (77 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (77 | ) |
Stock-based compensation expense |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 872 |
|
|
| — |
|
|
| — |
|
|
| 872 |
|
Balance at June 28, 2020 |
|
| 23,898 |
|
| $ | 334 |
|
| $ | (112,757 | ) |
| $ | 436,536 |
|
| $ | (289,638 | ) |
| $ | 178 |
|
| $ | 34,653 |
|
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)
For the 13 weeks ended: |
| Common Stock |
|
| Treasury |
|
| Additional Paid-In- |
|
| Accumulated |
|
| Non- Controlling |
|
|
|
|
| |||||||||
|
| Shares |
|
| Amount |
|
| Stock |
|
| Capital |
|
| Deficit |
|
| Interest |
|
| Total Equity |
| |||||||
Balance at April 1, 2018 |
|
| 25,286,229 |
|
|
| 321 |
|
|
| (85,441 | ) |
|
| 424,771 |
|
|
| (222,874 | ) |
|
| 556 |
|
| $ | 117,333 |
|
Net income (loss) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (360 | ) |
|
| 125 |
|
|
| (235 | ) |
Stock-based compensation plans |
|
| 625,063 |
|
|
| 6 |
|
|
| — |
|
|
| 4,483 |
|
|
| — |
|
|
| — |
|
|
| 4,489 |
|
Repurchases of common stock |
|
| (259,339 | ) |
|
| — |
|
|
| (3,386 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (3,386 | ) |
Distributions to non-controlling interest |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (256 | ) |
|
| (256 | ) |
Stock-based compensation expense |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,389 |
|
|
| — |
|
|
| — |
|
|
| 1,389 |
|
Balance at July 1, 2018 |
|
| 25,651,953 |
|
| $ | 327 |
|
| $ | (88,827 | ) |
| $ | 430,643 |
|
| $ | (223,234 | ) |
| $ | 425 |
|
| $ | 119,334 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2019 |
|
| 24,038,211 |
|
| $ | 330 |
|
| $ | (109,541 | ) |
| $ | 433,400 |
|
| $ | (248,528 | ) |
| $ | 427 |
|
| $ | 76,088 |
|
Net income (loss) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,866 | ) |
|
| 117 |
|
|
| (1,749 | ) |
Stock-based compensation plans |
|
| 82,694 |
|
|
| 1 |
|
|
| — |
|
|
| 2 |
|
|
| — |
|
|
| — |
|
|
| 3 |
|
Repurchases of common stock |
|
| (350,659 | ) |
|
| — |
|
|
| (2,323 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (2,323 | ) |
Distributions to non-controlling interest |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (177 | ) |
|
| (177 | ) |
Contributions from non-controlling interest |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 39 |
|
|
| 39 |
|
Treasury shares used for stock-based plans |
|
| (1,871 | ) |
|
| — |
|
|
| (10 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (10 | ) |
Stock-based compensation expense |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,005 |
|
|
| — |
|
|
| — |
|
|
| 1,005 |
|
Balance at June 30, 2019 |
|
| 23,768,375 |
|
| $ | 331 |
|
| $ | (111,874 | ) |
| $ | 434,407 |
|
| $ | (250,394 | ) |
| $ | 406 |
|
| $ | 72,876 |
|
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 26 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 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (690 | ) |
|
| — |
|
|
| (690 | ) |
Net income (loss) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (2,554 | ) |
|
| 166 |
|
|
| (2,388 | ) |
Stock-based compensation plans |
|
| 925,375 |
|
|
| 9 |
|
|
| — |
|
|
| 6,735 |
|
|
| — |
|
|
| — |
|
|
| 6,744 |
|
Repurchases of common stock |
|
| (264,339 | ) |
|
| — |
|
|
| (3,449 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (3,449 | ) |
Distributions to non-controlling interest |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (256 | ) |
|
| (256 | ) |
Treasury shares used for stock-based plans |
|
| (8,771 | ) |
|
| — |
|
|
| (116 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (116 | ) |
Stock-based compensation expense |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 2,251 |
|
|
| — |
|
|
| — |
|
|
| 2,251 |
|
Balance at July 1, 2018 |
|
| 25,651,953 |
|
| $ | 327 |
|
| $ | (88,827 | ) |
| $ | 430,643 |
|
| $ | (223,234 | ) |
| $ | 425 |
|
| $ | 119,334 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (20,305 | ) |
|
| 182 |
|
|
| (20,123 | ) |
Stock-based compensation plans |
|
| 116,367 |
|
|
| 1 |
|
|
| — |
|
|
| 172 |
|
|
| — |
|
|
| — |
|
|
| 173 |
|
Repurchases of common stock |
|
| (485,659 | ) |
|
| — |
|
|
| (3,467 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (3,467 | ) |
Distributions to non-controlling interest |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (177 | ) |
|
| (177 | ) |
Contributions from non-controlling interest |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 39 |
|
|
| 39 |
|
Treasury shares used for stock-based plans |
|
| (4,919 | ) |
|
| — |
|
|
| (35 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (35 | ) |
Stock-based compensation expense |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,464 |
|
|
| — |
|
|
| — |
|
|
| 1,464 |
|
Balance at June 30, 2019 |
|
| 23,768,375 |
|
| $ | 331 |
|
| $ | (111,874 | ) |
| $ | 434,407 |
|
| $ | (250,394 | ) |
| $ | 406 |
|
| $ | 72,876 |
|
See accompanying notes to the unaudited condensed consolidated financial statements.
6
Potbelly Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(amounts in thousands, unaudited)
|
| For the 26 Weeks Ended |
|
| For the 26 Weeks Ended |
| ||||||||||
|
| June 30, |
|
| July 1, |
|
| June 28, |
|
| June 30, |
| ||||
|
| 2019 |
|
| 2018 |
|
| 2020 |
|
| 2019 |
| ||||
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
| $ | (20,123 | ) |
| $ | (2,388 | ) |
| $ | (35,666 | ) |
| $ | (20,123 | ) |
Adjustments to reconcile net loss to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense |
|
| 11,121 |
|
|
| 11,684 |
|
|
| 10,411 |
|
|
| 11,121 |
|
Noncash lease expense |
|
| 13,826 |
|
|
| — |
|
|
| 14,333 |
|
|
| 13,826 |
|
Deferred income tax |
|
| 13,790 |
|
|
| (150 | ) |
|
| 9 |
|
|
| 13,790 |
|
Stock-based compensation expense |
|
| 1,464 |
|
|
| 2,251 |
|
|
| 872 |
|
|
| 1,464 |
|
Asset impairment, store closure and disposal of property and equipment |
|
| 433 |
|
|
| 4,221 |
|
|
| 7,689 |
|
|
| 433 |
|
Other operating activities |
|
| 18 |
|
|
| 311 |
|
|
| 488 |
|
|
| 18 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net |
|
| 192 |
|
|
| (822 | ) |
|
| 937 |
|
|
| 192 |
|
Inventories |
|
| 125 |
|
|
| 263 |
|
|
| 650 |
|
|
| 125 |
|
Prepaid expenses and other assets |
|
| 3,322 |
|
|
| (924 | ) |
|
| (3,000 | ) |
|
| 3,322 |
|
Accounts payable |
|
| 303 |
|
|
| 676 |
|
|
| 3,309 |
|
|
| 303 |
|
Operating lease liabilities |
|
| (15,281 | ) |
|
| — |
|
|
| (4,060 | ) |
|
| (15,281 | ) |
Accrued expenses and other liabilities |
|
| (2,202 | ) |
|
| 2,745 |
|
|
| (895 | ) |
|
| (2,202 | ) |
Net cash provided by operating activities: |
|
| 6,988 |
|
|
| 17,867 |
| ||||||||
Net cash (used in) provided by operating activities: |
|
| (4,923 | ) |
|
| 6,988 |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment |
| $ | (5,230 | ) |
| $ | (11,614 | ) |
| $ | (7,333 | ) |
| $ | (5,230 | ) |
Net cash used in investing activities: |
|
| (5,230 | ) |
|
| (11,614 | ) |
|
| (7,333 | ) |
|
| (5,230 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings under credit facility |
| $ | 39,786 |
|
| $ | — |
| ||||||||
Repayments under credit facility |
|
| (16,700 | ) |
|
| — |
| ||||||||
Payment of debt issuance costs |
|
| (438 | ) |
|
| — |
| ||||||||
Proceeds from exercise of stock options |
| $ | 173 |
|
| $ | 6,744 |
|
|
| — |
|
|
| 173 |
|
Employee taxes on certain stock-based payment arrangements |
|
| (35 | ) |
|
| (512 | ) |
|
| (77 | ) |
|
| (35 | ) |
Treasury stock repurchases |
|
| (3,467 | ) |
|
| (3,449 | ) |
|
| — |
|
|
| (3,467 | ) |
Distributions to non-controlling interest |
|
| (177 | ) |
|
| (256 | ) |
|
| (172 | ) |
|
| (177 | ) |
Contributions from non-controlling interest |
|
| 39 |
|
|
| — |
|
|
| 143 |
|
|
| 39 |
|
Net cash (used in) provided by financing activities: |
|
| (3,467 | ) |
|
| 2,527 |
| ||||||||
Net cash provided by (used in) financing activities: |
|
| 22,542 |
|
|
| (3,467 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
| (1,709 | ) |
|
| 8,780 |
|
|
| 10,286 |
|
|
| (1,709 | ) |
Cash and cash equivalents at beginning of period |
|
| 19,775 |
|
|
| 25,530 |
|
|
| 18,806 |
|
|
| 19,775 |
|
Cash and cash equivalents at end of period |
| $ | 18,066 |
|
| $ | 34,310 |
|
| $ | 29,092 |
|
| $ | 18,066 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid |
| $ | 180 |
|
| $ | 244 |
|
| $ | 18 |
|
| $ | 180 |
|
Interest paid |
|
| 48 |
|
|
| 38 |
|
|
| 330 |
|
|
| 48 |
|
Supplemental non-cash investing and financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid liability for purchases of property and equipment |
| $ | 583 |
|
| $ | 1,299 |
|
| $ | 183 |
|
| $ | 583 |
|
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 orand operates more than 400 company-owned shops in the United States. Additionally, Potbelly franchisees operate more thanover 40 shops domestically.in the 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 30, 2018.29, 2019. 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 June 30, 201928, 2020 and December 30, 2018,29, 2019, its statement of operations for the 13 and 26 weeks ended June 28, 2020 and June 30, 2019, and July 1, 2018, the statement of equity for the 13 and 26 weeks ended June 28, 2020 and June 30, 2019, and July 1, 2018 and its statement of cash flows for the 26 weeks ended June 28, 2020 and June 30, 2019 and July 1, 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.
COVID-19
On January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus ("COVID-19") and the risks to the international community as the virus spreads globally. On March 11, 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally. In response to the pandemic, many states and jurisdictions in which we operate have issued stay-at-home orders and other measures aimed at slowing the spread of the coronavirus. We initially closed the vast majority our dining rooms and shifted to off-premise operations only, and we experienced a sudden and drastic decrease in revenues. We continue to follow guidance from local authorities in determining the appropriate restrictions to put in place for each shop. The majority of our shops have reopened their dining rooms with restrictions, such as social distancing and limited capacities, to ensure the health and safety of our guests and employees.
The disruption in operations and reduction in revenues have led the Company to consider the impact of the COVID-19 pandemic on the recoverability of its assets, including property and equipment, right-of-use assets for operating leases, goodwill and intangible assets, and others.
Due to the impact of the COVID-19 pandemic, the Company evaluated its goodwill, intangible assets, and long-lived assets, which includes property and equipment and right-of-use assets for operating leases for impairment. The Company did not record any impairment to its goodwill or indefinite-lived intangible assets during the 13 and 26 weeks ended June 28, 2020. The Company recorded an impairment charge for its long-lived assets of $0.9 million and $6.8 million for the 13 and 26 weeks ended June 28, 2020, primarily driven by the expected impact of the COVID-19 pandemic on future cash flows. The ultimate severity and longevity of the COVID-19 pandemic is unknown, and therefore, it is possible that impairments could be identified in future periods, and such amounts could be material. See Note 3 for further details.
The Company recognized an income tax benefit of $3.7 million during the first quarter of 2020 primarily due to the impact of the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”). The Company estimates that it will be able to obtain a tax refund of $3.7 million from the carryback of NOLs and a refund of prior AMT credits. The Company received $1.1 million of this refund in July 2020 and expects to receive the remaining $2.6 million before the end of the current year. See Note 5 for further details.
