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

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

Delaware

36-4466837

(State or Other Jurisdiction of

Incorporation)

(IRS Employer

Identification Number)

111 N. Canal Street, Suite 850

Chicago, Illinois 60606

(Address, including Zip Code, of Principal Executive Offices)

Registrant’s telephone number, including area code: (312) 951-0600

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	¨ o		Accelerated filer	x

Non-accelerated filer	¨ o	(Do not check if a smaller reporting company)	Smaller reporting company	¨ o

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

Common stock, $0.01 Par Value – ~~30,213,562~~30,297,871 shares as of ~~July 31,~~October 30, 2015

POTBELLY CORPORATION

QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS


		Page
PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements		3

	Condensed Consolidated Balance Sheets		3

	Condensed Consolidated Statements of Operations		4

	Condensed Consolidated Statement of Equity		5

	Condensed Consolidated Statements of Cash Flows		6

	Notes to Condensed Consolidated Financial Statements		7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		11

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		18

Item 4.	Controls and Procedures		18

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings		19

Item 1A.	Risk Factors		19

Item 2.	Unregistered Sale of Equity Securities and Use of Proceeds		19

Item 6.	Exhibits		19

	Signature		20

2

POTBELLY CORPORATION AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

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

							September 27,			December 28,
	June 28, 2015			December 28, 2014			2015			2014
ASSETS
Current assets
Cash and cash equivalents	$	54,105		$	63,005		$	42,768		$	63,005
Accounts receivable, net of allowances of $43 and $19 as of June 28, 2015 and December 28, 2014, respectively		5,034			4,016
Accounts receivable, net of allowances of $34 and $19 as of September 27, 2015 and December 28, 2014, respectively								5,406			4,016
Inventories		2,820			2,768			2,830			2,768
Deferred income taxes, current		541			507			564			507
Prepaid expenses and other current assets		8,529			9,922			9,793			9,922

Total current assets		71,029			80,218			61,361			80,218
Property and equipment, net		92,615			85,704			96,001			85,704
Indefinite-lived intangible assets		3,404			3,404			3,404			3,404
Goodwill		1,428			1,428			1,428			1,428
Deferred income taxes, non-current		17,860			17,860			17,860			17,860
Deferred expenses, net and other assets		3,673			3,333			3,882			3,333

Total assets	$	190,009		$	191,947		$	183,936		$	191,947


LIABILITIES AND EQUITY
Current liabilities
Accounts payable	$	2,228		$	3,301		$	3,442		$	3,301
Accrued expenses		19,694			16,349			21,920			16,349
Accrued income taxes		100			226			125			226
Current portion of long-term debt		—			1,008			—			1,008

Total current liabilities		22,022			20,884			25,487			20,884
Deferred rent and landlord allowances		15,781			14,012			17,083			14,012
Other long-term liabilities		699			726			676			726

Total liabilities		38,502			35,622			43,246			35,622

Equity
Common stock, $0.01 par value—authorized, 200,000,000 shares; outstanding 28,371,178 and 28,934,700 shares as of June 28, 2015, and December 28, 2014, respectively		301			298
Common stock, $0.01 par value—authorized, 200,000,000 shares; outstanding 27,366,312 and 28,934,700 shares as of September 27, 2015 and December 28, 2014, respectively								303			298
Warrants		909			909			909			909
Additional paid-in-capital		396,385			391,972			398,416			391,972
Treasury stock, held at cost, 1,749,406 and 827,090 shares as of June 28, 2015, and December 28, 2014, respectively		(22,792	)		(10,246	)
Treasury stock, held at cost, 2,921,811 and 827,090 shares as of September 27, 2015, and December 28, 2014, respectively								(37,276	)		(10,246	)
Accumulated deficit		(223,882	)		(226,874	)		(222,481	)		(226,874	)

Total stockholders’ equity		150,921			156,059			139,871			156,059
Non-controlling interest		586			266			819			266

Total equity		151,507			156,325			140,690			156,325

Total liabilities and equity	$	190,009		$	191,947		$	183,936		$	191,947

See accompanying notes to the unaudited condensed consolidated financial statements.

3

POTBELLY CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

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

											For the 13 Weeks Ended				For the 39 Weeks Ended
	For the 13 Weeks Ended						For the 26 Weeks Ended				September 27,		September 28,		September 27,		September 28,
	June 28, 2015			June 29, 2014			June 28, 2015		June 29, 2014		2015		2014		2015		2014
Revenues
Sandwich shop sales, net	$	95,566		$	83,268		$	180,963	$	156,791	$	95,564	$	84,340	$	276,527	$	241,131
Franchise royalties and fees		383			352			754		710		475		335		1,229		1,045

Total revenues		95,949			83,620			181,717		157,501		96,039		84,675		277,756		242,176


Expenses
Sandwich shop operating expenses
Cost of goods sold, excluding depreciation		27,253			23,936			51,598		45,022		27,256		24,044		78,854		69,066
Labor and related expenses		27,152			23,405			51,752		44,865		27,663		23,772		79,415		68,637
Occupancy expenses		11,539			10,183			22,886		20,162		11,855		10,467		34,741		30,629
Other operating expenses		9,970			8,691			19,627		16,849		10,501		8,847		30,128		25,696
General and administrative expenses		9,643			8,865			18,474		16,687		9,232		7,623		27,706		24,310
Depreciation expense		5,288			4,784			10,439		9,501		5,510		5,039		15,949		14,540
Pre-opening costs		536			273			1,077		525		510		314		1,587		839
Impairment and loss on disposal of property and equipment		484			29			832		877		1,133		1,315		1,965		2,192

Total expenses		91,865			80,166			176,685		154,488		93,660		81,421		270,345		235,909

Income from operations		4,084			3,454			5,032		3,013		2,379		3,254		7,411		6,267
Interest expense		63			40			124		82		56		42		180		124

Income before income taxes		4,021			3,414			4,908		2,931		2,323		3,212		7,231		6,143
Income tax expense		1,563			1,407			1,914		1,216		866		1,260		2,780		2,476

Net income		2,458			2,007			2,994		1,715		1,457		1,952		4,451		3,667
Net (loss) income attributable to non-controlling interest		(3	)		(3	)		2		6

Net income attributable to non-controlling interest												56		5		58		11
Net income attributable to Potbelly Corporation		2,461			2,010			2,992		1,709	$	1,401	$	1,947	$	4,393	$	3,656


Net income per common share attributable to common stockholders:
Basic	$	0.09		$	0.07		$	0.10	$	0.06	$	0.05	$	0.07	$	0.15	$	0.12
Diluted	$	0.08		$	0.07		$	0.10	$	0.06	$	0.05	$	0.06	$	0.15	$	0.12
Weighted average shares outstanding:
Basic		28,594,712			29,342,528			28,749,898		29,246,676		27,850,394		29,358,822		28,450,063		29,284,058
Diluted		29,364,689			30,509,553			29,520,163		30,642,892		28,369,775		30,044,456		29,137,537		30,463,093

See accompanying notes to the unaudited condensed consolidated financial statements.

