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 24, 2017~~

March 27, 2022

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

For the Transition Period from to

____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

~~111 N. Canal Street, Suite 850~~

~~Chicago, Illinois 60606~~

~~(Address, including Zip Code,~~

Securities registered pursuant to Section 12(b) of ~~Principal Executive Offices)~~

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

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 ☐

Indicate by check mark whether the registrant has submitted electronically ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit ~~and post~~ such files). Yes ☒x No ☐

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

☐

~~(Do not check if a smaller reporting company)~~

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. ☒

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

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

As of April 24, 2022, the registrant had 28,858,420 shares of common stock, as$0.01 par value per share, outstanding.

Table of ~~the latest practicable date:~~

~~Common stock, $0.01 Par Value – 24,804,265 shares as of September 24, 2017~~

Contents

Potbelly Corporation and Subsidiaries

Table of Contents

			~~Page~~
				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 ~~Statement~~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		12 17

Item 3.			Quantitative and Qualitative Disclosures About Market Risk		20 27

Item 4.			Controls and Procedures		20 27

PART II.			OTHER INFORMATION		28

Item 1.			Legal Proceedings		21 28

Item 1A.			Risk Factors		21 28

Item 2.			Unregistered Sale of Equity Securities and Use of Proceeds		21 28
Item 3.		Defaults Upon Senior Securities				28
Item 6. 4.		Mine Safety Disclosures		~~Exhibits~~28			22
Item 5.		Other Information				28
Item 6.		Exhibits		29
		Signature				23 30

Table of Contents

PART I. ~~FINANCIAL~~FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Potbelly Corporation and Subsidiaries

Condensed Consolidated Balance Sheets

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

	September 24,			December 25,
	2017			2016				March 27, 2022		December 26, 2021
Assets							Assets
Current assets							Current assets
Cash and cash equivalents	$	22,178		$	23,379		Cash and cash equivalents	$	9,493	$	14,353
Accounts receivable, net of allowances of $112 and $78 as of September 24, 2017 and December 25, 2016, respectively		5,858			3,787
Accounts receivable, net of allowances of $30 and $27 as of March 27, 2022 and December 26, 2021, respectively							Accounts receivable, net of allowances of $30 and $27 as of March 27, 2022 and December 26, 2021, respectively	7,148		6,032
Inventories		3,310			3,365		Inventories	3,305		3,491
Prepaid expenses and other current assets		10,694			8,020		Prepaid expenses and other current assets	4,231		4,178
Total current assets		42,040			38,551		Total current assets	24,177		28,054

Property and equipment, net		105,379			107,074		Property and equipment, net	47,080		49,805
Right-of-use assets for operating leases							Right-of-use assets for operating leases	161,836		166,084
Indefinite-lived intangible assets		3,404			3,404		Indefinite-lived intangible assets	3,404		3,404
Goodwill		2,222			2,222		Goodwill	2,222		2,222
Deferred income taxes, non-current		18,381			19,410
Deferred expenses, net and other assets		4,804			4,784		Deferred expenses, net and other assets	3,629		3,668
Total assets	$	176,230		$	175,445		Total assets	$	242,348	$	253,237

Liabilities and Equity
Liabilities and equity (deficit)							Liabilities and equity (deficit)
Current liabilities							Current liabilities
Accounts payable	$	4,569		$	3,111		Accounts payable	$	9,233	$	8,140
Accrued expenses		24,194			23,082		Accrued expenses	26,422		30,859
Accrued income taxes		—			1,622
Short-term operating lease liabilities							Short-term operating lease liabilities	27,770		28,548
Current portion of long-term debt							Current portion of long-term debt	2,833		2,333
Total current liabilities		28,763			27,815		Total current liabilities	66,258		69,880

Deferred rent and landlord allowances		23,000			21,076
Long-term debt, net of current portion							Long-term debt, net of current portion	21,467		17,517
Long-term operating lease liabilities							Long-term operating lease liabilities	162,698		166,291
Other long-term liabilities		2,511			2,318		Other long-term liabilities	1,952		1,966
Total liabilities		54,274			51,209		Total liabilities	252,375		255,654

Stockholders’ equity
Common stock, $0.01 par value—authorized 200,000,000 shares; outstanding 24,804,265 and 25,139,127 shares as of September 24, 2017 and December 25, 2016, respectively		313			309
Commitments and contingencies (Note 11)							Commitments and contingencies (Note 11)	0		0

Equity (deficit)							Equity (deficit)
Common stock, $0.01 par value—authorized 200,000 shares; outstanding 28,461 and 28,380 shares as of March 27, 2022 and December 26, 2021, respectively							Common stock, $0.01 par value—authorized 200,000 shares; outstanding 28,461 and 28,380 shares as of March 27, 2022 and December 26, 2021, respectively	381		380
Warrants		—			909		Warrants	2,566		2,566
Additional paid-in-capital		414,943			407,622		Additional paid-in-capital	453,245		452,570
Treasury stock, held at cost, 6,498,908 and 5,753,412 shares as of September 24, 2017, and December 25, 2016, respectively		(81,174	)		(72,321	)
Treasury stock, held at cost, 9,831 and 9,785 shares as of March 27, 2022, and December 26, 2021, respectively							Treasury stock, held at cost, 9,831 and 9,785 shares as of March 27, 2022, and December 26, 2021, respectively	(114,856)		(114,577)
Accumulated deficit		(212,729	)		(213,034	)	Accumulated deficit	(351,174)		(343,261)
Total stockholders’ equity		121,353			123,485
Total stockholders’ equity (deficit)							Total stockholders’ equity (deficit)	(9,838)		(2,322)
Non-controlling interest		603			751		Non-controlling interest	(189)		(95)
Total stockholders' equity		121,956			124,236
Total equity (deficit)							Total equity (deficit)	(10,027)		(2,417)

Total liabilities and equity	$	176,230		$	175,445
Total liabilities and equity (deficit)							Total liabilities and equity (deficit)	$	242,348	$	253,237

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 ~~share and~~ per share data, unaudited)

	For the 13 Weeks Ended					For the 39 Weeks Ended
	September 24,			September 25,		September 24,		September 25,			For the Quarter Ended
	2017			2016		2017		2016			March 27, 2022		March 28, 2021
Revenues										Revenues
Sandwich shop sales, net	$	105,327		$	103,224	$	313,568	$	303,116	Sandwich shop sales, net	$	97,431	$	77,501
Franchise royalties and fees		800			558		2,394		1,657	Franchise royalties and fees	790		562
Total revenues		106,127			103,782		315,962		304,773	Total revenues	98,221		78,063

Expenses										Expenses
Sandwich shop operating expenses
Cost of goods sold, excluding depreciation		28,405			28,478		83,703		83,224
Sandwich shop operating expenses, excluding depreciation										Sandwich shop operating expenses, excluding depreciation
Food, beverage and packaging costs										Food, beverage and packaging costs	27,308		21,469
Labor and related expenses		31,187			30,163		93,213		88,260	Labor and related expenses	33,253		28,614
Occupancy expenses		14,354			13,111		42,792		39,042	Occupancy expenses	13,845		13,599
Other operating expenses		12,464			11,338		36,349		32,570	Other operating expenses	18,105		14,003
Franchise marketing expenses										Franchise marketing expenses	120		43
General and administrative expenses		12,104			9,999		33,375		30,827	General and administrative expenses	8,518		7,172
Depreciation expense		6,315			5,656		18,960		16,996	Depreciation expense	3,136		4,174
Pre-opening costs		336			340		955		731
Impairment and loss on disposal of property and equipment		1,536			1,855		5,762		2,880
Impairment, loss on disposal of property and equipment and shop closures										Impairment, loss on disposal of property and equipment and shop closures	1,319		3,122
Total expenses		106,701			100,940		315,109		294,530	Total expenses	105,604		92,196
Income (loss) from operations		(574	)		2,842		853		10,243
Loss from operations										Loss from operations	(7,383)		(14,133)

Interest expense		32			33		101		102
Income (loss) before income taxes		(606	)		2,809		752		10,141
Income tax expense (benefit)		(487	)		960		252		3,732
Net income (loss)		(119	)		1,849		500		6,409
Net income attributable to non-controlling interest		121			54		195		153
Net income (loss) attributable to Potbelly Corporation	$	(240	)	$	1,795	$	305	$	6,256
Interest expense, net										Interest expense, net	327		288
Loss before income taxes										Loss before income taxes	(7,710)		(14,421)
Income tax expense										Income tax expense	177		53
Net loss										Net loss	(7,887)		(14,474)
Net income (loss) attributable to non-controlling interest										Net income (loss) attributable to non-controlling interest	26		(2)
Net loss attributable to Potbelly Corporation										Net loss attributable to Potbelly Corporation	$	(7,913)	$	(14,472)

Net income (loss) per common share attributable to common stockholders:
Net loss per common share attributable to common stockholders:										Net loss per common share attributable to common stockholders:
Basic	$	(0.01	)	$	0.07	$	0.01	$	0.24	Basic	$	(0.28)	$	(0.56)
Diluted	$	(0.01	)	$	0.07	$	0.01	$	0.24	Diluted	$	(0.28)	$	(0.56)
Weighted average shares outstanding:										Weighted average shares outstanding:
Basic		24,959,023			25,240,374		25,030,951		25,772,846	Basic	28,396		25,944
Diluted		24,959,023			25,829,970		25,857,083		26,341,913	Diluted	28,396		25,944