To preserve financial flexibility, the Company drew the $40.0 million of available capacity under its revolving credit facility on March 17, 2020. The Company subsequently repaid $16.7 million of these borrowings during the 13 weeks ended June 28, 2020. See Note 7 for further details.
The full impact of the COVID-19 outbreak continues to evolve as of the date of this report. Due to the rapid development and fluidity of this situation, the Company cannot determine the ultimate impact that the COVID-19 pandemic will have on its consolidated financial condition, liquidity, and future results of operations, and therefore any prediction as to the ultimate impact on the Company’s consolidated financial condition, liquidity, and future results of operations is uncertain.
Resolution of Substantial Doubt Related to Going Concern Assessment
Under ASC 205, Presentation of Financial Statements, the Company is required to consider and has evaluated whether there is substantial doubt that it has the ability to meet its obligations within one year from the financial statement issuance date. As of May 18, 2020, the date of the issuance of the financial statements for the first quarter of 2020, management concluded that there was substantial doubt of its ability to continue as a going concern due to the probable inability to meet its debt covenants for the next year. However, following the successful completion of the second amendment to its Credit Agreement (“the Second Credit Agreement Amendment”) on July 17, 2020 and evaluation of other conditions that exist as of the issuance date of these financial statements, management concluded that the factors that raised substantial doubt have been resolved. See Note 7 for further details of the Second Credit Agreement Amendment.
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”); seven7 of LLC’s wholly owned subsidiaries and LLC’s seven7 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 20192020 and 20182019 both consist of 52 weeks. The fiscal quarters ended June 28, 2020 and June 30, 2019 and July 1, 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
On December 31, 2018,30, 2019, the Company adopted ASU 2016-02, “LeasesAccounting Standard Update No. 2016-13, Financial Instruments—Credit Losses (Topic 842),” along with related clarifications and improvements.326). This pronouncement requires lesseesthe measurement and recognition of expected credit losses on financial instruments. ASU 2016-13 replaces the existing incurred loss model with a forward-looking expected credit loss model that requires consideration of a broader range of information to recognizeestimate credit losses. The Company recorded a liability for lease obligations, which represents the discounted obligationnet reduction of $5 thousand to make future lease payments, and a corresponding right-of-use asset on the balance sheet. The guidance requires disclosure of key information about leasing arrangements that is intended to give financial statement users the ability to assess the amount, timing, and potential uncertainty of cash flows related to leases. We elected the optional transition method to apply the standardopening accumulated deficit as of December 30, 2019, due to the effective date and therefore, prior period amounts have not been adjusted and continue to be reported in accordance with our historical accounting under previous lease guidance, ASCcumulative impact of adopting Topic 840: Leases (Topic 840). The adoption of Topic 842 had a material impact on the consolidated balance sheets and an immaterial impact on the consolidated statements of operations, consolidated statements of equity and consolidated statements of cash flows.
Our practical expedients were as follows:
| |
|
|
| |
| |
|
|
The impact on the consolidated balance sheet is as follows:
|
|
|
|
| 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 |
|
|
|
|
|
326.
(2) Revenue
PotbellyThe Company primarily earns revenue at a point in time through sales at ourfor sandwich shop locations and records such revenuesales which can occur in person at the shop, over our online or app platforms, or through a third-party platform. Revenue is recorded 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 26 weeks ended June 28, 2020, revenue recognized from all revenue sources on point in time sales was $56.0 million and $143.5 million, respectively, and revenue recognized from sales over time was $0.2 million and $0.3 million, respectively. For the 13 and 26 weeks ended June 30, 2019, revenue recognized from all revenue sources on point in time sales was $105.5 million and $203.3 million, respectively, and revenue recognized from sales over time was $0.1 million and $0.4 million, respectively. For the 13 and 26 weeks ended July 1, 2018, revenue recognized from all revenue sources on point in time sales was $110.2 million and $212.9 million, respectively, and revenue recognized from sales over time was $0.2 million and $0.4 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.
Loyalty Program
During the second quarter of 2020, the Company implemented a new customer loyalty program for customers using the Potbelly Perks application at the point of sale. The customer will typically earn 10 points for every dollar spent, and the customer will earn a free entrée after earning 1,000 points. The Company defers revenue associated with the estimated selling price of points earned by Potbelly Perks members towards free entrees as each point is earned, and a corresponding liability is established in deferred revenue. The deferral is based on the estimated value of the product for which the reward is expected to be redeemed, net of estimated unredeemed points. Once a customer earns a free entrée, that entree reward will expire after 30 days. Any point in a customer’s account that does not go toward earning a full entrée will expire a year after the point is earned. When points are redeemed, the Company recognizes revenue for the redeemed product and reduces deferred revenue.
Contract Liabilities
As described above, the Company records current and noncurrent contract liabilities for upfront franchise fees, gift cards and gift cards.the loyalty program. 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 December 31, 2018 |
| $ | (2,184 | ) |
| $ | (1,631 | ) |
Ending balance as of June 30, 2019 |
|
| (1,687 | ) |
|
| (1,960 | ) |
Increase (decrease) in contract liability |
| $ | (497 | ) |
| $ | 329 |
|
|
| Current Contract Liability |
|
| Noncurrent Contract Liability |
| ||
|
| (Thousands) |
|
| (Thousands) |
| ||
Beginning balance as of December 30, 2019 |
| $ | (1,594 | ) |
| $ | (2,054 | ) |
Ending balance as of June 28, 2020 |
|
| (1,626 | ) |
|
| (1,831 | ) |
Increase (decrease) in contract liability |
| $ | 32 |
|
| $ | (223 | ) |
The aggregate value of remaining performance obligations on outstanding contracts was $3.6$3.5 million as of June 30, 2019.28, 2020. 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 |
| ||
2019 |
| $ | 1,250 |
| ||||
2020 |
|
| 288 |
|
| $ | 1,039 |
|
2021 |
|
| 246 |
|
|
| 478 |
|
2022 |
|
| 199 |
|
|
| 244 |
|
2023 |
|
| 192 |
|
|
| 195 |
|
2024 |
|
| 162 |
| ||||
Thereafter |
|
| 1,472 |
|
|
| 1,339 |
|
Total revenue recognized |
| $ | 3,647 |
|
| $ | 3,457 |
|
For the 13 and 26 weeks ended June 28, 2020, the amount of revenue recognized related to the December 30, 2019 liability ending balance was $0.4 million and $0.9 million, respectively. For the 13 and 26 weeks ended June 30, 2019, the amount of revenue recognized related to the December 31,30, 2018 liability ending balance was $0.6 million and $1.5 million, respectively. For the 13 and 26 weeks ended July 1, 2018, the amount of revenue recognized related to the January 1, 2018 liability ending balance was $0.6 million and $1.6 million, respectively. This revenue related to the recognition of gift card redemptions and upfront franchise fees. For the 13 and 26 weeks ended June 28, 2020 and June 30, 2019, and the 26 weeks ended July 1, 2018, the Company did not0t recognize any revenue from obligations satisfied (or partially satisfied) in prior periods.
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 group. If the carrying amount of the asset group exceeds its estimated undiscounted future cash flows, an impairment charge is recognized as the amount by which the carrying amount of the asset group exceeds the fair value of the asset group. The fair value of the shop assets is determined using the discounted future cash flow method of anticipated cash flows through the shop’s lease-end date using fair value measurement inputs classified as Level 3. The fair value of right-of-use assets is estimated using market comparative information for similar properties. Level 3 inputs are derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable. 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 and 26 weeks ended June 30, 2019,28, 2020, 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 $0.2$0.9 million and $6.8 million for the 13 and 26 weeks ended June 28, 2020, respectively, primarily driven by the expected impact of the COVID-19 pandemic on future cash flows. The ultimate severity and longevity of the COVID-19 pandemic is unknown, and therefore, it is possible that impairments could be identified in future periods, and such amounts could be material. After performing a periodic review of the Company’s shops during the 13 and 26 weeks ended June 30, 2019. The2019, the Company recorded an impairment charge of $2.1 million and $4.1 million for the 13 and 26 weeks ended July 1, 2018, respectively.$0.2 million.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Assets recognized or disclosed at fair value on the consolidated financial statements on a nonrecurring basis include items such as leasehold improvements, property and equipment, operating lease assets, goodwill, and other intangible assets. These assets are measured at fair value if determined to be impaired.
The Company reviews indefinite-lived intangible assets, which includes goodwill and tradenames, annually at fiscal year-end for impairment or more frequently if events or circumstances indicate that the carrying value may not be recoverable. Due to the initial impact of the COVID-19 pandemic to the global economy, including but not limited to, the volatility of the Company's stock price as well as that of its competitors, declining sales at the Company's restaurants and the challenging environment for the restaurant industry generally, the Company determined that there were indicators of potential impairment of its goodwill and indefinite-lived intangible assets during the first quarter of 2020. As such, the Company performed an impairment assessment for both goodwill and indefinite lived intangible assets and concluded that the fair value of these assets exceeded their carrying values. The Company has not recorded any impairment to its goodwill or indefinite-lived intangible assets during the 13 and 26 weeks ended June 28, 2020. The ultimate severity and longevity of the COVID-19 pandemic is unknown, and therefore, it is possible that impairments could be identified in future periods, and such amounts could be material.
(4) Loss Per Share
Basic and diluted income per common share attributable to common stockholders are 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, no0 potential common shares are included in diluted shares outstanding as the effect is anti-dilutive. For the 13 and 26 weeks ended June 28, 2020, and June 30, 2019, and July 1, 2018, the Company had a loss per share, and therefore potentially dilutive shares were excluded from the calculation.
The following table summarizes the loss per share calculation:
|
| For the 13 Weeks Ended |
|
| For the 26 Weeks Ended |
|
| For the 13 Weeks Ended |
|
| For the 26 Weeks Ended |
| ||||||||||||||||||||
|
| June 30, |
|
| July 1, |
|
| June 30, |
|
| July 1, |
|
| June 28, |
|
| June 30, |
|
| June 28, |
|
| June 30, |
| ||||||||
|
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||||||
Net loss attributable to Potbelly Corporation |
| $ | (1,866 | ) |
| $ | (360 | ) |
| $ | (20,305 | ) |
| $ | (2,554 | ) |
| $ | (22,216 | ) |
| $ | (1,866 | ) |
| $ | (35,552 | ) |
| $ | (20,305 | ) |
Weighted average common shares outstanding-basic |
|
| 23,908,095 |
|
|
| 25,551,386 |
|
|
| 24,020,567 |
|
|
| 25,348,121 |
|
|
| 23,773 |
|
|
| 23,908 |
|
|
| 23,709 |
|
|
| 24,021 |
|
Plus: Effect of potential stock options exercise |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Weighted average common shares outstanding-diluted |
|
| 23,908,095 |
|
|
| 25,551,386 |
|
|
| 24,020,567 |
|
|
| 25,348,121 |
|
|
| 23,773 |
|
|
| 23,908 |
|
|
| 23,709 |
|
|
| 24,021 |
|
Loss per share available to common stockholders-basic |
| $ | (0.08 | ) |
| $ | (0.01 | ) |
| $ | (0.85 | ) |
| $ | (0.10 | ) |
| $ | (0.93 | ) |
| $ | (0.08 | ) |
| $ | (1.50 | ) |
| $ | (0.85 | ) |
Loss per share available to common stockholders-diluted |
| $ | (0.08 | ) |
| $ | (0.01 | ) |
| $ | (0.85 | ) |
| $ | (0.10 | ) |
| $ | (0.93 | ) |
| $ | (0.08 | ) |
| $ | (1.50 | ) |
| $ | (0.85 | ) |
Potentially dilutive shares that are considered anti-dilutive: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common share options |
|
| 2,376,713 |
|
|
| 2,557,475 |
|
|
| 2,381,767 |
|
|
| 2,829,461 |
|
|
| 2,998 |
|
|
| 2,377 |
|
|
| 2,646 |
|
|
| 2,382 |
|
Our
On March 27, 2020, the CARES Act was enacted into law. The CARES Act is a tax and spending package intended to provide economic relief to address the impact of the COVID-19 pandemic. The CARES Act includes several significant business tax provisions that, among other things, would eliminate the taxable income limit for certain net operating losses (“NOLs”) and allow businesses to carry back NOLs arising in 2018, 2019, and 2020 to the five prior tax years, accelerate refunds of previously generated corporate alternative minimum tax (“AMT”) credits, loosen the business interest limitation under section 163(j), and fix the qualified improvement property regulations in the 2017 Tax Cuts and Jobs Act. As a result of the CARES Act, the Company estimates that it will be able to obtain a tax refund of $3.7 million from the carryback of NOLs and a refund of prior AMT credits. The $3.7 million tax receivable is recorded in other current assets on the Company’s condensed consolidated balance sheet as of June 28, 2020. The Company received $1.1 million of this refund in July 2020 and expects to receive the remaining $2.6 million before the end of the current year.
