pbpb-20240331

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 31, 2024


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 28, 2024, the registrant had 29,841,506 shares of common stock, $0.01 par value per share, outstanding.

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Potbelly Corporation and Subsidiaries

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		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	20
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	30
Item 4.	Controls and Procedures	30
PART II.	OTHER INFORMATION	31
Item 1.	Legal Proceedings	31
Item 1A.	Risk Factors	31
Item 2.	Unregistered Sale of Equity Securities and Use of Proceeds	31
Item 3.	Defaults Upon Senior Securities	31
Item 4.	Mine Safety Disclosures	31
Item 5.	Other Information	31
Item 6.	Exhibits	32
	Signature	33

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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 31, 2024		December 31, 2023
Assets
Current assets
Cash and cash equivalents	$	12,723	$	33,788
Accounts receivable, net of allowances of $21 and $26 as of March 31, 2024 and December 31, 2023, respectively	8,380		7,960
Inventories	3,556		3,516
Prepaid expenses and other current assets	7,476		7,828
Assets classified as held-for-sale	171		—
Total current assets	32,306		53,092

Property and equipment, net	45,608		45,087
Right-of-use assets for operating leases	138,068		144,390
Indefinite-lived intangible assets	3,404		3,404
Goodwill	2,053		2,056
Restricted cash	749		749
Deferred expenses, net and other assets	5,268		3,681
Total assets	$	227,456	$	252,460

Liabilities and equity
Current liabilities
Accounts payable	$	9,970	$	9,927
Accrued expenses	32,982		35,377
Short-term operating lease liabilities	24,464		24,525
Current portion of long-term debt	—		1,250
Total current liabilities	67,416		71,078

Long-term debt, net of current portion	5,000		19,168
Long-term operating lease liabilities	134,768		142,050
Other long-term liabilities	6,616		6,070
Total liabilities	213,800		238,367

Commitments and contingencies (Note 12)

Equity
Common stock, $0.01 par value—authorized 200,000 shares; outstanding 29,685 and 29,364 shares as of March 31, 2024 and December 31, 2023, respectively	394		389
Warrants	1,745		2,219
Additional paid-in-capital	466,132		462,583
Treasury stock, held at cost, 10,131 and 10,077 shares as of March 31, 2024, and December 31, 2023, respectively	(117,366)		(116,701)
Accumulated deficit	(336,564)		(333,797)
Total stockholders’ equity	14,341		14,693
Non-controlling interest	(685)		(600)
Total equity	13,656		14,093

Total liabilities and equity	$	227,456	$	252,460

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 31, 2024		March 26, 2023
Revenues
Sandwich shop sales, net	$	107,577	$	116,947
Franchise royalties, fees and rent income	3,576		1,323
Total revenues	111,153		118,270

Expenses
Sandwich shop operating expenses, excluding depreciation
Food, beverage and packaging costs	29,270		32,620
Labor and related expenses	32,253		36,502
Occupancy expenses	11,714		13,310
Other operating expenses	19,829		20,484
Franchise support, rent and marketing expenses	2,537		591
General and administrative expenses	11,547		9,969
Depreciation expense	3,011		2,971
Pre-opening costs	—		22
Loss on Franchise Growth Acceleration Initiative activities	133		949
Impairment, loss on disposal of property and equipment and shop closures	741		1,045
Total operating expenses	111,035		118,463
Income (loss) from operations	118		(193)

Interest expense, net	364		667
Loss on extinguishment of debt	2,376		239
Loss before income taxes	(2,622)		(1,099)
Income tax expense	51		105
Net loss	(2,673)		(1,204)
Net income attributable to non-controlling interest	94		123
Net loss attributable to Potbelly Corporation	$	(2,767)	$	(1,327)

Net income per common share attributable to common stockholders:
Basic	$	(0.09)	$	(0.05)
Diluted	$	(0.09)	$	(0.05)
Weighted average shares outstanding:
Basic	29,551		28,907
Diluted	29,551		28,907

See accompanying notes to the unaudited condensed consolidated financial statements.

