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 ~~September~~June 25, ~~2022~~2023


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

For the Transition Period from ____to ____

Commission File Number: 001-36104

Potbelly Corporation

(Exact name of registrant as specified in its charter)


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

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

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $0.01 par value

PBPB

The NASDAQ Stock Market LLC

(Nasdaq Global Select Market)

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

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

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

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

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

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

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ☒ No o

As of ~~October~~July 23, ~~2022,~~2023, the registrant had ~~28,812,262~~29,317,743 shares of common stock, $0.01 par value per share, outstanding.

Table of Contents

Potbelly Corporation and Subsidiaries

Table of Contents

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)


		September 25, 2022		December 26, 2021			June 25, 2023		December 25, 2022
Assets	Assets					Assets
Current assets	Current assets					Current assets
Cash and cash equivalents	Cash and cash equivalents	$	9,506	$	14,353	Cash and cash equivalents	$	34,261	$	15,619
Accounts receivable, net of allowances of $32 and $27 as of September 25, 2022 and December 26, 2021, respectively		8,317		6,032
Accounts receivable, net of allowances of $24 and $16 as of June 25, 2023 and December 25, 2022, respectively						Accounts receivable, net of allowances of $24 and $16 as of June 25, 2023 and December 25, 2022, respectively	8,275		6,420
Inventories	Inventories	3,660		3,491		Inventories	3,534		3,990
Prepaid expenses and other current assets	Prepaid expenses and other current assets	4,225		4,178		Prepaid expenses and other current assets	5,110		4,501
Assets classified as held-for-sale						Assets classified as held-for-sale	1,237		—
Total current assets	Total current assets	25,708		28,054		Total current assets	52,417		30,530

Property and equipment, net	Property and equipment, net	44,665		49,805		Property and equipment, net	43,485		44,477
Right-of-use assets for operating leases	Right-of-use assets for operating leases	162,086		166,084		Right-of-use assets for operating leases	151,328		160,891
Indefinite-lived intangible assets	Indefinite-lived intangible assets	3,404		3,404		Indefinite-lived intangible assets	3,404		3,404
Goodwill	Goodwill	2,222		2,222		Goodwill	2,122		2,222
Restricted cash						Restricted cash	749		—
Deferred expenses, net and other assets	Deferred expenses, net and other assets	3,470		3,668		Deferred expenses, net and other assets	3,368		3,647
Total assets	Total assets	$	241,555	$	253,237	Total assets	$	256,873	$	245,171

Liabilities and equity (deficit)
Liabilities and equity						Liabilities and equity
Current liabilities	Current liabilities					Current liabilities
Accounts payable	Accounts payable	$	10,229	$	8,140	Accounts payable	$	9,754	$	10,718
Accrued expenses	Accrued expenses	28,307		30,859		Accrued expenses	35,636		30,826
Short-term operating lease liabilities	Short-term operating lease liabilities	28,066		28,548		Short-term operating lease liabilities	27,535		27,395
Current portion of long-term debt	Current portion of long-term debt	—		2,333		Current portion of long-term debt	1,250		—
Total current liabilities	Total current liabilities	66,602		69,880		Total current liabilities	74,175		68,939

Long-term debt, net of current portion	Long-term debt, net of current portion	10,100		17,517		Long-term debt, net of current portion	21,108		8,550
Long-term operating lease liabilities	Long-term operating lease liabilities	162,101		166,291		Long-term operating lease liabilities	150,166		160,968
Other long-term liabilities	Other long-term liabilities	1,843		1,966		Other long-term liabilities	4,223		2,441
Total liabilities	Total liabilities	240,646		255,654		Total liabilities	249,672		240,898

Commitments and contingencies (Note 11)	Commitments and contingencies (Note 11)					Commitments and contingencies (Note 11)

Equity (deficit)
Common stock, $0.01 par value—authorized 200,000 shares; outstanding 28,791 and 28,380 shares as of September 25, 2022 and December 26, 2021, respectively		384		380
Equity						Equity
Common stock, $0.01 par value—authorized 200,000 shares; outstanding 29,309 and 28,819 shares as of June 25, 2023 and December 25, 2022, respectively						Common stock, $0.01 par value—authorized 200,000 shares; outstanding 29,309 and 28,819 shares as of June 25, 2023 and December 25, 2022, respectively	389		384
Warrants	Warrants	2,566		2,566		Warrants	2,219		2,566
Additional paid-in-capital	Additional paid-in-capital	455,012		452,570		Additional paid-in-capital	459,351		455,831
Treasury stock, held at cost, 9,924 and 9,785 shares as of September 25, 2022, and December 26, 2021, respectively		(115,331)		(114,577)
Treasury stock, held at cost, 10,053 and 9,924 shares as of June 25, 2023, and December 25, 2022, respectively						Treasury stock, held at cost, 10,053 and 9,924 shares as of June 25, 2023, and December 25, 2022, respectively	(116,497)		(115,388)
Accumulated deficit	Accumulated deficit	(341,571)		(343,261)		Accumulated deficit	(338,027)		(338,916)
Total stockholders’ equity (deficit)		1,060		(2,322)
Total stockholders’ equity						Total stockholders’ equity	7,435		4,477
Non-controlling interest	Non-controlling interest	(151)		(95)		Non-controlling interest	(234)		(204)
Total equity (deficit)		909		(2,417)
Total equity						Total equity	7,201		4,273

Total liabilities and equity (deficit)		241,555		253,237
Total liabilities and equity						Total liabilities and equity	$	256,873	$	245,171

See accompanying notes to the unaudited condensed consolidated financial statements.

Table of Contents

Potbelly Corporation and Subsidiaries

Condensed Consolidated Statements of Operations

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


		For the Quarter Ended				For the Year to Date Ended					For the Quarter Ended				For the Year to Date Ended
		September 25, 2022		September 26, 2021		September 25, 2022		September 26, 2021			June 25, 2023		June 26, 2022		June 25, 2023		June 26, 2022
Revenues	Revenues									Revenues
Sandwich shop sales, net	Sandwich shop sales, net	$	116,449	$	100,996	$	328,873	$	275,274	Sandwich shop sales, net	$	124,709	$	114,992	$	241,656	$	212,423
Franchise royalties and fees		1,200		698		2,950		1,974
Franchise royalties, fees and rent income										Franchise royalties, fees and rent income	1,914		960		3,237		1,750
Total revenues	Total revenues	117,649		101,694		331,823		277,248		Total revenues	126,623		115,952		244,893		214,173

Expenses	Expenses									Expenses
Sandwich shop operating expenses, excluding depreciation	Sandwich shop operating expenses, excluding depreciation									Sandwich shop operating expenses, excluding depreciation
Food, beverage and packaging costs	Food, beverage and packaging costs	34,814		28,225		94,952		76,035		Food, beverage and packaging costs	34,903		32,830		67,523		60,138
Labor and related expenses	Labor and related expenses	36,031		33,087		105,405		93,662		Labor and related expenses	37,866		36,121		74,368		69,374
Occupancy expenses	Occupancy expenses	13,559		13,437		41,209		40,598		Occupancy expenses	13,083		13,805		26,393		27,650
Other operating expenses	Other operating expenses	19,743		17,466		56,977		47,039		Other operating expenses	20,925		19,128		41,409		37,233
Franchise marketing expenses		115		94		361		213
Franchise support, rent and marketing expenses										Franchise support, rent and marketing expenses	1,215		126		1,806		246
General and administrative expenses	General and administrative expenses	9,554		7,260		26,899		23,106		General and administrative expenses	11,695		8,827		21,664		17,345
Depreciation expense	Depreciation expense	2,922		3,610		9,089		12,337		Depreciation expense	2,887		3,030		5,857		6,167
Pre-opening costs										Pre-opening costs	33		—		55		—
Loss on Franchise Growth Acceleration Initiative activities										Loss on Franchise Growth Acceleration Initiative activities	14		—		963		—
Impairment, loss on disposal of property and equipment and shop closures	Impairment, loss on disposal of property and equipment and shop closures	1,616		1,118		3,980		4,497		Impairment, loss on disposal of property and equipment and shop closures	658		1,044		1,703		2,363
Total expenses	Total expenses	118,354		104,297		338,872		297,487		Total expenses	123,279		114,911		241,741		220,516
Loss from operations		(705)		(2,603)		(7,049)		(20,239)
Income (loss) from operations										Income (loss) from operations	3,344		1,041		3,152		(6,343)

Interest expense, net	Interest expense, net	354		241		1,037		713		Interest expense, net	1,011		357		1,678		683
Gain on extinguishment of debt		(10,191)		—		(10,191)		—
Loss on extinguishment of debt										Loss on extinguishment of debt	—		—		239		—
Income (loss) before income taxes	Income (loss) before income taxes	9,132		(2,844)		2,105		(20,952)		Income (loss) before income taxes	2,333		684		1,235		(7,026)
Income tax expense (benefit)	Income tax expense (benefit)	(4)		16		148		230		Income tax expense (benefit)	(48)		(24)		57		153
Net income (loss)	Net income (loss)	9,136		(2,860)		1,957		(21,182)		Net income (loss)	2,381		708		1,178		(7,179)
Net income attributable to non-controlling interest	Net income attributable to non-controlling interest	107		88		267		119		Net income attributable to non-controlling interest	165		134		288		160
Net income (loss) attributable to Potbelly Corporation	Net income (loss) attributable to Potbelly Corporation	$	9,029	$	(2,948)	$	1,690	$	(21,301)	Net income (loss) attributable to Potbelly Corporation	$	2,216	$	574	$	890	$	(7,339)

Net income (loss) per common share attributable to common stockholders:	Net income (loss) per common share attributable to common stockholders:									Net income (loss) per common share attributable to common stockholders:
Basic	Basic	$	0.31	$	(0.10)	$	0.06	$	(0.78)	Basic	$	0.08	$	0.02	$	0.03	$	(0.26)
Diluted	Diluted	$	0.31	$	(0.10)	$	0.06	$	(0.78)	Diluted	$	0.07	$	0.02	$	0.03	$	(0.26)
Weighted average shares outstanding:	Weighted average shares outstanding:									Weighted average shares outstanding:
Basic	Basic	28,726		28,264		28,563		27,395		Basic	29,199		28,565		29,053		28,481
Diluted	Diluted	28,867		28,264		28,947		27,395		Diluted	30,088		29,117		29,776		28,481

See accompanying notes to the unaudited condensed consolidated financial statements.

Table of Contents

Potbelly Corporation and Subsidiaries

Condensed Consolidated Statements of Equity (Deficit)

(amounts and shares in thousands, unaudited)


		Common Stock			Treasury Stock			Warrants		Additional Paid-In- Capital			Accumulated Deficit		Non- Controlling Interest			Total Equity (Deficit)				Common Stock						Treasury Stock			Warrants		Additional Paid-In- Capital			Accumulated Deficit			Non- Controlling Interest			Total Equity (Deficit)
		Shares	Amount
Balance at December 27, 2020		24,323	339				(113,266)					—					438,174				(319,477)		(275)			$	5,495
Net loss		—	—		—			—		—			(14,472)		(2)			(14,474)
Shares issued under equity compensation plan		63	1		—			—		(1)			—		—			—
Issuance of common shares and warrants, net of fees		3,250	32		—			2,566		12,342			—		—			14,940
Contributions from non-controlling interest		—	—		—			—		—			—		136			136
Stock-based compensation expense		—	—		—			—		193			—		—			193
Balance at March 28, 2021		27,636	372		(113,266)			2,566		450,708			(333,949)		(141)			$	6,290
Net income (loss)		—	—		—			—		—			(3,881)		33			(3,848)
Shares issued under equity compensation plan		535	6		(685)			—		(6)			—		—			(685)
Proceeds from exercise of stock options		—	—		—			—		219			—		—			219
Issuance of common shares and warrants, net of fees		—	—		—			—		(101)			—		—			(101)
Stock-based compensation expense		—	—		—			—		655			—		—			655
Balance at June 27, 2021		28,171	$	378	$	(113,951)		$	2,566	$	451,475		$	(337,830)	$	(108)		$	2,530
Net income (loss)		—	—		—			—		—			(2,948)		88			(2,860)
Shares issued under equity compensation plan		198	2		(560)			—		(2)			—		—			(560)
Stock-based compensation expense		—	—		—			—		640			—		—			640
Balance at September 26, 2021		28,369	$	380	$	(114,511)		$	2,566	$	452,113		$	(340,778)	$	(20)		$	(250)
																						Shares		Amount				Treasury Stock			Warrants		Additional Paid-In- Capital			Accumulated Deficit			Non- Controlling Interest			Total Equity (Deficit)
Balance at December 26, 2021	Balance at December 26, 2021	28,380	$	380	$	(114,577)		$	2,566	$	452,570		$	(343,261)	$	(95)		$	(2,417)	Balance at December 26, 2021		28,380		$	380
Net income (loss)	Net income (loss)	—	—		—			—		—			(7,913)		26			(7,887)		Net income (loss)		—		—						—					—			—			(7,913)			26	(7,887)
Shares issued under equity compensation plan	Shares issued under equity compensation plan	81	1		(279)			—		—			—		—			(278)		Shares issued under equity compensation plan		81		1				(279)			—		—			—			—			(278)
Distributions to non-controlling interest	Distributions to non-controlling interest	—	—		—			—		—			—		(120)			(120)		Distributions to non-controlling interest		—		—				—			—		—			—			(120)			(120)
Stock-based compensation expense	Stock-based compensation expense	—			—			—		675			—		—			675		Stock-based compensation expense		—						—			—		675			—			—			675
Balance at March 27, 2022	Balance at March 27, 2022	28,461	381		(114,856)			2,566		453,245			(351,174)		(189)			(10,027)		Balance at March 27, 2022		28,461		381				(114,856)			2,566		453,245			(351,174)			(189)			(10,027)
Net income		—	—		—			—		—			574		134			708
Net income (loss)																				Net income (loss)		—		—				—			—		—			574			134			708
Shares issued under equity compensation plan	Shares issued under equity compensation plan	235	2		(325)			—		(3)			—		—			(326)		Shares issued under equity compensation plan		235		2				(325)			—		(3)			—			—			(326)
Distributions to non-controlling interest	Distributions to non-controlling interest	—	—		—			—		—			—		(56)			(56)		Distributions to non-controlling interest		—		—				—			—		—			—			(56)			(56)
Stock-based compensation expense	Stock-based compensation expense	—	—		—			—		820			—		—			820		Stock-based compensation expense		—		—				—			—		820			—			—			820
Balance at June 26, 2022	Balance at June 26, 2022	28,696	$	383	$	(115,181)		$	2,566	$	454,062		$	(350,600)	$	(111)		$	(8,881)	Balance at June 26, 2022		28,696		$	383			$	(115,181)		$	2,566	$	454,062		$	(350,600)		$	(111)		$	(8,881)
Net income		—	—		—			—		—			9,029		107			9,136

Balance at December 25, 2022																				Balance at December 25, 2022		28,819		$	384			$	(115,388)		$	2,566	$	455,831		$	(338,916)		$	(204)		$	4,273
Net income (loss)																				Net income (loss)		—		—				—			—		—			(1,327)			123			(1,204)
Shares issued under equity compensation plan	Shares issued under equity compensation plan	95	1		(150)			—		(1)			—		—			(150)		Shares issued under equity compensation plan		70		1				(337)			—		(1)			—			—			(337)
Proceeds from exercise of warrants																				Proceeds from exercise of warrants		159		1				—			(313)		1,177			—			—			865
Distributions to non-controlling interest	Distributions to non-controlling interest	—	—		—			—		—			—		(147)			(147)		Distributions to non-controlling interest		—		—				—			—		—			—			(152)			(152)
Stock-based compensation expense	Stock-based compensation expense	—	—		—			—		951			—		—			951		Stock-based compensation expense		—		—				—			—		911			—			—			911
Balance at September 25, 2022		28,791	384		(115,331)			2,566		455,012			(341,571)		(151)			909
Balance at March 26, 2023																				Balance at March 26, 2023		29,048		$	386			$	(115,725)		$	2,253	$	457,918		$	(340,243)		$	(233)		$	4,356
Net income (loss)																				Net income (loss)		—		—				$	—		$	—	$	—		$	2,216		$	165		$	2,381
Shares issued under equity compensation plan																				Shares issued under equity compensation plan		243		3				(772)			—		(2)			—			—			(771)
Proceeds from exercise of warrants																				Proceeds from exercise of warrants		18		—				—			(34)		130			—			—			96
Distributions to non-controlling interest																				Distributions to non-controlling interest		—		—				—			—		—			—			(166)			(166)
Stock-based compensation expense																				Stock-based compensation expense		—		—				—			—		1,305			—			—			1,305
Balance at June 25, 2023																				Balance at June 25, 2023		29,309		$	389			$	(116,497)		$	2,219	$	459,351		$	(338,027)		$	(234)		$	7,201

See accompanying notes to the unaudited condensed consolidated financial statements.