The interim tax provision is determined using an estimated annual effective tax rate and is adjusted for discrete taxable events that occur during the quarter. The difference between the effectiveCompany recognized an income tax rate in 2019 and 2018 is the recordingbenefit of the valuation allowance in$3.7 million during the first quarter of 2020 primarily due to the impact of the Cares Act discussed above. The Company recorded a tax expense of $13.6 million during the first quarter of 2019 due to the Company recording a non-cash charge to income tax expense for the recognition of a full valuation allowance against its net deferred tax assets. The Company continues to record a valuation allowance against all of its deferred tax assets as June 28, 2020. The Company did not provide for an income tax benefit on its pre-tax loss for the 13 and 26 weeks ended June 28, 2020 and June 30, 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 consideredconsiders 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, theThe Company estimates it will 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 recordedfirst quarter of 2019 resulting in a non-cash charge to income tax expense of $13.6 million relatedmillion. The Company continued to the recognition of the valuation allowance during the first quarter of 2019 and continues to recordmaintain a valuation allowance against all of ourits deferred tax assets as of June 30, 2019.28, 2020. The Company did not provide for an income tax benefit on the pre-tax loss recorded for the three and six months ended June 30, 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 assessassesses the likelihood of the realization of its deferred tax assets at the end of each reporting periodquarter and the valuation allowance will beis 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 lease.
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 estimateThe Company estimates 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 lease 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.
RelatedAs a result of COVID-19, the Company suspended the payment of rent on the majority of its leases and has been in discussions with landlords regarding the restructuring of those leases in light of various contractual and legal defenses. The Company entered into 107 amendments with our respective landlords during the thirteen weeks ended June 28, 2020. Under these agreements, certain rent payments will be abated, deferred or modified without penalty for various periods, generally covering two to four months of rent payments. In April 2020, the Financial Accounting Standards Board issued guidance allowing entities to make a policy election whether to account for lease concessions related to the adoption of Topic 842, our policy elections wereCOVID-19 pandemic as follows:
|
| |
|
|
Supplemental balance sheet informationlease modifications. The election applies to any lessor-provided lease concession related to the impact of the COVID-19 pandemic, provided the concession does not result in a substantial increase in the rights of the lessor or in the obligations of the lessee. During the thirteen weeks ended June 28, 2020, we received concessions from certain landlords in the form of rent deferrals and abatements which were not substantial, and we have elected to not account for these rent concessions as lease modifications.
During the thirteen weeks ended June 28, 2020, the Company terminated the leases was as follows:for 6 company-owned shops which will be permanently closed. The Company incurred $0.3 million in lease termination fees related to these leases. Upon termination of these leases, the Company derecognized ROU assets of $3.6 million and lease liabilities of $3.8 million that resulted in a net gain of $0.2 million that is recorded in general and administrative expenses.
|
|
|
| June 30, |
| |
Operating Leases |
| Classification |
| 2019 |
| |
Right-of-use assets |
| Right-of-use assets for operating leases |
| $ | 216,540 |
|
Short-term lease liabilities |
| Short-term operating lease liabilities |
|
| 29,126 |
|
Long-term lease liabilities |
| Long-term operating lease liabilities |
|
| 210,898 |
|
Total lease liabilities |
|
|
|
| 240,024 |
|
Operating lease term and discount rate were as follows:
| ||||
| ||||
|
| |||
|
|
|
|
| June 28, |
|
| June 30, |
| ||
|
| 2020 |
|
| 2019 |
| ||
Weighted average remaining lease term (years) |
| 8.16 |
|
| 8.72 |
| ||
Weighted average discount rate |
|
| 7.90 | % |
|
| 8.03 | % |
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 |
|
| 26 weeks ending |
|
|
| 13 weeks ending |
|
| 26 weeks ending |
| ||||||||||
|
|
|
| June 30, |
|
| June 30, |
|
|
| June 28, |
| June 30, |
|
| June 28, |
| June 30, |
| ||||||
|
| Classification |
| 2019 |
|
| 2019 |
| Classification |
| 2020 |
| 2019 |
|
| 2020 |
| 2019 |
| ||||||
Operating lease cost |
| Occupancy and General and administrative expenses |
|
| 11,611 |
|
|
| 22,606 |
| Occupancy and General and administrative expenses |
|
| 11,817 |
|
| 11,611 |
|
|
| 23,587 |
|
| 22,606 |
|
Variable lease cost |
| Occupancy |
|
| 3,649 |
|
|
| 7,153 |
| Occupancy |
|
| 2,918 |
|
| 3,649 |
|
|
| 6,240 |
|
| 7,153 |
|
Total lease cost |
|
|
| $ | 15,260 |
|
| $ | 29,759 |
|
|
| $ | 14,735 |
| $ | 15,260 |
|
| $ | 29,827 |
| $ | 29,759 |
|
Supplemental disclosures of cash flow information related to leases were as follows:
|
| 13 weeks ending |
|
| 26 weeks ending |
|
| 13 weeks ending |
|
| 26 weeks ending |
| ||||||||||
|
| June 30, |
|
| June 30, |
|
| June 28, |
| June 30, |
|
| June 28, |
| June 30, |
| ||||||
|
| 2019 |
|
| 2019 |
|
| 2020 |
| 2019 |
|
| 2020 |
| 2019 |
| ||||||
Operating cash flows rent paid for operating lease liabilities |
|
| 11,788 |
|
|
| 23,726 |
|
|
| 1,528 |
|
| 11,788 |
|
|
| 13,507 |
|
| 23,726 |
|
Operating right-of-use assets obtained in exchange for new operating lease liabilities |
|
| 2,735 |
|
|
| 3,657 |
|
|
| 8,002 |
| 2,735 |
|
|
| 13,536 |
| 3,657 |
| ||
Reduction in operating right-of-use assets due to lease terminations |
|
| (1,320 | ) |
|
| (5,847 | ) |
|
| (3,442 | ) |
| (1,320 | ) |
|
| (4,881 | ) |
| (5,847 | ) |
As of June 30, 2019,28, 2020, the Company has additional operating lease payments related to shopshad 0 real estate leases entered into that had not yet open of $4.4 million. These operating leases will commence during the next fiscal year with an average lease term of 12 years.commenced.
Maturities of lease liabilities were as follows as of June 30, 2019:28, 2020:
|
| Operating Leases |
|
| Operating Leases |
| ||
Remainder of 2019 |
|
| 23,542 |
| ||||
2020 |
|
| 45,919 |
| ||||
Remainder of 2020 |
|
| 31,433 |
| ||||
2021 |
|
| 41,664 |
|
|
| 46,600 |
|
2022 |
|
| 36,359 |
|
|
| 40,477 |
|
2023 |
|
| 31,492 |
|
|
| 35,598 |
|
2024 |
|
| 28,775 |
|
|
| 32,805 |
|
2025 |
|
| 30,552 |
| ||||
Thereafter |
|
| 135,169 |
|
|
| 112,663 |
|
Total lease payments |
|
| 342,920 |
|
|
| 330,128 |
|
Less: imputed interest |
|
| (102,896 | ) |
|
| (89,721 | ) |
Present value of lease liabilities |
| $ | 240,024 |
|
| $ | 240,407 |
|
As previously disclosed(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 our 2018 Annual Report on Form 10-KJuly 2022. The Credit Agreement amends and under the previous lease accounting, maturities of lease liabilities were as followsrestates 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 the 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 the “restricted payments” (primarily distributions and equity repurchases) that the Company may make, provided that proceeds of the loans under the Credit Agreement may not be used for purposes of making restricted payments.
On March 17, 2020, the Company fully drew the available capacity of $39.8 million under the Credit Agreement as a precautionary measure in order to increase its cash position and preserve financial flexibility in light of current uncertainty in the global markets resulting from the COVID-19 pandemic. In accordance with the terms of the Credit Agreement, the proceeds from these borrowings may in the future be used for working capital, general corporate or other permitted purposes.
The Credit Agreement was subsequently amended as of May 15, 2020 (the “Credit Agreement Amendment”) to, among other things (i) change the maturity date from July 31, 2022 to March 31, 2022; (ii) eliminate the $20.0 million expansion feature; (iii) amend the interest rate to the Company’s option at either (a) a eurocurrency rate determined by reference to the applicable LIBOR rate with a 1.00% floor plus a margin of 5.00% or (b) a prime rate as announced by JP Morgan plus 4.00%; (iv) amend the commitment fee to 1.00% per annum in respect of any unused commitments under the credit facility; (v) implement additional restrictions on restricted payments, acquisitions and other indebtedness; and (vi) implement additional financial covenants. Per the terms of the Credit Agreement Amendment, the Company repaid $15.0 million of its outstanding borrowing at the signing of the Credit Agreement Amendment, and may re-borrow this $15.0 million when its cash balance held by JP Morgan declines below $28.0 million. Lastly, the Company was required to pay a fee of 1% of the outstanding loan balance after the signing of the Credit Agreement Amendment.
On July 17, 2020, the Company entered into Amendment No. 2 (the “Second Amendment”) to the Credit Agreement to, among other things: (i) revise its financial covenants; (ii) decrease the aggregate amount of loan commitment available under the Credit Agreement from $40.0 million to $30.0 million after March 31, 2021 and (iii) decrease the interest rate to the Company’s option at either (a) a eurocurrency rate determined by reference to the applicable LIBOR rate with a 1.00% floor plus a margin of 4.75% or (b) a prime rate as announced by JP Morgan plus 2.25%. Per the terms of the Second Amendment, the Company repaid $14.5 million of its outstanding borrowing at the signing of the Second Amendment, and may reborrow the entire amount available under the credit facility when its cash balance held by JP Morgan declines below $10.0 million in total. As of June 28, 2020, the Company had $23.1 million outstanding under the Credit Agreement. There were 0 borrowings outstanding as of June 30, 2018:2019.
The Second Amendment includes financial covenants that require the Company to (i) maintain periodic minimum liquidity levels through February 28, 2022 ranging from $15.0 million to $30.0 million and (ii) maintain monthly minimum adjusted EBITDA thresholds for specified computation periods through February 28, 2022 ranging from ($18.0) million to $8.3 million. The Company is currently in compliance with all debt covenants as of June 28, 2020.
|
| 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 |
|
On April 10, 2020, Potbelly Sandwich Works, LLC, an indirect subsidiary of the Company, was granted a loan (the “Loan”) from JPMorgan Chase Bank, N.A. in the aggregate amount of $10.0 million, pursuant to the Paycheck Protection Program under Division A, Title I of the CARES Act, which was enacted March 27, 2020. On April 28, 2020, the Company repaid the $10.0 million proceeds from the loan.
(7)(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. The 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, SEC 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 13 and 26 weeks ended June 28, 2020, the Company did 0t repurchase any shares of its common stock. In light of the COVID-19 pandemic, the Company does not have plans to repurchase any common stock under its stock repurchase program at this time. For the 13 and 26 weeks ended June 30, 2019, the Company repurchased 350,659 shares and 485,659 shares of its common stock for approximately $2.3 million under the stock repurchase program, including cost and commission, in open market transactions. For the 26 weeks ended June 30, 2019, the Company repurchased 485,659 shares of its common stock for approximately $3.5 million, respectively, under the stock 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.
(8)(9) Stock-Based Compensation
Stock options
On May 16, 2019, the Company’s stockholders approved the Potbelly Corporation 2019 Long-Term Incentive Plan (the “2019 Plan”) and, in connection therewith, all equity awards made after that date were made under the 2019 Plan. On June 10, 2019,The Company has awarded stock options to certain employees of the Company registered 1,200,000 sharesand certain non-employee members of its common stock reserved for issuance under the 2019 Plan. All remaining sharesBoard of common stock reserved for issuance under the previous Amended and Restated 2013 Long-Term Incentive Plan (the “2013 Plan”) are available for issuance under the 2019 Plan and no future awards will be made under the 2013 Plan.Directors. The grants generally vest over a four-year period. The fair value of stock options is determined using the Black-Scholes option pricing model. There were no0 stock options granted during the 13 weeks and 26 weeks ended June 30, 2019.28, 2020.