4

POTBELLY CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statement of Equity

(amounts in thousands, except share data, unaudited)

Common Stock Treasury Additional Accumulated Non-Controlling
Shares Amount Stock Warrants Paid-In-Capital Deficit Interest Total Equity
Balance at December 29, 2013
29,148,029    $ 291    $ —      $ 909    $ 383,077    $ (231,232 ) $ 228    $ 153,273
Net income
—   —      —      —      —      1,709    6    1,715
Issuance of unrestricted common stock
25,663    —      —      —      400    —      —      400
Exercise of stock options
297,002    4    —      —      2,624    —      —      2,628
Distribution to non-controlling interest
—      —      —      —      —      —      (26 ) (26 )
Amortization of stock-based compensation
—      —      —      —      1,041    —      —      1,041

Balance at June 29, 2014
29,470,694    $ 295    $ —      $ 909    $ 387,142    $ (229,523 ) $ 208    $ 159,031

Balance at December 28, 2014
28,934,700    $ 298    $ (10,246 ) $ 909    $ 391,972    $ (226,874 ) $ 266    $ 156,325
Net income
—      —      —      —      —      2,992    2    2,994
Exercise of stock options
358,794    3    —      —      3,062    —      —      3,065
Excess tax benefits associated with exercise of stock options
—      —      —      —      224    —      —      224
Repurchases of common stock
(922,316 ) —      (12,546 ) —      —      —      —      (12,546 )
Capital distribution to non-controlling interest
—      —      —      —      —      —      (8 ) (8 )
Contributions from non-controlling interest
—      —      —      —      —      —      326    326
Amortization of stock-based compensation
—      —      —      —      1,127    —      —      1,127

Balance at June 28, 2015
28,371,178    $ 301    $ (22,792 ) $ 909    $ 396,385    $ (223,882 ) $ 586    $ 151,507

	Common Stock					Treasury					Additional Paid-In-		Accumulated			Non-Controlling
	Shares			Amount		Stock			Warrants		Capital		Deficit			Interest			Total Equity
Balance at December 29, 2013		29,148,029		$	291	$	—		$	909	$	383,077	$	(231,232	)	$	228		$	153,273
Net income		—			—		—			—		—		3,656			11			3,667
Issuance of unrestricted common stock		28,240			—		—			—		432		—			—			432
Exercise of stock options		338,946			4		—			—		2,964		—			—			2,968
Repurchases of common stock		(471,290	)		—		(5,797	)		—		—		—			—			(5,797	)
Distribution to non- controlling interest		—			—		—			—		—		—			(34	)		(34	)
Amortization of stock-based compensation		—			—		—			—		1,590		—			—			1,590
Balance at September 28, 2014		29,043,925		$	295	$	(5,797	)	$	909	$	388,063	$	(227,576	)	$	205		$	156,099
Balance at December 28, 2014		28,934,700		$	298	$	(10,246	)	$	909	$	391,972	$	(226,874	)	$	266		$	156,325
Net income		—			—		—			—		—		4,393			58			4,451
Exercise of stock options		526,333			5		—			—		4,315		—			—			4,320
Excess tax benefits associated with exercise of stock options		—			—		—			—		334		—			—			334
Repurchases of common stock		(2,094,721	)		—		(27,030	)		—		—		—			—			(27,030	)
Distribution to non- controlling interest		—			—		—			—		—		—			(85	)		(85	)
Contributions from non-controlling interest		—			—		—			—		—		—			580			580
Amortization of stock-based compensation		—			—		—			—		1,795		—			—			1,795
Balance at September 27, 2015		27,366,312		$	303	$	(37,276	)	$	909	$	398,416	$	(222,481	)	$	819		$	140,690

See accompanying notes to the unaudited condensed consolidated financial statements.

5

POTBELLY CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(amounts in thousands, unaudited)

							For the 39 Weeks Ended
	For the 26 Weeks Ended						September 27,			September 28,
	June 28, 2015			June 29, 2014			2015			2014
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	2,994		$	1,715		$	4,451		$	3,667
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		10,439			9,501			15,949			14,540
Deferred income tax		190			121			(57	)		116
Deferred rent and landlord allowances		1,769			723			3,071			1,086
Amortization of stock compensation expense		1,127			1,441			1,795			2,022
Excess tax benefit from stock-based compensation		(224	)		—			(334	)		—
Asset impairment, store closure and disposal of property and equipment		887			877			2,160			2,192
Amortization of debt issuance costs		35			35			53			53
Changes in operating assets and liabilities:
Accounts receivable, net		(1,018	)		(958	)		(1,259	)		(1,572	)
Inventories		(52	)		(90	)		(56	)		(184	)
Prepaid expenses and other assets		904			(2,035	)		(646	)		(2,125	)
Accounts payable		(730	)		1,351			136			1,235
Accrued and other liabilities		2,641			(910	)		5,060			2,264

Net cash provided by operating activities		18,962			11,771			30,323			23,294


CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of franchise shop								(333	)		—
Purchases of property and equipment		(17,901	)		(13,386	)		(27,324	)		(20,544	)

Net cash (used in) investing activities		(17,901	)		(13,386	)		(27,657	)		(20,544	)


CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on note payable		(1,022	)		(42	)		(1,022	)		(63	)
Proceeds from exercise of stock options		3,743			3,337			5,291			3,780
Payment of payroll taxes related to stock-based compensation awards		(678	)		(709	)		(971	)		(812	)
Treasury stock repurchase		(12,546	)		—			(27,030	)		(5,797	)
Excess tax benefit from stock-based compensation		224			—			334			—
Contributions from non-controlling interest		326			—			580			—
Distribution to non-controlling interest		(8	)		(26	)		(85	)		(34	)

Net cash (used in) provided by financing activities		(9,961	)		2,560


NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS		(8,900	)		945
Net cash (used in) financing activities								(22,903	)		(2,926	)
NET (DECREASE) IN CASH AND CASH EQUIVALENTS								(20,237	)		(176	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		63,005			69,579			63,005			69,579

CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	54,105		$	70,524		$	42,768		$	69,403


Supplemental cash flow information:
Income taxes paid	$	230		$	700		$	2,301		$	867
Interest paid		114			84			155			124
Supplemental non-cash investing and financing activities:
Unpaid liability for purchases of property and equipment	$	2,931		$	2,424		$	3,364		$	3,059

See accompanying notes to the unaudited condensed consolidated financial statements

6

POTBELLY CORPORATION AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

(1) Organization and Other Matters

Business

Potbelly Corporation (the “Company” or “Potbelly”), through its wholly-owned subsidiaries, operates Potbelly Sandwich Works sandwich shops in 2728 states and the District of Columbia. As of June 28, 2015 and June 29, 2014, the Company had 349 and 312 company-operated shops, respectively. During the 26 weeks ended June 28, 2015, the Company opened 17 new company-operated shops and closed 2 shops. During the 26 weeks ended June 29, 2014, the Company opened 16 new company-operated shops and closed no shops.

The Company also sells and administers franchises of Potbelly Sandwich Works sandwich shops. The first domestic and international franchise locations administered by the Company opened during February ~~2011. As of June 28, 2015, 17 franchised shops were~~2011, and in ~~operation domestically and 12 franchised shops were in operation internationally. During the 26 weeks ended June 28,~~July 2015, the Company opened ~~one franchised~~its first franchise shop in the United Kingdom. Additionally, during July 2015, the Company transitioned a franchise shop to a company-operated shop at a cost of $0.3 million. The Company did not record any goodwill related to the transaction.

The table below sets forth a rollforward of company-operated and ~~closed one franchised shop. During~~franchise-operated activities:

	Company-			Franchise-Operated									Total
	Operated			Domestic			International			Total			Company
Shops as of December 29, 2013		296			11			12			23			319
Shops opened		23			3			1			4			27
Shop closed⁽¹⁾		—			—			(1	)		(1	)		(1	)
Shops as of September 28, 2014		319			14			12			26			345

Shops as of December 28, 2014		334			17			12			29			363
Shops opened		28			2			2			4			32
Shop purchased from franchisee		1			(1	)		—			(1	)		—
Shops closed⁽²⁾		(5	)		—			(1	)		(1	)		(6	)
Shops as of September 27, 2015		358			18			13			31			389

_______________

⁽¹⁾ Shop closure during the 2639 weeks ended ~~June 29,~~September 28, 2014 was driven by an underperforming shop.

⁽²⁾ Shop closures during the ~~Company opened three franchised~~39 weeks ended September 27, 2015 were related to planned shop closures in airport terminal locations as well as planned closures for underperforming shops ~~and closed no franchised shops.~~with expiring leases.

