pbpb-20230326

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

______________________________________________

FORM 10-Q

______________________________________________


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

For the Quarterly Period Ended March 26, 2023


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

For the Transition Period from ____to ____

Commission File Number: 001-36104

______________________________________________

Potbelly Corporation

(Exact name of registrant as specified in its charter)

______________________________________________


Delaware						36-4466837
(State or Other Jurisdiction of Incorporation)						(IRS Employer Identification Number)
111 N. Canal Street, Suite 325 Chicago, Illinois						60606
(Address of Principal Executive Offices)						(Zip Code)

Registrant’s Telephone Number, Including Area Code: (312) 951-0600

______________________________________________

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $0.01 par value

PBPB

The NASDAQ Stock Market LLC

(Nasdaq Global Select Market)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

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

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

As of April 23, 2023, the registrant had 29,150,046 shares of common stock, $0.01 par value per share, outstanding.

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Potbelly Corporation and Subsidiaries

Table of Contents


		Page
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements	3
	Condensed Consolidated Balance Sheets (Unaudited)	3
	Condensed Consolidated Statements of Operations (Unaudited)	4
	Condensed Consolidated Statements of Equity (Unaudited)	5
	Condensed Consolidated Statements of Cash Flows (Unaudited)	6
	Notes to Condensed Consolidated Financial Statements (Unaudited)	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	26
Item 4.	Controls and Procedures	26
PART II.	OTHER INFORMATION	27
Item 1.	Legal Proceedings	27
Item 1A.	Risk Factors	27
Item 2.	Unregistered Sale of Equity Securities and Use of Proceeds	27
Item 3.	Defaults Upon Senior Securities	27
Item 4.	Mine Safety Disclosures	27
Item 5.	Other Information	27
Item 6.	Exhibits	28
	Signature	29

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Potbelly Corporation and Subsidiaries

Condensed Consolidated Balance Sheets

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


	March 26, 2023		December 25, 2022
Assets
Current assets
Cash and cash equivalents	$	25,596	$	15,619
Accounts receivable, net of allowances of $28 and $16 as of March 26, 2023 and December 25, 2022, respectively	7,259		6,420
Inventories	3,541		3,990
Prepaid expenses and other current assets	4,322		4,501
Assets classified as held-for-sale	1,248		—
Total current assets	41,966		30,530

Property and equipment, net	42,543		44,477
Right-of-use assets for operating leases	156,809		160,891
Indefinite-lived intangible assets	3,404		3,404
Goodwill	2,122		2,222
Restricted cash	749		—
Deferred expenses, net and other assets	3,296		3,647
Total assets	$	250,889	$	245,171

Liabilities and equity
Current liabilities
Accounts payable	$	10,412	$	10,718
Accrued expenses	26,865		30,826
Short-term operating lease liabilities	27,279		27,395
Current portion of long-term debt	1,250		—
Total current liabilities	65,806		68,939

Long-term debt, net of current portion	21,297		8,550
Long-term operating lease liabilities	156,428		160,968
Other long-term liabilities	3,002		2,441
Total liabilities	246,533		240,898

Commitments and contingencies (Note 11)

Equity
Common stock, $0.01 par value—authorized 200,000 shares; outstanding 29,048 and 28,819 shares as of March 26, 2023 and December 25, 2022, respectively	386		384
Warrants	2,253		2,566
Additional paid-in-capital	457,918		455,831
Treasury stock, held at cost, 9,966 and 9,924 shares as of March 26, 2023, and December 25, 2022, respectively	(115,725)		(115,388)
Accumulated deficit	(340,243)		(338,916)
Total stockholders’ equity	4,589		4,477
Non-controlling interest	(233)		(204)
Total equity	4,356		4,273

Total liabilities and equity	$	250,889	$	245,171

See accompanying notes to the unaudited condensed consolidated financial statements.