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Potbelly Corporation and Subsidiaries

Condensed Consolidated Statements of Equity

(amounts and shares in thousands, unaudited)


	Common Stock			Treasury Stock		Warrants		Additional Paid-In- Capital		Accumulated Deficit		Non- Controlling Interest		Total Equity
	Shares	Amount
Balance at December 25, 2022	28,819	$	384	$	(115,388)	$	2,566	$	455,831	$	(338,916)	$	(204)	$	4,273
Net income (loss)	—	—		—		—		—		(1,327)		123		(1,204)
Stock-based compensation plans	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 (unaudited)	29,048	$	386	$	(115,725)	$	2,253	$	457,918	$	(340,243)	$	(233)	$	4,356

Balance at December 31, 2023	29,364	$	389	$	(116,701)	$	2,219	$	462,583	$	(333,797)	$	(600)	$	14,093
Net income (loss)	—	—		—		—		—		(2,767)		94		(2,673)
Shares issued under equity compensation plan	81	3		(665)		—		(3)		—		—		(665)
Proceeds from exercise of warrants	240	2		—		(474)		1,781		—		—		1,309
Distributions to non-controlling interest	—	—		—		—		—		—		(179)		(179)
Stock-based compensation expense	—	—		—		—		1,771		—		—		1,771
Balance at March 31, 2024 (unaudited)	29,685	$	394	$	(117,366)	$	1,745	$	466,132	$	(336,564)	$	(685)	$	13,656

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 to Date Ended
	March 31, 2024		March 26, 2023
Cash flows from operating activities:
Net loss	$	(2,673)	$	(1,204)
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense	3,011		2,971
Noncash lease expense	6,191		6,127
Deferred income tax	1		1
Stock-based compensation expense	1,771		911
Asset impairment, loss on disposal of property and equipment and shop closures	474		843
Loss on Franchise Growth Acceleration Initiative activities	133		936
Loss on extinguishment of debt	2,376		224
Other operating activities	77		85
Changes in operating assets and liabilities:
Accounts receivable, net	(441)		(847)
Inventories	(33)		274
Prepaid expenses and other assets	(515)		136
Accounts payable	(151)		(507)
Operating lease liabilities	(7,254)		(6,923)
Accrued expenses and other liabilities	(2,274)		(3,684)
Net cash provided by (used in) operating activities:	693		(657)

Cash flows from investing activities:
Purchases of property and equipment	(3,963)		(3,312)
Proceeds from sale of refranchised shops and other assets	227		96
Net cash used in investing activities:	(3,736)		(3,216)

Cash flows from financing activities:
Borrowings under Revolving Facility	7,000		—
Borrowings under Term Loan	—		25,000
Borrowings under Former Credit Facility	—		14,600
Repayments under Revolving Facility	(2,000)		—
Repayments under Term Loan	(22,827)		—
Repayments under Former Credit Facility	—		(23,150)
Payment of debt issuance costs	(345)		(2,204)
Proceeds from exercise of warrants	1,309		865
Employee taxes on certain stock-based payment arrangements	(980)		(47)
Distributions to non-controlling interest	(179)		(152)
Principal payments made for Term Loan	—		(313)
Net cash provided by (used in) financing activities:	(18,022)		14,599

Net increase (decrease) in cash and cash equivalents and restricted cash	(21,065)		10,726
Cash and cash equivalents and restricted cash at beginning of period	34,537		15,619
Cash and cash equivalents and restricted cash at end of period	$	13,472	$	26,345

Supplemental cash flow information:
Income taxes paid	$	12	$	55
Interest paid	$	359	$	787

Supplemental non-cash investing and financing activities:
Unpaid liability for purchases of property and equipment	$	909	$	978
Unpaid liability for employee taxes on certain stock-based payment arrangements	$	328	$	305

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)

(Dollars and shares in thousands, except per share amounts or where noted)

(1) Organization and Other Matters

Business

Potbelly Corporation, a Delaware corporation, together with its subsidiaries (collectively referred to as the "Company," "Potbelly," "we," "us" or "our"), owns and operates 345 company-operated shops in the United States as of March 31, 2024. Additionally, Potbelly franchisees operate 82 shops domestically.