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 28, 2014. The unaudited condensed consolidated financial statements included herein have been prepared by the Company without audit, pursuant to the rules and regulations of the SEC regarding interim financial reporting. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to the SEC’s 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 position as of ~~June 28,~~September 27, 2015 and December 28, 2014, its statement of operations for the 13 and 2639 weeks ended ~~June 28,~~September 27, 2015 and ~~June 29,~~September 28, 2014 and its statement of cash flows for the 2639 weeks ended ~~June 28,~~September 27, 2015 and ~~June 29,~~September 28, 2014 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 (loss) recorded within its consolidated financial statements, and, therefore, does not separately present a statement of comprehensive income (loss) in its consolidated financial statements.

Principles of Consolidation

The unaudited condensed consolidated financial statements include the accounts of Potbelly Corporation; its wholly owned subsidiary, Potbelly Illinois, Inc. (“PII”); PII’s wholly owned subsidiaries, Potbelly Franchising, LLC and Potbelly Sandwich Works LLC (“LLC”) and 17 of LLC’s wholly owned subsidiaries and the LLC’s 4 joint ventures, collectively, the “Company.” All significant 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 4 joint venture investments. The Company has ownership interests ranging from 65-80% in these consolidated joint ventures.

7

POTBELLY CORPORATION AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

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 years 2015 and 2014 each consist of 52 weeks. The fiscal quarters ended ~~June 28,~~September 27, 2015 and ~~June 29,~~September 28, 2014 each consisted of 13 weeks.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions, primarily related to ~~the~~ long-lived assets and income taxes, that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

~~POTBELLY CORPORATION AND SUBSIDIARIES~~

~~Notes to Unaudited Condensed Consolidated Financial Statements~~

New and Revised Financial Accounting Standards

We qualify as an “emerging growth company” pursuant to the provisions of the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, enacted on April 5, 2012. Section 102 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. However, we have chosen to “opt out” of such extended transition period, and as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Our decision to opt out of the extended transition period is irrevocable.

In April 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.” The pronouncement changes the criteria for reporting discontinued operations while enhancing disclosures in this area. Pursuant to ASU 2014-08, only disposals representing a strategic shift, such as a major line of business, a major geographical area or a major equity investment, which were not expected to have continuing cash flows should be presented as a discontinued operation. If the disposal does qualify as a discontinued operation under ASU 2014-08, the entity will be required to provide expanded disclosures. ASU 2014-08 is effective for fiscal and interim periods beginning on or after December 15, 2014. Early adoption is permitted. The adoption of ASU 2014-08 is not expected to have a significant impact on our consolidated financial statements or disclosures.

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers.” The pronouncement was issued to clarify the principles for recognizing revenue and to develop a common revenue standard and disclosure requirements for U.S. GAAP and IFRS. The FASB has approved a one-year deferral of the effective date of ASU 2014-09, such that it will become effective for the annual period ending after December 15, 2017. We are evaluating the expected adoption method of ASU 2014-09 and the adoption is not expected to have a significant impact on our consolidated balance sheet or consolidated statement of operations.

In August 2014, the FASB issued ASU No. 2014-15, “Presentation of Financial Statements – Going Concern (Subtopic 205-40) – Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.” The pronouncement requires our management to evaluate whether there is substantial doubt about our ability to continue as a going concern. The pronouncement is effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early adoption is permitted. The adoption of ASU 2014-15 is not expected to have a material effect on our consolidated balance sheet or consolidated statement of operations.

In July 2015, the FASB issued ASU No. 2015-11, “Inventory (Topic 330)”. The pronouncement was issued to simplify the measurement of inventory and changes the measurement from lower of cost or market to lower of cost and net realizable value. This pronouncement is effective for reporting periods beginning after December 15, 2016. The adoption of ASU 2015-11 is not expected to have a significant impact on our consolidated balance sheet or consolidated statement of operations.

(2) Fair Value Measurement

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

The Company assesses potential impairments to its long-lived assets, which includes property and equipment, whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. Shop-level assets are grouped at the individual

8

POTBELLY CORPORATION AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

shop-level for the purpose of the impairment assessment. Recoverability of an asset is measured by a comparison of the carrying amount of an asset to its estimated undiscounted future cash flows expected to be generated by the asset. 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 exceeds the fair value of the asset. After performing a periodic review of our shops during ~~the first and second fiscal~~each quarter of 2015, it was determined that indicators of impairment were present for certain shops as a result of continued underperformance of shop profitability. We performed an impairment analysis related to these shops and recorded impairment charges of ~~$0.3~~$1.0 million and ~~$0.6~~$1.6 million for the 13 ~~weeks~~ and 2639 weeks ended ~~June 28,~~September 27, 2015, respectively, related to the excess of the carrying amounts recorded on our balance sheet over the identified shops’ estimated fair values. The fair value of the shop assets was 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. Level 3 inputs are derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

In fiscal 2014, the Company established a non-qualified deferred compensation plan, “Potbelly Non-Qualified Deferred Compensation Plan,” which allows highly compensated employees to defer a portion of their base salary and variable compensation each plan year. The Company maintains a rabbi trust to fund obligations under the deferred compensation plan. Amounts in the rabbi trust are invested in mutual funds. The investments in the rabbi trust are designated as trading securities and carried at fair value. Fair market value of investments in the rabbi trust is measured using Level 1 inputs (quoted prices for identical assets in active markets). As of ~~June 28,~~September 27, 2015, the fair value of the investments in the rabbi trust was ~~$71~~$97 thousand, which is included in other assets in the

~~POTBELLY CORPORATION AND SUBSIDIARIES~~

~~Notes to Unaudited Condensed Consolidated Financial Statements~~

condensed consolidated balance sheet. The associated liability is recorded within other long-term liabilities in the condensed consolidated balance sheet. The Company records trading gains and losses in general and administrative expenses in the condensed consolidated statement of operations, along with the offsetting amount related to the increase or decrease in deferred compensation to reflect its exposure to liabilities for payment under the deferred plan. For the three months ended ~~June 28,~~September 27, 2015, the Company recorded an immaterial amount of unrealized losses on investments held in the rabbi trust.

(3) Earnings per share

Basic and diluted income ~~(loss)~~ per share are calculated using the weighted average number of shares outstanding for the period as follows:

									For the 13 Weeks Ended				For the 39 Weeks Ended
	For the 13 Weeks Ended				For the 26 Weeks Ended				September 27,		September 28,		September 27,		September 28,
	June 28, 2015		June 29, 2014		June 28, 2015		June 29, 2014		2015		2014		2015		2014
Net income attributable to Potbelly Corporation	$	2,461	$	2,010	$	2,992	$	1,709	$	1,401	$	1,947	$	4,393	$	3,656

Weighted average common shares outstanding-basic		28,594,712		29,342,528		28,749,898		29,246,676		27,850,394		29,358,822		28,450,063		29,284,058
Plus: Effect of potential stock options exercise		708,271		1,046,198		709,276		1,258,203		471,579		602,982		630,043		1,054,632
Plus: Effect of potential warrant exercise		61,706		120,827		60,989		138,013		47,802		82,652		57,431		124,403

Weighted average common shares outstanding-diluted		29,364,689		30,509,553		29,520,163		30,642,892		28,369,775		30,044,456		29,137,537		30,463,093


Income per share available to common stockholders-basic	$	0.09	$	0.07	$	0.10	$	0.06	$	0.05	$	0.07	$	0.15	$	0.12
Income per share available to common stockholders-diluted	$	0.08	$	0.07	$	0.10	$	0.06	$	0.05	$	0.06	$	0.15	$	0.12
Potentially dilutive shares that are considered anti-dilutive:
Common share options		491,494		242,636		609,084		242,636		1,192,579		869,317		803,582		537,318
Warrants		—		—		—		—		—		—		—		—

(4) Income Taxes

The Company recognized income tax expense of ~~$1.9~~$2.8 million on pre-tax income of ~~$4.9~~$7.2 million, or an effective tax rate of ~~39.0%~~38.4%, for the 2639 weeks ended ~~June 28,~~September 27, 2015, compared to income tax expense of ~~$1.2~~$2.5 million on pre-tax income of ~~$2.9~~$6.1 million, or an effective tax rate of ~~41.5%~~40.3%, for the 2639 weeks ended ~~June 29,~~September 28, 2014. The difference between the statutory rate and the effective tax rate is primarily attributable to state income taxes offset by certain federal and state tax credits.