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Potbelly Corporation and Subsidiaries

Condensed Consolidated Statements of Operations

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


	For the Quarter Ended
	March 26, 2023		March 27, 2022
Revenues
Sandwich shop sales, net	$	116,947	$	97,431
Franchise royalties, fees and rent income	1,323		790
Total revenues	118,270		98,221

Expenses
Sandwich shop operating expenses, excluding depreciation
Food, beverage and packaging costs	32,620		27,308
Labor and related expenses	36,502		33,253
Occupancy expenses	13,310		13,845
Other operating expenses	20,484		18,105
Franchise support, rent and marketing expenses	591		120
General and administrative expenses	9,969		8,518
Depreciation expense	2,971		3,136
Pre-opening costs	22		—
Loss on Franchise Growth Acceleration Initiative activities	949		—
Impairment, loss on disposal of property and equipment and shop closures	1,045		1,319
Total expenses	118,463		105,604
Loss from operations	(193)		(7,383)

Interest expense, net	667		327
Loss on extinguishment of debt	239		—
Loss before income taxes	(1,099)		(7,710)
Income tax expense	105		177
Net loss	(1,204)		(7,887)
Net income attributable to non-controlling interest	123		26
Net loss attributable to Potbelly Corporation	$	(1,327)	$	(7,913)

Net loss per common share attributable to common stockholders:
Basic	$	(0.05)	$	(0.28)
Diluted	$	(0.05)	$	(0.28)
Weighted average shares outstanding:
Basic	28,907		28,396
Diluted	28,907		28,396

See accompanying notes to the unaudited condensed consolidated financial statements.

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Potbelly Corporation and Subsidiaries

Condensed Consolidated Statements of Equity (Deficit)

(amounts and shares in thousands, unaudited)


	Common Stock			Treasury Stock		Warrants		Additional Paid-In- Capital		Accumulated Deficit		Non- Controlling Interest		Total Equity (Deficit)
	Shares	Amount
Balance at December 26, 2021	28,380	$	380	$	(114,577)	$	2,566	$	452,570	$	(343,261)	$	(95)	$	(2,417)
Net income (loss)	—	—		—		—		—		(7,913)		26		(7,887)
Shares issued under equity compensation plan	81	1		(279)		—		—		—		—		(278)
Distributions to non-controlling interest	—	—		—		—		—		—		(120)		(120)
Stock-based compensation expense	—			—		—		675		—		—		675
Balance at March 27, 2022	28,461	$	381	$	(114,856)	$	2,566	$	453,245	$	(351,174)	$	(189)	$	(10,027)

Balance at December 25, 2022	28,819	$	384	$	(115,388)	$	2,566	$	455,831	$	(338,916)	$	(204)	$	4,273
Net income	—	—		—		—		—		(1,327)		123		(1,204)
Shares issued under equity compensation plan	70	1		(337)		—		(1)		—		—		(337)
Proceeds from exercise of warrants	159	1		—		(313)		1,177		—		—		865
Distributions to non-controlling interest	—	—		—		—		—		—		(152)		(152)
Stock-based compensation expense	—	—		—		—		911		—		—		911
Balance at March 26, 2023	29,048	$	386	$	(115,725)	$	2,253	$	457,918	$	(340,243)	$	(233)	$	4,356

See accompanying notes to the unaudited condensed consolidated financial statements.

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Potbelly Corporation and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(amounts in thousands, unaudited)


	For the Quarter Ended
	March 26, 2023		March 27, 2022
Cash flows from operating activities:
Net loss	$	(1,204)	$	(7,887)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation expense	2,971		3,136
Noncash lease expense	6,127		6,487
Deferred income tax	1		5
Stock-based compensation expense	911		675
Asset impairment, loss on disposal of property and equipment and shop closures	843		1,319
Loss on Franchise Growth Acceleration Initiative activities	936		—
Loss on extinguishment of debt	224		—
Other operating activities	85		67
Changes in operating assets and liabilities:
Accounts receivable, net	(847)		(1,116)
Inventories	274		186
Prepaid expenses and other assets	136		(171)
Accounts payable	(507)		1,039
Operating lease liabilities	(6,923)		(7,055)
Accrued expenses and other liabilities	(3,684)		(4,424)
Net cash used in operating activities:	(657)		(7,739)

Cash flows from investing activities:
Purchases of property and equipment	(3,312)		(1,378)
Proceeds from sale of refranchised shops	96		—
Net cash used in investing activities:	(3,216)		(1,378)