Table of Contents

Potbelly Corporation and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(amounts in thousands, unaudited)


		For the Year to Date Ended					For the Year to Date Ended
		September 25, 2022		September 26, 2021			June 25, 2023		June 26, 2022
Cash flows from operating activities:	Cash flows from operating activities:					Cash flows from operating activities:
Net income (loss)	Net income (loss)	$	1,957	$	(21,182)	Net income (loss)	$	1,178	$	(7,179)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Adjustments to reconcile net loss to net cash used in operating activities:						Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation expense	Depreciation expense	9,089		12,337		Depreciation expense	5,857		6,167
Noncash lease expense	Noncash lease expense	19,511		19,199		Noncash lease expense	12,386		13,020
Deferred income tax	Deferred income tax	14		14		Deferred income tax	(81)		9
Stock-based compensation expense	Stock-based compensation expense	2,446		1,488		Stock-based compensation expense	2,216		1,495
Asset impairment, loss on disposal of property and equipment and shop closures	Asset impairment, loss on disposal of property and equipment and shop closures	3,980		3,944		Asset impairment, loss on disposal of property and equipment and shop closures	1,061		2,363
Gain on extinguishment of debt		(10,191)		—
Loss on Franchise Growth Acceleration Initiative activities						Loss on Franchise Growth Acceleration Initiative activities	936		—
Loss on extinguishment of debt						Loss on extinguishment of debt	224		—
Other operating activities	Other operating activities	205		232		Other operating activities	209		139
Changes in operating assets and liabilities:	Changes in operating assets and liabilities:					Changes in operating assets and liabilities:
Accounts receivable, net	Accounts receivable, net	(2,286)		(1,378)		Accounts receivable, net	(1,862)		(1,379)
Inventories	Inventories	(169)		(197)		Inventories	281		(121)
Prepaid expenses and other assets	Prepaid expenses and other assets	(491)		626		Prepaid expenses and other assets	(240)		12
Accounts payable	Accounts payable	1,352		1,206		Accounts payable	(1,222)		455
Operating lease liabilities	Operating lease liabilities	(21,163)		(24,932)		Operating lease liabilities	(13,707)		(14,183)
Accrued expenses and other liabilities	Accrued expenses and other liabilities	(3,236)		1,505		Accrued expenses and other liabilities	4,786		1,180
Net cash provided by (used in) operating activities:		1,018		(7,138)
Net cash provided by operating activities:						Net cash provided by operating activities:	12,022		1,978

Cash flows from investing activities:	Cash flows from investing activities:					Cash flows from investing activities:
Purchases of property and equipment	Purchases of property and equipment	$	(4,914)	$	(7,543)	Purchases of property and equipment	(7,281)		(3,115)
Proceeds from sale of refranchised shops						Proceeds from sale of refranchised shops	1,362		—
Net cash used in investing activities:	Net cash used in investing activities:	(4,914)		(7,543)		Net cash used in investing activities:	(5,919)		(3,115)

Cash flows from financing activities:	Cash flows from financing activities:					Cash flows from financing activities:
Borrowings under Term Loan						Borrowings under Term Loan	25,000		—
Principal payments made for Term Loan						Principal payments made for Term Loan	(625)		—
Borrowings under revolving credit facility	Borrowings under revolving credit facility	$	30,550	$	28,000	Borrowings under revolving credit facility	14,600		15,000
Repayments under revolving credit facility	Repayments under revolving credit facility	(30,300)		(28,486)		Repayments under revolving credit facility	(23,150)		(12,800)
Payment of debt issuance costs	Payment of debt issuance costs	(176)		(195)		Payment of debt issuance costs	(2,204)		(76)
Proceeds from issuance of common shares and warrants, net of fees		—		14,839
Proceeds from exercise of stock options		—		219
Proceeds from exercise of warrants						Proceeds from exercise of warrants	961		—
Employee taxes on certain stock-based payment arrangements	Employee taxes on certain stock-based payment arrangements	(702)		(1,122)		Employee taxes on certain stock-based payment arrangements	(976)		(507)
Contributions from non-controlling interest		—		136
Distributions to non-controlling interest	Distributions to non-controlling interest	(323)		—		Distributions to non-controlling interest	(318)		(176)
Net cash provided by (used in) financing activities:		(951)		13,391
Net cash provided by financing activities:						Net cash provided by financing activities:	13,288		1,441

Net decrease in cash and cash equivalents		(4,847)		(1,290)
Cash and cash equivalents at beginning of period		14,353		11,126
Cash and cash equivalents at end of period		$	9,506	$	9,836
Net increase (decrease) in cash and cash equivalents and restricted cash						Net increase (decrease) in cash and cash equivalents and restricted cash	19,391		304
Cash and cash equivalents and restricted cash at beginning of period						Cash and cash equivalents and restricted cash at beginning of period	15,619		14,353
Cash and cash equivalents and restricted cash at end of period						Cash and cash equivalents and restricted cash at end of period	$	35,010	$	14,657

Supplemental cash flow information:	Supplemental cash flow information:					Supplemental cash flow information:
Income taxes paid	Income taxes paid	$	139	$	185	Income taxes paid	$	245	$	132
Interest paid	Interest paid	662		482		Interest paid	$	1,446	$	236

Supplemental non-cash investing and financing activities:	Supplemental non-cash investing and financing activities:					Supplemental non-cash investing and financing activities:
Gain on extinguishment of debt and accrued interest related to PPP loan		$	10,191	$	—
Unpaid liability for purchases of property and equipment	Unpaid liability for purchases of property and equipment	573		599		Unpaid liability for purchases of property and equipment	$	1,035	$	591
Unpaid liability for employee taxes on certain stock-based payment arrangements	Unpaid liability for employee taxes on certain stock-based payment arrangements	52		124		Unpaid liability for employee taxes on certain stock-based payment arrangements	$	149	$	97

See accompanying notes to the unaudited condensed consolidated financial statements

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Potbelly Corporation and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements (unaudited)

(1) Organization and Other Matters

Business

Potbelly Corporation, ~~(the~~a Delaware corporation, together with its subsidiaries (collectively referred to as the "Company", "Potbelly", "we", "us" or "our"), ~~through its wholly owned subsidiaries,~~ owns and operates ~~388~~372 company-owned shops in the United ~~States.~~States as of June 25, 2023. Additionally, Potbelly franchisees operate 4655 shops ~~in the United States.~~domestically.

Basis of Presentation

The unaudited condensed consolidated financial statements and notes herein should be read in conjunction with the audited consolidated financial statements of Potbelly ~~Corporation~~ and its subsidiaries and the notes thereto included in our Annual Report on Form 10-K for the year ended December ~~26, 2021.~~25, 2022. The unaudited condensed consolidated financial statements included herein have been prepared by us without audit, pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the "SEC") regarding interim financial reporting. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America ("U.S. GAAP") have been condensed or omitted pursuant to the SEC rules and regulations. In the opinion of management, all adjustments, which are of a normal and recurring nature (except as otherwise noted), that are necessary to present fairly our balance sheet as of ~~September~~June 25, ~~2022~~2023 and December ~~26, 2021,~~25, 2022, our statement of operations for the quarter and year to date ended ~~September~~June 25, ~~2022~~2023 and ~~September~~June 26, ~~2021,~~2022, the statement of equity for the quarter and year to date ended ~~September~~June 25, ~~2022~~2023 and ~~September~~June 26, ~~2021,~~2022, and our statement of cash flows for the quarter and year to date ended ~~September~~June 25, ~~2022~~2023 and ~~September~~June 26, ~~2021~~2022 have been included. The condensed consolidated statements of operations for the interim periods presented herein are not necessarily indicative of the results to be expected for the full year.

Beginning in the first quarter of 2022, we reclassified certain advertising and marketing expenses within the condensed consolidated statement of operations. Refer to discussion of the Potbelly Brand Fund in the paragraphs below. These reclassifications had no impact on our results of operations, financial position, or cash flows.

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.

~~COVID-19~~

On January 30, 2020, the WHO announced a global health emergency because of COVID-19 and the risks to the international community as the virus spreads globally. On March 11, 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally. The COVID-19 pandemic significantly impacted economic conditions in the United States where all our shops are located during portions of 2020 and 2021. The availability of COVID-19 vaccines and lifting of local restrictions has resulted in an improvement to our sales since the beginning of the pandemic. We have returned nearly all of our shops to our pre-pandemic operating hours. To the extent there is a resurgence of COVID-19 cases, we will follow guidance from local authorities in determining the appropriate restrictions to put in place for each shop, including mask mandates, hours of operation, and the suspension or reduction of in-shop dining, which could result in lower in-shop dining revenue or higher operating costs.

Principles of Consolidation

The unaudited condensed consolidated financial statements include the accounts of ~~Potbelly Corporation;~~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 2023 consists of 53 weeks and fiscal year 2022 ~~and 2021 both consist~~consists of 52 weeks. The fiscal quarters ended ~~September~~June 25,

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~~2022~~ 2023 and ~~September~~June 26, ~~2021~~2022 each consisted of 13 weeks. The year to date periods ended ~~September~~June 25, ~~2022~~2023 and ~~September~~June 26, ~~2021~~2022 each consisted of 3926 weeks.

Use of Estimates

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

Franchise Growth Acceleration Initiative

On March 2, 2022, we announced our Franchise Growth Acceleration Initiative, which included a plan to grow our franchise units domestically through multi-unit shop development area agreements, which may include refranchising certain company-operated shops. Deals for refranchised shops typically include cash consideration for the sale of the current shops as well as development agreement fees for commitments to develop new shops to fully penetrate existing markets. On an ongoing basis, we collect additional cash consideration for royalties and lease payments.

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All losses recognized on sales of shops and other expenses incurred to execute a refranchising transaction are included in Loss on Franchising Growth Acceleration Initiative activities in the condensed consolidated statement of operations. Development agreement fees received are recorded in the consolidated balance sheets as accrued expenses or other long-term liabilities, and amortized over the term of the franchise agreement once the shops are opened. During the first quarter of 2023, we executed our first refranchising transaction. On July 17, 2023, we closed on our second refranchising transaction. Both transactions are further discussed in Note 8. The second refranchising transaction is also discussed in Note 12.

Restricted Cash

As of June 25, 2023, we had restricted cash related to funds held in a money market account as collateral for letters of credit to certain lease agreements.

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


	June 25, 2023		December 25, 2022

Reconciliation of cash, cash equivalents and restricted cash:
Cash and cash equivalents	$	34,261	$	15,619
Restricted cash, noncurrent	749		—
Total cash, cash equivalents and restricted cash shown on statement of cash flows	$	35,010	$	15,619

Potbelly Brand Fund

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

Beginning in the first quarter of fiscal year 2022, we manage these advertising and marketing expenses through the Brand Fund using the funds contributed by our shops. We manage these funds separately from our general operating expenses, but we are not obligated to maintain the funds in separate accounts or entities. We may spend more or less in any fiscal period than the amounts contributed to the Brand Fund, and we may choose to roll over any unused contributions to the following fiscal period or return them to our shops. ~~Cash held related to the Brand Fund is not considered to be restricted cash as there are no restrictions on the use of the funds.~~

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

Expenses incurred by the Brand Fund are ~~allocated~~recorded to company-operated and franchised shops based on ~~their relative contributions. The allocation~~a percentage of ~~company-operated~~sales. Company-operated Brand Fund expense is included within other operating expenses in our condensed consolidated statements of operations. ~~The allocation of franchisee~~Franchisee Brand Fund expense is presented aswithin franchise support, rent and marketing expenses in our condensed consolidated statements of operations. ~~Prior periods have been reclassified to conform to the current presentation of these expenses.~~

Recent Accounting Pronouncements

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

(2) Revenue

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

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For the year to date ended June 25, 2023, revenue recognized from all revenue sources on point in time sales was $243.7 million, and revenue recognized from sales over time was $1.2 million. For the year to date ended June 26, 2022, revenue recognized from all revenue sources on point in time sales was $213.5 million and revenue recognized from sales over time was $0.7 million.

Franchise Revenue, including Rent Income

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

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

Gift Card Redemptions / Breakage Revenue

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

We recognized gift card breakage income of $0.4 million and ~~$0.1~~$0.3 million for the year to date ended ~~September~~June 25, ~~2022~~2023 and ~~September~~June 26, ~~2021,~~2022, respectively, which is recorded within net sandwich shop sales in our condensed consolidated statements of operations.

Loyalty Program

We offer a customer loyalty program for customers using the Potbelly Perks application at the point of sale. The customer will typically earn 10 points for every dollar spent, and the customer will earn a free entrée after earning 1,000 points. We defer revenue associated with the estimated selling price of points earned by Potbelly Perks members towards free entrées as each point is earned, and a corresponding liability is established in deferred revenue. The deferral is based on the estimated value of the product for which the reward is expected to be redeemed, net of estimated unredeemed points. Once a customer earns a free entrée, that entrée reward will expire after 30 days. Any point in a customer’s account that does not go toward earning a full entrée will expire after the customer's account has been inactive for a year. The breakage amount recognized is estimated based on a historical data analysis of loyalty reward redemptions and is recognized in net shop sandwich sales in the consolidated statement of operations. When points are redeemed, we recognize revenue for the redeemed product and reduce accrued expenses.