(5) Capital Stock

On ~~August 1, 2014,~~September 8, 2015, the Company’s Board of Directors authorized a share repurchase program of up to $35.0 million of the Company’s common stock. This program replaces the previously authorized share repurchase program, which was completed in the third quarter of 2015. Under ~~this~~the current program, the Company may, from time to time, purchase shares in the open market (including

9

POTBELLY CORPORATION AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

in pre-arranged stock trading plans in accordance with the guidelines specified in Rule 10b5-1 under the Securities Exchange Act of 1934, as amended) or in privately negotiated transactions. During the 2639 weeks ended ~~June 28,~~September 27, 2015, the Company repurchased ~~922,316~~2,094,721 shares of its common stock for approximately ~~$12.5~~$27.0 million in open market ~~transactions.~~transactions, which includes shares purchased under both the new plan and the completed plan. As of ~~June 28,~~September 27, 2015, the remaining dollar value of authorization under the new share repurchase program was ~~$12.2~~$32.7 million. Repurchased shares are included as treasury stock in the condensed consolidated balance sheets and the condensed consolidated statement of equity.

(6) Stock-Based Compensation

Throughout the 2639 weeks ~~ending June 28,~~ended September 27, 2015, the Company issued ~~498,479~~558,479 stock options under the 2013 Long-Term Incentive Plan to eligible employees and key executives. The fair value of the options was determined using the Black-Scholes option pricing model. The weighted average fair value of options granted during the 2639 weeks ended ~~June 28,~~September 27, 2015 was ~~$6.65~~$6.45 per share, as estimated using the following weighted average assumptions: expected life of options ~~– seven~~–seven years; ~~volatility- 45.47%~~volatility –45.25%; risk-free interest rate ~~– 1.90%~~–1.90%; and dividend yield ~~– 0.00%~~–0.00%. The Company used the simplified method for determining the expected life of the options. Due to the lack of historical data as a newly public company, the Company calculated the specific stock price volatility using a blended volatility rate based on comparable publicly traded companies.

~~POTBELLY CORPORATION AND SUBSIDIARIES~~

~~Notes to Unaudited Condensed Consolidated Financial Statements~~

A summary of activity for the 2639 weeks ended ~~June 28,~~September 27, 2015 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 28, 2014		4,613		$	10.10	$	12,731		5.62		4,613		$	10.10	$	12,731		5.62


Granted		498			13.59						558			13.23
Exercised		(359	)		8.54						(526	)		8.21
Canceled		(141	)		14.18						(197	)		14.24

Outstanding—June 28, 2015		4,611			10.47	$	12,653		5.61


Exercisable—June 28, 2015		3,337			6.79	$	11,549		3.19

Outstanding—September 27, 2015											4,448			10.53	$	6,326		5.38
Exercisable—September 27, 2015											3,207			9.46	$	5,884		4.12

In accordance with ASC Topic 718,Compensation—Stock Compensation, stock-based compensation is measured at the grant date, based on the calculated fair value of the award, and is recognized as an 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 2639 weeks ended ~~June~~September 27, 2015, the Company recognized $0.7 million and $1.8 million, respectively. For the 13 and 39 weeks ended September 28, ~~2015,~~2014, the Company recognized $0.6 million and ~~$1.1 million, respectively. For the 13 and 26 weeks ended June 29, 2014, the Company recognized $1.0 million and $1.4~~$2.0 million, respectively, which includes $32 thousand and $0.4 million related to the May 2014 unrestricted common stock ~~grants.~~grants, respectively. As of ~~June 28,~~September 27, 2015, the unrecognized stock-based compensation expense was ~~$7.2~~$6.8 million, which will be recognized through fiscal year 2019. The Company records stock-based compensation expense within general and administrative expenses in the consolidated statements of operations.

In May 2015, the Company issued 30,856 shares of restricted stock units (“RSUs”) to certain non-employee members of its Board of Directors. The RSUs had a grant-date ~~share price~~fair value of $14.26 upon issuance and have a vesting schedule of 50% on the first anniversary of the grant date and 50% on the second anniversary of the grant date. In August 2015, the Company issued 5,221 shares of RSUs to the new non-employee member of its Board of Directors. The RSUs had a grant-date fair value of $11.88 upon issuance and 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 Company recorded an immaterial amount of stock-based compensation expense related to the issuance of ~~the~~all of these RSUs.

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 28, 2014. This discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and involves numerous risks and uncertainties. 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” 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. 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 28, 2014, for a discussion of factors that could cause our actual results to differ from those expressed or implied by forward-looking statements.

Overview

Potbelly is a fast-growing neighborhood sandwich concept offering toasty warm sandwiches, signature salads and other fresh menu items served by engaging people in an environment that reflects the Potbelly brand. Our combination of product, people and place is how we deliver on our passion to be “The Best Place for Lunch.” Our sandwiches, salads and hand-dipped milkshakes are all made fresh to order and our cookies are baked fresh each day. Our employees are trained to engage with our customers in a genuine way to provide a personalized experience. Our shops feature vintage design elements and locally-themed décor inspired by the neighborhood that we believe create a lively atmosphere. Through this combination, we believe we are creating a devoted base of Potbelly fans that return again and again and that we are expanding one sandwich shop at a time.

We believe that a key to our past and future success is our culture. It is embodied inThe Potbelly Advantage,, which is an expression of our Vision, Mission, Passion and Values, and the foundation of everything we do. Our Vision is for our customers to feel that we are their “Neighborhood Sandwich Shop” and to tell others about their great experience. Our Mission is to make people really happy, to make more money and to improve every day. Our Passion is to be “The Best Place for Lunch.” 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.

13 Weeks Ended ~~June 28,~~September 27, 2015 Compared to 13 Weeks Ended ~~June 29,~~September 28, 2014

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


	For the 13 Weeks Ended																	For the 13 Weeks Ended
	June 28, 2015			% of Revenues			June 29, 2014			% of Revenues			Increase (Decrease)		Percent Change			September 27, 2015		% of Revenues			September 28, 2014		% of Revenues			Increase (Decrease)			Percent Change
Revenues
Sandwich shop sales, net	$	95,566			99.6	%	$	83,268			99.6	%	$	12,298		14.8	%	$	95,564		99.5	%	$	84,340		99.6	%	$	11,224			13.3	%
Franchise royalties and fees		383			0.4			352			0.4			31		8.8			475		0.5			335		0.4			140			41.8

Total revenues		95,949			100.0			83,620			100.0			12,329		14.7			96,039		100.0			84,675		100.0			11,364			13.4

Expenses
Sandwich shop operating expenses
Cost of goods sold, excluding depreciation		27,253			28.4			23,936			28.6			3,317		13.9			27,256		28.4			24,044		28.4			3,212			13.4
Labor and related expenses		27,152			28.3			23,405			28.0			3,747		16.0			27,663		28.8			23,772		28.1			3,891			16.4
Occupancy expenses		11,539			12.0			10,183			12.2			1,356		13.3			11,855		12.3			10,467		12.4			1,388			13.3
Other operating expenses		9,970			10.4			8,691			10.4			1,279		14.7			10,501		10.9			8,847		10.4			1,654			18.7
General and administrative expenses		9,643			10.1			8,865			10.6			778		8.8			9,232		9.6			7,623		9.0			1,609			21.1
Depreciation expense		5,288			5.5			4,784			5.7			504		10.5			5,510		5.7			5,039		6.0			471			9.3
Pre-opening costs		536			0.6			273			0.3			263		96.3			510		0.5			314		0.4			196			62.4
Impairment and loss on disposal of property and equipment		484			0.5			29			*			455		1569.0			1,133		1.2			1,315		1.6			(182	)		(13.8	)