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, ~~except share data,~~ unaudited)

Common Stock

Treasury

Additional
Paid-In-

Accumulated

Non-
Controlling

Shares

Amount

Stock

Warrants

Capital

Deficit

Interest

Total Equity

Balance at December 27, 2015

26,304,261

$
303

$
(50,000
)

$
909

$
399,458

$
(221,246
)

$
789

$
130,213

Net income

—

—

—

—

—

6,256

153

6,409

Stock-based compensation
   plans

511,781

5

—

—

5,414

—

—

5,419

Excess tax deficiencies
   associated with exercise
   of stock options

—

—

—

—

(605
)

—

—

(605
)
Repurchases of common
   stock

(1,574,316
)

—

(20,447
)

—

—

—

—

(20,447
)
Distributions to non-
   controlling interest

—

—

—

—

—

—

(249
)

(249
)
Contributions from non-
   controlling interest

—

—

—

—

—

—

74

74

Amortization of
   stock-based compensation

—

—

—

—

2,266

—

—

2,266

Balance at September 25, 2016

25,241,726

$
308

$
(70,447
)

$
909

$
406,533

$
(214,990
)

$
767

$
123,080

Balance at December 25, 2016

25,139,127

$
309

$
(72,321
)

$
909

$
407,622

$
(213,034
)

$
751

$
124,236

Net income

—

—

—

—

—

305

195

500

Stock-based compensation
   plans

168,930

2

—

—

1,179

—

—

1,181

Exercise of stock warrants

241,704

2

—

(909
)

2,879

—

—

1,972

Repurchases of common
   stock

(745,496
)

—

(8,853
)

—

—

—

—

(8,853
)
Distributions to non-
   controlling interest

—

—

—

—

—

—

(354
)

(354
)
Contributions from non-
   controlling interest

—

—

—

—

—

—

11

11

Amortization of
   stock-based compensation

—

—

—

—

3,263

—

—

3,263

Balance at September 24, 2017

24,804,265

$
313

$
(81,174
)

$
—

$
414,943

$
(212,729
)

$
603

$
121,956


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

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 39 Weeks Ended
	September 24,			September 25,				For the Quarter Ended
	2017			2016				March 27, 2022		March 28, 2021
Cash flows from operating activities:							Cash flows from operating activities:
Net income	$	500		$	6,409
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		18,960			16,996
Net loss							Net loss	$	(7,887)	$	(14,474)
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	3,136		4,174
Noncash lease expense							Noncash lease expense	6,487		6,287
Deferred income tax		—			397		Deferred income tax	5		5
Deferred rent and landlord allowances		1,924			1,912
Amortization of stock compensation expense		3,263			2,266
Excess tax deficiency (benefit) from stock-based compensation		292			(24	)
Asset impairment, store closure and disposal of property and equipment		5,922			2,897
Amortization of debt issuance costs		28			25
Stock-based compensation expense							Stock-based compensation expense	675		193
Asset impairment, loss on disposal of property and equipment and shop closures							Asset impairment, loss on disposal of property and equipment and shop closures	1,319		2,741
Other operating activities							Other operating activities	67		85
Changes in operating assets and liabilities:							Changes in operating assets and liabilities:
Accounts receivable, net		(1,422	)		(61	)	Accounts receivable, net	(1,116)		(282)
Inventories		54			141		Inventories	186		306
Prepaid expenses and other assets		(2,650	)		(457	)	Prepaid expenses and other assets	(171)		(12)
Accounts payable		699			(1,496	)	Accounts payable	1,039		(274)
Accrued and other liabilities		798			4,566
Net cash provided by operating activities		28,368			33,571
Operating lease liabilities							Operating lease liabilities	(7,055)		(8,991)
Accrued expenses and other liabilities							Accrued expenses and other liabilities	(4,424)		542
Net cash used in operating activities:							Net cash used in operating activities:	(7,739)		(9,700)

Cash flows from investing activities:							Cash flows from investing activities:
Acquisition of franchise shop		—			(1,108	)
Purchases of property and equipment		(23,526	)		(19,883	)	Purchases of property and equipment	$	(1,378)	$	(1,300)
Net cash used in investing activities		(23,526	)		(20,991	)
Net cash used in investing activities:							Net cash used in investing activities:	(1,378)		(1,300)

Cash flows from financing activities:							Cash flows from financing activities:
Proceeds from exercise of stock options		1,181			5,746
Proceeds from exercise of stock warrants		1,972			—
Treasury stock repurchases		(8,853	)		(20,447	)
Excess tax benefit from stock-based compensation		—			24
Borrowings under revolving credit facility							Borrowings under revolving credit facility	$	10,000	$	8,000
Repayments under revolving credit facility							Repayments under revolving credit facility	(5,550)		(11,500)
Payment of debt issuance costs							Payment of debt issuance costs	(40)		(195)
Proceeds from issuance of common shares and warrants, net of fees							Proceeds from issuance of common shares and warrants, net of fees	—		14,940
Employee taxes on certain stock-based payment arrangements							Employee taxes on certain stock-based payment arrangements	(33)		—
Contributions from non-controlling interest		11			74		Contributions from non-controlling interest	—		136
Distributions to non-controlling interest		(354	)		(249	)	Distributions to non-controlling interest	(120)		—
Net cash used in financing activities		(6,043	)		(14,852	)
Net cash provided by financing activities:							Net cash provided by financing activities:	4,257		11,381

Net decrease in cash and cash equivalents		(1,201	)		(2,272	)
Net increase (decrease) in cash and cash equivalents							Net increase (decrease) in cash and cash equivalents	(4,860)		381
Cash and cash equivalents at beginning of period		23,379			32,006		Cash and cash equivalents at beginning of period	14,353		11,126
Cash and cash equivalents at end of period	$	22,178		$	29,734		Cash and cash equivalents at end of period	$	9,493	$	11,507

Supplemental cash flow information:							Supplemental cash flow information:
Income taxes paid	$	3,346		$	2,265		Income taxes paid	$	—	$	10
Interest paid		73			82		Interest paid	159		238

Supplemental non-cash investing and financing activities:							Supplemental non-cash investing and financing activities:
Unpaid liability for purchases of property and equipment	$	2,752		$	3,142		Unpaid liability for purchases of property and equipment	$	460	$	421
Unpaid liability for employee taxes on certain stock-based payment arrangements							Unpaid liability for employee taxes on certain stock-based payment arrangements	246		—

See accompanying notes to the unaudited condensed consolidated financial statements

Table of Contents

Potbelly Corporation and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements (unaudited)

(1) Organization and Other Matters

Business

Potbelly Corporation (the “Company”, “Potbelly”, “we”, “us” or ~~“Potbelly”~~“our”), through its ~~wholly-owned~~wholly owned subsidiaries, owns and operates or franchises Potbelly Sandwich Shops in 31 states and the District of Columbia. The Company also sells and administers franchises of Potbelly Sandwich Shops. The first domestic franchise location administered by the Company opened during February 2011. Additionally, in February 2011, the Company opened its first international franchise in the Middle East. In July 2015, the Company opened its first franchise shop394 company-owned shops in the United ~~Kingdom and~~States. Additionally, Potbelly franchisees operate 46 shops in ~~October 2016,~~ the ~~Company opened its first franchise shop in Canada.~~ Additionally, during April 2016, the Company transitioned a franchise shop to a company-operated shop for a purchase price of $1.1 million. The Company recorded $0.8 million of goodwill related to the transaction. The Company believes this acquisition is immaterial.

United States.

Basis of Presentation

The unaudited condensed consolidated financial statements and notes herein should be read in conjunction with the audited consolidated financial statements of Potbelly Corporation and its subsidiaries and the notes thereto included in ~~the Company’s~~our Annual Report on Form 10-K for the year ended December ~~25, 2016.~~26, 2021. The unaudited condensed consolidated financial statements included herein have been prepared by ~~the Company~~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 ~~the Company’s financial position~~our balance sheet as of ~~September 24, 2017~~March 27, 2022 and December ~~25, 2016, its~~26, 2021, our statement of operations for the 13quarters ended March 27, 2022 and ~~39 weeks~~March 28, 2021, the statement of equity for the quarters ended ~~September 24, 2017~~March 27, 2022 and ~~September 25, 2016~~March 28, 2021, and ~~its~~our statement of cash flows for the ~~39 weeks~~quarters ended ~~September 24, 2017~~March 27, 2022 and ~~September 25, 2016~~March 28, 2021 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.

~~The Company does~~

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 the loss from operations, balance sheets or statements of cash flows.

We do not have any components of other comprehensive income recorded within ~~its~~our consolidated financial statements and therefore, ~~does~~do not separately present a statement of comprehensive income in ~~its~~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. In response to the pandemic, many states and jurisdictions in which we operate issued stay-at-home orders and other measures aimed at slowing the spread of the coronavirus, resulting in significant changes to our operations and a sudden and drastic decrease in revenues. While the pandemic continues to have an impact on our business, the distribution of COVID-19 vaccines and lifting of local restrictions has resulted in a gradual improvement to our sales during 2021 and 2022. Nearly all of our shops, including those in central business districts, have reopened their dining rooms and are no longer subject to operating restrictions and capacity limits related to COVID-19. We will continue to 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 if required due to changes in the pandemic response in each jurisdiction and restaurant operating protocols, 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; its wholly owned subsidiary, Potbelly Illinois, Inc. (“PII”); PII’s wholly owned subsidiaries, Potbelly Franchising, LLC and Potbelly Sandwich Works, LLC (“~~LLC”~~PSW”); ~~eight~~7 of ~~LLC’s~~PSW’s wholly owned subsidiaries and ~~LLC’s five~~PSW’s 6 joint ventures, collectively, the “Company.” All ~~significant~~ intercompany balances and transactions have been eliminated in consolidation. For consolidated joint ventures, non-controlling interest represents a non-controlling partner’s share of the assets, liabilities and operations related to the ~~five~~6 joint venture investments. ~~The Company~~Potbelly has ownership interests ranging from ~~51-80%~~51- 80% in these consolidated joint ventures.