Cash flows from financing activities:
Borrowings under Term Loan	25,000		—
Principal payments made for Term Loan	(313)		—
Borrowings under revolving credit facility	14,600		10,000
Repayments under revolving credit facility	(23,150)		(5,550)
Payment of debt issuance costs	(2,204)		(40)
Proceeds from exercise of warrants	865		—
Employee taxes on certain stock-based payment arrangements	(47)		(33)
Distributions to non-controlling interest	(152)		(120)
Net cash provided by financing activities:	14,599		4,257

Net increase (decrease) in cash and cash equivalents and restricted cash	10,726		(4,860)
Cash and cash equivalents and restricted cash at beginning of period	15,619		14,353
Cash and cash equivalents and restricted cash at end of period	$	26,345	$	9,493

Supplemental cash flow information:
Income taxes paid	$	55	$	—
Interest paid	$	787	$	159

Supplemental non-cash investing and financing activities:
Unpaid liability for purchases of property and equipment	$	978	$	460
Unpaid liability for employee taxes on certain stock-based payment arrangements	$	305	$	246

See accompanying notes to the unaudited condensed consolidated financial statements

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Potbelly Corporation and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements (unaudited)

(1) Organization and Other Matters

Business

Potbelly Corporation, a Delaware corporation, together with its subsidiaries (collectively referred to as "the Company", "Potbelly", "we", "us" or "our"), owns and operates 373 company-owned shops in the United States as of March 26, 2023. Additionally, Potbelly franchisees operate 53 shops domestically.

Basis of Presentation

The unaudited condensed consolidated financial statements and notes herein should be read in conjunction with the audited consolidated financial statements of Potbelly Corporation and its subsidiaries and the notes thereto included in our Annual Report on Form 10-K for the year ended December 25, 2022. The unaudited condensed consolidated financial statements included herein have been prepared by us without audit, pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the "SEC") regarding interim financial reporting. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America ("U.S. GAAP") have been condensed or omitted pursuant to the SEC rules and regulations. In the opinion of management, all adjustments, which are of a normal and recurring nature (except as otherwise noted), that are necessary to present fairly our balance sheet as of March 26, 2023 and December 25, 2022, our statement of operations for the quarter ended March 26, 2023 and March 27, 2022, the statement of equity for the quarter ended March 26, 2023 and March 27, 2022, and our statement of cash flows for the quarter ended March 26, 2023 and March 27, 2022 have been included. The condensed consolidated statements of operations for the interim periods presented herein are not necessarily indicative of the results to be expected for the full year.

We do not have any components of other comprehensive income recorded within our consolidated financial statements and therefore, do not separately present a statement of comprehensive income in our condensed consolidated financial statements.

Principles of Consolidation

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

Fiscal Year

We use a 52/53-week fiscal year that ends on the last Sunday of the calendar period. Approximately every five or six years a 53rd week is added. Fiscal year 2023 consists of 53 weeks and fiscal year 2022 consists of 52 weeks. The fiscal quarters ended March 26, 2023 and March 27, 2022 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.

Franchise Growth Acceleration Initiative

On March 2, 2022, we announced our Franchise Growth Acceleration Initiative, which included a plan to grow our franchise units domestically through multi-unit shop development area agreements, which may include refranchising certain company-operated shops. Deals for refranchised shops will include commitments for developing new shops to fully penetrate existing markets for which we collect development agreement fees from the franchisee.

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All gains and losses recognized on sales of shops and other expenses incurred to execute a refranchising transaction are included in Loss on Franchising Growth Acceleration Initiative activities in the condensed consolidated statement of operations. Development agreement fees received are recorded in the consolidated balance sheets as accrued expenses or other long-term liabilities, and amortized over the term of the franchise agreement once the shops are opened. During the first quarter of 2023, we executed our first refranchising transaction, which is further discussed in Note 8.

Restricted Cash

As of March 26, 2023, we had restricted cash related to funds held in a money market account as collateral for letters of credit to certain lease agreements.