Total expenses		91,865			95.7			80,166			95.9			11,699		14.6			93,660		97.5			81,421		96.2			12,239			15.0

Income from operations		4,084			4.3			3,454			4.1			630		18.2			2,379		2.5			3,254		3.8			(875	)		(26.9	)
Interest expense, net		63			0.1			40			*			23		57.5			56		0.1			42	*				14			33.3

Income before income taxes		4,021			4.2			3,414			4.1			607		17.8			2,323		2.4			3,212		3.8			(889	)		(27.7	)
Income tax expense		1,563			1.6			1,407			1.7			156		11.1			866		0.9			1,260		1.5			(394	)		(31.3	)

Net income		2,458			2.6			2,007			2.4			451		22.5			1,457		1.5			1,952		2.3			(495	)		(25.4	)
Net loss attributable to non-controlling interests		(3	)		*			(3	)		*			—		0.0

Net income attributable to non- controlling interests																			56		0.1			5	*				51			1,020.0
Net income attributable to Potbelly Corporation	$	2,461			2.6	%	$	2,010			2.4	%	$	451		22.4	%	$	1,401		1.5	%	$	1,947		2.3	%	$	(546	)		(28.0	)%

_______________

*	Amount is less than 0.1%

Revenues

Total revenues increased by ~~$12.3~~$11.4 million, or ~~14.7%~~13.4%, to ~~$95.9~~$96.0 million during the 13 weeks ended ~~June 28,~~September 27, 2015, from ~~$83.6~~$84.7 million during the 13 weeks ended ~~June 29,~~September 28, 2014. The increase in revenues primarily consisted of an increase of $8.3 million in sales from shops not yet in our company-operated comparable store sales base, $0.1 million increase in franchise revenues and a ~~$4.0~~$3.0 million, or ~~4.9%~~3.7%, increase in company-operated comparable store sales. The increase in company-operated comparable store sales resulted from increases in average check from certain menu price increases and menu mix, as well as traffic.

Cost of Goods Sold

Cost of goods sold increased by ~~$3.3~~$3.2 million, or ~~13.9%~~13.4%, to ~~$27.2~~$27.3 million during the 13 weeks ended ~~June 28,~~September 27, 2015, compared to ~~$23.9~~$24.0 million during the 13 weeks ended ~~June 29,~~September 28, 2014, primarily due to the increase in revenues. As a percentage of revenues, cost of goods sold ~~decreased to~~remained consistent at 28.4% during the 13 weeks ended ~~June 28,~~September 27, 2015 ~~from 28.6% during~~and the 13 weeks ended ~~June 29, 2014, primarily driven by certain menu price increases, partially offset by inflation on dairy and certain proteins.~~September 28, 2014.

Labor and Related Expenses

Labor and related expenses increased by ~~$3.7~~$3.9 million, or ~~16.0%~~16.4%, to ~~$27.1~~$27.7 million during the 13 weeks ended ~~June 28,~~September 27, 2015, from ~~$23.4~~$23.8 million during the 13 weeks ended ~~June 29,~~September 28, 2014, primarily due to new shop ~~openings. As~~openings, wage inflation in certain states as a ~~percentage~~result of revenues, labor and related expenses increased to 28.3% during the 13 weeks ended June 28, 2015, from 28.0% during the 13 weeks ended June 29, 2014, primarily driven by higher labor costs, performance-based manager bonusesstatutory minimum wage increases, as well as an increase in an existing incentive program and an additional incentive program to reward employees for tenure and ~~development.~~development which began in fiscal year 2015. As a percentage of

revenues, labor and related expenses increased to 28.8% during the 13 weeks ended September 27, 2015, from 28.1% during the 13 weeks ended September 28, 2014, primarily driven by higher labor costs, wage inflation in certain states as a result of statutory minimum wage increases, as well as an increase in an existing incentive program and an additional incentive program to reward employees for tenure and development, which began in fiscal year 2015.

Occupancy Expenses

Occupancy expenses increased by $1.4 million, or 13.3%, to ~~$11.6~~$11.9 million during the 13 weeks ended ~~June 28,~~September 27, 2015, from ~~$10.2~~$10.5 million during the 13 weeks ended ~~June 29,~~September 28, 2014, primarily due to new shop openings. As a percentage of revenues, occupancy expenses decreased to ~~12.0%~~12.3% during the 13 weeks ended ~~June 28,~~September 27, 2015, from ~~12.2%~~12.4% during the 13 weeks ended ~~June 29,~~September 28, 2014, primarily due to sales leverage (i.e., the ability to spread certain expenses over a higher revenue base). partially offset by increases in certain occupancy related costs.

Other Operating Expenses

Other operating expenses increased by ~~$1.3~~$1.7 million, or ~~14.7%~~18.7%, to ~~$10.0~~$10.5 million during the 13 weeks ended ~~June 28,~~September 27, 2015, from ~~$8.7~~$8.8 million during the 13 weeks ended ~~June 29,~~September 28, 2014. The increase is attributable to new shop openings, as well as increased fees associated with credit card usage in our shops, and other operating expense increases in line with revenue growth. As a percentage of revenues, other operating expenses ~~remained consistent at~~increased to 10.9% during the 13 weeks ended September 27, 2015, from 10.4% during the 13 weeks ended ~~June~~September 28, ~~2015 and June 29, 2014.~~2014, primarily driven by increased fees associated with credit card usage in our shops, various increases in other operating expenses as well as the $0.2 million cumulative adjustment recorded during the 13 weeks ended September 28, 2014, for the change in accounting estimate related to gift card breakage.

General and Administrative Expenses

General and administrative expenses increased by ~~$0.7~~$1.6 million, or ~~8.8%~~21.1%, to ~~$9.6~~$9.2 million during the 13 weeks ended ~~June 28,~~September 27, 2015, from ~~$8.9~~$7.6 million during the 13 weeks ended ~~June 29,~~September 28, 2014. The ~~net~~ increase is driven primarily by ~~increased spending on advertising, partially offset by lower~~increases in performance-based incentives, stock-based compensation ~~expense.~~as well as rent associated with our new office and costs associated with improving our technological infrastructure. As a percentage of revenues, general and administrative expenses ~~decreased~~increased to ~~10.1%~~9.6% during the 13 weeks ended ~~June 28,~~September 27, 2015, from ~~10.6%~~9.0% during the 13 weeks ended ~~June 29,~~September 28, 2014, driven by ~~lower stock-based compensation expense, coupled with~~items referenced above, partially offset by sales leverage (~~i.e.~~i.e., the ability to spread certain costs over a higher revenue base).

Depreciation Expense

Depreciation expense increased by $0.5 million, or ~~10.5%~~9.3%, to ~~$5.3~~$5.5 million during the 13 weeks ended ~~June 28,~~September 27, 2015, from ~~$4.8~~$5.0 million during the 13 weeks ended ~~June 29,~~September 28, 2014, primarily due to a higher depreciable base related to new shops and existing shop capital ~~investments.~~ investments. As a percentage of revenues, depreciation decreased to ~~5.5% during the 13 weeks ended June 28, 2015, from~~ 5.7% during the 13 weeks ended ~~June 29,~~September 27, 2015, from 6.0% during the 13 weeks ended September 28, 2014, driven by lower depreciation associated with new shops with lower build-out costs and longer expected useful lives for leasehold improvements, as well as leasehold improvements at legacy shops with higher build-out costs and shorter expected useful lives being fully depreciated.