Basis of Presentation

The unaudited condensed consolidated financial statements and notes herein should be read in conjunction with the audited consolidated financial statements of Potbelly and its subsidiaries and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2023. The unaudited condensed consolidated financial statements included herein have been prepared by us without audit, pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the "SEC") regarding interim financial reporting. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America ("U.S. GAAP") have been condensed or omitted pursuant to the SEC rules and regulations. In the opinion of management, the accompanying condensed consolidated financial statements contain all adjustments necessary to present fairly the financial position, results of operations and cash flows for the interim periods reported within. The condensed consolidated statements of operations for the interim periods presented herein are not necessarily indicative of the results to be expected for the full year.

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

Principles of Consolidation

The unaudited condensed consolidated financial statements include the accounts of Potbelly; its wholly-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 2024 consists of 52 weeks and fiscal year 2023 consisted of 53 weeks. The fiscal quarters ended March 31, 2024 and March 26, 2023 each consisted of 13 weeks.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses and the disclosure of contingent assets and liabilities. Significant estimates include amounts for long-lived assets and income taxes. Actual results could differ from those estimates.

Recent Accounting Pronouncements

In November 2023, the Financial Accounting Standard Board ("FASB") issued guidance to expand annual and interim disclosure requirements for reportable segments, primarily through additional disclosures on segment expenses. We will adopt the accounting guidance in our Annual Report on Form 10-K for the year ended December 29, 2024. We do not anticipate the updated standard will have a material impact on our financial statement disclosures.

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In December 2023, the FASB issued guidance to enhance transparency of income tax disclosures. The updated guidance requires additional disclosures on income tax rate reconciliation and income taxes paid, among other things. We will adopt the accounting guidance in our Annual Report on Form 10-K for the year ended December 27, 2025. We are currently evaluating the impact that the updated standard will have on our financial statement disclosures.

2) Restricted Cash

As of March 31, 2024, we had restricted cash related to funds held in a money market account as collateral for letters of credit to certain lease agreements.

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


	March 31, 2024		December 31, 2023

Reconciliation of cash, cash equivalents and restricted cash:
Cash and cash equivalents	$	12,723	$	33,788
Restricted cash, noncurrent	749		749
Total cash, cash equivalents and restricted cash shown on statement of cash flows	$	13,472	$	34,537

(3) Revenue

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

For the quarter to date ended March 31, 2024, revenue recognized from all revenue sources on point in time sales was $110.6 million, and revenue recognized from sales over time was $0.6 million. For the quarter to date ended March 26, 2023, revenue recognized from all revenue sources on point in time sales was $117.9 million and revenue recognized from sales over time was $0.4 million.

Franchise Royalties and Fees

We earn an initial franchise fee, a franchise development agreement fee and ongoing royalty fees and support fees under our franchise agreements. Initial franchise fees are considered highly dependent upon and interrelated with the franchise right granted in the franchise agreement. As such, these franchise fees are recognized over the contractual term of the franchise agreement. We record a contract liability for the unearned portion of the initial franchise fees. Franchise development agreement fees represent the exclusivity rights for a geographical area paid by a third party to develop Potbelly shops for a certain period of time. Franchise development agreement fee payments received by us are recorded in the consolidated balance sheets as accrued expenses or other long-term liabilities, and amortized over the term of the franchise agreement once the shops are opened. These franchise fees are considered highly dependent upon and interrelated with the franchise right granted in the franchise agreement. Royalty fees and Brand Fund contributions are based on a percentage of sales and are recorded as revenue as they are earned and become receivable from the franchisee. Other support fees, which primarily include fees for software and technology, are recorded as revenue as the fees are earned and the service is provided to the franchise. Revenue from support fees are recognized gross of the related expenses since we are the principal in the arrangement to provide those services.

Gift Card Redemptions / Breakage Revenue

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

We recognized gift card breakage income of $0.3 million and $0.2 million for the quarter to date ended March 31, 2024 and March 26, 2023, respectively.