A summary of stock option activity for the 26 weeks ended June 30, 201928, 2020 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 30, 2018 |
|
| 2,150 |
|
| $ | 11.49 |
|
| $ | 378 |
|
|
| 5.13 |
| ||||||||||||||||
Outstanding—December 29, 2019 |
|
| 1,774 |
|
| $ | 11.34 |
|
| $ | — |
|
|
| 4.33 |
| ||||||||||||||||
Granted |
|
| — |
|
|
| — |
|
|
|
|
|
|
|
|
|
|
| — |
|
|
| — |
|
|
|
|
|
|
|
|
|
Exercised |
|
| (22 | ) |
|
| 7.93 |
|
|
|
|
|
|
|
|
|
|
| — |
|
|
| — |
|
|
|
|
|
|
|
|
|
Canceled |
|
| (198 | ) |
|
| 13.54 |
|
|
|
|
|
|
|
|
|
|
| (33 | ) |
|
| 10.51 |
|
|
|
|
|
|
|
|
|
Outstanding—June 30, 2019 |
|
| 1,930 |
|
| $ | 11.32 |
|
| $ | — |
|
|
| 5.04 |
| ||||||||||||||||
Exercisable—June 30, 2019 |
|
| 1,534 |
|
| $ | 11.05 |
|
| $ | — |
|
|
| 4.15 |
| ||||||||||||||||
Outstanding—June 28, 2020 |
|
| 1,741 |
|
|
| 11.35 |
|
| $ | — |
|
|
| 3.76 |
| ||||||||||||||||
Exercisable—June 28, 2020 |
|
| 1,576 |
|
| $ | 11.14 |
|
| $ | — |
|
|
| 3.38 |
|
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 and 26 weeks ended June 28, 2020, the Company recognized stock-based compensation expense related to stock options of $0.1 million and $0.3 million, respectively. For the 13 and 26 weeks ended June 30, 2019, the Company recognized stock-based compensation expense related to stock options of $0.3 million and $0.6 million, respectively. For the 13 weeks and 26 weeks ended July 1, 2018, the Company recognized stock-based compensation expense related to stock options of $0.3 million and $1.0 million, respectively. As of June 30, 2019,28, 2020, unrecognized stock-based compensation expense for stock options was $1.4$0.5 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.
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 and 26 weeks ended June 28, 2020, the Company recognized stock-based compensation expense related to RSUs of $0.3 million and $0.6 million, respectively. For the 13 and 26 weeks ended June 30, 2019, the Company recognized stock-based compensation expense related to RSUs of $0.7 million and $0.9 million, respectively. For the 13 weeks and 26 weeks ended July 1, 2018, the Company recognized stock-based compensation expense related to RSUs of $1.1 million and $1.3 million, respectively. As of June 30, 2019,28, 2020, unrecognized stock-based compensation expense for RSUs was $2.1$3.2 million, which will be recognized though fiscal year 2022.2023.
A summary of RSU activity for the 26 weeks ended June 30, 201928, 2020 is as follows:
RSUs |
| Number of RSUs |
|
| Weighted Average Fair Value per Share |
|
| Number of RSUs (Thousands) |
|
| Weighted Average Fair Value per Share |
| ||||
Non-vested as of December 30, 2018 |
|
| 247 |
|
| $ | 11.99 |
| ||||||||
Non-vested as of December 29, 2019 |
|
| 463 |
|
| $ | 7.59 |
| ||||||||
Granted |
|
| 306 |
|
|
| 7.02 |
|
|
| 963 |
|
|
| 2.48 |
|
Vested |
|
| (93 | ) |
|
| 6.13 |
|
|
| (168 | ) |
|
| 2.68 |
|
Canceled |
|
| (13 | ) |
|
| 8.46 |
|
|
| (1 | ) |
|
| 2.98 |
|
Non-vested as of June 30, 2019 |
|
| 447 |
|
| $ | 8.68 |
| ||||||||
Non-vested as of June 28, 2020 |
|
| 1,257 |
|
| $ | 3.55 |
|
Performance stock units
The Company awards performance share units (“PSUs”) to eligible employees;employees. In June 2020 the Company issued 774,761 PSUs with a grant date fair value of $1.50 that was established using a Monte Carlo simulation model. These PSUs are subject to service and performancemarket vesting conditions. The PSUs will vest over the performance period of May 15, 2020 through May 15, 2025. Participants are entitled to receive a specified number of shares of the Company’s common stock contingent on the achievement of a stock return on the Company's common stock. Compensation expense for these awards will be amortized over an average expected service period of 1.8 years.
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.goals, subject to continued service through the performance period. 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 26 weeks ended June 28, 2020 and June 30, 2019, the0 expense associated with the PSUs was not material.recognized related to PSUs.
(9)(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. The Complaint was brought as a nationwide “collective action” under the FLSA and as a “class action” under NYLL. Since the filing of the Complaint, 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 towhich received final court approval.approval on February 4, 2020. All charges related to the claims are reflected in the statement of operations.
(10) Subsequent Event
(11) Related Party Transactions
On August 7, 2019,May 10, 2020, the Company entered into a second amended and restated revolving credit facility agreementSettlement Agreement (the "Credit Agreement"“Settlement Agreement”) with JPMorgan Chase Bank, N.A. that expiresIntrinsic Investment Holdings, LLC, the Vann A. Avedisian Trust U/A 8/29/85, Vann A. Avedisian, KGT Investments, LLC, The Khimji Foundation, Mahmood Khimji, Bryant L. Keil and Neil Luthra (the foregoing, collectively with each of their respective affiliates, the “Vann Group”). In connection with the Settlement Agreement with the Vann Group, the Company issued 130,000 shares of common stock (including 41,311 shares issued to the Vann A. Avedisian Trust U/A 8/29/85, 43,571 shares issued to KGT Investments, LLC and 45,118 shares issued to The Khimji Foundation) to reimburse the Vann Group for its documented out-of-pocket costs, fees and expenses incurred in July 2022.connection with the Settlement Agreement. The Company recorded expense of $0.4 million within general and administrative expenses related to the issuance of these shares. Based on a report of Schedule 13D filed May 11, 2020 by the Vann Group, the Vann Group beneficially owns 8.7% of the common stock of the Company.
(12) Subsequent Events
Credit Facility
A second amendment to the Credit Agreement amended and restated that certain amended and restated revolving credit facility agreement, datedwas entered into as of December 9, 2015, and amended on May 3, 2019 (collectively, the "Prior Credit Agreement") with JPMorgan Chase Bank, N.A. The Credit Agreement provides, among other things,July 17, 2020. See Note 7 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 the applicable LIBOR rate plus a margin ranging from 1.25% to 1.75% or (ii) a prime rate as announced by JP Morgan Chase 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 the “restricted payments” (primarily distributions and equity repurchases) that the Company may make, provided that proceeds of the loans under the credit agreement may not be used for purposes of making restricted payments.further details.
As disclosed in Note 6, the Company continues to have discussions with its landlords about deferral or abatement of rent, restructured lease terms, and early terminations. Since June 28, 2020, the Company has terminated the leases for 9 company-owned shops which have been permanently closed. The Company incurred $0.5 million in lease termination fees related to these leases.
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 30, 2018.29, 2019. 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, estimated costs associated with our closure of underperforming shops, and the implementation and results of 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, the COVID-19 outbreak; compliance with covenants in our credit facility; competition; general economic conditions; our ability to successfully implement our business strategy; the success of our initiatives to increase sales and traffic; changes in commodity, energy and other costs; our ability to attract and 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 30, 2018,29, 2019 and our Quarterly Report on Form 10-Q for the quarter ended March 29, 2020, 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.
OverviewBusiness
Potbelly Corporation 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,a much-needed lunch-break escape for more than 40 years. Potbelly promises Fresh, Fast & Friendly serviceowns and operates Potbelly Sandwich Shop concepts in an environment that reflects the local neighborhood. United States. The Company also has domestic franchise operations of Potbelly Sandwich Shop concepts. Potbelly’s chief operating decision maker is our Chief Executive Officer. Based on how our Chief Executive Officer reviews financial performance and allocates resources on a recurring basis, the Company has one operating segment and one reportable segment.
Our employees are trainedshop model is designed to engage withgenerate, and has generated, strong cash flow, attractive shop-level financial results and high returns on investment. We operate our customersshops successfully in a genuine waywide range of geographic markets, population densities and real estate settings. We aim to providegenerate average shop-level profit margins, a personalized experience.non-GAAP measure, that range from the high teens to above 20%. Our shops feature vintage design elementsability to achieve such margins and locally-themed décor inspiredreturns depends on a number of factors. For example, we face increasing labor and commodity costs, which we have partially offset by the neighborhoodincreasing menu prices. Although there is no guarantee that we believe create a lively atmosphere. Through this combination,will be able to maintain these returns, we believe we are creating a devoted base of Potbelly fans that return againour attractive shop economics support our ability to profitably grow our brand in new 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 and Values, and the foundation of everything we do. Our Vision is to create an experience people love to share thanks to our craveable food, quirky personality and amazing people. Our Mission is to help people 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.existing markets.
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 31, 2017 |
|
| 437 |
|
|
| 39 |
|
|
| 16 |
|
|
| 55 |
|
|
| 492 |
| ||||||||||||||||||||
Shops opened |
|
| 5 |
|
|
| 2 |
|
|
| 2 |
|
|
| 4 |
|
|
| 9 |
| ||||||||||||||||||||
Shops closed |
|
| (6 | ) |
|
| — |
|
|
| (1 | ) |
|
| (1 | ) |
|
| (7 | ) | ||||||||||||||||||||
Shops as of July 1, 2018 |
|
| 436 |
|
|
| 41 |
|
|
| 17 |
|
|
| 58 |
|
|
| 494 |
| ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Operated |
|
| Domestic |
|
| International |
|
| Total |
|
| Company |
| |||||
Shops as of December 30, 2018 |
|
| 437 |
|
|
| 41 |
|
|
| 8 |
|
|
| 49 |
|
|
| 486 |
|
|
| 437 |
|
|
| 41 |
|
|
| 8 |
|
|
| 49 |
|
|
| 486 |
|
Shops opened |
|
| 1 |
|
|
| 5 |
|
|
| — |
|
|
| 5 |
|
|
| 6 |
|
|
| 1 |
|
|
| 5 |
|
|
| — |
|
|
| 5 |
|
|
| 6 |
|
Shops closed |
|
| (9 | ) |
|
| (2 | ) |
|
| (7 | ) |
|
| (9 | ) |
|
| (18 | ) |
|
| (9 | ) |
|
| (2 | ) |
|
| (7 | ) |
|
| (9 | ) |
|
| (18 | ) |
Shops as of June 30, 2019 |
|
| 429 |
|
|
| 44 |
|
|
| 1 |
|
|
| 45 |
|
|
| 474 |
|
|
| 429 |
|
|
| 44 |
|
|
| 1 |
|
|
| 45 |
|
|
| 474 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
Shops as of December 29, 2019 |
|
| 428 |
|
|
| 46 |
|
|
| — |
|
|
| 46 |
|
|
| 474 |
| ||||||||||||||||||||
Shops opened |
|
| 3 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 3 |
| ||||||||||||||||||||
Shops closed |
|
| (7 | ) |
|
| (2 | ) |
|
| — |
|
|
| (2 | ) |
|
| (9 | ) | ||||||||||||||||||||
Shops as of June 28, 2020 |
|
| 424 |
|
|
| 44 |
|
|
| — |
|
|
| 44 |
|
|
| 468 |
|
Impact of COVID-19 on Our Business
On January 30, 2020, the WHO announced a global health emergency because of COVID-19 and the risks to the international community as the virus spreads globally. On March 11, 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally. The COVID-19 pandemic has significantly impacted economic conditions in the United States where all our shops are located. In response to the pandemic, many states and jurisdictions in which we operate have issued stay-at-home orders and other measures aimed at slowing the spread of the coronavirus. While most of our company-owned shops remain open in accordance with guidance from local authorities, these measures resulted in us closing the vast majority our dining rooms and shifting to off-premise operations only, and we experienced a sudden and drastic decrease in revenues. Since the onset of the pandemic, local regulations continue to change in response to the changing environment, and some of our shops are able to operate with limited dine-in capacity. We are continuing to monitor these regulations in each jurisdiction where we operate in order to adjust our operations accordingly.