For the year to date ended September 25, 2022 revenue recognized from all revenue sources on point in time sales was $330.6 million, and revenue recognized from sales over time was $1.2 million. For the year to date ended September 26, 2021, revenue recognized from all revenue sources on point in time sales was $276.8 million and revenue recognized from sales over time was $0.4 million.

Contract Liabilities

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

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

Current Contract
Liability
Noncurrent Contract
Liability
(Thousands) (Thousands)
Beginning balance as of December 26, 2021 $ 6,533 $ 1,428
Ending balance as of September 25, 2022 6,146 1,289
Decrease in contract liability $ (387) $ (139)


	Current Contract Liability		Noncurrent Contract Liability
	(Thousands)		(Thousands)
Beginning balance as of December 25, 2022	$	7,008	$	1,677
Ending balance as of June 25, 2023	6,626		3,400
Increase (Decrease) in contract liability	$	(382)	$	1,723

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The aggregate value of remaining performance obligations on outstanding contracts was ~~$7.4~~$10.0 million as of ~~September~~June 25, ~~2022.~~2023. We expect to recognize revenue related to contract liabilities as follows (in thousands), which may vary based upon franchise activity as well as gift card redemption patterns:


Years Ending	Years Ending	Amount		Years Ending	Amount
2022		$	4,171
2023	2023	1,382		2023	$	5,733
2024	2024	394		2024	459
2025	2025	349		2025	465
2026	2026	155		2026	211
2027				2027	147
Thereafter	Thereafter	984		Thereafter	3,011
Total revenue recognized	Total revenue recognized	$	7,435	Total revenue recognized	$	10,026

For the quarter and year to date ended ~~September~~June 25, 2023, the amount of revenue recognized related to the December 25, 2022 liability ending balance was $0.6 million and $2.0 million, respectively. For quarter ended June 26, 2022, the amount of revenue recognized related to the December 26, 2021 liability ending balance was ~~$0.4~~$0.7 million and $2.2 million, respectively. For quarter and year to date ended September 26, 2021, the amount of revenue recognized related to the December 27, 2020 liability ending balance was $0.2 million and $1.1 million, respectively.$1.8 million. This revenue is related to the recognition of gift card redemptions and upfront franchise fees. For the ~~year to date~~quarter ended ~~September~~June 25, ~~2022~~2023 and ~~September~~June 26, ~~2021,~~2022, we did not recognize any revenue from obligations satisfied (or partially satisfied) in prior periods.

(3) Fair Value Measurement

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

The book value of the long-term and short-term debt under the Credit Agreement, ~~subsequently amended most recently as of September 23, 2022 and~~which is further discussed in Note 7, is considered to approximate its fair value as of ~~September~~June 25, ~~2022~~2023 as the interest rates are considered in line with current market rates.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

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

We assess potential impairments to our long-lived assets, which includes property and equipment and lease right-of-use assets, on a quarterly basis or whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. Shop-level assets and right-of-use assets are grouped at the individual shop-level for the purpose of the impairment assessment. Recoverability of an asset group is measured by a comparison of the carrying amount of an asset group to its estimated undiscounted future cash flows expected to be generated by the asset group. If the carrying amount of the asset group exceeds its estimated undiscounted future cash flows, an impairment charge is recognized as the amount by which the carrying amount of the asset group exceeds the fair value of the asset group. The fair value of the shop assets is determined using the discounted future cash flow method of anticipated cash flows through the shop’s lease-end date using fair value measurement inputs classified as Level 3. The fair value of right-of-use assets is estimated using market comparative information for similar properties. Level 3 inputs are derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable. After performing a periodic review of our shops during the quarter and year to date ended ~~September~~June 25, ~~2022,~~2023, it was determined that indicators of impairment were present for certain shops as a result of continued ~~underperformance, primarily related to the impacts of COVID-19.~~underperformance. We performed an impairment analysis related to these shops and recorded an impairment charge of ~~$1.0~~$0.1 million and ~~$3.0~~$0.7 million for the quarter and year to date ended ~~September~~June 25, ~~2022. The ultimate severity and longevity of the COVID-19 pandemic is unknown, and therefore,~~ ~~it is possible that impairments could be identified in future periods, and such amounts could be material.~~2023.

(4) Earnings (Loss) Per Share

Basic and diluted income (loss) per common share attributable to common stockholders are calculated using the weighted average number of common shares outstanding for the period. Diluted income (loss) per common share

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attributable to common stockholders is computed by dividing the income (loss) allocated to common stockholders by the weighted average number of fully diluted common shares outstanding. In periods of a net loss, no potential common shares

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are included in diluted shares outstanding as the effect is anti-dilutive. For the ~~quarter and~~ year to date ended ~~September~~June 26, ~~2021,~~2022, we had a loss per share, and therefore potentially dilutive shares were excluded from the calculation.

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


		For the Quarter Ended				For the Year to Date Ended					For the Quarter Ended				For the Year to Date Ended
		September 25, 2022		September 26, 2021		September 25, 2022		September 26, 2021			June 25, 2023		June 26, 2022		June 25, 2023		June 26, 2022
Net income (loss) attributable to Potbelly Corporation	Net income (loss) attributable to Potbelly Corporation	$	9,029	$	(2,948)	$	1,690	$	(21,301)	Net income (loss) attributable to Potbelly Corporation	$	2,216	$	574	$	890	$	(7,339)
Weighted average common shares outstanding-basic		28,726		28,264		28,563		27,395
Weighted average common stock outstanding-basic										Weighted average common stock outstanding-basic	29,199		28,565		29,053		28,481
Plus: Effect of potentially dilutive stock-based compensation awards	Plus: Effect of potentially dilutive stock-based compensation awards	141		—		329		—		Plus: Effect of potentially dilutive stock-based compensation awards	467		451		360		—
Plus: Effect of potential warrant exercise	Plus: Effect of potential warrant exercise	—		—		55		—		Plus: Effect of potential warrant exercise	422		101		363		—
Weighted average common shares outstanding-diluted	Weighted average common shares outstanding-diluted	28,867		28,264		28,947		27,395		Weighted average common shares outstanding-diluted	30,088		29,117		29,776		28,481
Income (loss) per share available to common stockholders-basic	Income (loss) per share available to common stockholders-basic	$	0.31	$	(0.10)	$	0.06	$	(0.78)	Income (loss) per share available to common stockholders-basic	$	0.08	$	0.02	$	0.03	$	(0.26)
Income (loss) per share available to common stockholders-diluted	Income (loss) per share available to common stockholders-diluted	$	0.31	$	(0.10)	$	0.06	$	(0.78)	Income (loss) per share available to common stockholders-diluted	$	0.07	$	0.02	$	0.03	$	(0.26)
Potentially dilutive shares that are considered anti-dilutive:	Potentially dilutive shares that are considered anti-dilutive:									Potentially dilutive shares that are considered anti-dilutive:
Shares	Shares	2,620		1,888		647		1,994		Shares	433		637		633		1,906

(5) 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 ~~September~~June 25, ~~2022.~~2023. We did not provide for an income tax expense or benefit on our pre-tax income (loss) for the quarter and year to date ended ~~September~~June 25, ~~2022~~2023 and ~~September~~June 26, ~~2021.~~2022. We assess the likelihood of the realization of our deferred tax assets each quarter and the valuation allowance is adjusted accordingly.

On August 16, 2022, the Inflation Reduction Act ("IRA") was signed into law. We do not expect the IRA to have a material impact to our condensed consolidated financial statements and we will continue to monitor the potential impacts of the IRA to our business.

(6) 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.

~~Operating leases result~~ In addition, we lease certain properties from third parties that we sublease to franchisees. We remain primarily liable to the landlord for the performance of all obligations in the ~~recording a right-of-use asset and lease liability on~~event that the ~~consolidated balance sheet. Right-of-use assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from~~sublessee does not perform its obligations under the lease. Operating lease assets and liabilities are recognized at the lease commencement date, which is the date we take possession of the property. Operating lease liabilities represent the present value of lease payments not yet paid. Operating right-of-use assets represent the operating lease liability adjusted for prepayments or accrued lease payments, initial direct costs, lease incentives, and impairment of operating lease assets. In determining the present value of lease payments not yet paid, we estimate our incremental secured borrowing rates

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~~corresponding to the maturities~~All of our ~~leases. We estimate this rate based on prevailing financial market conditions, comparable company and credit analysis, and management judgment.~~

~~Our leases typically contain rent escalations over the lease term and lease expense is recognized on a straight-line basis over the lease term. Tenant incentives used to fund leasehold improvements~~subleases are ~~recognized when earned and reduce right-of-use assets related to the lease. The tenant incentives are amortized through the right-of-use asset~~classified as ~~reductions of rent expense over the lease term.~~

~~We elected a short-term lease exception policy, permitting us to not apply the recognition requirements of ASC 842,~~ ~~Leases,to short-term leases (i.e.~~operating leases with ~~terms of 12 months or less)~~fixed and ~~an accounting policy to account for lease and non-lease components as a single component for certain classes of assets.~~variable income.

~~During the quarter and year to date ended September 25, 2022, we terminated 1 lease and 2 leases, respectively.~~ Lessee Disclosures

We did not ~~incur~~terminate any ~~lease termination fees related to these leases for the year to date ended September 25, 2022. Upon termination of these~~ leases during the quarter and year to date ended ~~September~~June 25, 2022, we derecognized ROU assets of $0.2 million and lease liabilities of $0.3 million that resulted in a net gain of $0.1 million that is recorded in impairment, loss on disposal of property and equipment and shop closures.2023.

Operating lease term and discount rate were as follows:


		September 25, 2022		September 26, 2021			June 25, 2023		June 26, 2022
Weighted average remaining lease term (years)	Weighted average remaining lease term (years)	6.77		7.33		Weighted average remaining lease term (years)	6.35		6.89
Weighted average discount rate	Weighted average discount rate	8.17	%	7.93	%	Weighted average discount rate	8.44	%	8.11	%

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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:~~

For the Quarter Ended For the Year to Date Ended
Classification September 25,
2022 September 26,
2021 September 25,
2022 September 26,
2021
Operating lease cost Occupancy and General and administrative expenses 10,043 10,310 30,440 31,017
Variable lease cost Occupancy 3,251 3,090 10,509 9,565
Total lease cost 13,294 13,400 40,949 40,582
follows (in thousands), which are included in occupancy, general and administrative and franchise support, rent and marketing expense:


	For the Quarter Ended			For the Year Ended
	June 25, 2023		June 26, 2022	June 25, 2023		June 26, 2022
Operating lease cost	$	9,982	10,092	$	20,175	20,397
Variable lease cost	3,824		3,692	7,364		7,044
Short-term lease cost	62		104	157		214
Total lease cost	$	13,868	13,888	$	27,696	27,655

Supplemental disclosures of cash flow information related to leases were as ~~follows:~~follows (in thousands):


		For the Quarter Ended		For the Year to Date Ended			For the Quarter Ended			For the Year Ended
		September 25, 2022	September 26, 2021	September 25, 2022	September 26, 2021		June 25, 2023		June 26, 2022	June 25, 2023		June 26, 2022
Operating cash flows rent paid for operating lease liabilities	Operating cash flows rent paid for operating lease liabilities	10,254	11,688	31,179	36,739	Operating cash flows rent paid for operating lease liabilities	$	10,508	10,804	$	21,206	21,398
Operating right-of-use assets obtained in exchange for new operating lease liabilities	Operating right-of-use assets obtained in exchange for new operating lease liabilities	7,361	2,302	17,537	6,958	Operating right-of-use assets obtained in exchange for new operating lease liabilities	1,368		6,794	4,252		10,176
Reduction in operating right-of-use assets due to lease terminations and modifications	Reduction in operating right-of-use assets due to lease terminations and modifications	84	—	1,347	4,140	Reduction in operating right-of-use assets due to lease terminations and modifications	$	859	1,264	$	859	1,264

Maturities of lease liabilities were as follows (in thousands) as of June 25, 2023:


	Operating Leases
Remainder of 2023	$	20,469
2024	41,337
2025	38,586
2026	34,641
2027	28,906
2028	22,311
Thereafter	46,159
Total lease payments	232,409
Less: imputed interest	(54,709)
Present value of lease liabilities	$	177,700

As of ~~September~~June 25, ~~2022,~~2023, we had no significant real estate leases entered into that had not yet commenced.

Lessor Disclosures

We recognized $0.5 million and $0.6 million in franchise rent income during the quarter and year to date ended June 25, 2023 respectively, which is included in franchise royalties, fees and rent income in the condensed consolidated statement of operations. During the quarter and year to date ended June 25, 2023, we incurred $0.6 million and $0.7 million

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~~Maturities~~in expenses associated with these leases, which are included in franchise support, rent and marketing expenses in the condensed consolidated statement of operations. The components of lease ~~liabilities~~income were as follows ~~as of September 25, 2022:~~(in thousands):

Operating Leases
Remainder of 2022 10,575
2023 41,879
2024 39,269
2025 36,276
2026 32,632
2027 27,139
Thereafter 63,374
Total lease payments 251,144
Less: imputed interest (60,977)
Present value of lease liabilities 190,167


	For the Quarter Ended				For the Year Ended
	June 25, 2023		June 26, 2022		June 25, 2023		June 26, 2022
Number of subleases	8		—		8		—

Operating lease income	$	480	$	—	$	600	$	—
Variable lease income	25		—		38		—
Franchise rent income	$	505	$	—	$	638	$	—

(7) Debt and Credit Facilities

The components of long-term debt were as ~~follows:~~follows (in thousands):


		September 25, 2022		December 26, 2021			June 25, 2023		December 25, 2022
Revolving credit facility	Revolving credit facility	$	10,100	$	9,850	Revolving credit facility	$	—	$	8,550
Paycheck Protection Program loan		—		10,000
Term loan credit facility						Term loan credit facility	24,375		—
Unamortized debt issuance costs						Unamortized debt issuance costs	(2,017)		—
Less: current portion of long-term debt	Less: current portion of long-term debt	—		(2,333)		Less: current portion of long-term debt	(1,250)		—
Total long-term debt	Total long-term debt	$	10,100	$	17,517	Total long-term debt	$	21,108	$	8,550

~~Revolving credit facility~~Term Loan Credit Facility

On ~~August~~February 7, ~~2019,~~2023 (the “Closing Date”), we entered into a ~~second amended~~credit and ~~restated revolving credit facility~~guaranty agreement (the ~~"Credit Agreement"~~“Credit Agreement”) with ~~JPMorgan Chase Bank, N.A. ("JPMorgan"~~Sagard Holdings Manager LP as administrative agent (the “Administrative Agent”). The Credit Agreement amends and restates the revolving credit facility agreement, dated as of December 9, 2015, and amended on May 3, 2019 (collectively, the "Prior Credit Agreement") with JPMorgan. As disclosed in our Annual Report on Form 10-K for the fiscal year ended December 26, 2021, we subsequently amended the Credit Agreement during fiscal years 2020 and 2021. The Credit Agreement provides for a ~~revolving~~term loan facility with an aggregate commitment of $25 million (the “Term Loan”). Concurrent with entry into the Credit Agreement, we repaid in full and terminated the obligations and commitments under our existing senior secured credit facility in(the “Former Credit Facility”). Upon termination of the Former Credit Facility, we recognized a ~~maximum~~loss on extinguishment of debt of $0.2 million. The remaining proceeds from the Term Loan were used to pay related transaction fees and expenses, and for general corporate purposes.