Pre-Opening Costs

Pre-opening costs increased by $0.2 million, or ~~96.3%~~62.4%, to $0.5 million during the 13 weeks ended ~~June 28,~~September 27, 2015, from $0.3 million during the 13 weeks ended ~~June 29,~~September 28, 2014, primarily due to timing of new shop openings during the 13 weeks ended ~~June 28,~~September 27, 2015 compared to the 13 weeks ended ~~June 29,~~September 28, 2014.

Impairment and Loss on Disposal of Property and Equipment

Impairment and loss on disposal of property and equipment ~~increased~~decreased to ~~$0.5~~$1.1 million during the 13 weeks ended ~~June 28,~~September 27, 2015, from ~~$29 thousand~~$1.3 million during the 13 weeks ended ~~June 29,~~September 28, 2014. After performing a periodic review of our shops during the ~~second~~third quarter of 2015, it was determined that indicators of impairment were present for a certain ~~shop~~shops as a result of continued underperformance of shop profitability. We performed an impairment analysis related to ~~this shop~~these shops and recorded an impairment charge of ~~$0.3~~$1.0 million related to the excess of the carrying amounts recorded on our balance sheet over the identified ~~shop’s~~shops’ estimated fair values.

Interest Expense, net

Interest expense increased by ~~$23~~$14 thousand, or ~~57.5%~~33.3%, to ~~$63~~$56 thousand during the 13 weeks ended ~~June 28,~~September 27, 2015, from ~~$40~~$42 thousand during the 13 weeks ended ~~June 29,~~September 28, 2014, primarily due to the accretion of certain occupancy-related interest costs. Interest expense for the 13 weeks ended ~~June 28,~~September 27, 2015 is attributable to interest on the note payable, unused commitment fees, occupancy-related interest costs and deferred financing fees, partially offset by interest income related to money market funds.

Income Tax Expense

Income tax expense ~~increased~~decreased by ~~$0.2~~$0.4 million to ~~$1.6~~$0.9 million for the 13 weeks ended ~~June 28,~~September 27, 2015, from ~~$1.4~~$1.3 million for the 13 weeks ended ~~June 29,~~September 28, 2014. For the 13 weeks ended ~~June 28,~~September 27, 2015, our effective tax rate was ~~38.9%~~37.3%, compared to ~~41.2%~~39.2% for the 13 weeks ended ~~June 29,~~September 28, 2014. The decrease in the effective tax rate primarily relates to the Company recognizing certain federal tax credits, which were not recognized in the comparable prior period.

~~26 Weeks Ended June 28,~~39 weeks ended September 27, 2015 Compared to ~~26 Weeks Ended June 29,~~39 weeks ended September 28, 2014

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


	For the 26 Weeks Ended																For the 39 Weeks Ended
	June 28, 2015		% of Revenues			June 29, 2014		% of Revenues			Increase (Decrease)			Percent Change			September 27, 2015		% of Revenues			September 28, 2014		% of Revenues			Increase (Decrease)			Percent Change
Revenues
Sandwich shop sales, net	$	180,963		99.6	%	$	156,791		99.5	%	$	24,172			15.4	%	$	276,527		99.6	%	$	241,131		99.6	%	$	35,396			14.7	%
Franchise royalties and fees		754		0.4			710		0.5			44			6.2			1,229		0.4			1,045		0.4			184			17.6

Total revenues		181,717		100.0			157,501		100.0			24,216			15.4			277,756		100.0			242,176		100.0			35,580			14.7

Expenses
Sandwich shop operating expenses
Cost of goods sold, excluding depreciation		51,598		28.4			45,022		28.6			6,576			14.6			78,854		28.4			69,066		28.5			9,788			14.2
Labor and related expenses		51,752		28.5			44,865		28.5			6,887			15.4			79,415		28.6			68,637		28.3			10,778			15.7
Occupancy expenses		22,886		12.6			20,162		12.8			2,724			13.5			34,741		12.5			30,629		12.6			4,112			13.4
Other operating expenses		19,627		10.8			16,849		10.7			2,778			16.5			30,128		10.8			25,696		10.6			4,432			17.2
General and administrative expenses		18,474		10.2			16,687		10.6			1,787			10.7			27,706		10.0			24,310		10.0			3,396			14.0
Depreciation expense		10,439		5.7			9,501		6.0			938			9.9			15,949		5.7			14,540		6.0			1,409			9.7
Pre-opening costs		1,077		0.6			525		0.3			552			105.1			1,587		0.6			839		0.3			748			89.2
Impairment and loss on disposal of property and equipment		832		0.5			877		0.6			(45	)		(5.1	)		1,965		0.7			2,192		0.9			(227	)		(10.4	)

Total expenses		176,685		97.2			154,488		98.1			22,197			14.4			270,345		97.3			235,909		97.4			34,436			14.6

Income from operations		5,032		2.8			3,013		1.9			2,019			67.0			7,411		2.7			6,267		2.6			1,144			18.3
Interest expense, net		124		0.1			82		0.1			42			51.2			180		0.1			124		0.1			56			45.2

Income before income taxes		4,908		2.7			2,931		1.9			1,977			67.5			7,231		2.6			6,143		2.5			1,088			17.7
Income tax expense		1,914		1.1			1,216		0.8			698			57.4			2,780		1.0			2,476		1.0			304			12.3

Net income		2,994		1.6			1,715		1.1			1,279			74.6			4,451		1.6			3,667		1.5			784			21.4
Net income attributable to non-controlling interests		2		*			6		*			(4	)		(66.7	)

Net income attributable to non- controlling interests																		58		0.0			11	*				47			427.3
Net income attributable to Potbelly Corporation	$	2,992		1.6	%	$	1,709		1.1	%	$	1,283			75.1	%	$	4,393		1.6	%	$	3,656		1.5	%	$	737			20.2	%

_______________

*	Amount is less than 0.1%

Revenues

Total revenues increased by ~~$24.2~~$35.6 million, or ~~15.4%~~14.7%, to ~~$181.7~~$277.8 million during the 2639 weeks ended ~~June 28,~~September 27, 2015, from ~~$157.5~~$242.2 million during the 2639 weeks ended ~~June 29,~~September 28, 2014. The increase in revenues primarily consisted of an increase of ~~$16.3~~$24.6 million in sales from shops not yet in our company-operated comparable store sales base and a ~~$7.8~~$10.8 million, or ~~5.1%~~4.6%, increase in company-operated comparable store sales. The increase in company-operated comparable store sales resulted from increases in average check from certain menu price increases and menu mix, as well as traffic.

Cost of Goods Sold

Cost of goods sold increased by ~~$6.6~~$9.8 million, or ~~14.6%~~14.2%, to ~~$51.6~~$78.9 million during the 2639 weeks ended ~~June 28,~~September 27, 2015, compared to ~~$45.0~~$69.1 million during the 2639 weeks ended ~~June 29,~~September 28, 2014, primarily due to the increase in revenues. As a percentage of revenues, cost of goods sold decreased to 28.4% during the 2639 weeks ended ~~June 28,~~September 27, 2015, from ~~28.6%~~28.5% during the 2639 weeks ended ~~June 29,~~September 28, 2014, primarily driven by certain menu price increases.

Labor and Related Expenses

Labor and related expenses increased by ~~$6.9~~$10.8 million, or ~~15.4%~~15.7%, to ~~$51.8~~$79.4 million during the 2639 weeks ended ~~June 28,~~September 27, 2015, from ~~$44.9~~$68.6 million during the 2639 weeks ended ~~June 29,~~September 28, 2014, primarily due to new shop openings. As a percentage of revenues, labor and related expenses ~~remained consistent at 28.5%~~increased to 28.6% during the 2639 weeks ended ~~June~~September 27, 2015, from 28.3% during the 39 weeks ended September 28, ~~2015~~2014, primarily driven by higher labor costs, wage inflation in certain states as a result of statutory minimum wage increases, performance-based manager bonuses as well as an increase in an existing incentive program and ~~June 29, 2014.~~

an additional incentive program to reward employees for tenure and development, which began in fiscal year 2015.