The COVID-19 pandemic has adversely affected, and will continue to adversely affect, our operations and financial results for the foreseeable future. There are many uncertainties regarding the current coronavirus COVID-19 pandemic, and the Company is closely monitoring the impact of the pandemic on all aspects of its business, including how it will impact its customers, employees, suppliers, vendors, business partners, and distribution channels. The Company is unable to predict the impact that COVID-19 will have on its financial position and operating results due to numerous uncertainties, however, the Company is continually assessing the evolving impact of the COVID-19 pandemic and intends to make adjustments to its responses accordingly.
As the COVID-19 pandemic emerged, the Company’s first priority was and continues to be ensuring the health and safety of our employees as we serve our customers and communities. We have provided masks, gloves, and other personal protective equipment to our shop employees and implemented daily temperature checks and screening before each shift. We continue to adhere to our stringent food safety and quality assurance programs. We have implemented strict sanitation protocols for our shops including disinfecting high-touch areas and providing tamper-evident stickers on all pickup and delivery orders. We are monitoring recommendations from the CDC and will make necessary adjustments to align with emerging best practices. We have been in regular contact with our supply chain partners and we have not experienced, nor do we foresee, disruptions in our supply chain. As of August 5, 2020, 41 of the Company’s shops remain temporarily closed. We have implemented a strategy to reduce costs and preserve cash. Please see the “Liquidity and Capital Resources” section below for additional details.
Revenue – Through the first ten weeks of 2020, we saw comparable same-store-sales increase 2.5% and the Company was on pace to record the first positive quarterly comparable same-store-sales since 2016. Due to the negative impact of the COVID-19 pandemic, comparable same-store sales reached a low point with a decrease of 67.7% at the end of March. We reported a decrease in comparable same-store sales of 10.1% for the quarter ended March 29, 2020 compared to the prior year. Same-store sales steadily improved throughout the second quarter and ended with a decrease in same-store sales of 41.5% for the quarter. As our shops were subject to restrictions on dine-in capacity, our shops have increased off-premise operations, continuing to provide delivery, in-shop pick-up, drive-thru, or curbside pick-up services. We continue to follow guidance from local authorities in determining the appropriate restrictions to put in place for each shop. The majority of our shops have reopened their dining rooms with restrictions, such as social distancing and limited capacities, to ensure the health and safety of our guests and employees. Customers can place off-premise orders through Potbelly.com and the Potbelly app, or through DoorDash, Grubhub, and Uber Eats marketplaces nationwide. We launched the Potbelly Pantry program, which allows customers to purchase Potbelly products in bulk as a response to changing customer needs during the pandemic. We also introduced Family Meal Deals which allow customers to purchase a combination of sandwiches, salads, sides, shakes, and other menu items for a family or group at a reduced price.
Operating Costs - We have implemented measures to reduce operating costs and general and administrative expenses in response to the negative impact the pandemic has had on our business. We have adjusted shop-level labor and reduced purchases of inventory to align with new levels of demand. We have reduced advertising and marketing expenditures. We enacted a hiring freeze, and all business travel has been suspended. As of the beginning of the second quarter of 2020, we temporarily reduced salaries for all corporate employees, suspended merit increases, promotions, bonuses, and certain benefits, and furloughed approximately one-third of our corporate employees. The Board of Directors has elected to temporarily defer compensation. We have suspended the payment of rent on the majority of our leases and are in discussions with our landlords regarding the restructuring of those leases in light of various contractual and legal defenses. As of August 5, 2020, we have amended the lease agreements for 187 of our shops, which include rent abatements, rent deferrals, and/or modified lease terms to reduce ongoing rent, and we have completed early terminations of leases for 15 of our shops.
Shop Development – The Company has halted capital investment in new company-owned shops, except for shops that are substantially complete, as well as all non-essential capital expenditures. The Company does not have plans to begin construction on any company-owned shops until the impact of the pandemic is behind us.
We will continue to actively monitor the evolving situation and may take further actions that alter our business operations as may be required by federal, state or local authorities or that we determine are in the best interests of our employees, customers, franchisees, stakeholders and communities.
13 Weeks Ended June 28, 2020 Compared to 13 Weeks Ended June 30, 2019 Compared to 13 Weeks Ended July 1, 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 |
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||
|
| June 30, 2019 |
|
| % of Revenues |
|
| July 1, 2018 |
|
| % of Revenues |
|
| Increase (Decrease) |
|
| Percent Change |
|
| June 28, 2020 |
|
| % of Revenues |
|
| June 30, 2019 |
|
| % of Revenues |
|
| Increase (Decrease) |
|
| Percent Change |
| ||||||||||||
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sandwich shop sales, net |
| $ | 104,801 |
|
|
| 99.2 | % |
| $ | 109,381 |
|
|
| 99.1 | % |
| $ | (4,580 | ) |
|
| (4.2 | )% |
| $ | 55,863 |
|
|
| 99.5 | % |
| $ | 104,801 |
|
|
| 99.2 | % |
| $ | (48,938 | ) |
|
| (46.7 | )% |
Franchise royalties and fees |
|
| 829 |
|
|
| 0.8 |
|
|
| 966 |
|
|
| 0.9 |
|
|
| (137 | ) |
|
| (14.2 | ) |
|
| 299 |
|
|
| 0.5 |
|
|
| 829 |
|
|
| 0.8 |
|
|
| (530 | ) |
|
| (63.9 | ) |
Total revenues |
|
| 105,630 |
|
|
| 100.0 |
|
|
| 110,347 |
|
|
| 100.0 |
|
|
| (4,717 | ) |
|
| (4.3 | ) |
|
| 56,162 |
|
|
| 100.0 |
|
|
| 105,630 |
|
|
| 100.0 |
|
|
| (49,468 | ) |
|
| (46.8 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Percentages stated as a percent of sandwich shop sales, net) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||
Sandwich shop operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold, excluding depreciation |
|
| 28,264 |
|
|
| 26.8 |
|
|
| 28,639 |
|
|
| 26.0 |
|
|
| (375 | ) |
|
| (1.3 | ) |
|
| 16,108 |
|
|
| 28.8 |
|
|
| 28,264 |
|
|
| 27.0 |
|
|
| (12,156 | ) |
|
| (43.0 | ) |
Labor and related expenses |
|
| 32,114 |
|
|
| 30.4 |
|
|
| 32,412 |
|
|
| 29.4 |
|
|
| (298 | ) |
|
| (0.9 | ) |
|
| 21,884 |
|
|
| 39.2 |
|
|
| 32,114 |
|
|
| 30.6 |
|
|
| (10,230 | ) |
|
| (31.9 | ) |
Occupancy expenses |
|
| 15,230 |
|
|
| 14.4 |
|
|
| 14,985 |
|
|
| 13.6 |
|
|
| 245 |
|
|
| 1.6 |
|
|
| 14,649 |
|
|
| 26.2 |
|
|
| 15,230 |
|
|
| 14.5 |
|
|
| (581 | ) |
|
| (3.8 | ) |
Other operating expenses |
|
| 11,816 |
|
|
| 11.2 |
|
|
| 12,793 |
|
|
| 11.6 |
|
|
| (977 | ) |
|
| (7.6 | ) |
|
| 10,990 |
|
|
| 19.7 |
|
|
| 11,816 |
|
|
| 11.3 |
|
|
| (826 | ) |
|
| (7.0 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||
(Percentages stated as a percent of total revenues) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||
General and administrative expenses |
|
| 13,843 |
|
|
| 13.1 |
|
|
| 13,440 |
|
|
| 12.2 |
|
|
| 403 |
|
|
| 3.0 |
|
|
| 8,164 |
|
|
| 14.5 |
|
|
| 13,843 |
|
|
| 13.1 |
|
|
| (5,679 | ) |
|
| (41.0 | ) |
Depreciation expense |
|
| 5,585 |
|
|
| 5.3 |
|
|
| 5,858 |
|
|
| 5.3 |
|
|
| (273 | ) |
|
| (4.7 | ) |
|
| 4,955 |
|
|
| 8.8 |
|
|
| 5,585 |
|
|
| 5.3 |
|
|
| (630 | ) |
|
| (11.3 | ) |
Pre-opening costs |
|
| — |
|
| * |
|
|
| 68 |
|
| * |
|
|
| (68 | ) |
|
| (100.0 | ) |
|
| — |
|
| * |
|
|
| — |
|
| * |
|
|
| — |
|
|
| 0.0 |
| ||||
Impairment and loss on disposal of property and equipment |
|
| 246 |
|
|
| 0.2 |
|
|
| 2,057 |
|
|
| 1.9 |
|
|
| (1,811 | ) |
|
| (88.0 | ) |
|
| 1,299 |
|
|
| 2.3 |
|
|
| 246 |
|
|
| 0.2 |
|
|
| 1,053 |
|
| >100 |
| |
Total expenses |
|
| 107,098 |
|
| >100 |
|
|
| 110,252 |
|
|
| 99.9 |
|
|
| (3,154 | ) |
|
| (2.9 | ) |
|
| 78,049 |
|
| >100 |
|
|
| 107,098 |
|
| >100 |
|
|
| (29,049 | ) |
|
| (27.1 | ) | |||
Income (loss) from operations |
|
| (1,468 | ) |
|
| (1.4 | ) |
|
| 95 |
|
| * |
|
|
| (1,563 | ) |
| >(100) |
| ||||||||||||||||||||||||||
Loss from operations |
|
| (21,887 | ) |
|
| (39.0 | ) |
|
| (1,468 | ) |
|
| (1.4 | ) |
|
| (20,419 | ) |
| >100 |
| |||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
| 35 |
|
| * |
|
|
| 28 |
|
| * |
|
|
| 7 |
|
|
| 25.0 |
|
|
| 388 |
|
|
| 0.7 |
|
|
| 35 |
|
| * |
|
|
| 353 |
|
| >100 |
| ||||
Income (loss) before income taxes |
|
| (1,503 | ) |
|
| (1.4 | ) |
|
| 67 |
|
| * |
|
|
| (1,570 | ) |
| >(100) |
| ||||||||||||||||||||||||||
Income tax benefit (expense) |
|
| 246 |
|
|
| 0.2 |
|
|
| 302 |
|
|
| 0.3 |
|
|
| (56 | ) |
|
| (18.5 | ) | ||||||||||||||||||||||||
Loss before income taxes |
|
| (22,275 | ) |
|
| (39.7 | ) |
|
| (1,503 | ) |
|
| (1.4 | ) |
|
| (20,772 | ) |
| >100 |
| |||||||||||||||||||||||||
Income tax expense (benefit) |
|
| 41 |
|
| * |
|
|
| 246 |
|
|
| 0.2 |
|
|
| (205 | ) |
|
| (83.3 | ) | |||||||||||||||||||||||||
Net loss |
|
| (1,749 | ) |
|
| (1.7 | ) |
|
| (235 | ) |
|
| (0.2 | ) |
|
| (1,514 | ) |
| >100 |
|
|
| (22,316 | ) |
|
| (39.7 | ) |
|
| (1,749 | ) |
|
| (1.7 | ) |
|
| (20,567 | ) |
| >100 |
| ||
Net income attributable to non-controlling interest |
|
| 117 |
|
|
| 0.1 |
|
|
| 125 |
|
|
| 0.1 |
|
|
| (8 | ) |
|
| (6.4 | ) | ||||||||||||||||||||||||
Net income (loss) attributable to non-controlling interest |
|
| (100 | ) |
|
| (0.2 | ) |
|
| 117 |
|
|
| 0.1 |
|
|
| (217 | ) |
| >(100) |
| |||||||||||||||||||||||||
Net loss attributable to Potbelly Corporation |
| $ | (1,866 | ) |
|
| (1.8 | )% |
| $ | (360 | ) |
|
| (0.3 | )% |
| $ | (1,506 | ) |
| >100% |
|
| $ | (22,216 | ) |
|
| (39.6 | )% |
| $ | (1,866 | ) |
|
| (1.8 | )% |
| $ | (20,350 | ) |
| >100% |
|
* | Amount is less than 0.1% |
Revenues
Total revenues decreased by $4.7$49.5 million, or 4.3%46.8%, to $56.2 million during the 13 weeks ended June 28, 2020, from $105.6 million during the 13 weeks ended June 30, 2019, from $110.3 million during the 13 weeks ended July 1, 2018.2019. The revenue decrease for the quarter was driven by a $4.3$39.6 million, or 4.0%41.5%, decrease in sales from company-operated comparable store shops and a decrease in sales of $2.0$15.5 million from shops that have permanently closed. These decreases wereThis was partially offset by ana $5.3 million increase in sales from shops not yet in our company-operated comparable store sales base and shops that opened in 2019.base.