The Credit Agreement is scheduled to mature on February 7, 2028. We are required to make principal ~~amount~~payments equal to 1.25% of ~~$25 million.~~

~~On January 28, 2022, we entered into Amendment No. 6 (the "Sixth Amendment") to~~ the ~~Credit Agreement. The Sixth Amendment, among other things, (i) extended~~initial principal of the Term Loan on the last business day of each fiscal quarter. If not previously paid, any remaining principal balance must be repaid on the maturity ~~date~~date.

Loans under the Credit Agreement ~~from January 31,~~will initially bear interest, at the Company’s option, at either the term SOFR plus 9.25% per annum or base rate plus 8.25% per annum.

As of June 25, 2023, the effective interest rate was 15.00%.

We may prepay the Term Loan in agreed-upon minimum principal amounts, subject to ~~May 31, 2023, (ii) changed~~prepayment fees equal to (a) if the ~~benchmark interest rates~~prepayment occurs 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 occurs 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 occurs 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.

Subject to certain customary exceptions, obligations under the Credit Agreement ~~for borrowings from~~are guaranteed by the ~~London Interbank Offered Rate (LIBOR)~~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.

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The Credit Agreement contains customary representations and affirmative and negative covenants. Among other things, these covenants restrict the Company’s and certain of its subsidiaries’ ability to incur indebtedness, make certain investments, pay dividends or repurchase stock, and make dispositions and acquisitions. In addition, the ~~Secured Overnight Financing Rate (SOFR) subject to~~Credit Agreement requires that the Company and its wholly-owned subsidiaries maintain certain ~~adjustments in the Sixth Amendment, (iii) increased the interest rate margin by 75 basis points with respect to any CBFR Loan (as defined~~total net leverage ratios as set forth in the Credit ~~Agreement), (iv) sets the interest rate margin at 600 basis points with respect to any Term Benchmark Loan (as defined~~Agreement, an average liquidity amount that shall not be less than $10 million, maximum capital expenditures per year as set forth in the Credit ~~Agreement), (v) amended certain financial covenant testing levels,~~Agreement and ~~(vi) amended the definition of subsidiary to exclude the Potbelly Employee Relief Fund NFP, an Illinois not-for-profit corporation.~~

~~On May 31, 2022, we entered into Amendment No. 7 (the "Seventh Amendment") to~~fixed charge coverage ratios as set forth in the Credit Agreement.

The ~~Seventh Amendment, among other things (i) extended~~Credit Agreement also contains customary events of default. If an event of default occurs, the ~~maturity date~~Administrative Agent and lenders are entitled to take various actions, including the acceleration of amounts due under the Credit Agreement, ~~from May 31, 2023~~termination of commitments thereunder and all other actions permitted to ~~August 31, 2023 and (ii) amended certain financial covenant testing levels.~~be taken by a secured creditor.

~~On September 23, 2022, we entered~~In connection with entering into ~~Amendment No. 8 (the "Eighth Amendment") to the Credit Agreement. The Eighth Amendment, among other things (i) extended the maturity date under~~ the Credit Agreement, ~~from August 31,~~we paid $2.2 million in debt issuance costs, all of which were capitalized. During the quarter ended June 25, 2023, ~~to December 31, 2023 and (ii) amended certain financial covenant testing levels.~~

we amortized $0.2 million of debt issuance costs using the effective interest method, which is included in interest expense in the condensed consolidated statement of operations. As of ~~September~~June 25, ~~2022,~~2023, we had ~~$10.1 million outstanding under the Credit Agreement. As of December 26, 2021, we had $9.9~~$24.4 million outstanding under the Credit Agreement. We are currently in compliance with all financial debt covenants.

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~~Paycheck Protection Program Loan~~(8) Franchise Growth Acceleration Initiative

On ~~August 10, 2020, PSW, an indirect subsidiary~~March 2, 2022, we announced our Franchise Growth Acceleration Initiative, which included a plan to grow our franchise units domestically through multi-unit shop development area agreements, which may include refranchising certain company-operated shops. Deals for refranchised shops typically include cash consideration for the sale of the ~~Company, entered into a loan~~current shops as well as development agreement ~~with Harvest Small Business Finance, LLC in the aggregate amount of $10.0 million (the "Loan"), pursuant~~fees for commitments to ~~the PPP under the CARES Act. The Loan was necessary~~develop new shops to ~~support our~~fully penetrate existing markets. On an ongoing ~~operations due to the economic uncertainty resulting from the COVID-19 pandemic~~basis, we collect additional cash consideration for royalties and ~~lack of access to alternative sources of liquidity.~~lease payments.

The ~~Loan was scheduled to mature five years from the date on which PSW applies for loan forgiveness under the CARES Act, bears interest at~~following is a ~~rate of 1% per annum and is subject to the terms and conditions applicable to loans administered by the U.S. Small Business Administration ("SBA") under the CARES Act. The PPP provides that the use~~summary of the Loan amount shall be limited to certain qualifying expenses and may be partially or wholly forgiven in accordance with the requirements set forth in the CARES Act. We used all of the PPP proceeds toward qualifying expenses and pursued forgiveness of the full Loan amount.

On July 12, 2022, we received notification from Harvest Small Business Finance, LLC that the SBA approved our loan forgiveness application for the entire outstanding principal and accrued interest under the Loan equaling $10.2 million, which we recognized as a gain on extinguishment of debt during the third fiscal quarter in our condensed consolidated statement of operations.

~~(8) Restructuring~~

On November 3, 2020, as part of our COVID-related cost reduction efforts and to better align our general and administrative expenses with future strategy, we made the determination to reorganize and restructure our corporate team. The restructuring plan implemented resulted in general and administrative expense savings in 2021 and 2022. This was accomplished through corporate expense optimization, consolidating our shop support services, and through other expense and staff reductions. As a result, we reduced corporate employment levels by approximately 35 employees in the fourth quarter of 2020. We substantially completed our planned restructuring actions during 2020, but we will continue to evaluate our cost structure and seek opportunities for further efficiencies and cost savings as part of our ongoing strategy.

~~During the first quarter of 2022, we fully paid our remaining obligations~~activities recorded as a result of the ~~restructuring~~Franchise Growth Acceleration initiative during the quarter and year ended June 25, 2023 and June 26, 2022:


	For the Quarter Ended				For the Year to Date Ended
	June 25, 2023		June 26, 2022		June 25, 2023		June 26, 2022
Number of shops sold to franchisees	—		—		8		—

Proceeds from sale of company-operated shops	$	—	$	—	$	100	$	—
Net assets sold	—		—		(512)		—
Goodwill related to the company-operated shops sold to franchisee	—		—		(21)		—
Loss on sale of company-operated shops, net	—		—		(433)		—

Adjustment to recognize held-for-sale assets at fair value	—		—		(503)		—
Other expenses (a)	(14)		—		(27)		—
Loss on Franchise Growth Acceleration Initiative activities	$	(14)	$	—	$	(963)	$	—

(a)These costs primarily include professional service fees and travel expenses incurred to execute the refranchise transaction.

Refranchise Transactions

On March 6, 2023, we finalized a multi-unit development agreement along with our first refranchising deal in New York City. This agreement included a development commitment for 13 new shops over the next eight years, and the refranchise of eight shops, the ownership of which was fully transferred to the franchisee on March 6, 2023. We recognized

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a loss of $0.4 million related to the sale of these shops calculated based on the purchase price of the assets held at the company-operated shops less the net assets disposed of, including an allocated portion of goodwill.

Assets held-for-sale

As of June 25, 2023, we had assets held-for-sale of $1.2 million, primarily consisting of property and equipment held at company-operated shops that we plan ~~implemented~~to sell within the next year to new or existing franchisees. Long-lived assets that meet the held-for-sale criteria are reported at the lower of their carrying value or fair value less estimated costs to sell. During the quarter ended March 26, 2023, we recorded an adjustment of $0.5 million to recognize the held-for-sale assets at fair value, which is included in loss on Franchising Growth Acceleration Initiative activities in the ~~fourth~~condensed consolidated statement of operations. The estimated fair value of the assets held-for-sale is based upon Level 2 inputs, which includes a sales agreement. On July 17, 2023, we closed on the sale of these assets and ownership transferred to the franchisee. For the quarter ended June 25, 2023, we received $1.2 million in cash attributable to the sale of ~~2020.~~


	~~Total~~
	~~(Thousands)~~
~~Balance as of December 26, 2021~~	$	~~122~~
~~Charges incurred~~	—
~~Payments made~~	~~(122)~~
~~Balance at September 25, 2022~~	$	—

these refranchise assets.

(9) Capital Stock

On May 8, 2018, we announced that our Board of Directors authorized a stock repurchase program for up to $65.0 million of our outstanding common stock. The program permits us, from time to time, to purchase shares in the open market (including in pre-arranged stock trading plans in accordance with the guidelines specified in Rule 10b5-1 under the Securities and Exchange Act of 1934, as amended) or in privately negotiated transactions. The number of common shares actually repurchased, and the timing and price of repurchases, will depend upon market conditions, SEC requirements and other factors. Purchases may be started or stopped at any time without prior notice depending on market conditions and other factors. For the quarter ~~and year to date~~ ended ~~September~~June 25, ~~2022,~~2023, we did not repurchase any shares of our common stock under the stock repurchase program. We do not have plans to repurchase any common stock under our stock repurchase program at this time.

On February 9, 2021, we closed on a Securities Purchase Agreement (the "SPA") for the sale by us of 3,249,668 shares of our common stock at a par value of $0.01 per share and the issuance of warrants to purchase 1,299,861 shares of common stock at an exercise price of $5.45 per warrant for gross proceeds of $16.0 million, before deducting placement agent fees and offering expenses of approximately $1.0 million. The warrants are initially exercisable commencing August 13, 2021 through their expiration date of August 12, 2026. The proceeds received from the SPA were allocated between

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shares and warrants based on their relative fair values at closing. The warrants were valued utilizing the Black-Scholes method. During the quarter and year to date ended June 25, 2023, 17,505 and 176,272 warrants were exercised at the exercise price of $5.45 per warrant. As of June 25, 2023, we had 1,123,589 warrants outstanding that are exercisable through August 12, 2026.

On November 3, 2021, we entered into a certain Equity Sales Agreement (the "Sales Agreement") with William Blair & Company, L.L.C., as agent ("William Blair") pursuant to which we may sell shares of our common stock having an aggregate offering price of up to $40.0 million (the "Shares"), from time to time, in our sole discretion, through an "at the market" equity offering program under which William Blair will act as sales agent. As of ~~September~~June 25, ~~2022,~~2023, we have not sold any shares under the Sales Agreement.

(10) Stock-Based Compensation

Stock options

We have awarded stock options to certain employees including ~~the~~our senior leadership team. The number of options and exercise price of each option is determined by an independent committee designated by our Board of Directors. The options granted are generally exercisable over a 10-year period from the date of the grant. Outstanding options expire on various dates through the year 2028. The range of exercise prices for the outstanding options as of ~~September~~June 25, ~~2022~~2023 is ~~$9.47~~$10.59 and $20.53 per option, and the options generally vest in one-fourth and one-fifth increments over four and five-year periods, respectively.

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A summary of stock option activity for the year to date ended June 25, 2023 is as follows:


Options	Options	Shares (Thousands)	Weighted Average Exercise Price		Aggregate Intrinsic Value (Thousands)		Weighted Average Remaining Term (Years)	Options	Shares (Thousands)	Weighted Average Exercise Price		Aggregate Intrinsic Value (Thousands)		Weighted Average Remaining Term (Years)
Outstanding—December 26, 2021		538	$	12.03	$	—	2.35
Outstanding—December 25, 2022								Outstanding—December 25, 2022	473	$	12.22	$	—	1.46
Granted	Granted	—	—					Granted	—	—
Exercised	Exercised	—	—					Exercised	—	$	—
Canceled	Canceled	(43)	9.14					Canceled	(67)	9.77
Outstanding—September 25, 2022		495	12.28		$	—	1.71
Exercisable—September 25, 2022		495	$	12.28	$	—	1.71
Outstanding—June 25, 2023								Outstanding—June 25, 2023	406	$	12.62	$	—	1.06
Exercisable—June 25, 2023								Exercisable—June 25, 2023	406	12.62		$	—	1.06

Stock-based compensation related to stock options is measured at the grant date based on the calculated fair value of the award, and is recognized as expense over the requisite employee service period, which is generally the vesting period of the grant with a corresponding increase to additional paid-in capital. We did not recognize stock-based compensation expense related to stock options for the quarter or year to date ended ~~September~~June 25, 2023 or the quarter ended June 26, 2022. For the year to date ended ~~September 25,~~June 26, 2022, we recognized stock-based compensation expense related to stock options of ~~less than $0.1 million. For the quarter and year to date ended September 26, 2021, we recognized stock-based compensation expense related to stock options of less than~~ $0.1 million. As of ~~September~~June 25, ~~2022,~~2023, we do not have unrecognized stock-based compensation expense related to stock options. We record stock-based compensation expense within general and administrative expenses in the condensed consolidated statements of operations.

Restricted stock units

We award restricted stock units ("RSUs") to certain employees and certain non-employee members of our Board of Directors. ~~Prior~~Grants of RSUs to ~~2021, the~~our Board of Director grants had a vesting schedule of 50% on the first anniversary of the grant date and 50% on the second anniversary of the grant date. Beginning with the annual grant made in the second quarter of 2021, the Board of Director grants fully vest on the first anniversary of the grant date, or upon termination from the Board of Directors for any reason other than for cause, a pro rata portion of the shares vest on the termination date. The employee grants vest in one-third increments over a three-year period.

A summary of RSU activity for the year to date ended June 25, 2023 is as follows:

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RSUs	RSUs	Number of RSUs (Thousands)	Weighted Average Fair Value per Share		RSUs	Number of RSUs (Thousands)	Weighted Average Fair Value per Share
Non-vested as of December 26, 2021		1,151	$	4.87
Non-vested as of December 25, 2022					Non-vested as of December 25, 2022	908	$	4.25
Granted	Granted	497	6.11		Granted	591	7.41
Vested	Vested	(664)	5.80		Vested	(551)	5.08
Canceled	Canceled	—	—		Canceled	(49)	6.34
Non-vested as of September 25, 2022		984	$	4.29
Non-vested as of June 25, 2023					Non-vested as of June 25, 2023	899	$	6.95

For the quarter and year to date ended ~~September~~June 25, 2023, we recognized stock-based compensation expense related to RSUs of $1.0 million and $1.6 million, respectively. For the quarter and year to date ended June 26, 2022, we recognized stock-based compensation expense related to RSUs of ~~$0.8~~$0.7 million and ~~$2.1 million, respectively. For the quarter and year to date ended September 26, 2021, we recognized stock-based compensation expense related to RSUs of $0.6 million and $1.0~~$1.3 million, respectively. As of ~~September~~June 25, ~~2022,~~2023, unrecognized stock-based compensation expense for RSUs was ~~$5.0~~$6.7 million, which will be recognized through fiscal year 2024.