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Loyalty Program

We offer a customer loyalty program for customers using the Potbelly Perks application at the point of sale. In January 2024, we enhanced our Potbelly Perks program to provide more reward options and flexibility for members. Under the original program, the customer would earn 10 points for every dollar spent, and the customer would earn a free entrée after earning 1,000 points. Once a customer earned a free entrée, that entrée reward expires after 30 days. Under the enhanced program, Perks members will earn 10 or more coins, the equivalent of points under the legacy program, for every dollar they spend. The number of coins earned per dollar is dependent on each member's annual spend with Potbelly. Coins can be redeemed for a variety of items across the Potbelly menu. The coins expire one year after they are earned. The change in program did not have a material impact on our financial statements.

We defer revenue associated with the estimated selling price of points and coins earned by Potbelly Perks members towards free entrées as they are earned, and a corresponding deferred revenue liability is established in accrued expenses. The deferral is based on the estimated value of the unredeemed points and rewards. The estimated value and the estimated redemption rates are based on a historical data analysis of loyalty reward redemptions. Estimated breakage is recognized in net shop sandwich sales in the consolidated statement of operations. When points and coins are redeemed, we recognize revenue for the redeemed product and reduce accrued expenses.

Contract Liabilities

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

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


	Current Contract Liability		Noncurrent Contract Liability
Beginning balance as of December 31, 2023	$	8,028	$	4,397
Ending balance as of March 31, 2024	8,077		5,318
Increase in contract liability	$	49	$	921

The aggregate value of remaining performance obligations on outstanding contracts was $13.4 million as of March 31, 2024. We expect to recognize revenue related to contract liabilities as follows, which may vary based upon franchise activity as well as gift card and loyalty program redemption patterns:


Years Ending	Amount
2024	$	6,097
2025	1,564
2026	915
2027	645
2028	728
Thereafter	3,446
Total revenue recognized	$	13,395

For the quarter ended March 31, 2024, the amount of revenue recognized related to the December 31, 2023 liability ending balance was $1.8 million. 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. This revenue is related to the recognition of gift card redemptions and upfront franchise fees. For the quarters ended March 31, 2024 and March 26, 2023, we did not recognize any revenue from obligations satisfied (or partially satisfied) in prior periods.

Contract Costs

Deferred contract costs, which include sales commissions and market planning costs, totaled $1.0 million and $0.9 million as of March 31, 2024 and December 31, 2023, respectively. Amortization expense for deferred costs was $26.2

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thousand and $27.9 thousand for the quarters ended March 31, 2024 and March 26, 2023, respectively. There was no impairment loss in relation to the costs capitalized for the periods presented.

(4) Fair Value Measurement

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

We apply fair value accounting for all financial assets and liabilities and nonfinancial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis. Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities that are required to be recorded at fair value, we assume the highest and best use of the asset by market participants in which we would transact and the market-based risk measurements or assumptions that market participants would use in pricing the asset or liability, such as inherent risk, transfer restrictions, and credit risk.

We apply the following fair value hierarchy, which prioritizes the inputs used to measure fair value into three levels, and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:

•Level 1 — Quoted prices in active markets for identical assets or liabilities.

•Level 2 — Observable inputs other than quoted prices in active markets for identical assets or liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

•Level 3 — Inputs that are both unobservable and significant to the overall fair value measurement reflect an entity’s estimates of assumptions that market participants would use in pricing the asset or liability.

The following table presents information about our financial assets that were measured at fair value on a recurring basis and indicates the level of the fair value hierarchy used to determine such fair values:


	March 31, 2024		December 31, 2023

Assets - Level 1
Money market funds	$	—	$	6,398
Financial assets measured at fair value on recurring basis	$	—	$	6,398

The book value of the long-term and short-term debt under the Credit Agreement, which is further discussed in Note 8, was considered to approximate its fair value as of March 31, 2024, as the interest rates are considered in line with current market rates.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

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

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

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quarter ended March 31, 2024, it was determined that indicators of impairment were present for certain shops as a result of continued underperformance. We performed an impairment analysis related to these shops and recorded an impairment charge of $0.2 million for the quarter ended March 31, 2024.

(5) Earnings 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, no potential common shares are included in diluted shares outstanding as the effect is anti-dilutive.