Cost of Goods Sold
Cost of goods sold decreased by $0.4$12.2 million, or 1.3%43.0%, to $16.1 million during the 13 weeks ended June 28, 2020, from $28.3 million during the 13 weeks ended June 30, 2019, from $28.6 million during the 13 weeks ended July 1, 2018.2019. This decrease was primarily driven by a decrease in shop revenue. As a percentage of revenues,sandwich shop sales, cost of goods sold increased to 26.8%28.8% during the 13 weeks ended June 28, 2020, from 27.0% during the 13 weeks ended June 30, 2019, from 26.0% during the 13 weeks ended July 1, 2018, primarily driven shift in product mix due to increase in off-premise sales and by higher discounting and cost inflation in certain products, partially offset by certain menu price increases.
Labor and Related Expenses
Labor and related expenses decreased by $0.3$10.2 million, or 0.9%31.9%, to $21.9 million during the 13 weeks ended June 28, 2020, from $32.1 millionfor the 13 weeks ended June 30, 2019, primarily due to labor management amid a decrease in shop revenue and a decrease in expense from closed shops, partially offset by wage inflation. As a percentage of sandwich shop sales, labor and related expenses increased to 39.2% during the 13 weeks ended June 28, 2020, from 30.6% during the 13 weeks ended June 30, 2019, from $32.4 million during the 13 weeks ended July 1, 2018, primarily due to a decrease in expense from closed shops and labor management, partially offset by inflationary wage increases in certain states. As a percentage of revenues, labor and related expenses increased to 30.4% during the 13 weeks ended June 30, 2019, from 29.4% during the 13 weeks ended July 1, 2018, primarily driven by inflationary wage increases in certain states and sales deleverage in certain labor related costs which wasnot directly variable with sales, partially offset by a decrease in expense from closed shops.
Occupancy Expenses
Occupancy expenses increaseddecreased by $0.2$0.6 million, or 1.6%3.8%, to $14.6 million during the 13 weeks ended June 28, 2020, from $15.2 million during the 13 weeks ended June 30, 2019 from $15.0 millionprimarily due to a decrease in expenses related to closed shops. As a percentage of sandwich shop sales, occupancy expenses increased to 26.2% during the 13 weeks ended July 1, 2018 primarily due to inflation in certain occupancy related costs, including lease renewals, real estate taxes and common area maintenance, partially offset by shop closures. As a percentage of revenues, occupancy expenses increased to 14.4%June 28, 2020, from 14.5% during the 13 weeks ended June 30, 2019, from 13.6% during the 13 weeks ended July 1, 2018, 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 decreased by $1.0$0.8 million, or 7.6%7.0%, to $11.0 million during the 13 weeks ended June 28, 2020, from $11.8 million during the 13 weeks ended June 30, 2019, from $12.8 million during the 13 weeks ended July 1, 2018.2019. The decrease was primarily attributable to a decrease in music, utilities, and supplies,certain items variable with sales, partially offset by an increasehigher expenses related to third-party delivery partnerships driven by increased sales in delivery and third-party sales expense.that channel. As a percentage of revenues,sandwich shop sales, other operating expenses decreased slightlyincreased to 11.2%19.7% during the 13 weeks ended June 28, 2020, from 11.3% during the 13 weeks ended June 30, 2019, from 11.6% during the 13 weeks ended July 1, 2018, primarily driven by sales deleverage in operating expense items such as utilities, higher expenses related to third-party delivery partnerships driven by increased sales in that channel and other expenses not directly variable with sales.
General and Administrative Expenses
General and administrative expenses increaseddecreased by $0.4$5.7 million, or 3.0%41.0%, to $8.2 million during the 13 weeks ended June 28, 2020, from $13.8 million during the 13 weeks ended June 30, 2019, from $13.4 million during the 13 weeks ended July 1, 2018.2019. The increasedecrease was driven primarily by an increase in advertising, professional services, and lease exit costs, partially offset by a decrease in restructuringadvertising costs, stock-based compensation expense and performance-based incentive expensesas well as a decrease in payroll costs as a result of furloughs of approximately one-third of corporate employees. As a percentage of revenues, general and administrative expenses increased to 14.5% during the 13 weeks ended June 28, 2020, from 13.1% during the 13 weeks ended June 30, 2019, from 12.2% during the 13 weeks ended July 1, 2018, primarily due to an increase in advertising, professional services and lease exit costs, partially offsetdriven by a decrease in restructuringshop revenue, partially offset by reductions in advertising and payroll costs stock-based compensation expense and performance-based incentive expenses.noted above.
Depreciation Expense
Depreciation expense decreased by $0.3$0.6 million, or 4.7%11.3%, to $5.0 million during the 13 weeks ended June 28, 2020, from $5.6 million during the 13 weeks ended June 30, 2019, from $5.9 million during the 13 weeks ended July 1, 2018.2019. The decrease was driven primarily by a lower depreciable base related to a decrease in the number of company-operated shops and impairment charges taken subsequent to the 13 weeks ended July 1, 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.in prior periods. 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 5.3%8.8% during the 13 weeks ended June 30, 2019,28, 2020 and was 5.3% for the 13 weeks ended July 1, 2018.June 30, 2019.
Pre-Opening Costs
Pre-openingThere were no pre-opening costs were $0 during the 13 weeks ended June 28, 2020 and June 30, 2019 and $68 thousand during the 13 weeks ended July 1, 2018. The decrease was due to no new company-operated shop openings in the second quarter of 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 and right-of-use lease assets decreasedincreased to $1.3 million during the 13 weeks ended June 28, 2020, from $0.2 million during the 13 weeks ended June 30, 2019 from $2.1 million duringprimarily due to the 13 weeks ended July 1, 2018.expected impact of COVID-19 on future cash flows. After performing periodic reviews of Company shops during the second quarter of 2019,2020, it was determined that indicators of impairment were present for certain shops. The Company performed impairment analyses related to these shops and recorded an impairment charge of $0.2$0.9 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,whenever events or changes in circumstances indicate that carrying amount may not be recoverable and exceeds the fair value, which involves 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.
The COVID-19 outbreak has had a significant impact on the global economy, including declining sales at our restaurants and the overall challenging environment for the restaurant industry. Given the high degree of uncertainty as to whether, when or the manner in which the conditions surrounding the pandemic will change, including the timing of any lifting of restrictions on restaurant operating hours, dine-in limitations or other restrictions that largely limited restaurants to take-out and delivery sales, customer engagement with our brand, the short- and long-term impact on consumer discretionary spending and overall global economic conditions, it is possible that non-cash impairments could be identified in tangible assets in the future. However, given the current challenges facinglikelihood or the industry and our business, future evaluations could result inamount of an additional impairment charges.charge cannot be reasonably estimated at this time.
Interest expense was $388 thousand during the 13 weeks ended June 28, 2020 and $35 thousand during the 13 weeks ended June 30, 2019, and $28 thousand during the 13 weeks ended July 1, 2018.driven by an increase in outstanding borrowings on our revolving credit facility.
Income Tax Expense
IncomeThe Company recorded a tax expense was $0.2 million$41 thousand for the 13thirteen weeks ended June 28, 2020, and $246 thousand for the thirteen weeks ended June 30, 2019, compared2019.
26 Weeks Ended June 28, 2020 Compared to expense of $0.3 million for the 13 weeks ended July 1, 2018.
26 Weeks Ended June 30, 2019 Compared to 26 Weeks Ended July 1, 2018
The following table presents information comparing the components of net income for the periods indicated (dollars in thousands):
|
| For the 26 Weeks Ended |
|
|
|
|
|
|
|
|
|
| For the 26 Weeks Ended |
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||
|
| June 30, 2019 |
|
| % of Revenues |
|
| July 1, 2018 |
|
| % of Revenues |
|
| Increase (Decrease) |
|
| Percent Change |
|
| June 28, 2020 |
|
| % of Revenues |
|
| June 30, 2019 |
|
| % of Revenues |
|
| Increase (Decrease) |
|
| Percent Change |
| ||||||||||||
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sandwich shop sales, net |
| $ | 202,059 |
|
|
| 99.2 | % |
| $ | 211,628 |
|
|
| 99.2 | % |
| $ | (9,569 | ) |
|
| (4.5 | )% |
| $ | 142,824 |
|
|
| 99.4 | % |
| $ | 202,059 |
|
|
| 99.2 | % |
| $ | (59,235 | ) |
|
| (29.3 | )% |
Franchise royalties and fees |
|
| 1,658 |
|
|
| 0.8 |
|
|
| 1,636 |
|
|
| 0.8 |
|
|
| 22 |
|
|
| 1.3 | % |
|
| 928 |
|
|
| 0.6 |
|
|
| 1,658 |
|
|
| 0.8 |
|
|
| (730 | ) |
|
| (44.0 | ) |
Total revenues |
|
| 203,717 |
|
|
| 100.0 |
|
|
| 213,264 |
|
|
| 100.0 |
|
|
| (9,547 | ) |
|
| (4.5 | ) |
|
| 143,752 |
|
|
| 100.0 |
|
|
| 203,717 |
|
|
| 100.0 |
|
|
| (59,965 | ) |
|
| (29.4 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Percentages stated as a percent of sandwich shop sales, net) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||
Sandwich shop operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold, excluding depreciation |
|
| 54,242 |
|
|
| 26.6 |
|
|
| 55,275 |
|
|
| 25.9 |
|
|
| (1,033 | ) |
|
| (1.9 | ) |
|
| 40,282 |
|
|
| 28.2 |
|
|
| 54,242 |
|
|
| 26.8 |
|
|
| (13,960 | ) |
|
| (25.7 | ) |
Labor and related expenses |
|
| 64,087 |
|
|
| 31.5 |
|
|
| 63,991 |
|
|
| 30.0 |
|
|
| 96 |
|
|
| 0.2 |
|
|
| 52,281 |
|
|
| 36.6 |
|
|
| 64,087 |
|
|
| 31.7 |
|
|
| (11,806 | ) |
|
| (18.4 | ) |
Occupancy expenses |
|
| 29,607 |
|
|
| 14.5 |
|
|
| 29,711 |
|
|
| 13.9 |
|
|
| (104 | ) |
|
| (0.4 | ) |
|
| 29,677 |
|
|
| 20.8 |
|
|
| 29,607 |
|
|
| 14.7 |
|
|
| 70 |
|
|
| 0.2 |
|
Other operating expenses |
|
| 23,961 |
|
|
| 11.8 |
|
|
| 25,293 |
|
|
| 11.9 |
|
|
| (1,332 | ) |
|
| (5.3 | ) |
|
| 23,755 |
|
|
| 16.6 |
|
|
| 23,961 |
|
|
| 11.9 |
|
|
| (206 | ) |
|
| (0.9 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||
(Percentages stated as a percent of total revenues) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||
General and administrative expenses |
|
| 26,552 |
|
|
| 13.0 |
|
|
| 25,628 |
|
|
| 12.0 |
|
|
| 924 |
|
|
| 3.6 |
|
|
| 18,898 |
|
|
| 13.1 |
|
|
| 26,552 |
|
|
| 13.0 |
|
|
| (7,654 | ) |
|
| (28.8 | ) |
Depreciation expense |
|
| 11,121 |
|
|
| 5.5 |
|
|
| 11,684 |
|
|
| 5.5 |
|
|
| (563 | ) |
|
| (4.8 | ) |
|
| 10,411 |
|
|
| 7.2 |
|
|
| 11,121 |
|
|
| 5.5 |
|
|
| (710 | ) |
|
| (6.4 | ) |
Pre-opening costs |
|
| 10 |
|
| * |
|
|
| 136 |
|
| * |
|
|
| (126 | ) |
|
| (92.6 | ) |
|
| 64 |
|
| * |
|
|
| 10 |
|
| * |
|
|
| 54 |
|
| >100 |
| |||||
Impairment and loss on disposal of property and equipment |
|
| 328 |
|
|
| 0.2 |
|
|
| 4,081 |
|
|
| 1.9 |
|
|
| (3,753 | ) |
|
| (92.0 | ) |
|
| 7,256 |
|
|
| 5.0 |
|
|
| 328 |
|
|
| 0.2 |
|
|
| 6,928 |
|
| >100 |
| |
Total expenses |
|
| 209,908 |
|
| >100 |
|
|
| 215,799 |
|
| >100 |
|
|
| (5,891 | ) |
|
| (2.7 | ) |
|
| 182,624 |
|
| >100 |
|
|
| 209,908 |