Performance stock units

We award performance share units ("PSUs") to certain of our employees. ~~The~~We have PSUs that have certain vesting conditions based upon our stock price and relative stock performance. We also have PSUs that are based solely on stock price.

Because these PSUs are subject to service and market vesting conditions, we determine the fair market value of each grant using a Monte Carlo simulation model. Participants are entitled to receive a specified number of shares of our common stock contingent on achievement of a stock return on our common stock. For the quarter and year to date ended ~~September~~June 25, 2023, we recognized stock-based compensation expense for PSUs with market vesting conditions of $0.3 million

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and $0.6 million, respectively. For the quarter and year to date ended June 26, 2022, we recognized stock-based compensation expense for PSUs with market vesting conditions of ~~$0.2~~$0.1 million and ~~$0.4~~$0.2 million, respectively.

A summary of activity for PSUs with market vesting conditions for the year to date ended ~~September~~June 25, ~~2022~~2023 is as follows:


PSUs	PSUs	Number of PSUs (Thousands)	Weighted Average Fair Value per Share	PSUs	Number of PSUs (Thousands)	Weighted Average Fair Value per Share
Non-vested as of December 26, 2021		130	8.43
Non-vested as of December 25, 2022				Non-vested as of December 25, 2022	275	9.34
Granted	Granted	145	10.15	Granted	297	7.68
Vested	Vested	—	—	Vested	(18)	4.30
Canceled	Canceled	—	—	Canceled	(40)	6.24
Non-vested as of September 25, 2022		275	9.34
Non-vested as of June 25, 2023				Non-vested as of June 25, 2023	514	$8.44

(11) Commitments and Contingencies

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. We accrue for such liabilities when it is probable that future costs will be incurred and such costs can be reasonably estimated. Such accruals are based on developments to date, our estimates of the outcomes of these matters and ~~its~~our experience in contesting, litigating and settling other similar matters. 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.

Many of the food products we purchase are subject to changes in the price and availability of food commodities, including, among other things, beef, poultry, grains, dairy and produce. We work with our suppliers and use a mix of forward pricing protocols for certain items including agreements with our supplier on fixed prices for deliveries at a time in the future and agreements on a fixed price with our suppliers for the duration of those protocols. We also utilize formula pricing protocols under which the prices we pay are based on a specified formula related to the prices of the goods, such as spot prices. Our use of any forward pricing arrangements varies substantially from time to time and these arrangements tend to cover relatively short periods (i.e., typically twelve months or less). Such contracts are used in ~~the~~ normal purchases of our food products and not for speculative purposes, and as such are not required to be evaluated as derivative instruments.

(12) Subsequent Events

On July 17, 2023, we finalized a multi-unit development agreement to develop 15 new Potbelly shops in the next eight years. The transaction included refranchising 12 existing shops. Refer to Note 8 for additional information.

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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 ~~26, 2021.~~25, 2022. This discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the Private Securities Litigation Reform Act of 1995, and involves numerous risks and uncertainties. Forward-looking statements may include, among others, statements relating to our future financial position and results of operations, our ability to grow our brand in new and existing markets, and the implementation and results of strategic initiatives, including our "Traffic-Driven Profitability" ~~5-pillar~~Five-Pillar strategic plan. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts and generally contain words such as "believes," "expects," "may," "will," "should," "seeks," "intends," "plans," "strives," "goal," "estimates," "forecasts," "projects" or "anticipates" and the negative of these terms or similar expressions. Our forward-looking statements are subject to risks and uncertainties, which may cause actual results to differ materially from those projected or implied by the forward-looking statement, due to reasons including, but not limited to, ~~the potential future impact of COVID-19 on our business and results of operations;~~ compliance with covenants in our credit facility; competition; general economic conditions including any impact from inflation; our ability to successfully implement our business strategy; the success of our initiatives to increase sales and traffic, including the success of our franchising initiatives; changes in commodity, energy, labor and other costs; our ability to attract and retain management and employees and adequately staff our restaurants; consumer reaction to industry-related public health issues and perceptions of food safety; our ability to manage our growth; reputational and brand issues; price and availability of commodities; consumer confidence and spending patterns; and weather conditions. Forward-looking statements are based on current expectations and assumptions and currently available data and are neither predictions nor guarantees of future events or performance. You should not place undue reliance on forward-looking statements, which speak only as of the date hereof. See "Risk Factors" and "Cautionary Note Regarding Forward-Looking Statements" included in our Annual Report on Form 10-K for the fiscal year ended December ~~26, 2021,~~25, 2022, for a discussion of factors that could cause our actual results to differ from those expressed or implied by forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law.

Business

Potbelly ~~Corporation~~ is a neighborhood sandwich concept that has been feeding customers’ smiles with warm, toasty sandwiches, signature salads, hand-dipped shakes and other fresh menu items, customized just the way customers want them, for more than 40 years. Potbelly owns and operates Potbelly Sandwich Shop concepts in the United States. We also have domestic franchise operations of Potbelly Sandwich Shop concepts. Potbelly’s chief operating decision maker is our Chief Executive Officer. Based on how our Chief Executive Officer reviews financial performance and allocates resources on a recurring basis, we have one operating segment and one reportable segment.

We strive to be proactive and deliberate in our efforts to drive profitable growth in our existing business. Our "Traffic-Driven Profitability" ~~5-pillar~~Five-Pillar strategic plan includes a prioritized set of low-cost strategic investments that we believe will deliver strong returns. The 5five pillars are:

•Craveable Quality Food at a Great Value

•People Creating Good Vibes

•Customer Experiences that Drive Traffic Growth

•Digitally Driven Awareness, Connection and Traffic

•Franchise Focused Development

Our shop model is designed to generate, and has generated, strong cash flow, attractive shop-level financial results and high returns on investment. We operate our shops successfully in a wide range of geographic markets, population densities and real estate settings. We aim to generate average shop-level profit margins, a non-GAAP measure, that range from the mid to high teens. Our ability to achieve such margins and returns depends on a number of factors. For example, we face increasing labor and commodity costs, which we have partially offset by increasing menu prices. Although there is

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no guarantee that we will be able to maintain these returns, we believe our attractive shop economics support our ability to profitably grow our brand in new and existing markets.

We are actively executing against our Franchise Growth Acceleration Initiative which includes the goal of refranchising approximately 25% of our ~~company units~~company-operated shops over the next three years and executing area development agreements with franchisees to develop additional Potbelly shops in specific markets.

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

Company-
Operated Franchise-
Operated Total
Company
Shops as of December 27, 2020 400 46 446
Shops opened — 3 3
Shops closed (3) (3) (6)
Shops as of September 26, 2021 397 46 443
Shops as of December 26, 2021 397 46 443
Shops opened — 1 1
Shops closed (9) (1) (10)
Shops as of September 27, 2022 388 46 434

~~Impact of COVID-19 on Our Business~~

The situation surrounding the COVID-19 pandemic continues to change and we cannot determine the extent of the pandemic on our operations and financial results. We have and could continue to experience macroeconomic impacts arising from the COVID-19 pandemic, including but not limited to, commodity inflation, disruption in our supply chain, and labor availability challenges at certain shops. We have increased, and plan to continue to increase, menu prices as necessary in order to offset additional costs as a result of a higher inflationary economic environment in the U.S. These price increases may not be sufficient to mitigate additional unexpected higher costs and further increases may negatively impact consumer behavior and purchases. We will continue to actively monitor the evolving situation and may take further actions that alter our business operations as may be required by federal, state or local authorities or that we determine are in the best interests of our employees, customers, franchisees, stakeholders and communities.


	Company- Operated	Franchise- Operated	Total Company
Shops as of December 26, 2021	397	46	443
Shops opened	—	1	1
Shops closed	(4)	—	(4)
Shops refranchised	—	—	—
Shops as of June 26, 2022	393	47	440

Shops as of December 25, 2022	384	45	429
Shops opened	—	2	2
Shops closed	(4)	—��	(4)
Shops refranchised	(8)	8	—
Shops as of June 25, 2023	372	55	427

Key Performance Indicators

In assessing the performance of our business, we consider a variety of performance and financial measures. The key measures for determining how the business is performing are comparable store sales, number of company-operated shop openings, shop-level profit margins, and ~~adjusted~~Adjusted EBITDA.

Company-Operated Comparable Store Sales

Comparable store sales reflect the change in year-over-year sales for the comparable company-operated store base. We define the comparable store base to include those shops open for 15 months or longer. As of the quarters ended ~~September~~June 25, ~~2022~~2023 and ~~September~~June 26, ~~2021,~~2022, there were ~~382~~369 and ~~365~~379 shops, respectively, in our comparable company-operated store base. Comparable store sales growth can be generated by an increase in number of transactions and/or by increases in the average check amount resulting from a shift in menu mix and/or increase in price. This measure highlights

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performance of existing shops as the impact of new shop openings is excluded. For purposes of the comparable store sales calculation, a transaction is defined as an entrée, which includes sandwiches, salads and bowls of soup or mac and cheese.

Number of Company-Operated Shop Openings

The number of company-operated shop openings reflects the number of shops opened during a particular reporting period. Before we open new shops, we incur pre-opening costs. Often, new shops open with an initial start-up period of ~~higher than normal~~higher-than-normal sales volumes, which subsequently decrease to stabilized levels. While sales volumes are generally higher during the initial opening period, new shops typically experience normal inefficiencies in the form of higher cost of sales, labor and other direct operating expenses and as a result, shop-level profit margins are generally lower during the start-up period of operation. The average start-up period is 10 to 13 weeks. ~~The number and timing of~~With our focus on franchise shop ~~openings has had, and is expected~~development, we expect company shop development to ~~continue to have, an impact on our results of operations.~~be limited in 2023.

Shop-Level Profit ~~(Loss)~~ Margin

Shop-level profit ~~(loss)~~ margin is defined as net company-operated sandwich shop sales less company-operated sandwich shop operating expenses, excluding depreciation, which consists of food, beverage and packaging costs, labor and related expenses, occupancy expenses, and other operating expenses, as a percentage of net company-operated sandwich shop sales. Other operating expenses include all other shop-level operating costs, excluding depreciation, the major components of which are credit card fees, fees to third-party marketplace partners, marketing and advertising, shop technology and

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software, supply chain costs, operating supplies, utilities, and repair and maintenance costs. Shop-level profit ~~(loss)~~ margin is not required by, or presented in accordance with U.S. GAAP. ~~Potbelly believes~~We believe shop-level profit ~~(loss)~~ margin is important in evaluating shop-level productivity, efficiency and performance.

Adjusted EBITDA

~~Potbelly defines adjusted~~We define Adjusted EBITDA as net income before depreciation and amortization, interest expense and the provision for income taxes, adjusted for the impact of the following items that we do not consider representative of ongoing operating performance: stock-based compensation expense, impairment and shop closure expenses, ~~and~~ gain or loss on disposal of property and equipment, and gain or loss on Franchise Growth Acceleration Initiative activities, as well as other one-time, non-recurring ~~charges, such as CEO transition costs.~~charges. Adjusted EBITDA is not required by or presented in accordance with U.S. GAAP. ~~Potbelly believes~~We believe that ~~adjusted~~Adjusted EBITDA is a useful measure of operating performance, as it provides a picture of operating results by eliminating expenses that management does not believe are reflective of underlying business performance.

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Quarter Ended ~~September~~June 25, ~~2022~~2023 Compared to Quarter Ended ~~September~~June 26, ~~2021~~2022

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


		For the Quarter Ended										Increase (Decrease)		Percent Change					For the Quarter Ended										Increase (Decrease)		Percent Change
		September 25, 2022		% of Revenues			September 26, 2021		% of Revenues								June 25, 2023		% of Revenues					June 26, 2022	% of Revenues
Revenues	Revenues																				Revenues
Sandwich shop sales, net	Sandwich shop sales, net	$	116,449	99.0		%	$	100,996	99.3		%	$	15,453	15.3		%		Sandwich shop sales, net	$	124,709		98.5			$	114,992	99.2		$	9,717	8.5
Franchise royalties and fees		1,200		1.0			698		0.7			502		71.9
Franchise royalties, fees and rent income																		Franchise royalties, fees and rent income	1,914			1.5			960		0.8		954		99.4
Total revenues	Total revenues	117,649		100.0			101,694		100.0			15,955		15.7				Total revenues	126,623			100.0			115,952		100.0		10,671		9.2

Expenses	Expenses																	Expenses
(Percentages stated as a percent of sandwich shop sales, net)	(Percentages stated as a percent of sandwich shop sales, net)																	(Percentages stated as a percent of sandwich shop sales, net)
Sandwich shop operating expenses, excluding depreciation	Sandwich shop operating expenses, excluding depreciation																	Sandwich shop operating expenses, excluding depreciation
Food, beverage and packaging costs	Food, beverage and packaging costs	34,814		29.9			28,225		27.9			6,589		23.3				Food, beverage and packaging costs	34,903			28.0			32,830		28.5		2,073		6.3
Labor and related expenses	Labor and related expenses	36,031		30.9			33,087		32.8			2,944		8.9				Labor and related expenses	37,866			30.4			36,121		31.4		1,745		4.8
Occupancy expenses	Occupancy expenses	13,559		11.6			13,437		13.3			122		0.9				Occupancy expenses	13,083			10.5			13,805		12.0		(722)		(5.2)
Other operating expenses	Other operating expenses	19,743		17.0			17,466		17.3			2,277		13.0				Other operating expenses	20,925			16.8			19,128		16.6		1,797		9.4

(Percentages stated as a percent of total revenues)	(Percentages stated as a percent of total revenues)																	(Percentages stated as a percent of total revenues)
Franchise marketing expenses		115		NM			94		NM			21		22.3
Franchise support, rent and marketing expenses																		Franchise support, rent and marketing expenses	1,215			1.0			126		0.1		1,089		864.3
General and administrative expenses	General and administrative expenses	9,554		8.1			7,260		7.1			2,294		31.6				General and administrative expenses	11,695			9.2			8,827		7.6		2,868		32.5
Depreciation expense	Depreciation expense	2,922		2.5			3,610		3.5			(688)		(19.1)				Depreciation expense	2,887			2.3			3,030		2.6		(143)		(4.7)
Pre-opening costs																		Pre-opening costs	33			NM			—		NM		33		NM
Loss on Franchise Growth Acceleration Initiative activities																		Loss on Franchise Growth Acceleration Initiative activities	14			NM			—		NM		14		NM
Impairment, loss on disposal of property and equipment and shop closures	Impairment, loss on disposal of property and equipment and shop closures	1,616		1.4			1,118		1.1			498		44.5				Impairment, loss on disposal of property and equipment and shop closures	658			0.5			1,044		0.9		(386)		(37.0)
Total expenses	Total expenses	118,354		100.6			104,297		102.6			14,057		13.5				Total expenses	123,279			97.4			114,911		99.1		8,368		7.3
Loss from operations		(705)		(0.6)			(2,603)		(2.6)			1,898		NM
Income (loss) from operations																		Income (loss) from operations	3,344			2.6			1,041		0.9		2,303		221.2