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


	For the Quarter Ended
	March 31, 2024		March 26, 2023
Net loss attributable to Potbelly Corporation	$	(2,767)	$	(1,327)
Weighted average common stock outstanding-basic	29,551		28,907
Plus: Effect of potentially dilutive stock-based compensation awards	—		—
Plus: Effect of potential warrant exercise	—		—
Weighted average common shares outstanding-diluted	29,551		28,907
Income per share available to common stockholders-basic	$	(0.09)	$	(0.05)
Income per share available to common stockholders-diluted	$	(0.09)	$	(0.05)
Potentially dilutive shares that are considered anti-dilutive:
Shares	1,326		2,831
Warrants	883		—

(6) Income Taxes

The interim tax provision is determined using an estimated annual effective tax rate and is adjusted for discrete taxable events that occur during the quarter. We regularly assess the need for a valuation allowance related to our deferred tax assets, which includes consideration of both positive and negative evidence related to the likelihood of realization of such deferred tax assets to determine, based on the weight of the available evidence, whether it is more-likely-than-not that some or all of our deferred tax assets will not be realized. In our assessment, we consider recent financial operating results, projected future taxable income, the reversal of existing taxable differences, and tax planning strategies. We recorded a full valuation allowance against our net deferred tax assets during the first quarter of 2019, resulting in a non-cash charge to income tax expense of $13.6 million. We continue to maintain a valuation allowance against all of our deferred tax assets as of March 31, 2024. We did not provide for an income tax expense on our pre-tax income for the quarter ended March 31, 2024 and March 26, 2023.

Given the recent trend in our earnings and forecasted future earnings, we believe there is a reasonable possibility that sufficient positive evidence may become available in the next several quarters to conclude that all or a portion of the valuation allowance will no longer be needed. This would result in the recognition of deferred tax assets on our consolidated balance sheet and a decrease to tax expense on our consolidated statement of operations in the period when the release is recorded. However, the exact timing and amount of any valuation allowance releases are subject to change based on the earnings achieved in future periods.

(7) Leases

We determine if an arrangement is a lease at inception of the arrangement. We lease retail shops and warehouse and office space under operating leases. Our leases generally have terms of ten years and most include options to extend the leases for additional five-year periods. For leases with renewal periods at our option, we determine the expected lease period based on whether the renewal of any options are reasonably assured at the inception of the lease. In addition, we lease certain properties from third parties that we sublease to franchisees. We remain primarily liable to the landlord for the

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performance of all obligations in the event that the sublessee does not perform its obligations under the lease. All of our subleases are classified as operating leases with fixed and variable income.

Lessee Disclosures

The gains and losses recognized upon lease terminations are recorded in impairment, loss on disposal of property and equipment and shop closures in the consolidated statement of operations. The right-of use assets, liabilities and gains/losses recognized upon termination of lease contracts were as follows (in thousands, except for number of leases terminated):


	Fiscal Year Ended
	March 31, 2024		March 26, 2023
Leases terminated	1		—
Lease termination fees	$	200	—
Right-of-use assets derecognized upon lease termination	$	416	—
Lease liabilities derecognized upon lease termination	$	506	—
Gain (loss) recognized upon lease termination	$	(110)	$	—

The weighted average operating lease term and discount rate were as follows:



	March 31, 2024		March 26, 2023
Weighted average remaining lease term (years)	6.07		6.54
Weighted average discount rate	9.28	%	8.37	%

Certain of our operating lease agreements include variable payments that are passed through by the landlord, such as common area maintenance and real estate taxes, as well as variable payments based on percentage rent for certain of our shops. Pass-through charges and payments based on percentage rent are included within variable lease cost.

The components of lease cost were as follows, which are included in occupancy, general and administrative and franchise support, rent and marketing expense:


	For the Quarter Ended
	March 31, 2024		March 26, 2023
Operating lease cost	$	9,838	$	9,842
Variable lease cost	3,329		3,446
Short-term lease cost	101		95
Total lease cost	$	13,268	$	13,383

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


	For the Quarter Ended
	March 31, 2024		March 26, 2023
Operating cash flows rent paid for operating lease liabilities	$	10,748	$	10,698
Operating right-of-use assets obtained in exchange for new operating lease liabilities	$	1,182	$	2,883
Reduction in operating right-of-use assets due to lease modifications	$	(676)	—

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Maturities of lease liabilities were as follows as of March 31, 2024:


	Operating Leases
Remainder of 2024	$	28,264
2025	39,830
2026	35,855
2027	30,235
2028	23,764
2029	17,988
Thereafter	36,488
Total lease payments	212,424
Less: imputed interest	(53,192)
Present value of lease liabilities	$	159,232

As of March 31, 2024, we had no significant real estate leases entered into that had not yet commenced.