|
| >100 |
|
|
| (27,284 | ) |
|
| (13.0 | ) | ||||
Income (loss) from operations |
|
| (6,191 | ) |
|
| (3.0 | ) |
|
| (2,535 | ) |
|
| (1.2 | ) |
|
| (3,656 | ) |
| >100 |
| |||||||||||||||||||||||||
Loss from operations |
|
| (38,872 | ) |
|
| (27.0 | ) |
|
| (6,191 | ) |
|
| (3.0 | ) |
|
| (32,681 | ) |
| >100 |
| |||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
| 67 |
|
| * |
|
|
| 55 |
|
| * |
|
|
| 12 |
|
|
| 21.8 |
|
|
| 462 |
|
|
| 0.3 |
|
|
| 67 |
|
| * |
|
|
| 395 |
|
| >100 |
| ||||
Income (loss) before income taxes |
|
| (6,258 | ) |
|
| (3.1 | ) |
|
| (2,590 | ) |
|
| (1.2 | ) |
|
| (3,668 | ) |
| >100 |
| |||||||||||||||||||||||||
Loss before income taxes |
|
| (39,334 | ) |
|
| (27.4 | ) |
|
| (6,258 | ) |
|
| (3.1 | ) |
|
| (33,076 | ) |
| >100 |
| |||||||||||||||||||||||||
Income tax expense (benefit) |
|
| 13,865 |
|
|
| 6.8 |
|
|
| (202 | ) |
| * |
|
|
| 14,067 |
|
| >(100) |
|
|
| (3,668 | ) |
|
| (2.6 | ) |
|
| 13,865 |
|
|
| 6.8 |
|
|
| (17,533 | ) |
| >(100) |
| |||
Net income (loss) |
|
| (20,123 | ) |
|
| (9.9 | ) |
|
| (2,388 | ) |
|
| (1.1 | ) |
|
| (17,735 | ) |
| >100 |
| |||||||||||||||||||||||||
Net loss |
|
| (35,666 | ) |
|
| (24.8 | ) |
|
| (20,123 | ) |
|
| (9.9 | ) |
|
| (15,543 | ) |
|
| 77.2 |
| ||||||||||||||||||||||||
Net income attributable to non- controlling interests |
|
| 182 |
|
| * |
|
|
| 166 |
|
| * |
|
|
| 16 |
|
|
| 9.6 |
|
|
| (114 | ) |
|
| (0.1 | ) |
|
| 182 |
|
|
| 0.1 |
|
|
| (296 | ) |
| >(100) |
| |||
Net income (loss) attributable to Potbelly Corporation |
| $ | (20,305 | ) |
|
| (10.0 | )% |
| $ | (2,554 | ) |
|
| (1.2 | )% |
| $ | (17,751 | ) |
| >100 |
| |||||||||||||||||||||||||
Net loss attributable to Potbelly Corporation |
| $ | (35,552 | ) |
|
| (24.7 | )% |
| $ | (20,305 | ) |
|
| (10.0 | )% |
| $ | (15,247 | ) |
|
| 75.1 |
|
* | Amount is less than 0.1% |
Revenues
Total revenues decreased by $9.5$60.0 million, or 4.5%29.4%, to $143.8 million during the 26 weeks ended June 28, 2020, from $203.7 million during the 26 weeks ended June 30, 2019, from $213.3 million during the 26 weeks ended July 1, 2018.2019. The revenue decrease was driven by a $9.0$53.7 million, or 4.4%25.5%, decrease in sales from company-operated comparable store shops and a decrease in sales of $3.9$15.5 million from shops that have permanently closed. These decreases wereThis was partially offset by ana $9.1 million increase in sales from shops not yet in our company-operated comparable store sales base and shops that opened in 2019.base.
Cost of goods sold decreased by $1.0$14.0 million, or 1.9%25.7%, to $40.3 million during the 26 weeks ended June 28, 2020, from $54.2 million during the 26 weeks ended June 30, 2019, from $55.3 million during the 26 weeks ended July 1, 2018.2019. This decrease was primarily driven by a decrease in shop revenue. As a percentage of revenues,sandwich shop sales, cost of goods sold increased to 26.6%28.2% during the 26 weeks ended June 28, 2020, from 26.8% during the 26 weeks ended June 30, 2019, from 25.9% during the 26 weeks ended July 1, 2018, primarily driven by higher discountingshift in product mix due to increase in off-premise sales and cost inflation in certain products, partially offset by certain menu price increases.
Labor and Related Expenses
Labor and related expenses increaseddecreased by $0.1$11.8 million, or 0.2%18.4%, to $52.3 million during the 26 weeks ended June 28, 2020, from $64.1 millionfor the 26 weeks ended June 30, 2019, primarily due to labor management amid a decrease in shop revenue and a decrease in expense from closed shops, partially offset by wage inflation. As a percentage of sandwich shop sales, labor and related expenses increased to 36.6% during the 26 weeks ended June 28, 2020, from 31.7% during the 26 weeks ended June 30, 2019, from $64.0 million during the 26 weeks ended July 1, 2018. As a percentage of revenues, labor and related expenses increased to 31.5% during the 26 weeks ended June 30, 2019, from 30.0% during the 26 weeks ended July 1, 2018. These increases were primarily driven by inflationary wage increases in certain states and sales deleverage in certain labor related costs which wasnot directly variable with sales, partially offset by a decrease in expense from closed shops and labor management.shops.
Occupancy Expenses
Occupancy expenses decreasedincreased by $0.1 million, or 0.4%0.2%, to $29.7 million during the 26 weeks ended June 28, 2020, from $29.6 million during the 26 weeks ended June 30, 2019 from $29.7 million during the 26 weeks ended July 1, 2018, 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. As a percentage of revenues,sandwich shop sales, occupancy expenses increased to 14.5%20.8% during the 26 weeks ended June 28, 2020, from 14.7% during the 26 weeks ended June 30, 2019, from 13.9% during the 26 weeks ended July 1, 2018, 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 decreased by $1.3$0.2 million, or 5.3%0.9%, to $23.8 million during the 26 weeks ended June 28, 2020, from $24.0 million during the 26 weeks ended June 30, 2019, from $25.3 million during the 26 weeks ended July 1, 2018.2019. The decrease was primarily attributable to a decrease in certain items such as music, supplies, utilities and certain other expenses.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 revenues,sandwich shop sales, other operating expenses decreasedincreased to 11.8%16.6% during the 26 weeks ended June 28, 2020, from 11.9% during the 26 weeks ended June 30, 2019, from 11.9% during the 26 weeks ended July 1, 2018. This slight decrease was primarily driven by music, supplies,sales deleverage in operating expense items such as utilities and other expenses not directly variable with sales.
General and Administrative Expenses
General and administrative expenses increaseddecreased by $0.9$7.7 million, or 3.6%28.8%, to $18.9 million during the 26 weeks ended June 28, 2020, from $26.6 million during the 26 weeks ended June 30, 2019, from $25.6 million during the 26 weeks ended July 1, 2018. 2019. The decrease was driven primarily by a decrease in lease exit costs, payroll costs as a result of furloughs of approximately one-third of corporate employees, and advertising costs. As a percentage of revenues, general and administrative expenses increased to 13.1% during the 26 weeks ended June 28, 2020, from 13.0% during the 26 weeks ended June 30, 2019, from 12.0% during the 26 weeks ended July 1, 2018. These increases was driven primarily by an increasedue to a decrease in advertising, professional services, and lease exit costs,shop revenue, partially offset by a decreasereductions in restructuringadvertising and payroll costs stock-based compensation expense and performance-based incentive expenses.noted above.
Depreciation Expense
Depreciation expense decreased by $0.6$0.7 million, or 4.8%6.4%, to $10.4 million during the 26 weeks ended June 28, 2020, from $11.1 million during the 26 weeks ended June 30, 2019, from $11.7 million during the 26 weeks ended July 1, 2018,2019. The decrease was driven primarily by a lower depreciable base related to a decrease in the number of company-operated shops and impairment charges taken subsequent to the 26 weeks ended July 1, 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.in prior periods. 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 5.5%7.2% during the 26 weeks ended June 30, 2019,28, 2020 and was 5.5% for the 26 weeks ended July 1, 2018.June 30, 2019.
Pre-Opening Costs
Pre-opening costs decreased by $0.1 million, or 92.6%, towere $64 thousand during the 26 weeks ended June 28, 2020, and $10 thousand during the 26 weeks ended June 30, 2019, from $0.1 million during the 26 weeks ended July 1, 2018. The decrease was driven primarily by fewer shops opened during the 26 weeks ended June 30, 2019 compared to the 26 weeks ended July 1, 2018.2019.
Impairment and Loss on Disposal of Property and Equipment and Right-of-Use Lease Assets
Impairment and loss on disposal of property and equipment decreasedand right-of-use lease assets increased to $7.3 million during the 26 weeks ended June 28, 2020, from $0.3 million during the 26 weeks ended June 30, 2019 comparedprimarily due to $4.1 million during the 26 weeks ended July 1, 2018.expected impact of COVID-19 on future cash flows. After performing periodic reviews of Company shops during the first and second quarter of 2019,2020, it was determined that indicators of impairment were present for certain shops as a result of continued underperformance. Weshops. The Company performed impairment analyses related to these shops and recorded an impairment chargescharge of $0.2$6.8 million for the excess of the carrying amount recorded on ourthe balance sheet over the shops’ estimated fair value. We performThe Company performs impairment analyses on a quarterly basis,whenever events or changes in circumstances indicate that carrying amount may not be recoverable and exceeds the fair value, which involveinvolves significant judgment by management including estimates of future cash flows and future growth rates, among other assumptions. Based on ourthe Company’s current projections, no impairment beyond what has already been recorded has been identified.
The COVID-19 outbreak has had a significant impact on the global economy, including declining sales at our restaurants and the overall challenging environment for the restaurant industry. Given the high degree of uncertainty as to whether, when or the manner in which the conditions surrounding the pandemic will change, including the timing of any lifting of restrictions on restaurant operating hours, dine-in limitations or other restrictions that largely limited restaurants to take-out and delivery sales, customer engagement with our brand, the short- and long-term impact on consumer discretionary spending and overall global economic conditions, it is possible that non-cash impairments could be identified in tangible assets in the future. However, given the current challenges facinglikelihood or the industry and our business, future evaluations could result inamount of an additional impairment charges.charge cannot be reasonably estimated at this time.
Interest Expense
Interest expense was $462 thousand during the 26 weeks ended June 28, 2020 and $67 thousand during the 26 weeks ended June 30, 2019, driven by an increase in outstanding borrowings on our revolving credit facility.
Income Tax Expense
The Company recognized an income tax benefit of $3.7 million for the 26 weeks ended June 30, 2018 and $55 thousand28, 2020 primarily due to a discrete tax benefit recorded for the 26 weeks ended July 1, 2018.
Income Tax Expense (Benefit)
Incomecarryback of net operating losses (“NOLs”) and a refund of prior alternative minimum tax (“AMT”) credits allowed under the CARES Act, which the Company estimates will result in a tax refund of $3.7 million. The Company recorded a tax expense increased by $14.1 million, or more than 100%, toof $13.9 million for the 26 weeks ended June 30, 2019 fromprimarily due to the Company recording a benefit of $0.2 millionnon-cash charge to income tax expense for the 26 weeks ended July 1, 2018. The change was primarily attributable to the valuation allowance on deferred tax assets recorded by the Company during the first quarterrecognition of 2019, as a result of the changes in projected taxable income for 2019. The Company estimates it will 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 $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 26 weeks ended June 30, 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 reporting period and the valuation allowance will be adjusted accordingly.