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Fiscal Year

~~The Company uses~~

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 ~~2017 consists of 53 weeks~~2022 and ~~2016 consisted~~2021 both consist of 52 weeks. The fiscal quarters ended ~~September 24, 2017~~March 27, 2022 and ~~September 25, 2016~~March 28, 2021 each consisted of 13 weeks.

Use of Estimates

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

Potbelly Brand Fund

~~New and Revised Financial Accounting Standards~~

~~In May 2014,~~

We maintain the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, “Revenue from Contracts with Customers.” The pronouncement was issued to clarify the principles for recognizing revenue and to develop a common revenue standard and disclosure requirements for U.S. GAAP and International Financial Reporting Standards (IFRS). The FASB approved a one-year deferral of the effective date of ASU 2014-09, such that it will become effectivePotbelly Brand Fund (the "Brand Fund") for the ~~annual period beginning after December 15, 2017. In addition,~~purpose of collecting and administering funds to be used for advertising, customer research, marketing technology, agencies, and other activities that promote the ~~FASB issued ASU 2016-08, ASU 2016-10~~Potbelly brand in order to deliver sales at our shops. Company-operated and ~~ASU 2016-12~~franchised shops both contribute to the Brand Fund based on a percentage of sales.

Beginning in March 2016, April 2016 and May 2016, respectively, to help provide interpretive clarifications on the new guidance in Accounting Standards Codification (ASC) Topic 606. Potbelly will adopt the standard effective the first quarter of ~~2018~~fiscal year 2022, we manage these advertising and ~~apply~~marketing expenses through the ~~amendments~~Brand Fund using the ~~modified retrospective method.~~funds contributed by our shops. We manage these funds separately from our general operating expenses, but we are not obligated to maintain them 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 to company-operated and franchised shops based on their relative contributions. The ~~Company has determined~~allocation of company-operated Brand Fund expense is included within other operating expenses in our condensed consolidated statements of operations. The allocation of franchisee Brand Fund expense is presented as franchise 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 ~~the adoption will~~they were either not applicable or not expected to have a ~~material~~significant impact onto the condensed consolidated financial statements.

(2) Revenue

We primarily earn revenue at a point in time for sandwich shop sales, ~~but will impact franchise~~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 ~~and gift card breakage. Potbelly licenses intellectual property and trademarks to franchisees through franchise arrangements. As part of these agreements, Potbelly receives~~generating activities outlined below.

Franchise Revenue

We earn an initial franchise fee, ~~payment which is~~ 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 ~~as revenue~~ ~~when~~over the ~~shop opens. Effective~~contractual term of the franchise agreement. We record a contract liability for the ~~annual period beginning January 1, 2018,~~ 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~~s will generally be recognized~~ payments received by us are recorded in the consolidated balance sheets as ~~revenue~~accrued expenses or other long-term liabilities, and amortized over the life of the ~~contract.~~ franchise development agreement. 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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Gift Card Redemptions / Breakage Revenue

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

We recognized gift card breakage income of $0.2 million and $0.1 million for the quarters ended March 27, 2022 and March 28, 2021, 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 ~~recognizes breakage two years after~~Perks application at the ~~period~~point of sale. ~~Effective~~The customer will typically earn 10 points for every dollar spent, and the ~~annual period beginning January 1, 2018, expected breakage~~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 anticipated to be recognized as customers redeem the gift cards. The Company is continuing its assessment, which may identify additional impacts this standard will have on its consolidated financial statements and related disclosures.

In February 2016, the FASB issued ASU No. 2016-02, “Leases,” which will replace the existing guidance in ASC 840, “Leases.” The pronouncement requires a dual approach for lessee accounting under which a lessee would account for leases as finance leases or operating leases. Both finance leases and operating leases will result in the lessee recognizing a right-of-use assetearned, and a corresponding ~~lease liability. For finance leases,~~liability is established in deferred revenue. The deferral is based on the ~~lessee would recognize interest expense and amortization~~estimated value of the ~~right-of-use asset~~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 ~~for operating leases, the lessee would recognize a straight-line total lease expense. The pronouncement~~ is effective for fiscal years beginning after December 15, 2018, including annual and interim periods thereafter. In addition, the pronouncement requires the use of the modified retrospective method, which will require adjustment to all comparative periods presentedrecognized in net shop sandwich sales in the consolidated ~~financial statements. The Company is currently evaluating the impact ASU 2016-02 will have on its financial position, results~~statement of ~~operations and cash flows but expects that it will result in a material increase in its long-term assets and liabilities given the Company has a significant number of leases.~~

~~In March 2016, the FASB issued ASU No. 2016-09, “Compensation – Stock Compensation (Topic 718).” The pronouncement simplifies the accounting~~operations. When points are redeemed, we recognize revenue for the ~~taxes~~redeemed product and reduce accrued expenses.

For the quarter ended March 27, 2022 revenue recognized from all revenue sources on point in time sales was $97.9 million, and revenue recognized from sales over time was $0.3 million. For the quarter ended March 28, 2021, revenue recognized from all revenue sources on point in time sales was $77.5 million and revenue recognized from sales over time was $0.1 million.

Contract Liabilities

As described above, 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 March 27, 2022	6,193		1,403
Increase (decrease) in contract liability	$	(340)	$	(25)

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The aggregate value of remaining performance obligations on outstanding contracts was $7.6 million as of March 27, 2022. We expect to recognize revenue related to ~~stock-based compensation, including the accounting for income taxes, forfeitures and statutory tax withholding requirements,~~contract liabilities as follows (in thousands), which may vary based upon franchise activity as well as ~~classification within~~gift card redemption patterns:


Years Ending	Amount
2022	$	5,342
2023	495
2024	251
2025	361
2026	137
Thereafter	1,010
Total revenue recognized	$	7,596

For the ~~statement~~quarter ended March 27, 2022, the amount of ~~cash flows. The pronouncement~~revenue recognized related to the December 26, 2021 liability ending balance was $1.1 million. For the quarter ended March 28, 2021, the amount of revenue recognized related to the December 27, 2020 liability ending balance was $0.6 million. This revenue is effective for annual periods beginning after December 15, 2016, including annual and interim periods thereafter. Potbelly adopted ASU 2016-09 in the first quarter of 2017. The primary impact of adoption wasrelated to the recognition of ~~excess tax benefits~~gift card redemptions and ~~deficiencies that arise upon vesting or exercise of share-based payments~~upfront franchise fees. For the quarters ended March 27, 2022 and March 28, 2021, we did not recognize any revenue from obligations satisfied (or partially satisfied) in ~~the Income Statement as income tax expense instead of a component of equity recorded to paid-in capital.~~ ~~This aspect of the new guidance, which was required to be adopted prospectively, resulted in~~ an additional income tax expense of $45 thousand and $292 thousand for the 13 weeks and 39 weeks ended September 24, 2017, respectively. Potbelly has elected to continue to estimate forfeitures expected to occur to determine the amount of compensation cost to be recognized in each period. Excess income tax benefits and deficiencies from stock-based compensation arrangements are now classified as cash flow from operations, instead of as cash flow used in financing activities. The Company elected to apply this change in presentation prospectively and as such prior periods have not been adjusted. Additionally, in accordance with the new standard, the Company now excludes excess tax benefits and deficiencies from the assumed proceeds available to repurchase shares in the computation of the Company’s diluted earnings per share.

In January 2017, the FASB issued ASU No. 2017-04, “Intangibles – Goodwill and Other (Topic 350).” The new standard eliminates step 2 from the goodwill impairment test. Instead, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss will be recognized in an amount equal to that excess. Under current U.S. GAAP, to perform step 2 an entity must determine its implied fair value, which is determined in the same manner as the amount of goodwill recognized in a business combination. In addition to eliminating step 2, the new standard eliminates the requirement for a reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform step 2 of the goodwill impairment test. Instead, all reporting units, even those with a zero or negative amount will apply the same impairment test. An entity is required to disclose the amount of goodwill allocated to each reporting unit with a zero or negative carrying amount of net assets. The standard will be effective for Potbelly in the fiscal year beginning after December 15, 2019. Early adoption for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017 is permitted. This amendment is required to be applied on a prospective basis. Potbelly is currently assessing the impact and timing of adopting this guidance on its consolidated financial statements.

periods.