Lessor Disclosures

We recognized $1.4 million and $0.1 million in franchise rent income during the quarter ended March 31, 2024 and March 26, 2023, respectively, which is included in franchise royalties, fees and rent income in the condensed consolidated statement of operations. We incurred $1.4 million and $0.1 million in expenses during the quarter ended March 31, 2024 and March 26, 2023, respectively associated with these leases, which are included in franchise support, rent and marketing expenses in the condensed consolidated statement of operations from the inception of the related sublease agreements. The components of lease income were as follows (amount in thousands, except number of subleases):


	For the Quarter Ended
	March 31, 2024		March 26, 2023
Number of subleases	33		8

Operating lease income	$	1,011	$	120
Variable lease income	365		14
Franchise rent income	$	1,376	$	134

Future expected fixed sublease payments from franchisees to Potbelly were as follows at March 31, 2024:


	Operating Leases
Remainder of 2024	$	3,086
2025	3,931
2026	3,113
2027	2,095
2028	1,704
Thereafter	3,687
Total sublease payments	$	17,616

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(8) Debt and Credit Facilities

The components of long-term debt were as follows:


	March 31, 2024		December 31, 2023
Revolving Facility	$	5,000	$	—
Term Loan	—		22,162
Unamortized debt issuance costs	—		(1,744)
Less: current portion of long-term debt	—		(1,250)
Total long-term debt	$	5,000	$	19,168

Revolving Facility

On February 7, 2024, Potbelly Sandwich Works, LLC (the “Borrower”) entered into a credit agreement (the “Credit Agreement”) with Wintrust Bank, N.A. as administrative agent (the “Agent”), the other loan parties party thereto and the lenders party thereto. The Credit Agreement provides for a revolving loan facility with an aggregate commitment of $30,000,000 (the “Revolving Facility”, the commitments thereunder, the “Revolving Commitments”). Concurrently with entry into the Credit Agreement, we repaid in full and terminated the obligations and commitments of the lenders under our Term Loan. Proceeds from the Revolving Facility will be used for general corporate and working capital purposes.

The Revolving Commitments expire on February 7, 2027.

Loans under the Credit Agreement will initially bear interest, at our option, at either one-month term secured overnight financing rate ("SOFR") or the base rate plus, in each case, an applicable rate per annum, based upon the Consolidated Adjusted Leverage Ratio (as defined in the Credit Agreement). The applicable rate may vary between 3.75% and 2.75% with respect to borrowings which are based upon the one-month term SOFR and between 2.25% and 1.25% with respect to borrowings which are based upon the base rate. Initially, the applicable rate with respect to one-month term SOFR borrowings is 3.25% and the applicable rate with respect to base rate borrowings is 1.75% until the Agent receives a compliance certificate for the fiscal quarter ending on March 31, 2024.

We may prepay the Revolving Commitments at any time and from time to time in whole or in part without premium or penalty, subject to prior notice in accordance with the Credit Agreement.

Subject to certain customary exceptions, obligations under the Credit Agreement are guaranteed by the Company and all of the Company’s current and future wholly-owned material domestic subsidiaries and are secured by a first-priority security interest in substantially all of the assets of the Company and its subsidiary guarantors.

The Credit Agreement contains customary representations and affirmative and negative covenants. Among other things, these covenants restrict our ability to incur certain indebtedness and liens, undergo certain mergers, consolidations and certain other fundamental changes, make certain investments, make certain dispositions and acquisitions, enter into sale and leaseback transactions, enter into certain swap transactions, make certain restricted payments (including certain payment of dividends, repurchases of stock and payments on certain indebtedness), engage in certain transactions with affiliates, enter into certain types of restricted agreements, make certain changes to its organizational documents and indebtedness, and use the proceeds of the Revolving Commitments for certain non-permitted uses. In addition, the Credit Agreement requires that we maintain compliance with certain minimum fixed charge coverage ratios and maximum consolidated leverage ratios as set forth in the Credit Agreement.