The reconciliation of cash and cash equivalents and restricted cash presented in the condensed consolidated balance sheets to the total amount shown in our condensed consolidated statements of cash flows is as follows:


	March 26,		December 26,
	2023		2022
Reconciliation of cash, cash equivalents and restricted cash:
Cash and cash equivalents	$	25,596	$	15,619
Restricted cash, noncurrent	749		—
Total cash, cash equivalents and restricted cash shown on statement of cash flows	$	26,345	$	15,619

Potbelly Brand Fund

We maintain the Potbelly Brand Fund (the "Brand Fund") for the purpose of collecting and administering funds to be used for advertising, customer research, marketing technology, agencies, and other activities that promote the Potbelly brand in order to deliver sales at our shops. Company-operated and franchised shops both contribute to the Brand Fund based on a percentage of sales.

Beginning in the first quarter of fiscal year 2022, we manage these advertising and marketing expenses through the Brand Fund using the funds contributed by our shops. We manage these funds separately from our general operating expenses, but we are not obligated to maintain the funds in separate accounts or entities. We may spend more or less in any fiscal period than the amounts contributed to the Brand Fund, and we may choose to roll over any unused contributions to the following fiscal period or return them to our shops.

Brand Fund contributions made by company-operated shops are eliminated from the consolidated financial statements. Franchisee contributions are included within franchise royalties and fees in the condensed consolidated statements of operations.

Expenses incurred by the Brand Fund are recorded to company-operated and franchised shops based on a percentage of sales. Company-operated Brand Fund expense is included within other operating expenses in our condensed consolidated statements of operations. Franchisee Brand Fund expense is presented within franchise support, rent and marketing expenses in our condensed consolidated statements of operations.

Recent Accounting Pronouncements

We reviewed all recently issued accounting pronouncements and concluded that they were either not applicable or not expected to have a significant impact on the condensed consolidated financial statements.

(2) Revenue

We primarily earn revenue at a point in time for sandwich shop sales, which can occur in person at the shop, over our online or app platform, or through a third-party platform. Sales taxes collected from customers are excluded from revenues and the obligation is included in accrued liabilities until the taxes are remitted to the appropriate taxing authorities. We have other revenue generating activities outlined below.

For the quarter ended March 26, 2023, revenue recognized from all revenue sources on point in time sales was $117.9 million, and revenue recognized from sales over time was $0.4 million. For the quarter ended March 27, 2022, revenue recognized from all revenue sources on point in time sales was $97.9 million and revenue recognized from sales over time was $0.3 million.

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Franchise Revenue, including Rent Income

We earn an initial franchise fee, a franchise development agreement fee and ongoing fees for royalties and Brand Fund contributions under our franchise agreements. Initial franchise fees are considered highly dependent upon and interrelated with the franchise right granted in the franchise agreement. As such, these franchise fees are recognized over the contractual term of the franchise agreement. We record a contract liability for the unearned portion of the initial franchise fees. Franchise development agreement fees represent the exclusivity rights for a geographical area paid by a third party to develop Potbelly shops for a certain period of time. Franchise development agreement fee payments received by us are recorded in the consolidated balance sheets as accrued expenses or other long-term liabilities, and amortized over the term of the franchise agreement once the shops are opened. Royalties and Brand Fund contributions are based on a percentage of sales and are recorded as revenue as they are earned and become receivable from the franchisee.

We also earn rent income from properties leased by Potbelly and subleased to franchisees. Rent income is recognized on a straight-line basis over the operating lease terms. See Note 6 for further detail.

Gift Card Redemptions / Breakage Revenue

Potbelly sells gift cards to customers, records the sale as a contract liability and recognizes the associated revenue as the gift card is redeemed. A portion of these gift cards are not redeemed by the customer ("breakage"), which is recognized as revenue as a percentage of customers gift card redemptions. The expected breakage amount recognized is determined by a historical data analysis on gift card redemption patterns. We recognize gift card breakage income within net sandwich shop sales in the consolidated statements of operations.

We recognized gift card breakage income of $0.2 million and $0.2 million for the quarter ended March 26, 2023 and March 27, 2022, respectively, which is recorded within net sandwich shop sales in our condensed consolidated statements of operations.

Loyalty Program

We offer a 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. We defer revenue associated with the estimated selling price of points earned by Potbelly Perks members towards free entrées 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 entrée reward will expire after 30 days. Any point in a customer’s account that does not go toward earning a full entrée will expire after the customer's account has been inactive for a year. The breakage amount recognized is estimated based on a historical data analysis of loyalty reward redemptions and is recognized in net shop sandwich sales in the consolidated statement of operations. When points are redeemed, we recognize revenue for the redeemed product and reduce accrued expenses.