~~(2)~~

(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 ~~Company assesses~~book value of the long-term debt under the Credit Agreement, subsequently amended most recently as of January 28, 2022 and further discussed in Note 7, is considered to approximate its fair value as of March 27, 2022 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 ~~its~~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.~~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.~~asset group. The fair value of the shop assets ~~was~~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 ~~the Company’s~~our shops during the ~~13 weeks and 39 weeks~~quarter ended ~~September 24, 2017,~~March 27, 2022, it was determined that indicators of impairment were present for certain shops as a result of continued ~~underperformance. The Company~~underperformance, primarily related to the impacts of COVID-19. We performed an impairment analysis related to these shops and recorded an impairment charge of ~~$1.5 million and $5.8~~$1.1 million for the 13quarter ended March 27, 2022. The ultimate severity and ~~39 weeks ended September 24, 2017, respectively.~~ ~~Included within~~longevity of the ~~impairment charge for the 13~~COVID-19 pandemic is unknown, and ~~39 weeks ended September 24, 2017, impairment charges of $0.7 million were recorded~~therefore, it is possible that impairments could be identified in ~~relation to Hurricane Harvey, with insurance recoveries of $0.7 million also recorded within the same caption.~~ ~~The company recorded an impairment charge of $1.9 million~~future periods, and ~~$2.9 million for the 13 and 39 weeks ended September 25, 2016, respectively.~~

~~(3) Earnings (Loss)~~such amounts could be material.

(4) Loss Per Share

Basic and diluted ~~income~~loss per common share attributable to common stockholders ~~was~~are calculated using the weighted average number of common shares outstanding for the period. Diluted ~~income~~loss per common share attributable to common stockholders is computed by dividing the ~~income~~loss allocated to common stockholders by the weighted average number of fully

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diluted common shares outstanding. In periods of a net loss, no potential common shares are included in diluted shares outstanding as the effect is anti-dilutive. For the ~~13 weeks~~quarters ended ~~September 24, 2017, the Company~~March 27, 2022 and March 28, 2021, we had a loss per share, and therefore potentially dilutive shares were excluded ~~for potential stock option exercises and warrant exercises.~~

from the calculation.

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

For the 13 Weeks Ended

For the 39 Weeks Ended

September 24,

September 25,

September 24,

September 25,

2017

2016

2017

2016

Net income (loss) attributable to Potbelly Corporation

$
(240
)

$
1,795

$
305

$
6,256

Weighted average common shares outstanding-basic

24,959,023

25,240,374

25,030,951

25,772,846

Plus: Effect of potential stock options exercise

—

533,249

770,965

514,257

Plus: Effect of potential warrant exercise

—

56,347

55,167

54,810

Weighted average common shares outstanding-diluted

24,959,023

25,829,970

25,857,083

26,341,913

Income (loss) per share available to common stockholders-basic

$
(0.01
)

$
0.07

$
0.01

$
0.24

Income (loss) per share available to common stockholders-diluted

$
(0.01
)

$
0.07

$
0.01

$
0.24

Potentially dilutive shares that are considered anti-dilutive:

Common share options

4,012,073

1,233,294

1,151,317

1,236,599


	For the Quarter Ended
	March 27, 2022		March 28, 2021
Net loss attributable to Potbelly Corporation	$	(7,913)	$	(14,472)
Weighted average common shares outstanding-basic	28,396		25,944
Plus: Effect of potentially dilutive shares	—		—
Weighted average common shares outstanding-diluted	28,396		25,944
Loss per share available to common stockholders-basic	$	(0.28)	$	(0.56)
Loss per share available to common stockholders-diluted	$	(0.28)	$	(0.56)
Potentially dilutive shares that are considered anti-dilutive:
Shares	1,735		2,544

~~(4)~~

(5) Income Taxes

The ~~Company recognized income~~interim tax ~~benefit of $0.5 million on a pre-tax loss of $0.6 million, or~~provision is determined using an estimated annual effective tax rate ~~benefit~~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 ~~80.4%, for~~both positive and negative evidence related to the ~~13 weeks ended September 24, 2017, compared~~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 ~~$1.0~~$13.6 million. We continue to maintain a valuation allowance against all of our deferred tax assets as of March 27, 2022. We did not provide for an income tax benefit on our pre-tax loss for the quarters ended March 27, 2022 and March 28, 2021. We assess the likelihood of the realization of our deferred tax assets each quarter and the valuation allowance is adjusted accordingly.

(6) Leases

We determine if an arrangement is a lease at inception of the arrangement. We lease retail shops, 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 the recording a right-of-use asset and lease liability on 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 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 corresponding to the maturities 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 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 as reductions of rent expense over the lease term.

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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. leases with terms of 12 months or less) and an accounting policy to account for lease and non-lease components as a single component for certain classes of assets.

In fiscal year 2020, as a result of COVID-19, we held discussions with landlords regarding restructuring of our leases in light of various contractual and legal defenses, and we subsequently entered into a total of 350 amendments with our respective landlords through December 26, 2021. The vast majority of these lease amendments were completed during fiscal year 2020, and we are fully complete with COVID-19-related lease amendments as of December 26, 2021.

During the quarter ended March 27, 2022, we terminated 1 lease. The terminated lease had a month-to-month term and, as a result, we did not incur any lease termination fees or record a gain or loss related to this lease termination for the quarter ended March 27, 2022.


	For the Quarter Ended
	March 27, 2022	March 28, 2021
Leases terminated	1	2
Lease termination fees	—	177
Right-of-use assets derecognized upon lease termination	—	587
Lease liabilities derecognized upon lease termination	—	689
Gain recognized upon lease termination	—	102

Operating lease term and discount rate were as follows:


	For the Quarter Ended
	March 27, 2022		March 28, 2021
Weighted average remaining lease term (years)	7.06		7.65
Weighted average discount rate	8.06	%	7.83	%

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
	Classification	March 27, 2022	March 28, 2021
Operating lease cost	Occupancy and General and administrative expenses	10,305	10,411
Variable lease cost	Occupancy	3,462	3,239
Total lease cost		13,767	13,650

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


	For the Quarter Ended
	March 27, 2022	March 28, 2021
Operating cash flows rent paid for operating lease liabilities	10,594	12,914
Operating right-of-use assets obtained in exchange for new operating lease liabilities	3,382	1,718
Reduction in operating right-of-use assets due to lease terminations and modifications	—	3,294

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As of March 27, 2022, we had no real estate leases entered into that had not yet commenced.

Maturities of lease liabilities were as follows as of March 27, 2022:


			Operating Leases
Remainder of 2022			31,643
2023			38,423
2024			36,430
2025			33,647
2026			29,829
2027			24,546
Thereafter			59,440
Total lease payments			253,958
Less: imputed interest			(63,490)
Present value of lease liabilities			190,468

(7) Debt and Credit Facilities

The components of long-term debt were as follows:


	March 27, 2022		December 26, 2021
Revolving credit facility	$	14,300	$	9,850
Paycheck Protection Program loan	10,000		10,000
Less: current portion of long-term debt	(2,833)		(2,333)
Total long-term debt	$	21,467	$	17,517

Revolving credit facility

On August 7, 2019, we entered into a second amended and restated revolving credit facility agreement (the "Credit Agreement") with JPMorgan Chase Bank, N.A. (“JPMorgan”). 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 credit facility in a maximum principal amount 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 the maturity date under the Credit Agreement from January 31, 2023 to May 31, 2023, (ii) changed the benchmark interest rates under the Credit Agreement for borrowings from the London Interbank Offered Rate (LIBOR) to the Secured Overnight Financing Rate (SOFR) subject to certain adjustments in the Sixth Amendment, (iii) increased the interest rate margin by 75 basis points with respect to any CBFR Loan (as defined in the Credit Agreement), (iv) sets the interest rate margin at 600 basis points with respect to any Term Benchmark Loan (as defined in the Credit Agreement), (v) amended certain financial covenant testing levels, and (vi) amended the definition of subsidiary to exclude the Potbelly Employee Relief Fund NFP, an Illinois not-for-profit corporation.

As of March 27, 2022, we had $14.3 million outstanding under the Credit Agreement. As of December 26, 2021, we had $9.9 million outstanding under the Credit Agreement. 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.

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The Loan is scheduled to mature five years from the date on ~~pre-tax income of $2.8 million, or an effective tax~~which PSW applies for loan forgiveness under the CARES Act, bears interest at a rate of ~~34.2%, for~~1% per annum and is subject to the ~~13 weeks ended September 25, 2016.~~terms and conditions applicable to loans administered by the U.S. Small Business Administration under the CARES Act. The ~~Company recognized income tax expense~~PPP provides that the use of ~~$0.3 million on pre-tax income~~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 have used all of ~~$0.8 million,~~the PPP proceeds toward qualifying expenses and are pursuing forgiveness of the full Loan amount, but we are not able to determine the likelihood or ~~an effective tax rate~~the amount of ~~33.5%, for~~forgiveness that will be obtained.

We have recorded the ~~39 weeks ended September 24, 2017, compared to income tax expense~~amount of ~~$3.7 million on pre-tax income of $10.1 million, or an effective tax rate of 36.8%, for~~ the ~~39 weeks ended September 25, 2016. The effective tax rate differed from the federal statutory rate primarily due to a change~~Loan as long-term debt (current and non-current) in ~~earnings~~our condensed consolidated balance sheet and the ~~adoption~~related interest has been recorded to interest expense in our condensed consolidated statement of ~~ASU 2016-09, which had an unfavorable impact~~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 ~~Company’s tax rate benefit~~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 ~~7.5%~~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.

As of March 27, 2022, we have fully paid our remaining obligations as a result of the ~~13 weeks ended September 24, 2017 and an unfavorable impact~~restructuring plan implemented in the fourth quarter of ~~38.9% for the 39 weeks ended September 24, 2017.~~ ~~See Note 1 for additional information regarding the adoption of ASU 2016-09.~~

2020.