Interest expense, net	Interest expense, net	354		0.3			241		0.2			113		46.9				Interest expense, net	1,011			0.8			357		0.3		654		183.2
Gain on extinguishment of debt		(10,191)		(8.7)			—		NM			(10,191)		NM
Loss on extinguishment of debt																		Loss on extinguishment of debt	—			NM			—		NM		—		NM
Income (loss) before income taxes	Income (loss) before income taxes	9,132		7.8			(2,844)		(2.8)			11,976		NM				Income (loss) before income taxes	2,333			1.8			684		0.6		1,649		241.1
Income tax expense (benefit)	Income tax expense (benefit)	(4)		NM			16		NM			(20)		NM				Income tax expense (benefit)	(48)			NM			(24)		NM		(24)		NM
Net income (loss)	Net income (loss)	9,136		7.8			(2,860)		(2.8)			11,996		NM				Net income (loss)	2,381			1.9			708		0.6		1,673		236.3
Net income attributable to non-controlling interest	Net income attributable to non-controlling interest	107		NM			88		NM			19		21.6				Net income attributable to non-controlling interest	165			0.1			134		0.1		31		23.1
Net income (loss) attributable to Potbelly Corporation	Net income (loss) attributable to Potbelly Corporation	$	9,029	7.7		%	$	(2,948)	(2.9)		%	$	11,977	NM		%		Net income (loss) attributable to Potbelly Corporation	$	2,216		1.8			$	574	0.5		$	1,642	286.1

		For the Quarter Ended																	For the Quarter Ended
Other Key Performance Indicators	Other Key Performance Indicators	September 25, 2022					September 26, 2021					Increase (Decrease)						Other Key Performance Indicators	June 25, 2023						June 26, 2022				Increase (Decrease)
Comparable store sales	Comparable store sales	15.0			%		33.7			%		(18.7)			%			Comparable store sales	12.9				%		17.2			%	(4.3)			%
Shop-level profit margin(1)	Shop-level profit margin(1)	10.6			%		8.7			%		1.9			%			Shop-level profit margin(1)	14.4				%		11.4			%	3.0			%
Adjusted EBITDA(1)	Adjusted EBITDA(1)	$	4,677				$	2,677				$	2,000					Adjusted EBITDA(1)	$	8,043					$	5,801			$	2,242

_____________________________________

(1) - Reconciliation below for Non-GAAP measures

"NM" - Amount is not meaningful

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Revenues

Total revenues increased by ~~$16.0~~$10.7 million, or ~~15.7%~~9.2%, to ~~$117.6~~$126.6 million during the quarter ended ~~September~~June 25, ~~2022,~~2023, from ~~$101.7~~$116.0 million during the quarter ended ~~September~~June 26, ~~2021.~~2022. This increase was primarily driven by the sustained recovery of our shops in central business ~~district~~districts and airport locations, improved performance of our catering channel, successful marketing programs, and increased prices to offset cost inflation. Company-operated comparable store sales resulted in an increase in revenue of ~~$15.2~~$14.2 million, or ~~15.0%~~12.9%. The increase in revenue also included sales from shops that were temporarily closed in 2021. Additionally, revenue increased due to reductions in sales and promotional discounts during the quarter ended September 25, 2022 in comparison to the quarter ended September 26, 2021. These increases were partially offset by a decrease in sales of $5.0 million from shops that have either permanently closed ~~during~~or were refranchised over the ~~third quarter of 2022.~~last 12 months. Additionally, revenue from franchise royalties, fees and ~~fees~~rent income increased by ~~$0.5~~$1.0 million, or ~~71.9%.~~99.4% primarily driven by our refranchising efforts.

Food, ~~beverage,~~Beverage, and ~~packaging costs~~Packaging Costs

Food, beverage, and packaging costs increased by ~~$6.6~~$2.1 million, or ~~23.3%~~6.3%, to ~~$34.8~~$34.9 million during the quarter ended ~~September~~June 25, ~~2022,~~2023, from ~~$28.2~~$32.8 million during the quarter ended ~~September~~June 26, ~~2021.~~2022. This increase was primarily driven by an increase in shop sales volume and increased costs of our food and paper supplies, specifically proteins and bread. As a percentage of sandwich shop sales, food, beverage, and packaging costs ~~increased~~decreased to ~~29.9%~~28.0% during the quarter ended ~~September~~June 25, ~~2022,~~2023, from ~~27.9%~~28.5% during the quarter ended ~~September~~June 26, ~~2021,~~2022, primarily driven by increased ~~costs as noted above~~menu prices, partially offset by the increased ~~menu prices.~~costs as previously noted.

Labor and Related Expenses

Labor and related expenses increased by ~~$2.9~~$1.7 million, or ~~8.9%~~4.8%, to ~~$36.0~~$37.9 million during the quarter ended ~~September~~June 25, ~~2022,~~2023, from ~~$33.1~~$36.1 million for the quarter ended ~~September~~June 26, ~~2021,~~2022, primarily driven by an increase in shop sales volumes and higher shop labor wage rates as a result of labor availability challenges in certain restaurants. As a percentage of sandwich shop sales, labor and related expenses decreased to ~~30.9%~~30.4% during the quarter ended ~~September~~June 25, ~~2022,~~2023, from ~~32.8%~~31.4% for the quarter ended ~~September~~June 26, ~~2021,~~2022, primarily driven by sales leverage in certain labor related costs not directly variable with sales.

Occupancy Expenses

Occupancy expenses ~~increased~~decreased by ~~$0.1~~$0.7 million, or ~~0.9%~~5.2%, to ~~$13.6~~$13.1 million during the quarter ended ~~September~~June 25, ~~2022,~~2023, from ~~$13.4~~$13.8 million during the quarter ended ~~September~~June 26, ~~2021,~~2022, primarily due to a decrease in fixed lease expenses as a result of our refranchising efforts, partially offset by an increase in variable lease expenses. As a percentage of sandwich shop sales, occupancy expenses decreased to ~~11.6%~~10.5% for the quarter ended ~~September~~June 25, ~~2022,~~2023, from ~~13.3%~~12.0% for the quarter ended ~~September~~June 26, ~~2021,~~2022, primarily due to increased sales leverage in certain occupancy related costs which are not variable with ~~sales, as well as the impact of lease concessions and restructurings over the last year.~~sales.

Other Operating Expenses

Other operating expenses increased by ~~$2.3~~$1.8 million, or ~~13.0%~~9.4%, to ~~$19.7~~$20.9 million during the quarter ended ~~September~~June 25, ~~2022,~~2023, from ~~$17.5~~$19.1 million during the quarter ended ~~September~~June 26, ~~2021.~~2022. The increase was primarily related to an increase in marketing and advertising spend ~~utilities~~ and certain items variable with sales, including fees to third-party delivery partners and credit card fees. Marketing and advertising expenses included in other operating expenses were $1.7 million and $1.2 million as of the quarter ended September 25, 2022 and the quarter ended September 26, 2021, respectively. As a percentage of sandwich shop sales, other operating expenses ~~decreased~~increased to ~~17.0%~~16.8% for the quarter ended ~~September~~June 25, ~~2022,~~2023, from ~~17.3%~~16.6% for the quarter ended ~~September~~June 26, ~~2021,~~2022, primarily driven by ~~sales leverage~~the increase in ~~operating expense items that are not directly variable with sales.~~marketing and advertising spend.

Franchise ~~marketing expenses~~Support, Rent and Marketing Expenses

Franchise support, rent and marketing expenses increased by ~~$21 thousand~~$1.1 million to ~~$115 thousand~~$1.2 million during the quarter ended ~~September~~June 25, ~~2022~~2023 compared to ~~$94 thousand~~$0.1 million during the quarter ended ~~September~~June 26, ~~2021,~~2022, driven by an increase in franchise rent expenses as a result of the refranchising transaction executed in the first quarter as well as increased marketing and advertising ~~expenses allocated from the Brand Fund to franchised shops.~~expenses.

General and Administrative Expenses

General and administrative expenses increased by ~~$2.3~~$2.9 million, or ~~31.6%~~32.5%, to ~~$9.6~~$11.7 million during the quarter ended ~~September~~June 25, ~~2022,~~2023, from ~~$7.3~~$8.8 million during the quarter ended ~~September~~June 26, ~~2021.~~2022. This increase was primarily driven by an increase in ~~payroll costs~~bonus accrual expense and ~~bonus accrual~~stock-based compensation expense. As a percentage of revenues, general and administrative expenses increased to 9.2% for the quarter ended June 25, 2023, from 7.6% for the quarter ended June 26, 2022, primarily driven by the costs noted above.

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expenses increased to 8.1% for the quarter ended September 25, 2022, from 7.1% for the quarter ended September 26, 2021, primarily driven by an increase in certain costs not directly variable with sales.

Depreciation Expense

Depreciation expense decreased by ~~$0.7~~$0.1 million, or ~~19.1%~~4.7%, to $2.9 million during the quarter ended ~~September~~June 25, ~~2022,~~2023, from ~~$3.6~~$3.0 million during the quarter ended ~~September~~June 26, ~~2021.~~2022. The decrease was driven primarily by a lower depreciable base related to a decrease in the number of company-operated shops and impairment charges taken in prior periods. As a percentage of revenues, depreciation was ~~2.5%~~2.3% during the quarter ended ~~September~~June 25, ~~2022 and was 3.5%~~2023, a decrease from 2.6% for the quarter ended ~~September~~June 26, ~~2021.~~2022.

Impairment, Loss on Disposal of Property and Equipment and Shop Closures

Impairment, loss on disposal of property and equipment and shop closures decreased by ~~$0.5~~$0.4 million, or ~~44.5%~~37.0%, to ~~$1.6~~$0.7 million during the quarter ended ~~September~~June 25, ~~2022,~~2023, from ~~$1.1~~$1.0 million during the quarter ended ~~September~~June 26, ~~2021.~~2022.

After performing a periodic review of our shops during the quarter ended ~~September~~June 25, ~~2022,~~2023, it was determined that indicators of impairment were present for certain shops as a result of continued ~~underperformance, primarily related to the impacts of COVID-19.~~underperformance. We performed an impairment analysis related to these shops and recorded an impairment charge of ~~$1.0~~$0.1 million for the quarter ended ~~September~~June 25, ~~2022. The ultimate severity and longevity of the COVID-19 pandemic is unknown, and therefore,~~ ~~it is possible that impairments could be identified in future periods, and such amounts could be material.~~2023.

During the ~~quarter~~quarters ended ~~September~~June 25, 2023 and June 26, 2022, we did not incur any lease termination fees.

Interest Expense, Net

Net interest expense was ~~$354 thousand~~$1.0 million during the quarter ended ~~September~~June 25, ~~2022~~2023 compared to ~~$241 thousand~~$0.4 million during the quarter ended ~~September~~June 26, ~~2021,~~2022, due to higher interest rates and average borrowings outstanding as a result of ~~higher interest rates on our revolving credit facility agreement.~~the Term Loan entered into in February 2023.

Income Tax Expense

We recognized an income tax benefit of $4$48.0 thousand and $24.0 thousand for the ~~quarter~~quarters ended ~~September~~June 25, ~~2022. We recognized income tax expense of $16 thousand for the quarter ended September~~2023 and June 26, ~~2021.~~2022, respectively.

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Year to Date Ended ~~September~~June 25, ~~2022~~2023 Compared to Year to Date Ended ~~September~~June 26, ~~2021~~2022

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

For the Year to Date Ended Increase
(Decrease) Percent
Change
September 25,
2022 % of
Revenues September 26,
2021 % of
Revenues
Revenues
Sandwich shop sales, net $ 328,873 99.1 % % $ 275,274 99.3 % $ 53,599 19.5 %
Franchise royalties and fees $ 2,950 0.9 $ 1,974 0.7 976 49.4
Total revenues 331,823 100.0 $ 277,248 100.0 54,575 19.7
Expenses
(Percentages stated as a percent of sandwich shop sales, net)
Sandwich shop operating expenses, excluding depreciation
Food, beverage and packaging costs 94,952 28.9 76,035 27.6 18,917 24.9
Labor and related expenses 105,405 32.1 93,662 34.0 11,743 12.5
Occupancy expenses 41,209 12.5 40,598 14.7 611 1.5
Other operating expenses 56,977 17.3 47,039 17.1 9,938 21.1
(Percentages stated as a percent of total revenues)
Franchise marketing expenses 361 0.1 213 NM 148 69.5
General and administrative expenses 26,899 8.1 23,106 8.3 3,793 16.4
Depreciation expense 9,089 2.7 12,337 4.4 (3,248) (26.3)
Impairment, loss on disposal of property and equipment and shop closures 3,980 1.2 4,497 1.6 (517) (11.5)
Total expenses 338,872 102.1 297,487 107.3 41,385 13.9
Loss from operations (7,049) (2.1) (20,239) (7.3) 13,190 NM
Interest expense, net 1,037 0.3 713 0.3 324 45.4
Gain on extinguishment of debt (10,191) (3.1) — NM (10,191) NM
Income (loss) before income taxes 2,105 0.6 (20,952) (7.6) 23,057 NM
Income tax expense (benefit) 148 NM 230 NM (82) (35.7)
Net income (loss) 1,957 0.6 (21,182) (7.6) 23,139 NM
Net income attributable to non-controlling interest 267 NM 119 NM 148 124.4
Net income (loss) attributable to Potbelly Corporation $ 1,690 0.5 % $ (21,301) (7.7) % $ 22,991 NM %
For the Year to Date Ended
Other Key Performance Indicators September 25,
2022 September 26,
2021 Increase
(Decrease)
Comparable store sales 18.5 % 29.1 % (10.6) %
Shop-level profit margin(1)
9.2 % 6.5 % 2.7 %
Adjusted EBITDA(1)
$ 8,199 $ (2,036) $ 10,235

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	For the Year to Date Ended										Increase (Decrease)		Percent Change
	June 25, 2023		% of Revenues			June 26, 2022		% of Revenues
Revenues
Sandwich shop sales, net	$	241,656	98.7	%	%	$	212,423	99.2		%	$	29,233	13.8
Franchise royalties, fees and rent income	$	3,237	1.3			$	1,750	0.8			1,487		85.0
Total revenues	244,893		100.0			$	214,173	100.0			30,720		14.3

Expenses
(Percentages stated as a percent of sandwich shop sales, net)
Sandwich shop operating expenses, excluding depreciation
Food, beverage and packaging costs	67,523		27.9			60,138		28.3			7,385		12.3
Labor and related expenses	74,368		30.8			69,374		32.7			4,994		7.2
Occupancy expenses	26,393		10.9			27,650		13.0			(1,257)		(4.5)
Other operating expenses	41,409		17.1			37,233		17.5			4,176		11.2