Occupancy Expenses

Occupancy expenses increased by ~~$2.7~~$4.1 million, or ~~13.5%~~13.4%, to ~~$22.9~~$34.7 million during the 2639 weeks ended ~~June 28,~~September 27, 2015, from ~~$20.2~~$30.6 million during the 2639 weeks ended ~~June 29,~~September 28, 2014, primarily due to new shop openings. As a percentage of revenues, occupancy expenses decreased to 12.5% during the 39 weeks ended September 27, 2015, from 12.6% during the 2639 weeks ended ~~June~~September 28, ~~2015, from 12.8% during the 26 weeks ended June 29,~~ 2014, primarily due to sales leverage (~~i.e.~~i.e., the ability to spread certain expenses over a higher revenue base).

Other Operating Expenses

Other operating expenses increased by ~~$2.8~~$4.4 million, or ~~16.5%~~17.2%, to ~~$19.6~~$30.1 million during the 2639 weeks ended ~~June 28,~~September 27, 2015, from ~~$16.8~~$25.7 million during the 2639 weeks ended ~~June 29,~~September 28, 2014. The increase is attributable to new shop openings, increased marketing spend as well as increased fees associated with credit card usage in our shops. As a percentage of revenues, other operating expenses increased to 10.8% during the 2639 weeks ended ~~June 28,~~September 27, 2015, from ~~10.7%~~10.6% during the 2639 weeks ended ~~June 29,~~September 28, 2014, primarily due to ~~increased marketing spend.~~the $0.2 million cumulative adjustment recorded during the 39 weeks ended September 28, 2014, for the change in accounting estimate related to gift card breakage.

General and Administrative Expenses

General and administrative expenses increased by ~~$1.8~~$3.4 million, or ~~10.7%~~14.0%, to ~~$18.5~~$27.7 million during the 2639 weeks ended ~~June 28,~~September 27, 2015, from ~~$16.7~~$24.3 million during the 2639 weeks ended ~~June 29,~~September 28, 2014. The net increase is driven primarily by ~~an increase~~increases in our performance-based incentives, advertising, and rent associated with our new office, as well as ~~increased spending on advertising, partially offset by lower stock-based compensation expense.~~costs associated with improving our technological infrastructure. As a percentage of revenues, general and administrative expenses ~~decreased to 10.2%~~remained consistent at 10.0% during the 2639 weeks ended ~~June 28,~~September 27, 2015, ~~from 10.6% during~~and the 2639 weeks ended ~~June 29, 2014, driven by lower stock-based compensation expense, coupled with sales leverage (~~~~i.e.,~~ ~~the ability to spread certain costs over a higher revenue base).~~September 28, 2014.

Depreciation Expense

Depreciation expense increased by ~~$0.9~~$1.4 million, or ~~9.9%~~9.7%, to ~~$10.4~~$15.9 million during the 2639 weeks ended ~~June 28,~~September 27, 2015, from ~~$9.5~~$14.5 million during the 2639 weeks ended ~~June 29,~~September 28, 2014, primarily due to a higher depreciable base related to new shops and existing shop capital investments. As a percentage of revenues, depreciation decreased to 5.7% during the 2639 weeks ended ~~June 28,~~September 27, 2015, from 6.0% during the 2639 weeks ended ~~June 29,~~September 28, 2014, driven by lower depreciation associated with new shops with lower build-out costs and longer expected useful lives for leasehold improvements, as well as leasehold improvements at legacy shops with higher build-out costs and shorter expected useful lives being fully depreciated.

Pre-Opening Costs

Pre-opening costs increased by ~~$0.6~~$0.8 million, or ~~105.1%~~89.2%, to ~~$1.1~~$1.6 million during the 2639 weeks ended ~~June 28,~~September 27, 2015, from ~~$0.5~~$0.8 million during the 2639 weeks ended ~~June 29,~~September 28, 2014, primarily due to timing of new shop openings during the 2639 weeks ended ~~June 28,~~September 27, 2015 compared to the 2639 weeks ended ~~June 29,~~September 28, 2014.

Impairment and Loss on Disposal of Property and Equipment

Impairment and loss on disposal of property and equipment decreased to ~~$0.8~~$2.0 million during the 2639 weeks ended ~~June 28,~~September 27, 2015, from ~~$0.9~~$2.2 million during the 2639 weeks ended ~~June 29,~~September 28, 2014. After performing a periodic review of our shops during each

of the ~~first and second~~three completed fiscal quarters of 2015, it was determined that indicators of impairment were present for certain shops as a result of continued underperformance of shop profitability. We performed an impairment analysis related to these shops and recorded an impairment charge of ~~$0.6~~$1.6 million related to the excess of the carrying amounts recorded on our balance sheet over the identified shops’ estimated fair values.

Interest Expense, net

Interest expense increased by ~~$42 thousand,~~$0.1 million, or ~~51.2%~~45.2%, to ~~$124 thousand~~$0.2 million during the 2639 weeks ended ~~June 28,~~September 27, 2015, from ~~$82 thousand~~$0.1 million during the 2639 weeks ended ~~June 29,~~September 28, 2014, primarily due to the accretion of certain occupancy-related interest costs. Interest expense for the 2639 weeks ended ~~June 28,~~September 27, 2015 is attributable to interest on the note payable, unused commitment fees, occupancy-related interest costs and deferred financing fees, partially offset by interest income related to money market funds.

Income Tax Expense

Income tax expense increased by ~~$0.7~~$0.3 million to ~~$1.9~~$2.8 million for the 2639 weeks ended ~~June 28,~~September 27, 2015, from ~~$1.2~~$2.5 million for the 2639 weeks ended ~~June 29,~~September 28, 2014. For the 2639 weeks ended ~~June 28,~~September 27, 2015, our effective tax rate was ~~39.0%~~38.4%, compared to ~~41.5%~~40.3% for the 2639 weeks ended ~~June 29,~~September 28, 2014. The decrease in the effective tax rate primarily relates to the Company recognizing certain federal tax credits, which were not recognized in the comparable prior period.

Liquidity and Capital Resources

General

Our primary sources of liquidity and capital resources are cash provided from operating activities, existing cash and cash equivalents and our credit facility. Our primary requirements for liquidity and capital are new shop openings, existing shop capital investments (maintenance and improvements), purchasing existing franchise-operated shops, principal and interest payments on our debt, lease obligations, repurchases of our common stock and working capital and general corporate needs. Our requirement for working capital is not significant since our customers pay for their food and beverage purchases in cash or payment cards (credit or debit) at the time of sale. Thus, we are able to sell certain inventory items before we have to pay our suppliers for such items. Our shops do not require significant inventories or receivables. We believe that these sources of liquidity and capital will be sufficient to finance our continued operations and expansion plans for at least the next twelve months.

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

							For the 39 Weeks Ended
	For the 26 Weeks Ended						September 27,			September 28,
	June 28, 2015			June 29, 2014			2015			2014
Net cash provided by (used in):
Operating activities	$	18,962		$	11,771		$	30,323		$	23,294
Investing activities		(17,901	)		(13,386	)		(27,657	)		(20,544	)
Financing activities		(9,961	)		2,560			(22,903	)		(2,926	)

Net (decrease) increase in cash	$	(8,900	)	$	945

Net (decrease) in cash							$	(20,237	)	$	(176	)

Operating Activities

Net cash provided by operating activities increased to ~~$19.0~~$30.3 million for the 2639 weeks ended ~~June 28,~~September 27, 2015, from ~~$11.8~~$23.3 million for the 2639 weeks ended ~~June 29,~~September 28, 2014. The ~~$7.2~~$7.0 million increase is primarily attributable to an increase of ~~$5.2~~$6.3 million in net shop-level profits ~~increases in non-cash items such as depreciation and deferred rent and landlord allowances~~ as well as ~~timing of the payment of~~changes in certain working capital accounts.