	Total
	(Thousands)
Balance as of December 26, 2021	$	122
Charges incurred	—
Payments made	(122)
Balance at March 27, 2022	$	—

~~(5)~~

(9) Capital Stock

On ~~September~~May 8, ~~2016, the Company~~2018, we announced that ~~its~~our Board of Directors authorized a ~~share~~stock repurchase program offor up to ~~$30.0~~$65.0 million of ~~the Company’s~~our outstanding common stock. The ~~Company’s previous $35.0 million share repurchase program, authorized in September 2015, was completed in July 2016. The current~~ program permits ~~the Company,~~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. ~~During~~The number of common shares actually repurchased, and the ~~39 weeks~~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 24, 2017, the Company repurchased 745,496~~March 27, 2022, we did not repurchase any shares of ~~its~~our common stock under the stock repurchase program. In light of the COVID-19 pandemic, 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 ~~$8.9~~$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 shares and warrants based on their relative fair values at closing. The warrants were valued utilizing the Black-Scholes method.

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 ~~including cost and commission,~~(the “Shares”), from time to time, in ~~open market transactions.~~our sole discretion, through an “at the market” equity offering program under which William Blair will act as sales agent. As of ~~September 24, 2017, the remaining dollar value of authorization~~March 27, 2022, we have not sold any shares under the share repurchase program was $18.8 million, which does not include commission. Repurchased shares are included as treasury stock in the condensed consolidated balance sheets and the condensed consolidated statementssales agreement.

Table of ~~equity.~~

~~(6)~~Contents

(10) Stock-Based Compensation

Stock options ~~are~~

We have awarded ~~under the 2013 Long-Term Incentive Plan to eligible employees. The fair value of~~ stock options is determined using the Black-Scholes option pricing model. The weighted average fair value of options granted during the 39 weeks ended September 24, 2017 was $4.58 per share, as estimated using the following weighted average assumptions: expected life of options – 6.25 years; volatility – 36.37%; risk-free interest rate – 2.23%; and dividend yield – 0.0%. The Company used the simplified method for determining the expected life of the options. The expected volatility of the options was calculated using the Company’s historical data.

~~A summary of activity for the 39 weeks ended September 24, 2017 is as follows:~~

Options

Shares
(Thousands)

Weighted
Average
Exercise
Price

Aggregate
Intrinsic
Value
(Thousands)

Weighted
Average
Remaining
Term
(Years)

Outstanding—December 25, 2016

4,013

$
10.61

$
13,455

4.78

Granted

263

11.55

Exercised

(125
)

9.48

Canceled

(68
)

15.23

Outstanding—September 24, 2017

4,083

$
10.63

$
7,390

4.44

Exercisable—September 24, 2017

3,288

$
10.06

$
7,185

3.54

~~The company also awards restricted stock units (“RSUs”)~~ to certain ~~non-employee members of its Board of Directors and~~employees including the senior leadership team. ~~In May 2017, the Company issued 153,369~~The number of shares and exercise price of ~~RSUs with~~each option is determined by a ~~grant-date fair value of $11.05 upon issuance.~~ ~~In August 2017, the Company issued 2,608 shares of RSUs to certain non-employee members of its~~committee designated by our Board of Directors. The ~~RSUs had~~options granted are generally exercisable over a ~~grant-date fair value of $11.15 upon issuance. The Board of Director grants have a vesting schedule of 50% on~~10-year period from the ~~first anniversary~~date of the ~~grant date~~grant. Options outstanding expire on various dates through the year 2028. The range of exercise prices for the options outstanding as of March 27, 2022 is $9.47 and ~~50% on~~$20.53 per option, and the ~~second anniversary of the grant date. The senior leadership team grants~~options generally vest in ~~one-third~~one-fourth and one-fifth increments over ~~a three-year period beginning in March 2018.~~

four and five-year periods, respectively.

A summary of stock option activity is as follows:


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
Granted	—	—
Exercised	—	—
Canceled	(11)	8.16
Outstanding—March 27, 2022	527	12.11		$	—	2.14
Exercisable—March 27, 2022	527	$	12.11	$	—	2.14

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.~~paid-in capital. For the ~~13 weeks~~quarter ended ~~September 24, 2017, the Company~~March 27, 2022, we recognized stock-based compensation expense ~~of $1.4 million, of which $0.6 million was~~ related to ~~Chief Executive Officer (CEO) transition costs.~~stock options of less than $0.1 million. For the ~~39 weeks~~quarter ended ~~September 24, 2017, the Company~~March 28, 2021, we recognized stock-based compensation expense ~~of $3.3 million, of which $0.8 million was~~ related to ~~CEO transition costs.~~ ~~For the 13 and 39 weeks ended September 25, 2016, the Company recognized stock-based compensation~~stock options of ~~$0.8 million and $2.3 million, respectively.~~$0.1 million. As of ~~September 24, 2017,~~March 27, 2022, we do not have unrecognized stock-based compensation expense ~~was $4.9 million, which will be recognized through fiscal year 2021. The Company records~~related to stock options. We record stock-based compensation expense within general and administrative expenses in the condensed consolidated statements of operations.

~~(7)~~

Restricted stock units

We award restricted stock units (“RSUs”) to certain employees and certain non-employee members of our Board of Directors. Prior to 2021, the 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 is as follows:


RSUs	Number of RSUs (Thousands)	Weighted Average Fair Value per Share
Non-vested as of December 26, 2021	1,151	$	4.87
Granted	—	—
Vested	(130)	6.06
Canceled	—	—
Non-vested as of March 27, 2022	1,021	$	4.87

For the quarter ended March 27, 2022, we recognized stock-based compensation expense related to RSUs of $0.6 million. For the quarter ended March 28, 2021, we recognized stock-based compensation expense related to RSUs of

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$0.1 million. As of March 27, 2022, unrecognized stock-based compensation expense for RSUs was $4.1 million, which will be recognized through fiscal year 2024.

Performance stock units

We award performance share units (“PSUs”) to certain of our employees. The PSUs have certain vesting conditions based upon our stock price and relative stock performance.

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 ended March 27, 2022, we recognized stock-based compensation expense for PSUs with market vesting conditions of $0.1 million.

A summary of activity for PSUs with market vesting conditions for the quarter ended March 27, 2022 is as follows:


PSUs	Number of PSUs (Thousands)	Weighted Average Fair Value per Share
Non-vested as of December 26, 2021	130	8.43
Granted	—	—
Vested	—	—
Canceled	—	—
Non-vested as of March 27, 2022	130	8.43

(11) Commitments and Contingencies

~~The Company is~~

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 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 ~~the Company’s~~our financial position or results of operations and cash flows.

In 2016, the Company received notice of a potential claim alleging that it violated the Fair Labor Standards Act by not paying overtime to its assistant managers, whom the Company had classified as exempt employees. Although the Company believes that its assistant managers were properly classified as exempt under both federal and state laws, the Company agreed to mediate the matter. On February 20, 2017, the parties entered into a Settlement Agreement and Release whereby participating assistant managers agreed to release the Company from all federal and/or state wage and hour claims in exchange for a gross settlement amount of $1.3 million. As partMany of the ~~settlement process, a complaint was filed on February 17, 2017~~food products we purchase are subject to changes in the ~~Circuit Court~~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 ~~Fifteenth Judicial Circuit~~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 ~~Palm Beach County, Florida. A motion seeking the Court’s approval~~speculative purposes, and as such are not required to be evaluated as derivative instruments.

Table of ~~the settlement was filed on February 21, 2017, which was subsequently approved. In March 2017, the Company paid out the settlement, which was booked against the previously recorded liability.~~

Contents

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 ~~25, 2016.~~26, 2021. This discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, ~~(the “Securities Act”) and~~ Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and 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 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.~~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; our ability to successfully implement our business strategy; the success of our initiatives to increase sales and traffic; changes in commodity, energy and other costs; our ability to attract and retain management and employees; consumer reaction to industry-related public health issues and perceptions of food safety; our ability to manage our growth; reputational and brand issues; price and availability of commodities; consumer confidence and spending patterns; and weather conditions. Forward-looking statements are based on current expectations and assumptions and currently available data and are neither predictions nor guarantees of future events or performance. You should not place undue reliance on forward-looking statements, which speak only as of the date hereof. See “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements” included in our Annual Report on Form 10-K for the fiscal year ended December ~~25, 2016,~~26, 2021, for a discussion of factors that could cause our actual results to differ from those expressed or implied by forward-looking statements.