(Percentages stated as a percent of total revenues)
Franchise support, rent and marketing expenses	1,806		0.7			246		0.1			1,560		634.1
General and administrative expenses	21,664		8.8			17,345		8.1			4,319		24.9
Depreciation expense	5,857		2.4			6,167		2.9			(310)		(5.0)
Pre-opening costs	55		NM			—		NM			55		NM
Loss on Franchise Growth Acceleration Initiative activities	963		0.4			—		NM			963		NM
Impairment, loss on disposal of property and equipment and shop closures	1,703		0.7			2,363		1.1			(660)		(27.9)
Total expenses	241,741		98.7			220,516		103.0			21,225		9.6
Income (loss) from operations	3,152		1.3			(6,343)		(3.0)			9,495		NM

Interest expense, net	1,678		0.7			683		0.3			995		145.7
Gain on extinguishment of debt	239		0.1			—		NM			239		NM
Income (loss) before income taxes	1,235		0.5			(7,026)		(3.3)			8,261		NM
Income tax expense (benefit)	57		NM			153		NM			(96)		(62.7)
Net income (loss)	1,178		0.5			(7,179)		(3.4)			8,357		NM
Net income attributable to non-controlling interest	288		0.1			160		NM			128		80.0
Net income (loss) attributable to Potbelly Corporation	$	890	0.4		%	$	(7,339)	(3.4)		%	$	8,229	NM

	For the Year to Date Ended
Other Key Performance Indicators	June 25, 2023					June 26, 2022					Increase (Decrease)
Comparable store sales	17.2			%		20.4			%		(3.2)			%
Shop-level profit margin(1)	13.2			%		8.5			%		4.7			%
Adjusted EBITDA(1)	$	13,603				$	3,522				$	10,081

(1) - Reconciliation below for Non-GAAP measures

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"NM" - Amount is not meaningful

~~Table~~ ~~of Contents~~

Revenues

Total revenues increased by ~~$54.6~~$30.7 million, or ~~19.7%~~14.3%, to ~~$331.8~~$244.9 million during the year to date ended ~~September~~June 25, ~~2022,~~2023, from ~~$277.2~~$214.2 million during the year to date ended ~~September~~June 26, ~~2021.~~2022. This increase was primarily driven by the sustained recovery of our shops in central business district and airport locations, improved performance of our catering channel, successful marketing programs, and increased prices to offset cost inflation. Company-operated comparable store sales resulted in an increase of ~~$50.7~~$35.5 million, or ~~18.5%~~17.2% for the year to date ended ~~September~~June 25, ~~2022.~~2023. The increase in revenue also included sales from shops that were temporarily closed in ~~2021.~~2022. These increases were partially offset by a decrease in sales of $7.1 million from shops that have permanently closed or refranchised during the last year. Additionally, revenue from franchise royalties and fees increased by ~~$1.0~~$1.5 million, or ~~49.4%~~85.0%.

Food, ~~beverage,~~Beverage, and ~~packaging costs~~Packaging Costs

Food, beverage, and packaging costs increased by ~~$18.9~~$7.4 million, or ~~24.9%~~12.3%, to ~~$95.0~~$67.5 million during the year to date ended ~~September~~June 25, ~~2022,~~2023, from ~~$76.0~~$60.1 million during the year to date ended ~~September~~June 26, ~~2021.~~2022. This increase was primarily driven by an increase in shop sales volume and increased costs of our food and paper supplies, partially due to commodity inflation. As a percentage of sandwich shop sales, food, beverage, and packaging costs ~~increased~~decreased to ~~28.9%~~27.9% during the year to date ended ~~September~~June 25, ~~2022,~~2023, from ~~27.6%~~28.3% during the year to date ended ~~September~~June 26, ~~2021,~~2022, primarily driven by increased ~~costs as noted above~~menu prices partially offset by increased ~~menu prices.~~costs noted above.

Labor and Related Expenses

Labor and related expenses increased by ~~$11.7~~$5.0 million, or ~~12.5%~~7.2%, to ~~$105.4~~$74.4 million during the year to date ended ~~September~~June 25, ~~2022,~~2023, from ~~$93.7~~$69.4 million for the year to date ended ~~September~~June 26, ~~2021,~~2022, primarily driven by an increase in shop sales volumes and higher shop labor wage rates as a result of labor availability challenges in certain restaurants. As a percentage of sandwich shop sales, labor and related expenses decreased to ~~32.1%~~30.8% during the year to date ended ~~September~~June 25, ~~2022,~~2023, from ~~34.0%~~32.7% for the year to date ended ~~September~~June 26, ~~2021,~~2022, primarily driven by sales leverage in certain fixed labor related costs not directly variable with sales.

Occupancy Expenses

Occupancy expenses ~~increased~~decreased by ~~$0.6~~$1.3 million, or ~~1.5%~~4.5%, to ~~$41.2~~$26.4 million during the year to date ended ~~September~~June 25, ~~2022,~~2023, from ~~$40.6~~$27.7 million during the year to date ended ~~September~~June 26, ~~2021,~~2022, primarily due to ~~an increase in variable lease expenses.~~our refranchising efforts. As a percentage of sandwich shop sales, occupancy expenses decreased to ~~12.5%~~10.9% for the year to date ended ~~September~~June 25, ~~2022,~~2023, from ~~14.7%~~13.0% for the year to date ended ~~September~~June 26, ~~2021,~~2022, primarily due to increased sales leverage in certain fixed occupancy related costs ~~which are not variable with sales,~~and the refranchising of shops in New York City, as ~~well as the impact of lease concessions and restructurings over the last year.~~noted above.

Other Operating Expenses

Other operating expenses increased by ~~$9.9~~$4.2 million, or ~~21.1%~~11.2%, to ~~$57.0~~$41.4 million during the year to date ended ~~September~~June 25, ~~2022,~~2023, from ~~$47.0~~$37.2 million during the year to date ended ~~September~~June 26, ~~2021.~~2022. The increase was primarily related to an increase in marketing and advertising spend ~~utilities~~ and certain ~~items~~ variable ~~with sales,~~costs, including fees to third-party delivery partners and credit card fees. Marketing and advertising expenses included in other operating expenses were $5.4 million and $2.7 million as of the year to date ended September 25, 2022 and the year to date ended September 26, 2021, respectively. As a percentage of sandwich shop sales, other operating expenses ~~increased~~decreased to ~~17.3% for the year to date ended September 25, 2022, from~~ 17.1% for the year to date ended ~~September~~June 25, 2023, from 17.5% for the year to date ended June 26, ~~2021,~~2022, primarily driven by ~~increased marketing and advertising expenses~~a decrease in utilities as ~~noted above, partially offset by sales leverage in operating expense items that are not directly variable with sales.~~energy prices have declined year-over-year.

Franchise ~~marketing expenses~~Support, Rent and Marketing Expenses

Franchise support, rent and marketing expenses increased by ~~$0.1~~$1.6 million to ~~$0.4~~$1.8 million during the year to date ended ~~September~~June 25, ~~2022~~2023 compared to $0.2 million during the year to date ended ~~September~~June 26, ~~2021,~~2022, driven by increased rent expense from our refranchise efforts and increased marketing and advertising ~~expenses allocated from the Brand Fund to franchised shops.~~expenses.

General and Administrative Expenses

General and administrative expenses increased by ~~$3.8~~$4.3 million, or ~~16.4%~~24.9%, to ~~$26.9~~$21.7 million during the year to date ended ~~September~~June 25, ~~2022,~~2023, from ~~$23.1~~$17.3 million during the year to date ended ~~September~~June 26, ~~2021.~~2022. This increase was primarily driven by an increase in bonus expense and payroll ~~costs and stock-based compensation expense.~~costs. As a percentage of revenues,

~~Table~~ ~~of Contents~~

general and administrative expenses ~~decreased~~increased to 8.8% for the year to date ended June 25, 2023, from 8.1% for the year to date ended ~~September 25,~~June 26, 2022, ~~from 8.3% for the year to date ended September 26, 2021,~~ primarily driven by ~~increased sales leverage.~~an increase in corporate headcount to support our growth and development initiatives.

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Depreciation Expense

Depreciation expense decreased by ~~$3.2~~$0.3 million, or ~~26.3%~~5.0%, to ~~$9.1~~$5.9 million during year to date ended ~~September~~June 25, ~~2022,~~2023, from ~~$12.3~~$6.2 million during the ~~quarter~~year to date ended June ~~27, 2021.~~26, 2022. The decrease was driven primarily by a lower depreciable base related to a decrease in the number of company-operated shops and impairment charges taken in prior periods. As a percentage of revenues, depreciation was ~~2.7%~~2.4% during the year to date ended ~~September~~June 25, ~~2022~~2023 and was ~~4.4%~~2.9% for the year to date ended ~~September~~June 26, ~~2021.~~2022.

Impairment, Loss on Disposal of Property and Equipment and Shop Closures

Impairment, loss on disposal of property and equipment and shop closures decreased by ~~$0.5~~$0.7 million, or ~~11.5%~~27.9%, to ~~$4.0~~$1.7 million during the year to date ended ~~September~~June 25, ~~2022,~~2023, from ~~$4.5~~$2.4 million during the year to date ended ~~September~~June 26, ~~2021.~~2022.

After performing a periodic review of our shops during the year to date ended ~~September~~June 25, ~~2022,~~2023, it was determined that indicators of impairment were present for certain shops as a result of continued ~~underperformance, primarily related to the impacts of COVID-19.~~underperformance. We performed an impairment analysis related to these shops and recorded an impairment charge of ~~$3.0~~$0.7 million for the year to date ended ~~September~~June 25, ~~2022. The ultimate severity and longevity of the COVID-19 pandemic is unknown, and therefore,~~ it is possible that impairments could be identified in future periods, and such amounts could be material. During the first quarter of 2021, we amended the lease for our corporate Support Center office in Chicago to relocate to a different office space. As a result of this relocation, the leasehold improvements of the original office space were disposed, resulting in a loss on disposal of $2.5 million.2023.

During the year to date ended ~~September~~June 25, ~~2022,~~2023, we did not incur any lease termination fees.

Interest Expense, Net

Net interest expense was ~~$1.0~~$1.7 million during the year to date ended ~~September~~June 25, ~~2022~~2023 compared to $0.7 million during the year to date ended ~~September~~June 26, ~~2021,~~2022, as a result of higher borrowings outstanding and higher interest rates on our ~~revolving credit facility agreement.~~Term Loan entered into in February 2023.

Income Tax Expense

We recognized income tax expense of $0.1 million for the year to date ended ~~September~~June 25, ~~2022~~2023 compared to expense of $0.2 million for the year to date ended ~~September~~June 26, ~~2021.~~2022.

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Non-GAAP Financial Measures

Shop-Level Profit (Loss) Margin

Shop-level profit (loss) margin was ~~10.6%~~14.4% and ~~9.2%~~13.2% for the quarter and year to date ended ~~September~~June 25, ~~2022.~~2023, respectively. Shop-level profit (loss) margin is not required by, or presented in accordance with U.S. GAAP. We believe shop-level profit (loss) margin is important in evaluating shop-level productivity, efficiency and performance.

For the Quarter Ended For the Year to Date Ended
September 25,
2022 September 26,
2021 September 25,
2022 September 26,
2021
($ in thousands) ($ in thousands)
Income (loss) from operations $ (705) $ (2,603) $ (7,049) $ (20,239)
Less: Franchise royalties and fees 1,200 698 2,950 1,974
Franchise marketing expenses 115 94 361 213
General and administrative expenses 9,554 7,260 26,899 23,106
Depreciation expense 2,922 3,610 9,089 12,337
Impairment, loss on disposal of property and equipment and shop closures 1,616 1,118 3,980 4,497
Shop-level profit (loss) [Y] $ 12,302 $ 8,781 $ 30,330 $ 17,940
Total revenues $ 117,649 $ 101,694 $ 331,823 $ 277,248
Less: Franchise royalties and fees 1,200 698 2,950 1,974
Sandwich shop sales, net [X] $ 116,449 $ 100,996 $ 328,873 $ 275,274
Shop-level profit (loss) margin [Y÷X] 10.6 % 8.7 % 9.2 % 6.5 %


	For the Quarter Ended						For the Year to Date Ended
	June 25, 2023			June 26, 2022			June 25, 2023			June 26, 2022
	($ in thousands)						($ in thousands)
Income (loss) from operations	$	3,344		$	1,041		$	3,152		$	(6,343)
Less: Franchise royalties, fees and rent income	1,914			960			3,237			1,750
Franchise support, rent and marketing expenses	1,215			126			1,806			246
General and administrative expenses	11,695			8,827			21,664			17,345
Pre-opening costs	33			—			55			—
Loss on Franchise Growth Acceleration Initiative activities	14			—			963			—
Depreciation expense	2,887			3,030			5,857			6,167
Impairment, loss on disposal of property and equipment and shop closures	658			1,044			1,703			2,363
Shop-level profit (loss) [Y]	$	17,932		$	13,108		$	31,963		$	18,028
Total revenues	$	126,623		$	115,952		$	244,893		$	214,173
Less: Franchise royalties, fees and rent income	1,914			960			3,237			1,750
Sandwich shop sales, net [X]	$	124,709		$	114,992		$	241,656		$	212,423
Shop-level profit (loss) margin [Y÷X]	14.4		%	11.4		%	13.2		%	8.5		%

Adjusted EBITDA

Adjusted EBITDA was ~~$4.7~~$8.0 million and ~~$8.2~~$13.6 million for the quarter and year to date ended ~~September~~June 25, ~~2022.~~2023, respectively. Adjusted EBITDA is not required by, or presented in accordance with U.S. GAAP. We believe that ~~adjusted~~Adjusted EBITDA is a useful measure of operating performance, as it provides a picture of operating results by eliminating expenses that management does not believe are reflective of underlying business performance.