The Credit Agreement also contains customary events of default. If an event of default occurs, the Agent and lenders are entitled to take various actions, including the acceleration of amounts due under the Credit Agreement, termination of commitments thereunder and all other actions permitted to be taken by a secured creditor.

Term Loan

On February 7, 2023 (the “Closing Date”), we entered into a credit and guaranty agreement (the “Term Loan Credit Agreement”) with Sagard Holdings Manager LP as administrative agent (the “Administrative Agent”). The Term Loan Credit Agreement provides for a term loan facility with an aggregate commitment of $25 million (the “Term Loan”). Concurrent with entry into the Term Loan Credit Agreement, we repaid in full and terminated the obligations and commitments under our former senior secured credit facility (the “Former Credit Facility”). In connection with entering

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into the Term Loan Credit Agreement, we paid $2.2 million in debt issuance costs, all of which were capitalized. The remaining proceeds from the Term Loan were used to pay related transaction fees and expenses, and for general corporate purposes.

The Term Loan Credit Agreement was scheduled to mature on February 7, 2028. We were required to make principal payments equal to 1.25% of the initial principal of the Term Loan on the last business day of each fiscal quarter. If not previously paid, any remaining principal balance would be due on the maturity date.

Loans under the Term Loan Credit Agreement bore interest, at the Company’s option, at either the term SOFR plus 9.25% per annum or base rate plus 8.25% per annum.

The Term Loan could be prepaid in agreed-upon minimum principal amounts, subject to prepayment fees equal to (a) if the prepayment occurred on or prior to the one (1) year anniversary of the Closing Date, a customary make-whole amount plus 3.00% of the outstanding principal balance of the Term Loan, (b) if the prepayment occurred after such one (1) year anniversary and prior to the two (2) year anniversary of the Closing Date, 3.00% of the outstanding principal balance of the Term Loan, (c) if the prepayment occurred after such second anniversary of the Closing Date and prior to the three (3) year anniversary of the Closing Date 1.00% of the outstanding principal balance of the Term Loan and (d) thereafter, no prepayment fee.

On February 7, 2024, we repaid in full and terminated the obligations and commitments under the Term Loan Credit Agreement. As a result of repaying and terminating the Term Loan, we recognized a loss on extinguishment of debt of $2.4 million in the quarter ended March 31, 2024.

Former Credit Facility

On August 7, 2019, we entered into a second amended and restated revolving credit facility agreement (the "Former Credit Agreement") with JPMorgan Chase Bank, N.A. (“JPMorgan”). The Former Credit Agreement amends and restates that certain amended and restated revolving credit facility agreement, dated as of December 9, 2015, and amended on May 3, 2019 (collectively, the "Prior Credit Agreement") with JPMorgan. The Former Credit Agreement provided, among other things, for a revolving credit facility in a maximum principal amount $40 million, with possible future increases of up to $20 million under an expansion feature. Borrowings under the credit facility generally bear interest at our option at either (i) a eurocurrency rate determined by reference to the applicable LIBOR rate plus a specified margin or (ii) a prime rate as announced by JP Morgan plus a specified margin. The applicable margin was determined based upon our consolidated total leverage ratio. On the last day of each calendar quarter, we were required to pay a commitment fee of 0.20% per annum in respect of any unused commitments under the credit facility.

As disclosed in our Annual Report on Form 10-K for the fiscal year ended December 25, 2022, we subsequently amended the Former Credit Agreement during fiscal years 2020, 2021 and 2022. The Former Credit Agreement provided for a revolving credit facility in a maximum principal amount of $25 million.

On February 7, 2023, we repaid in full and terminated the obligations and commitments under the Former Credit Agreement. Upon termination of the Former Credit Facility, we recognized a loss on extinguishment of debt of $0.2 million in the quarter ended March 26, 2023.

(9) Franchise Growth Acceleration Initiative

The following is a summary of the refranchising activities recorded as a result of the Franchise Growth Acceleration Initiative during the quarter ended March 31, 2024 and March 26, 2023 (amounts in thousands, except number of shops):