Contract Liabilities

We record current and noncurrent contract liabilities in accrued expenses and other long-term liabilities, respectively, for initial franchise fees, gift cards, and loyalty programs. We have no other contract liabilities or contract assets recorded.

The opening and closing balances of our current and noncurrent contract liabilities from contracts with customers were as follows:


	Current Contract Liability		Noncurrent Contract Liability
	(Thousands)		(Thousands)
Beginning balance as of December 25, 2022	$	7,008	$	1,677
Ending balance as of March 26, 2023	6,553		2,229
Increase (Decrease) in contract liability	$	(455)	$	552

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The aggregate value of remaining performance obligations on outstanding contracts was $8.8 million as of March 26, 2023. We expect to recognize revenue related to contract liabilities as follows (in thousands), which may vary based upon franchise activity as well as gift card redemption patterns:


Years Ending	Amount
2023	$	5,786
2024	479
2025	378
2026	202
2027	142
Thereafter	1,795
Total revenue recognized	$	8,782

For the quarter ended March 26, 2023, the amount of revenue recognized related to the December 25, 2022 liability ending balance was $1.3 million. For quarter ended March 27, 2022, the amount of revenue recognized related to the December 26, 2021 liability ending balance was $1.1 million. This revenue is related to the recognition of gift card redemptions and upfront franchise fees. For the quarter ended March 26, 2023 and March 27, 2022, we did not recognize any revenue from obligations satisfied (or partially satisfied) in prior periods.

(3) Fair Value Measurement

The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and all other current liabilities approximate fair values due to the short maturities of these balances.

The book value of the long-term and short-term debt under the Credit Agreement, which is further discussed in Note 7, is considered to approximate its fair value as of March 26, 2023 as the interest rates are considered in line with current market rates.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

Assets recognized or disclosed at fair value on the consolidated financial statements on a nonrecurring basis include items such as leasehold improvements, property and equipment, operating lease assets, goodwill, and other intangible assets. These assets are measured at fair value if determined to be impaired.

We assess potential impairments to our long-lived assets, which includes property and equipment and lease right-of-use assets, on a quarterly basis or whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. Shop-level assets and right-of-use assets are grouped at the individual shop-level for the purpose of the impairment assessment. Recoverability of an asset group is measured by a comparison of the carrying amount of an asset group to its estimated undiscounted future cash flows expected to be generated by the asset group. If the carrying amount of the asset group exceeds its estimated undiscounted future cash flows, an impairment charge is recognized as the amount by which the carrying amount of the asset group exceeds the fair value of the asset group. The fair value of the shop assets is determined using the discounted future cash flow method of anticipated cash flows through the shop’s lease-end date using fair value measurement inputs classified as Level 3. The fair value of right-of-use assets is estimated using market comparative information for similar properties. Level 3 inputs are derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable. After performing a periodic review of our shops during the quarter ended March 26, 2023, it was determined that indicators of impairment were present for certain shops as a result of continued underperformance. We performed an impairment analysis related to these shops and recorded an impairment charge of $0.7 million for the quarter ended March 26, 2023.

(4) Earnings (Loss) Per Share

Basic and diluted income (loss) per common share attributable to common stockholders are calculated using the weighted average number of common shares outstanding for the period. Diluted income (loss) per common share attributable to common stockholders is computed by dividing the income (loss) allocated to common stockholders by the weighted average number of fully diluted common shares outstanding. In periods of a net loss, no potential common shares are included in diluted shares outstanding as the effect is anti-dilutive. For the quarters ended March 26, 2023 and March 27, 2022, we had a loss per share, and therefore potentially dilutive shares were excluded from the calculation.

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The following table summarizes the loss per share calculation:


	For the Quarter Ended
	March 26, 2023		March 27, 2022
Net loss attributable to Potbelly Corporation	$	(1,327)	$	(7,913)
Weighted average common stock outstanding-basic	28,907		28,396
Plus: Effect of potentially dilutive stock-based compensation awards	—		—
Plus: Effect of potential warrant exercise	—		—

SEC Form 10-Q filed by Potbelly Corporation