		For the Quarter Ended				For the Year to Date Ended					For the Quarter Ended				For the Year to Date Ended
		September 25, 2022		September 26, 2021		September 25, 2022		September 26, 2021			June 25, 2023		June 26, 2022		June 25, 2023		June 26, 2022
		($ in thousands)				($ in thousands)					($ in thousands)				($ in thousands)
Net income (loss) attributable to Potbelly Corporation	Net income (loss) attributable to Potbelly Corporation	$	9,029	$	(2,948)	$	1,690	$	(21,301)	Net income (loss) attributable to Potbelly Corporation	$	2,216	$	574	$	890	$	(7,339)
Depreciation expense	Depreciation expense	2,922		3,610		9,089		12,337		Depreciation expense	2,887		3,030		5,857		6,167
Interest expense	Interest expense	354		241		1,037		713		Interest expense	1,011		357		1,678		683
Income tax expense (benefit)		(4)		16		148		230
Income tax expense										Income tax expense	(48)		(24)		57		153
EBITDA	EBITDA	$	12,301	$	919	$	11,964	$	(8,021)	EBITDA	$	6,066	$	3,937	$	8,482	$	(336)
Impairment, loss on disposal of property and equipment, and shop closures (a)	Impairment, loss on disposal of property and equipment, and shop closures (a)	1,616		1,118		3,980		4,497		Impairment, loss on disposal of property and equipment, and shop closures (a)	658		1,044		1,703		2,363
Stock-based compensation	Stock-based compensation	951		640		2,446		1,488		Stock-based compensation	1,305		820		2,216		1,495
Gain on extinguishment of debt		(10,191)		—		(10,191)		—
Loss on extinguishment of debt										Loss on extinguishment of debt	—		—		239		—
Loss on Franchise Growth Acceleration Initiative activities (b)										Loss on Franchise Growth Acceleration Initiative activities (b)	14		—		963
Adjusted EBITDA	Adjusted EBITDA	$	4,677	$	2,677	$	8,199	$	(2,036)	Adjusted EBITDA	$	8,043	$	5,801	$	13,603	$	3,522

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(a)This adjustment includes costs related to impairment of long-lived assets, loss on disposal of property and equipment and shop closure expenses.

(b)This adjustment includes costs related to our plan to grow our franchise units domestically through multi-unit shop development area agreements, which may include refranchising certain company-operated shops.

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Liquidity and Capital Resources

General

~~Potbelly's~~Our ongoing primary sources of liquidity and capital resources are cash provided from operating activities, existing cash and cash equivalents, and our ~~revolving credit facility.~~Term Loan. In the short term, ~~Potbelly’s~~our primary requirements for liquidity and capital are existing shop capital investments, maintenance, lease obligations, working capital and general corporate needs. ~~Potbelly’s~~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, ~~Potbelly is~~we are able to sell certain inventory items before we need to pay our suppliers for such items. Company shops do not require significant inventories or receivables.

The COVID-19 pandemic’s impact on our operations and revenues had significantly affected our ability to generate cash from operations in 2020. To preserve financial flexibility, we have utilized our revolving credit facility to fund operations.

We ended the quarter ended ~~September~~June 25, ~~2022~~2023 with a cash balance of ~~$9.5~~$35.0 million and total liquidity (cash ~~plus amounts available under our committed Revolving Credit Facility, which is further described in the section below)~~less restricted cash) of ~~$23.7~~$34.3 million compared to a cash balance of ~~$14.7~~$25.6 million and total liquidity (cash less restricted cash) of ~~$26.9~~$24.8 million at the end of the previous quarter. We believe that cash from our operations and ~~borrowings~~the cash proceeds received under ~~our revolving credit facility~~the Term Loan will be able to provide sufficient liquidity for at least the next twelve months~~(cash plus amounts available under our committed revolving credit facility, which is further described in the section below)~~.

Cash Flows

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


		For the Year to Date Ended					For the Year to Date Ended
		September 25, 2022		September 26, 2021			June 25, 2023		June 26, 2022

Net cash provided by (used in):	Net cash provided by (used in):					Net cash provided by (used in):
Operating activities	Operating activities	$	1,018	(7,138)		Operating activities	$	12,022	1,978
Investing activities	Investing activities	(4,914)		(7,543)		Investing activities	(5,919)		(3,115)
Financing activities	Financing activities	(951)		13,391		Financing activities	13,288		1,441
Net increase (decrease) in cash	Net increase (decrease) in cash	$	(4,847)	$	(1,290)	Net increase (decrease) in cash	$	19,391	$	304

Operating Activities

Net cash provided by operating activities increased to ~~$1.0~~$12.0 million for the year to date ended ~~September~~June 25, ~~2022,~~2023, from ~~cash used in operating activities of $7.1~~$2.0 million for the year to date ended ~~September~~June 26, ~~2021.~~2022. The ~~$8.2~~$10.0 million change in operating cash was primarily driven by an increase in income from operations compared to the prior ~~year. This was partially offset by the timing of payment for certain accrued liabilities.~~year and development fees collected from franchisees.

Investing Activities

Net cash used in investing activities decreased to ~~$4.9~~$5.9 million for the year to date ended ~~September~~June 25, ~~2022,~~2023, from ~~$7.5~~$3.1 million for the year to date ended ~~September~~June 26, ~~2021.~~2022. The ~~$2.6~~$2.8 million decrease was primarily due ~~to a decrease in~~additional capital ~~expenditures. Capital~~ expenditures ~~consist~~which primarily ofrelated to ongoing investment in our company-owned shops and investment in our digital ~~technology. No new company shop construction is currently planned.~~platforms. This cash outflow was partially offset by $1.2 million cash collected from the sale of refranchised assets.

Financing Activities

Net cash ~~used in~~provided by financing activities ~~decreased~~increased to ~~$1.0~~$13.3 million for the year to date ended ~~September~~June 25, ~~2022,~~2023, from ~~net cash provided by financing activities of $13.4~~$1.4 million for the year to date ended ~~September~~June 26, ~~2021.~~2022. The ~~$14.3~~$11.9 million ~~change~~increase in financing cash was primarily driven by net proceeds from the ~~SPA~~Term Loan executed in ~~2021.~~the first quarter of 2023 partially offset by repayments under the our senior secured credit facility (the "Former Credit Facility").

~~Table~~ ~~of Contents~~

~~Revolving Credit Facility~~Term Loan

~~On January 28, 2022, we entered~~million (the “Term Loan”). Concurrent with entry into ~~Amendment No. 6 (the "Sixth Amendment") to~~ the Credit ~~Agreement.~~Agreement, we repaid in full and terminated the obligations and commitments under the Former

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Credit Facility. The ~~Sixth Amendment, among other things, (i) extended~~remaining proceeds from the Term Loan were used to pay related transaction fees and expenses, and for general corporate purposes.

The Credit Agreement is scheduled to mature on February 7, 2028. We are 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 must be repaid on the maturity ~~date~~date.

Loans under the Credit Agreement ~~from January 31,~~will initially bear interest, at the Company’s option, at either the term SOFR plus 9.25% per annum or base rate plus 8.25% per annum.

As of June 25, 2023, the effective interest rate was 15.00%.

~~On May 31, 2022, we entered into Amendment No. 7 (the "Seventh Amendment") to~~fixed charge coverage ratios as set forth in the Credit Agreement.

~~On September 23, 2022, we entered~~

In connection with entering into ~~Amendment No. 8 (the "Eighth Amendment") to the Credit Agreement. The Eighth Amendment, among other things (i) extended the maturity date under~~ the Credit Agreement, ~~from August 31,~~we paid $2.2 million is debt issuance costs, all of which were capitalized. During the quarter ended June 25, 2023, ~~to December 31, 2023 and (ii) amended certain financial covenant testing levels.~~

we amortized $0.2 million of debt issuance costs, which is included in interest expense in the condensed consolidated statement of operations. As of ~~September~~June 25, ~~2022,~~2023, we had ~~$10.1~~$24.4 million outstanding under the ~~Credit Agreement. As of December 26, 2021, we had $9.9 million outstanding under the Credit Agreement.~~Term Loan. We are currently in compliance with all financial debt covenants.

~~Paycheck Protection Program Loan~~

On August 10, 2020, PSW, an indirect subsidiary of the Company, entered into a loan agreement with Harvest Small Business Finance, LLC in the aggregate amount of $10.0 million (the "Loan"), pursuant to the PPP under the CARES Act. The Loan was necessary to support our ongoing operations due to the economic uncertainty resulting from the COVID-19 pandemic and lack of access to alternative sources of liquidity.

The Loan was scheduled to mature five years from the date on which PSW applies for loan forgiveness under the CARES Act, bears interest at a rate of 1% per annum and is subject to the terms and conditions applicable to loans administered by the U.S. Small Business Administration ("SBA") under the CARES Act. The PPP provides that the use of the Loan amount shall be limited to certain qualifying expenses and may be partially or wholly forgiven in accordance with the requirements set forth in the CARES Act. We used all of the PPP proceeds toward qualifying expenses and pursued forgiveness of the full Loan amount.

Stock Repurchase Program

On May 8, 2018, we announced that our Board of Directors authorized a stock repurchase program for up to $65.0 million of our outstanding common stock. The program permits us, from time to time, to purchase shares in the open market (including in pre-arranged stock trading plans in accordance with the guidelines specified in Rule 10b5-1 under the Securities and Exchange Act of 1934, as amended) or in privately negotiated transactions. The number of common shares actually repurchased, and the timing and price of repurchases, will depend upon market conditions, SEC requirements and other factors. Purchases may be started or stopped at any time without prior notice depending on market conditions and other factors. For the quarter ended ~~September~~June 25, ~~2022,~~2023, we did not repurchase any shares of our common stock under the

~~Table~~ ~~of Contents~~

stock repurchase program. We do not have plans to repurchase any common stock under our stock repurchase program at this time.

Equity Offering Program

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Critical Accounting Estimates

Our discussion and analysis of the financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses and the disclosure of contingent assets and liabilities. Actual results could differ from those estimates. Critical accounting estimates 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 have made no significant changes in our critical accounting estimates since the last annual report. Our critical accounting estimates are identified and described in our annual consolidated financial statements and related notes.

New and Revised Financial Accounting Standards

See Note 1 to the Consolidated Financial Statements for a description of recently issued Financial Accounting Standards.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

For quantitative and qualitative disclosures about market risk, see Item 7A, "Quantitative and Qualitative Disclosures About Market Risk," of our Annual Report on Form 10-K for the fiscal year ended December ~~26, 2021.~~25, 2022. Our exposures to market risk have not changed materially since December ~~26, 2021.~~25, 2022.

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 Exchange Act) as of ~~September~~June 25, ~~2022.~~2023. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of ~~September~~June 25, ~~2022,~~2023, our disclosure controls and procedures were effective in ensuring that information required to be disclosed in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and is accumulated and communicated to our management, including our Chief Executive Officer and 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 the quarter ended ~~September~~June 25, ~~2022~~2023 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Information pertaining to legal proceedings is provided in Note 11 to the Condensed Consolidated Financial Statements and is incorporated by reference herein.

ITEM 1A. RISK FACTORS

A description of the risk factors associated with our business is contained in Item 1A, "Risk Factors" of our Annual Report on Form 10-K for the fiscal year ended December ~~26, 2021.~~25, 2022. There have been no material changes to our Risk Factors as previously reported.

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

Issuer Purchases of Equity Securities

The following table contains information regarding purchases of our common stock made by or on behalf of Potbelly Corporation during the year to date ended ~~September~~June 25, ~~2022~~2023 (in thousands, except per share data):

Period Total Number of
Shares
Purchased (1) Average Price Paid
per Share 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)
December 26, 2021 - January 23, 2022 3 $ 5.65 — $ 37,982
January 24, 2022 - February 20, 2022 3 $ 5.54 — $ 37,982
February 21, 2022 - March 27, 2022 41 $ 6.11 — $ 37,982
March 28, 2022 - April 24, 2022 6 $ 6.62 — $ 37,982
April 25, 2022 - May 22, 2022 29 $ 6.42 — $ 37,982
May 23, 2022 - June 26, 2022 18 $ 5.15 — $ 37,982
June 27, 2022 - July 24, 2022 3 $ 6.35 — $ 37,982
July 25, 2022 - August 21, 2022 3 $ 6.58 — $ 37,982
August 22, 2022 - September 25, 2022 22 $ 5.51 — $ 37,982
Total number of shares purchased: 128 —


Period	Total Number of Shares Purchased (1)	Average Price Paid per Share		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)
December 26, 2022 - January 22, 2023	3	$	7.47	—	$	37,982
January 23, 2023 - February 19, 2023	1	$	7.99	—	$	37,982
February 20, 2023 - March 26, 2023	37	$	8.19	—	$	37,982
March 27, 2023 - April 23, 2023	45	$	8.56	—	$	37,982
April 24, 2023 - May 21, 2023	22	$	10.48	—	$	37,982
May 22, 2023 - June 25, 2023	20	$	7.94	—	$	37,982
Total number of shares purchased:	128			—

(1)Represents shares of our common stock surrendered by employees to satisfy withholding obligations resulting from the vesting of equity awards.

(2)On May 8, 2018, we announced that our Board of Directors authorized a stock repurchase program for up to $65.0 million of our outstanding common stock. The program permits us, from time to time, to purchase shares in the open market (including in pre-arranged stock trading plans in accordance with the guidelines specified in Rule 10b5-1 under the Exchange Act or in privately negotiated transactions). No time limit has been set for the completion of the repurchase program and the program may be suspended or discontinued at any time. ~~Due to the COVID-19 pandemic, we~~We do not have plans to repurchase any common stock under our stock repurchase program at this time. See Note 9 for further information regarding our stock repurchase program.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

~~Not applicable.~~During the quarter ended June 25, 2023, no director or officer of Potbelly adopted or terminated a "Rule 10b5-1 trading agreement" or "non-Rule 10b5-1 trading agreement," as each term is defined in Item 408(a) of Regulation S-K.

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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
~~10.1~~						Amendment No. 8 dated September 23, 2022, to the Second Amended and Restated Credit Agreement dated as of August 7, 2019, among Potbelly Sandwich Works, LLC, the other Loan Parties party thereto, the Lenders party thereto, and JPMorgan Chase Bank N.A., as Administrative Agent and J.P. Morgan Chase Bank, N.A., as Sole Bookrunner and Sole Lead Arranger.

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

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

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

101.INS						Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document.

101.SCH						Inline XBRL Taxonomy Extension Schema Document

101.CAL						Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF						Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB						Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE						Inline XBRL Taxonomy Extension Presentation Linkbase Document

104						Cover Page Interactive Data File (embedded within the Inline XBRL document)

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Table of Contents

SIGNATURE

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


		POTBELLY CORPORATION

Date: ~~November~~August 3, ~~2022~~2023	By:	/s/ Steven Cirulis
		Steven Cirulis
		Chief Financial Officer
		(Principal Financial Officer)

3234


		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	1718
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	2931
Item 4.	Controls and Procedures	2931
PART II.	OTHER INFORMATION	3032
Item 1.	Legal Proceedings	3032
Item 1A.	Risk Factors	3032
Item 2.	Unregistered Sale of Equity Securities and Use of Proceeds	3032
Item 3.	Defaults Upon Senior Securities	3032
Item 4.	Mine Safety Disclosures	3032
Item 5.	Other Information	3032
Item 6.	Exhibits	3133
	Signature	3234


		For the Quarter Ended		For the Year to Date Ended
	Classification	September 25, 2022	September 26, 2021	September 25, 2022	September 26, 2021
Operating lease cost	Occupancy and General and administrative expenses	10,043	10,310	30,440	31,017
Variable lease cost	Occupancy	3,251	3,090	10,509	9,565
Total lease cost		13,294	13,400	40,949	40,582


			Operating Leases
Remainder of 2022			10,575
2023			41,879
2024			39,269
2025			36,276
2026			32,632
2027			27,139
Thereafter			63,374
Total lease payments			251,144
Less: imputed interest			(60,977)
Present value of lease liabilities			190,167