~~Overview~~

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 ~~(the “Company” or “Potbelly”)~~ is a ~~fast-growing~~ neighborhood sandwich concept ~~offering~~that has been feeding customers’ smiles with warm, toasty ~~warm~~ sandwiches, signature salads, hand-dipped shakes and other fresh menu items, ~~served by engaging people~~customized just the way customers want them, for more than 40 years. Potbelly owns and operates Potbelly Sandwich Shop concepts in ~~an environment that reflects~~ the Potbelly brand. Our combination of product, people and place is how we deliver on our passion to be “The Best Place for Lunch.” Our sandwiches, salads and hand-dipped milkshakes are all made fresh to order and our cookies are baked fresh each day. Our employees are trained to engage with our customers in a genuine way to provide a personalized experience. Our shops feature vintage design elements and locally-themed décor inspired by the neighborhood that we believe create a lively atmosphere. Through this combination, we believe we are creating a devoted baseUnited States. We also have domestic franchise operations of Potbelly ~~fans that return again and again and that we are expanding one sandwich shop at a time.~~

~~We believe that a key to our past and future success~~Sandwich Shop concepts. Potbelly’s chief operating decision maker is our ~~culture. It is embodied in~~ ~~The Potbelly Advantage,~~ ~~which is an expression of~~Chief Executive Officer. Based on how our ~~Vision, Mission, Passion~~Chief Executive Officer reviews financial performance and ~~Values~~allocates resources on a recurring basis, we have one operating segment and the foundation of everything we do. Our Vision is for our customers to feel that we are their “Neighborhood Sandwich Shop” and to tell others about their great experience. Our Mission is to make people really happy, to make more money and to improve every day. Our Passion is to be “The Best Place for Lunch.” Our Values embody both how we lead and how we behave and form the cornerstone of our culture. We use simple language that resonates from the frontline associate to the most senior levels of the organization, creating shared expectations and accountabilities in how we approach our day-to-day activities. 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 strategic plan includes a ~~fun, friendly~~prioritized set of low-cost strategic investments that we believe will deliver strong returns. The 5 pillars are:

•Craveable Quality Food at a Great Value

•People Creating Good Vibes

•Customer Experiences that Drive Traffic Growth

•Digitally Driven Awareness, Connection and ~~hardworking group~~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 ~~people who enjoy taking care~~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 no guarantee that we will be able to maintain these returns, we believe our ~~customers, while at the same time taking care~~attractive shop economics support our ability to profitably grow our brand in new and existing markets.

Table of ~~each other.~~

Contents

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

Company-

Franchise-Operated

Total

Operated

Domestic

International

Total

Company

Shops as of December 27, 2015

372

24

12

36

408

Shops opened

15

5

2

7

22

Shops purchased from franchisee

1

(1
)

—

(1
)

—

Shops closed

(1
)

—

(1
)

(1
)

(2
)
Shops as of September 25, 2016

387

28

13

41

428

Shops as of December 25, 2016

411

30

13

43

454

Shops opened

22

10

3

13

35

Shops closed

(7
)

—

—

—

(7
)
Shops as of September 24, 2017

426

40

16

56

482


	Company- Operated	Franchise- Operated	Total Company
Shops as of December 27, 2020	400	46	446
Shops opened	—	—	—
Shops closed	(1)	(1)	(2)
Shops as of March 28, 2021	399	45	444

Shops as of December 26, 2021	397	46	443
Shops opened	—	—	—
Shops closed	(3)	—	(3)
Shops as of March 27, 2022	394	46	440

~~Financial Results~~

Impact of COVID-19 on Our Business

On January 30, 2020, the WHO announced a global health emergency because of COVID-19 and the risks to the international community as the virus spreads globally. On March 11, 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally. The COVID-19 pandemic significantly impacted economic conditions in the United States where all our shops are located during portions of 2020 and 2021. In response to the ~~third~~pandemic, many states and jurisdictions in which we operate issued stay-at-home orders and other measures aimed at slowing the spread of the coronavirus, resulting in significant changes to our operations and a sudden and drastic decrease in revenues. While the pandemic continues to have an impact on our business, the distribution of COVID-19 vaccines and lifting of local restrictions has resulted in a gradual improvement to our sales during 2021 and through the first quarter of ~~2017 Potbelly experienced temporary~~2022. Nearly all of our shops have reopened their dining rooms and are no longer subject to operating restrictions and capacity limits related to COVID-19. As of March 27, 2022, 5 of our shops remain temporarily closed. We will continue to follow guidance from local authorities in determining the appropriate restrictions to put in place for each shop, ~~closures in Texas~~including mask mandates, hours of operation, and the suspension or reduction of in-shop dining if required due to ~~Hurricane Harvey.~~ changes in the pandemic response in each jurisdiction and restaurant operating protocols, which could result in lower in-shop dining revenue or higher operating costs.

Specifically, COVID-19 has affected our financial results and performance as follows:

•Revenue – Many of our shops, specifically those in suburban and urban residential locations are now operating near or above pre-COVID-19 levels. Other shops, especially those in central business districts, are still operating materially below those levels but are continuing to recover. While the majority of our shops have reopened their dining rooms and are operating without mandated restrictions, the pandemic has affected consumer behavior including more significant focus on digital sales. As such, we continue to offer convenient off-premise options for customers. Customers canplace off-premise orders through Potbelly.com and the Potbelly app, or through DoorDash, Grubhub, Postmates, Uber Eats and other marketplaces nationwide. We also continue to evaluate our product offerings and service methods to ensure we are aligned with the preferences of our customers as the pandemic evolves.

•Operating Costs – We implemented measures to reduce operating costs and general and administrative expenses in response to the negative impact the pandemic has had on our business. We continually adjust shop-level labor and inventory to align with current levels of demand. At the onset of the pandemic, we implemented a strategy to reduce costs and preserve cash, and we continue to be thoughtful and judicious regarding our operating expenses during the uncertainty of the pandemic. We negotiated rent abatements, rent deferrals, and other modified lease terms with the majority of our shop landlords in order to preserve liquidity and reduce ongoing occupancy costs. Additionally, we announced and executed a corporate restructuring plan during the fourth quarter of 2020 which reduced annual general and administrative

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expenses in 2021 and 2022. The restructuring plan consisted of corporate expense optimization, consolidation of shop support services, and other expense and staff reductions.

As a result of COVID-19, during the quarter ended March 27, 2022, some of our food and paper suppliers have experienced shortages in labor and transportation resources, which in some cases, has resulted in increased costs of our food and paper, which we expect will continue to a certain extent through the remainder of the year. We have worked closely with our suppliers to ensure availability of products and, to date, there has been minimal disruption to the availability of our products, though it is possible that more significant disruptions could occur if the COVID-19 pandemic and labor and supply chain availability challenges continue to worsen.

In ~~total, 22~~addition, during the quarter ended March 27, 2022, we experienced labor availability challenges in certain shops. We are managing the labor availability impact on these restaurants by selectively raising wages and limiting our hours of operation or closing dining rooms, when necessary. We have also expanded the ability for customers to pay tips on their orders to further increase compensation for our shop employees.

Although we have been able to manage costs relating to compliance with our stringent food safety and quality assurance programs and implementation and maintenance of strict sanitation protocols for our shops, to the extent new requirements or actions are mandated or we deem them advisable, we may incur additional costs to comply with such requirements to take such actions.

We have increased, and plan to continue to increase, menu prices as necessary in order to offset additional costs as a result of COVID-19 and a higher inflationary economic environment in the U.S. These price increase may not be sufficient to mitigate additional unexpected higher costs and further increases may negatively impact consumer behavior and purchases.

•Shop Development – We halted capital investment in new company-owned shops, except for shops that were ~~affected,~~substantially complete, as well as all non-essential capital expenditures. We currently do not have plans to begin construction on any company-owned shops until the impact of the pandemic is behind us.

We will continue to actively monitor the evolving situation and may take further actions that alter our business operations as may be required by federal, state or local authorities or that we determine are in the best interests of our employees, customers, franchisees, stakeholders and communities.

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, shop-level profit margins, and 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 March 27, 2022 and March 28, 2021, there were 388 and 376 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 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 ~~one~~an initial start-up period of 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

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start-up period of operation. The average start-up period is 10 to 13 weeks. The number and timing of shop ~~being significantly damaged. Included within Potbelly’s Condensed Consolidated Statements~~openings has had, and is expected to continue to have, an impact on the our results of ~~Operations within~~operations.

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 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 shop-level profit (loss) margin is important in evaluating shop-level productivity, efficiency and performance.

Adjusted EBITDA

Potbelly defines adjusted EBITDA as net income before depreciation and amortization, interest expense and 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, gain or loss on disposal of property and equipment, ~~impairment~~and pre-opening expenses as well as other one-time, non-recurring charges, such as CEO transition costs. Potbelly believes that adjusted EBITDA is a useful measure of ~~$0.7 were million recorded in relation to this shop, with insurance recoveries~~operating performance, as it provides a picture of ~~$0.7 million also recorded within the same caption.~~

~~13 Weeks~~operating results by eliminating expenses that management does not believe are reflective of underlying business performance.