Investing Activities

Net cash used in investing activities increased to ~~$17.9~~$27.7 million for the 2639 weeks ended ~~June 28,~~September 27, 2015, from ~~$13.4~~$20.5 million for the 2639 weeks ended ~~June 29,~~September 28, 2014. The increase was primarily due to capital expenditures for future shop openings, maintaining our existing shops and certain other projects, including costs associated with the move of our Company headquarters during the 2639 weeks ended ~~June 28,~~September 27, 2015 as compared to the same period in 2014. In addition, in July 2015, the Company transitioned a franchise shop to a company-operated shop at a cost of $0.3 million.

Financing Activities

Net cash used in financing activities was ~~$10.0~~$22.9 million for the 2639 weeks ended ~~June 28,~~September 27, 2015, compared to ~~net cash provided by financing activities of $2.6~~$2.9 million for the 2639 weeks ended ~~June 29,~~September 28, 2014. The increase in net cash used was mainly driven by ~~the $12.5~~$27.0 million of treasury stock repurchased during the 2639 weeks ended ~~June 28,~~September 27, 2015 ~~with no comparable transactions~~compared to $5.8 million during the 2639 weeks ended ~~June 29, 2014,~~September 28, 2014. The net increase of $21.2 million in treasury stock repurchases is partially offset by ~~$3.1~~$4.3 million in cash proceeds received by us related to the exercise of stock options, net of payroll taxes paid, during the 2639 weeks ended ~~June 28,~~September 27, 2015, compared to ~~$2.6~~$3.0 million in cash proceeds received during the 2639 weeks ended ~~June 29,~~September 28, 2014.

Stock Repurchase Program

On ~~August 1, 2014,~~September 8, 2015, our Board of Directors authorized a share repurchase program of up to $35.0 million of the Company’s common stock. This program replaces the previously authorized share repurchase program, which was completed in the third quarter of 2015. Under this program, we may, from time to time, 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. During the 2639 weeks ended ~~June 28,~~September 27, 2015, we repurchased ~~922,316~~2,094,721 shares of our common stock for approximately ~~$12.5~~$27.0 million in open market ~~transactions. At June 28,~~transactions, which includes shares purchased under both the new plan and the completed plan. As of September 27, 2015, the remaining dollar value of authorization under the new share repurchase program was ~~$12.2~~$32.7 million.

Repurchased shares are included as treasury stock in the condensed consolidated balance sheets and the condensed consolidated statement of equity.

Credit Facility

On September 21, 2012, we entered into a five-year revolving credit facility agreement with JPMorgan Chase Bank, N.A. that expires in September 2017 and provides for borrowings up to $35.0 million to fund capital expenditures for new shops, renovations and maintenance of existing shops, and to provide ongoing working capital for other general and corporate purposes. We will be entitled to incur additional incremental increases in the revolving credit facility of up to $25.0 million that will be included in the credit facility if no event of default exists and certain other requirements are met. The credit facility contains customary representations, warranties, negative and affirmative covenants, including a requirement to maintain a maximum leverage ratio, as defined, of 2.25:1 and a minimum debt service coverage ratio, as defined, of 1.5:1. The credit facility also limits the restricted payments (primarily distributions and equity repurchases) that we may make, unless we obtain certain waivers or amendments from our lender. We were in compliance with these restrictions and conditions as of ~~June 28,~~September 27, 2015. The credit facility is secured by substantially all assets of the Company. Borrowings under the credit facility bear interest at our option at either (i) a Eurocurrency rate determined by reference to the applicable LIBOR rate plus an applicable margin or (ii) a prime rate as announced by JPMorgan Chase plus an applicable margin. As of ~~June 28,~~September 27, 2015, we had no amounts outstanding under the credit facility.

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 GAAP. The preparation of our consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. 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. We base our estimates on historical experience and other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Judgments and uncertainties affecting the application of those policies may result in materially different amounts being reported under different conditions or using different assumptions. We had no significant changes in our critical accounting estimates since our last annual report. Our critical accounting estimates are identified and described in our annual consolidated financial statements and related notes.

Off-Balance Sheet Arrangements

As of ~~June 28,~~September 27, 2015, we do 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

For a description of recently issued Financial Accounting Standards, see Note 1— “Organization and Other Matters” of the Notes to Unaudited Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q.

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 28, 2014. Our exposures to market risk have not changed materially since December 28, 2014.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”)) as of ~~June 28,~~September 27, 2015. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of ~~June 28,~~September 27, 2015, 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 (the “SEC”) and is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during our fiscal quarter ended ~~June 28,~~September 27, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

The certifications required by Section 302 of the Sarbanes-Oxley Act of 2002 are filed as exhibits 31.1 and 31.2 to this Quarterly Report on Form 10-Q.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We are subject to legal proceedings, claims and liabilities, such as employment-related claims and slip and fall cases, which arise in the ordinary course of business and are generally covered by insurance. In the opinion of management, the amount of ultimate liability with respect to those actions should not have a material adverse impact on our financial position or results of operations and cash flows.

ITEM 1A. RISK FACTORS

A description of the risk factors associated with our business is contained in Item 1A, “Risk Factors” of our Annual Report onForm 10-K for the fiscal year ended December 28, 2014. There have been no material changes to our Risk Factors as previously reported.

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

The following table contains information regarding purchases of our common stock made by or on behalf of Potbelly Corporation during the 13 weeks ended ~~June 28,~~September 27, 2015:

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, 2015 – April 26, 2015
   200,940       $ 13.89       200,940       $ 17,586,629
April 27, 2015 – May 24, 2015
   79,604       $ 13.93       79,604       $ 16,475,799
May 25, 2015 – June 28, 2015
   307,086       $ 13.83       307,086       $ 12,242,638





Total:
   587,630          587,630

Period	Total Number of Shares Purchased	Average Price Paid per Share (1)	Total Number of Shares Purchased as Part of Publicly Announced Programs (2)	Maximum Value of Shares that May Yet be Purchased Under the Programs (2)
June 29, 2015 – July 26, 2015	380,000	$12.98	380,000	$7,311,398
July 27, 2015 – August 23, 2015	431,491	$12.80	431,491	$1,812,778
August 24, 2015 – September 27, 2015	360,914	$11.14	360,914	$32,728,165
Total:	1,172,405		1,172,405

_______________

(1)	Average price paid per share excludes commissions.

(2)

On ~~August 5, 2014,~~September 8, 2015, we announced that our Board of Directors approved a new share repurchase program, authorizing us to repurchase up to $35.0 million of our common stock. This program replaced the previously authorized share repurchase program, which was completed during the third quarter of 2015. Such repurchases may take place from time to time in the open market (including in pre-arranged stock trading plans in accordance with the guidelines specified in Rule 10b5-1 under the Exchange Act) or in privately negotiated transactions. No time limit has been set for the completion of the repurchase program, and the program may be suspended or discontinued at any time.

~~ITEM 6.~~

~~EXHIBITS~~

ITEM 6. EXHIBITS

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


Exhibit No.		Description

~~10.22~~ 31.1		~~Director Compensation Plan, adopted May 14, 2015 †~~

~~31.1~~		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

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

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

101.INS		XBRL Instance Document

101.SCH		XBRL Taxonomy Extension Schema Document

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB		XBRL Taxonomy Extension Label Linkbase Document

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document

†	~~Management contract or compensatory plan~~

~~SIGNATURE~~SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		POTBELLY CORPORATION
	~~POTBELLY CORPORATION~~
Date: November 4, 2015
~~Date: August 5, 2015~~	By:	/s/ Michael Coyne
		Michael Coyne
		Chief Financial Officer
		(Principal Financial Officer)

20