Liquidity and Capital Resources
General
Historically, 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, 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
The COVID-19 pandemic’s impact on our operations and expansion plansrevenues has significantly affected our ability to generate cash from operations. To preserve financial flexibility, the Company drew $39.8 million under its revolving credit facility in March 2020. The Company ended the quarter with a cash balance of $29.1 million compared to a balance of $18.8 million at December 29, 2019. The increase in the cash balance is primarily due to the borrowing under its revolving credit facility. Total liquidity (cash plus amounts available on the revolving credit facility) was $45.8 million as of June 28, 2020 compared to $45.8 million as of March 29, 2020 and $58.8 million as of December 29, 2019.
Due to the dramatic impact of the pandemic on operations and sales, we suspended the payment of rent on the majority of our leases. We are in discussions with our landlords regarding the restructuring of those leases in light of various contractual and legal defenses. While we are having ongoing conversations with landlords in various markets in seeking commercially reasonable lease concessions given the current environment, we have not yet confirmed significant concessions for at least the next twelve months.remainder of the year. As of August 5, 2020, we have amended the lease agreements for 187 of our shops, which include rent abatements, rent deferrals, and/or modified lease terms to reduce ongoing rent, and we have completed early terminations of leases for 15 of our shops. Future lease amendments resulting from these discussions may have a material impact on our liquidity.
We are expecting to receive a $3.7 million of income tax refunds in 2020 due to the provisions of the CARES Act regarding the carryback of NOLs and the refund of prior AMT credits. We received $1.1 million of this refund in July 2020, and we expect to receive the remaining $2.6 million before the end of the current year. We have elected to defer the employer-paid portion of social security taxes which is expected to defer approximately $3.0 to $4.0 million of cash payments from 2020 in to 2021 and 2022. During the second quarter of 2020, $1.2 million of payroll tax expenses were deferred and are accrued within other long-term liabilities.
Cash Flows
The following table presents summary cash flow information for the periods indicated (in thousands):
|
| For the 26 Weeks Ended |
|
| For the 26 Weeks Ended |
| ||||||||||
|
| June 30, |
|
| July 1, |
|
| June 28, |
|
| June 30, |
| ||||
|
| 2019 |
|
| 2018 |
|
| 2020 |
|
| 2019 |
| ||||
Net cash provided by (used in): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities |
| $ | 6,988 |
|
| $ | 17,867 |
|
| $ | (4,923 | ) |
| $ | 6,988 |
|
Investing activities |
|
| (5,230 | ) |
|
| (11,614 | ) |
|
| (7,333 | ) |
|
| (5,230 | ) |
Financing activities |
|
| (3,467 | ) |
|
| 2,527 |
|
|
| 22,542 |
|
|
| (3,467 | ) |
Net increase (decrease) in cash |
| $ | (1,709 | ) |
| $ | 8,780 |
|
| $ | 10,286 |
|
| $ | (1,709 | ) |
Operating Activities
Net cash used in operating activities increased to $4.9 million for the 26 weeks ended June 28, 2020, from cash provided by operating activities decreased toof $7.0 million for the 26 weeks ended June 30, 2019, from $17.92019. The $11.9 million for the 26 weeks ended July 1, 2018. The $10.9 million decreasechange in operating cash was primarily driven by an increase in loss from operations, as well asoffset by the timing of payment for certain liabilities.liabilities including the deferral of rent for most of the second quarter of 2020.
Net cash used in investing activities decreasedincreased to $7.3 million for the 26 weeks ended June 28, 2020, from $5.2 million for the 26 weeks ended June 30, 2019, from $11.62019. The increase was primarily due to capital expenditures related to new shop construction, primarily occurring in the first quarter. Due to the COVID-19 pandemic, capital expenditures have been limited to essential maintenance and safety.
Financing Activities
Net cash provided by financing activities increased to $22.5 million for the 26 weeks ended July 1, 2018. The decrease was primarily due to fewer shops opened and under construction during the 26 weeks ended June 30, 2019 compared to the 26 weeks ended July 1, 2018.
Financing Activities
Net28, 2020, from net cash used in financing activities wasof $3.5 million for the 26 weeks ended June 30, 2019, compared to net cash provided by financing activities of $2.5 million for the 26 weeks ended July 1, 2018.2019. The change in financing cash was primarily driven by $6.6net borrowings under the Credit Facility of $23.1 million and a decrease in proceeds from the exerciserepurchases of treasury stock optionsof $3.5 million during the 26 weeks ended June 30, 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 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. Under the program, for the 26 weeks ended June 30, 2019, the Company repurchased 485,659 shares of its common stock for approximately $3.5 million under the stock repurchase program, including cost and 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, liquidity 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.28, 2020.
Credit Facility
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 amendedamends and restatedrestates 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 Chase Bank, N.A.JPMorgan. The Credit Agreement provides, among other things, for a revolving credit facility in a maximum principal amount of $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 the applicable LIBOR rate plus a margin ranging from 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 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 the “restricted payments” (primarily distributions and equity repurchases) that the Company may make, provided that proceeds of the loans under the credit agreementCredit Agreement may not be used for purposes of making restricted payments.
On March 17, 2020, the Company fully drew the available capacity of $39.8 million under its Revolving Credit Facility as a precautionary measure in order to increase its cash position and preserve financial flexibility in light of current uncertainty in the global markets resulting from the COVID-19 pandemic. In accordance with the terms of its Revolving Credit Facility, the proceeds from these borrowings may in the future be used for working capital, general corporate or other permitted purposes.
The Prior Credit Agreement provided,was subsequently amended as of May 15, 2020 (the “Credit Agreement Amendment”) to, among other things for a revolving credit facility in a maximum principal amount of $50.0(i) change the maturity date from July 31, 2022 to March 31, 2022; (ii) eliminate the $20.0 million with possible future increasesexpansion feature; (iii) amend the interest rate to $75.0 million under an expansion feature. Borrowings under the credit facility generally bore interest at ourCompany’s option at either (i)(a) a eurocurrency rate determined by reference to the applicable London Interbank Offered Rate (LIBOR)LIBOR rate with a 1.00% floor plus a margin ranging from 1.00% to 1.75%of 5.00% or (ii)(b) a prime rate as announced by JP Morgan Chase plus a margin ranging from 0.00% to 0.50%. The applicable margin was determined based upon our consolidated total leverage ratio. On4.00%; (iv) amend the last day of each calendar quarter, the Company was required to pay a commitment fee ranging from 0.125% to 0.20%1.00% per annum in respect of any unused commitments under the credit facility; (v) implement additional restrictions on restricted payments, acquisitions and other indebtedness; and (vi) implement additional financial covenants. Per the terms of the Credit Agreement Amendment, the Company repaid $15.0 million of its outstanding borrowing at the signing of the Credit Agreement Amendment, and may re-borrow this $15.0 million when its cash balances held by JP Morgan declines below $28.0 million. Lastly, the Company is required to pay an upfront fee of 1% of the outstanding loan balance within fifteen business days of the signing of the Credit Agreement Amendment.
On July 17, 2020, we entered into Amendment No. 2 (the “Second Amendment”) to the Credit Agreement to, among other things: (i) revise its financial covenants; (ii) decrease the aggregate amount of loan commitment available under the Credit Agreement from $40.0 million to $30.0 million after March 31, 2021 and (iii) decrease the interest rate to the Company’s option at either (a) a eurocurrency rate determined by reference to the applicable LIBOR rate with a 1.00% floor plus a margin of 4.75% or (b) a prime rate as announced by JP Morgan plus 2.25%. Per the terms of the Second Amendment, the Company repaid $14.5 million of its outstanding borrowing at the signing of the Second Amendment, and may reborrow the entire amount available under the credit facility when its cash balance held by JP Morgan declines below $10.0 million in total. As of June 28, 2020, the Company had $23.1 million outstanding under the Credit Agreement. There were no borrowings outstanding as of June 30, 2019.
The Second Amendment includes financial covenants that require the Company to (i) maintain periodic minimum liquidity levels through February 28, 2022 ranging from $15.0 million to $30.0 million and (ii) maintain monthly minimum adjusted EBITDA thresholds for specified computation periods through February 28, 2022 ranging from ($18.0) million to $8.3 million. The Company is currently in compliance with all debt covenants as of June 28, 2020.
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 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 specific rate determined basedguidelines specified in Rule 10b5-1 under the Exchange Act) or in privately negotiated transactions. The number of shares of common stock repurchased in the future, and the timing and price of repurchases, will depend upon ourmarket conditions, liquidity 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 total leverage ratio. As long asbalance sheets and the leverage ratios were met, there was no limit oncondensed consolidated statements of equity.
For the “restricted payments” (primarily distributions13 and equity repurchases) that the Company may have made. As of the 26 weeks ended June 30, 2019,28, 2020, the Company had no amounts outstandingdid not repurchase any shares of its common stock. In light of the COVID-19 pandemic, the Company does not have plans to repurchase any common stock under the Prior Credit Agreement.its stock repurchase program at this time.
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 June 30, 2019,28, 2020, 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 30, 2018.2019 and Item 3, “Quantitative and Qualitative Disclosures About Market Risk,” of our Quarterly Report on Form 10-Q for the quarter ended March 29, 2020. Our exposures to market risk have not changed materially since December 30, 2018.March 29, 2020.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and PrincipalChief 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 June 30, 2019.28, 2020. Based upon that evaluation, our Chief Executive Officer and PrincipalChief Financial Officer have concluded that, as of June 30, 2019,28, 2020, 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 PrincipalChief 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 second quarter ended June 30, 201928, 2020 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
Information pertaining to legal proceedings is provided in Note 910 to the Condensed Consolidated Financial Statements and is incorporated by reference herein.
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 30, 2018. There have been no material changes to our Risk Factors as previously reported.29, 2019. In light of the rapidly evolving COVID-19 pandemic, the Company filed Form 8-Ks on March 20, 2020 and May 8, 2020 for the purpose of supplementing the risk factors disclosed in Item 1A of its Annual Report on Form 10-K for the fiscal year ended December 29, 2019.
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 June 30, 2019:28, 2020:
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) |
| ||||
April 1, 2019 - April 28, 2019 |
|
| 95,000 |
|
| $ | 9.03 |
|
|
| 95,000 |
|
| $ | 40,186,965 |
|
April 29, 2019 - May 26, 2019 |
|
| 99,900 |
|
| $ | 6.98 |
|
|
| 99,900 |
|
| $ | 39,489,427 |
|
May 27, 2019 - June 30, 2019 |
|
| 157,630 |
|
| $ | 4.89 |
|
|
| 155,759 |
|
| $ | 38,728,687 |
|
Total: |
|
| 352,530 |
|
|
|
|
|
|
| 350,659 |
|
|
|
|
|
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) |
| ||||
March 30, 2020 - April 26, 2020 |
|
| — |
|
| $ | — |
|
|
| — |
|
| $ | 37.9 |
|
April 27, 2020 - May 24, 2020 |
|
| — |
|
| $ | — |
|
|
| — |
|
| $ | 37.9 |
|
May 25, 2020 - June 28, 2020 |
|
| 2 |
|
| $ | 2.85 |
|
|
| — |
|
| $ | 37.9 |
|
Total: |
|
| 2 |
|
|
|
|
|
|
| — |
|
|
|
|
|
(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 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 |
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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. that expires in July 2022. The Credit Agreement amended and restated 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 Chase Bank, N.A. The Credit Agreement provides, among other things, for a revolving credit facility in a maximum principal amount of $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 the applicable LIBOR rate plus a margin ranging from 1.25% to 1.75% or (ii) a prime rate as announced by JP Morgan Chase 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 and minimum liquidity requirements, 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, provided that proceeds of the loans under the credit agreement may not be used for purposes of making restricted payments.Not applicable.
The following exhibits are either provided with this Quarterly Report on Form 10-Q or are incorporated herein by reference.
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Exhibit No. |
| Description |
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| |
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10.2 |
| |
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10.3 |
| Note, dated April 6, 2020, between Potbelly Sandwich Works, LLC. and JPMorgan Chase Bank, N.A. |
10.4† | ||
10.5 | ||
10.6† | ||
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31.1 |
| Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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31.2 |
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32.1 |
| |
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101.INS |
| Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document. |
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101.SCH |
| Inline XBRL Taxonomy Extension Schema Document |
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101.CAL |
| Inline XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
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101.LAB |
| Inline XBRL Taxonomy Extension Label Linkbase Document |
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101.PRE |
| Inline XBRL Taxonomy Extension Presentation Linkbase Document |
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| Cover Page Interactive Data File (embedded within the Inline XBRL |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| POTBELLY CORPORATION |
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Date: August |
| By: | /s/ |
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| Chief Financial Officer |
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| (Principal Financial Officer) |
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