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Quarter Ended ~~September 24, 2017~~March 27, 2022 Compared to ~~13 Weeks~~Quarter Ended ~~September 25, 2016~~

March 28, 2021

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


	For the Quarter Ended										Increase (Decrease)		Percent Change
	March 27, 2022		% of Revenues			March 28, 2021		% of Revenues
Revenues
Sandwich shop sales, net	$	97,431	99.2		%	$	77,501	99.3		%	$	19,930	25.7		%
Franchise royalties and fees	790		0.8			562		0.7			228		40.6
Total revenues	98,221		100.0			78,063		100.0			20,158		25.8

Expenses
(Percentages stated as a percent of sandwich shop sales, net)
Sandwich shop operating expenses, excluding depreciation
Food, beverage and packaging costs	27,308		28.0			21,469		27.7			5,839		27.2
Labor and related expenses	33,253		34.1			28,614		36.9			4,639		16.2
Occupancy expenses	13,845		14.2			13,599		17.5			246		1.8
Other operating expenses	18,105		18.6			14,003		18.1			4,102		29.3

(Percentages stated as a percent of total revenues)
Franchise marketing expenses	120		0.1			43		NM			77		179.1
General and administrative expenses	8,518		8.7			7,172		9.2			1,346		18.8
Depreciation expense	3,136		3.2			4,174		5.3			(1,038)		(24.9)
Impairment, loss on disposal of property and equipment and shop closures	1,319		1.3			3,122		4.0			(1,803)		(57.8)
Total expenses	105,604		107.5			92,196		118.1			13,408		14.5
Loss from operations	(7,383)		(7.5)			(14,133)		(18.1)			6,750		(47.8)

Interest expense, net	327		0.3			288		0.4			39		13.5
Loss before income taxes	(7,710)		(7.8)			(14,421)		(18.5)			6,711		(46.5)
Income tax expense (benefit)	177		0.2			53		0.1			124		NM
Net loss	(7,887)		(8.0)			(14,474)		(18.5)			6,587		(45.5)
Net income (loss) attributable to non-controlling interest	26		NM			(2)		NM			28		NM
Net loss attributable to Potbelly Corporation	$	(7,913)	(8.1)		%	$	(14,472)	(18.5)		%	$	6,559	(45.3)		%

	For the Quarter Ended
Other Key Performance Indicators	March 27, 2022					March 28, 2021					Increase (Decrease)
Comparable store sales	24.4			%		(3.1)			%		27.5			%
Shop-level profit margin	5.0			%		(0.2)			%		5.2			%
Adjusted EBITDA	$	(2,279)				$	(6,642)				$	4,363

For the 13 Weeks Ended

September 24, 2017

% of
Revenues

September 25, 2016

% of
Revenues

Increase
(Decrease)

Percent
Change

Revenues

Sandwich shop sales, net

$
105,327

99.2
%

$
103,224

99.5
%

$
2,103

2.0
%
Franchise royalties and fees

800

0.8

558

0.5

242

43.4

Total revenues

106,127

100.0

103,782

100.0

2,345

2.3

Expenses

Sandwich shop operating
   expenses

Cost of goods sold, excluding
   depreciation

28,405

26.8

28,478

27.4

(73
)

(0.3
)
Labor and related expenses

31,187

29.4

30,163

29.1

1,024

3.4

Occupancy expenses

14,354

13.5

13,111

12.6

1,243

9.5

Other operating expenses

12,464

11.7

11,338

10.9

1,126

9.9

General and administrative
   expenses

12,104

11.4

9,999

9.6

2,105

21.1

Depreciation expense

6,315

6.0

5,656

5.4

659

11.7

Pre-opening costs

336

0.3

340

0.3

(4
)

(1.2
)
Impairment and loss on disposal
   of property and equipment

1,536

1.4

1,855

1.8

(319
)

(17.2
)
Total expenses

106,701

100.5

100,940

97.3

5,761

5.7

Income (loss) from operations

(574
)

(0.5
)

2,842

2.7

(3,416
)

>(100)

Interest expense

32

*

33

*

(1
)

(3.0
)
Income (loss) before income taxes

(606
)

(0.6
)

2,809

2.7

(3,415
)

>(100)

Income tax expense (benefit)

(487
)

(0.5
)

960

0.9

(1,447
)

>(100)

Net income (loss)

(119
)

*

1,849

1.8

(1,968
)

>(100)

Net income attributable to
   non-controlling interest

121

0.1

54

*

67

>100

Net income (loss) attributable to
   Potbelly Corporation

$
(240
)

(0.2
)%

$
1,795

1.7
%

$
(2,035
)

>(100)%

"NM" - Amount is not meaningful

*	~~Amount was less than 0.1%~~

Table of Contents

Revenues

Total revenues increased by ~~$2.3~~$20.2 million, or ~~2.3%~~25.8%, to ~~$106.1~~$98.2 million during the ~~13 weeks~~quarter ended ~~September 24, 2017,~~March 27, 2022, from ~~$103.8~~$78.1 million during the ~~13 weeks~~quarter ended ~~September 25, 2016. The revenue growth~~March 28, 2021. This increase was primarily driven by the easing of the government restrictions previously imposed by federal, state and local governments, as a result of the COVID-19 pandemic, as well as the national rollout of our new menu, which increased traffic and average check during the quarter. This resulted in an increase ~~in sales~~for the quarter of ~~$9.5~~$18.7 million, ~~from shops not yet~~or 24.4%, in ~~our~~ company-operated comparable store ~~sales base and an increase~~sales. The increases in sales during the first quarter of ~~$0.2~~2022 also included sales of $1.7 million ~~from franchise royalties and fees.~~of shops that were temporarily closed in 2021 that have since re-opened. These increases were partially offset by a decrease in sales of ~~$4.7~~$0.4 million ~~or 4.8%, from company-operated comparable store shops and a decrease in sales of $2.7 million from~~due to shops that have ~~closed. The decrease in company-operated comparable store sales resulted~~permanently closed during the last year. Additionally, revenue from ~~a decrease in traffic partially offset~~franchise royalties and fees increased by ~~certain menu price increases.~~

~~Cost of Goods Sold~~

~~Cost of goods sold decreased by $0.1~~$0.2 million, or ~~0.3%~~40.6%.

Food, beverage, and packaging costs

Food, beverage, and packaging costs increased by $5.8 million, or 27.2%, to ~~$28.4~~$27.3 million during the ~~13 weeks~~quarter ended ~~September 24, 2017,~~March 27, 2022, from ~~$28.5~~$21.5 million during the ~~13 weeks~~quarter ended ~~September 25, 2016,~~March 28, 2021. This increase was primarily ~~due to a decrease in input costs, which were partially offset~~driven by an increase in shop sales volume and increased costs ~~due to an increase~~of our food and paper as a result of some of our suppliers experiencing shortages in ~~sales volume.~~labor and transportation resources. As a percentage of ~~revenues, cost of goods sold decreased~~sandwich shop sales, food, beverage, and packaging costs increased to ~~26.8%~~28.0% during the ~~13 weeks~~quarter ended ~~September 24, 2017,~~March 27, 2022, from ~~27.4%~~27.7% during the ~~13 weeks~~quarter ended ~~September 25, 2016,~~March 28, 2021, primarily driven by ~~certain menu price increases~~commodity inflation partially offset by ~~inflation.~~

increased menu prices.

Labor and Related Expenses

Labor and related expenses increased by ~~$1.0~~$4.6 million, or ~~3.4%~~16.2%, to ~~$31.2~~$33.3 million during the ~~13 weeks~~quarter ended ~~September 24, 2017,~~March 27, 2022, from ~~$30.2~~$28.6 million ~~during~~for the ~~13 weeks~~quarter ended ~~September 25, 2016,~~March 28, 2021, primarily ~~due to new~~driven by an increase in shop ~~openings, which was partially offset by~~sales volumes and higher shop labor wage rates as a ~~decrease~~result of labor availability challenges in ~~expense from company-operated comparable store shops.~~certain restaurants. As a percentage of ~~revenues,~~sandwich shop sales, labor and related expenses ~~increased~~decreased to ~~29.4%~~34.1% during the ~~13 weeks~~quarter ended ~~September 24, 2017,~~March 27, 2022, from ~~29.1% during~~36.9% for the ~~13 weeks~~quarter ended ~~September 25, 2016,~~March 28, 2021, primarily driven by ~~a decrease in company-operated comparable store shop revenue and~~ ~~inflationary wage increases~~sales leverage in certain ~~states~~.

labor related costs not directly variable with sales.

Occupancy Expenses

Occupancy expenses increased by ~~$1.2~~$0.2 million, or ~~9.5%~~1.8%, to ~~$14.4~~$13.8 million during the ~~13 weeks~~quarter ended ~~September 24, 2017,~~March 27, 2022, from ~~$13.1~~$13.6 million during the ~~13 weeks~~quarter ended ~~September 25, 2016,~~March 28, 2021, primarily due to ~~new shop openings and~~ an increase in ~~real estate taxes, rent expense and common area maintenance. These increases were partially offset by a decrease in expenses from shops that have closed.~~variable lease expenses. As a percentage of ~~revenues,~~sandwich shop sales, occupancy expenses ~~increased~~decreased to ~~13.5% during~~14.2% for the ~~13 weeks~~quarter ended ~~September 24, 2017,~~March 27, 2022, from ~~12.6% during~~17.5% for the ~~13 weeks~~quarter ended ~~September 25, 2016,~~March 28, 2021, primarily due to ~~a decrease~~increased sales leverage in ~~company-operated comparable store shop revenue~~certain occupancy related costs which are not variable with sales, as well as the impact of lease concessions and ~~an increase in real estate taxes, rent expense and common area maintenance. These increases in~~restructurings over the ~~percentage of revenue were partially offset by a decrease in expenses from shops that have closed.~~

last year.

Other Operating Expenses

Other operating expenses increased by ~~1.1~~$4.1 million, or ~~9.9%~~29.3%, to ~~$12.5~~$18.1 million during the ~~13 weeks~~quarter ended ~~September 24, 2017,~~March 27, 2022, from ~~$11.3~~$14.0 million during the ~~13 weeks~~quarter ended ~~September 25, 2016.~~March 28, 2021. The increase was ~~attributable~~primarily related to ~~new shop openings~~an increase in certain items variable with sales, including fees to third-party delivery partners, and increased marketing and advertising expenses allocated from the Brand Fund to company-operated shops. Marketing and advertising expenses included in other operating expenses were $1.9 million and $0.7 million as ~~well as higher utility costs, information technology costs, credit card fees~~of the quarter ended March 27, 2022 and ~~shop repairs.~~the quarter ended March 28, 2021, respectively. As a percentage of ~~revenues,~~sandwich shop sales, other operating expenses increased to ~~11.7% during~~18.6% for the ~~13 weeks~~quarter ended ~~September 24, 2017,~~March 27, 2022, from ~~10.9% during~~18.1% for the ~~13 weeks~~quarter ended ~~September 25, 2016,~~March 28, 2021, primarily driven by ~~a decrease~~increased marketing and advertising expenses as noted above, partially offset by sales leverage in ~~company-operated comparable store shop revenue, higher utility costs~~operating expense items that are not directly variable with sales.

Franchise marketing expenses

Franchise marketing expenses increased by $77 thousand to $120 thousand during the quarter ended March 27, 2022 compared to $43 thousand during the quarter ended March 28, 2021, driven by increased marketing and ~~information technology costs.~~

advertising expenses allocated from the Brand Fund to franchised shops.

General and Administrative Expenses

General and administrative expenses increased by ~~$2.1~~$1.3 million, or ~~21.1%~~18.8%, to ~~$12.1~~$8.5 million during the ~~13 weeks~~quarter ended ~~September 24, 2017,~~March 27, 2022, from ~~$10.0~~$7.2 million during the ~~13 weeks~~quarter ended ~~September 25, 2016. The~~March 28, 2021. This increase was primarily driven ~~primarily~~ by ~~Chief Executive Officer (CEO) transition costs of $1.2 million, advertising~~an increase in payroll costs and ~~store closure expenses. These increases were partially offset by~~ ~~lower performance-based incentive expenses.~~stock-based compensation expense. As a percentage of revenues, general and administrative

Table of Contents

expenses decreased to 8.7% for the quarter ended March 27, 2022, from 9.2% for the quarter ended March 28, 2021, primarily driven by increased to 11.4% during the 13 weeks ended September 24, 2017, from 9.6% during the 13 weeks ended September 25, 2016, primarily due to CEO transition costs of $1.2 million, advertising costs and store closure expenses~~. These increase were partially offset by~~ ~~lower performance-based incentive expenses.~~

sales leverage.

Depreciation Expense

Depreciation expense ~~increased~~decreased by ~~0.7~~$1.0 million, or ~~11.7%~~24.9%, to ~~$6.3~~$3.1 million during quarter ended March 27, 2022, from $4.2 million during the ~~13 weeks~~quarter ended ~~September 24, 2017, from $5.7 million during the 13 weeks ended September 25, 2016,~~March 28, 2021. The decrease was driven primarily ~~due to~~by a ~~higher~~lower depreciable base related to ~~new~~a decrease in the number of company-operated shops ~~existing shop capital investments~~ and ~~investments in technology such as the mobile application. These increases were partially offset by~~ impairment charges taken ~~subsequent to the 13 weeks ended September 25, 2016, which lowered the depreciable base.~~in prior periods. As a percentage of revenues, depreciation ~~increased to 6.0%~~was 3.2% during the ~~13 weeks~~quarter ended ~~September 24, 2017, from 5.4% during~~March 27, 2022 and was 5.3% for the ~~13 weeks~~quarter ended September 25, 2016, driven by a decrease in company-operated comparable store shop revenue and a higher depreciable base related to new shops and existing shop capital investments. These impacts were partially offset by impairment charges taken subsequent to the 13 weeks ended September 25, 2016, which lowered the depreciable base.

~~Pre-Opening Costs~~

~~Pre-opening costs were $0.3 million during the 13 weeks ended September 24, 2017 and September 25, 2016.~~

March 28, 2021.

Impairment, ~~and~~ Loss on Disposal of Property and Equipment

and Shop Closures

Impairment, ~~and~~ loss on disposal of property and equipment and shop closures decreased by $1.8 million, or 57.8%, to ~~$1.5~~$1.3 million during the ~~13 weeks~~quarter ended ~~September 24, 2017,~~March 27, 2022, from ~~$1.9~~$3.1 million during the ~~13 weeks~~quarter ended ~~September 25, 2016.~~ March 28, 2021.

After performing a periodic ~~reviews~~review of ~~Company~~our shops during the ~~third~~ quarter ~~of 2017,~~ended March 27, 2022, it was determined that indicators of impairment were present for certain shops as a result of continued ~~underperformance.~~underperformance, primarily related to the impacts of COVID-19. We performed an impairment ~~analyses~~analysis related to these shops and recorded an impairment charge of ~~$1.5~~$1.1 million for the ~~excess~~quarter ended March 27, 2022. The ultimate severity and longevity of the ~~carrying amount recorded~~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 ~~our balance sheet over~~disposal of $2.5 million.

During the shops’ estimated fair value. We perform impairment analyses on a quarterly basis which involve significant judgment by management including estimates of future cash flows and future growth rates, among other assumptions. Based on our current projections, no impairment, beyond what has already been recorded, has been identified. However, given the current challenges facing the industry and our business, future evaluations could result in additional impairment charges.

quarter ended March 27, 2022, we did not incur any lease termination fees.

Interest Expense,

~~Interest~~ Net

Net interest expense was ~~$32~~$327 thousand during the ~~13 weeks~~quarter ended ~~September 24, 2017 and $33~~March 27, 2022 compared to $288 thousand during the ~~13 weeks~~quarter ended ~~September 25, 2016.~~

March 28, 2021, as a result of higher debt balances.

Income Tax Expense

~~Income~~

We recognized income tax expense ~~decreased by $1.5 million, or 150.7%, to a benefit~~ of ~~0.5~~$0.2 million for the ~~13 weeks~~quarter ended ~~September 24, 2017, from $1.0~~March 27, 2022 compared to expense of $0.1 million for the ~~13 weeks~~quarter ended ~~September 25, 2016, primarily attributable to lower pre-tax book income and certain tax benefits. The decrease~~March 28, 2021.

Table of Contents

Non-GAAP Financial Measures

Shop-Level Profit (Loss) Margin

Shop-level profit (loss) margin was partially offset by the adoption of Accounting Standards Update (ASU) 2016-09, which resulted in the tax effects of equity-based compensation being recorded through the income statement rather than equity. For the 13 weeks ended September 24, 2017, the effective tax rate was 80.4%, compared to 34.2%5.0% for the ~~13 weeks~~quarter ended ~~September 25, 2016. The increase~~March 27, 2022. Shop-level profit (loss) margin is not required by, or presented in ~~the effective tax rate~~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
	March 27, 2022			March 28, 2021
	($ in thousands)
Income (loss) from operations	$	(7,383)		$	(14,133)
Less: Franchise royalties and fees	790			562
Franchise marketing expenses	120			43
General and administrative expenses	8,518			7,172
Depreciation expense	3,136			4,174
Impairment, loss on disposal of property and equipment and shop closures	1,319			3,122
Shop-level profit (loss) [Y]	$	4,920		$	(184)
Total revenues	$	98,221		$	78,063
Less: Franchise royalties and fees	790			562
Sandwich shop sales, net [X]	$	97,431		$	77,501
Shop-level profit (loss) margin [Y÷X]	5.0		%	(0.2)		%

Adjusted EBITDA

Adjusted EBITDA was ~~driven by lower pre-tax book income and certain tax benefits~~ ~~partially offset by~~ ~~the net effect of the adoption of ASU 2016-09 for stock-based compensation, which impacted our tax rate by 7.5%.~~ ~~See Note 1 to the Condensed Consolidated Financial Statements for additional information regarding the adoption of ASU 2016-09.~~

~~39 Weeks Ended September 24, 2017 Compared to 39 Weeks Ended September 25, 2016~~

~~The following table presents information comparing the components of net income~~($2.3) million for the ~~periods indicated (dollars~~quarter ended March 27, 2022. Adjusted EBITDA is not required by, or presented in ~~thousands):~~

accordance with U.S. GAAP. We believe that 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
	March 27, 2022		March 28, 2021
	($ in thousands)
Net income (loss) attributable to Potbelly Corporation	$	(7,913)	$	(14,472)
Depreciation expense	3,136		4,174
Interest expense	327		288
Income tax expense (benefit)	177		53
EBITDA	$	(4,273)	$	(9,957)
Impairment, loss on disposal of property and equipment, and shop closures (a)	1,319		3,122
Stock-based compensation	675		193
Adjusted EBITDA	$	(2,279)	$	(6,642)

For the 39 Weeks Ended

September 24, 2017

% of
Revenues

September 25, 2016

% of
Revenues

Increase
(Decrease)

Percent
Change

Revenues

Sandwich shop sales, net

$
313,568

99.2
%

$
303,116

99.5
%

$
10,452

3.4
%
Franchise royalties and fees

2,394

0.8

1,657

0.5

737

44.5

Total revenues

315,962

100.0

304,773

100.0

11,189

3.7

Expenses

Sandwich shop operating
   expenses

Cost of goods sold, excluding
   depreciation

83,703

26.5

83,224

27.3

479

0.6

Labor and related expenses

93,213

29.5

88,260

29.0

4,953

5.6

Occupancy expenses

42,792

13.5

39,042

12.8

3,750

9.6

Other operating expenses

36,349

11.5

32,570

10.7

3,779

11.6

General and administrative
   expenses

33,375

10.6

30,827

10.1

2,548

8.3

Depreciation expense

18,960

6.0

16,996

5.6

1,964

11.6

Pre-opening costs

955

0.3

731

0.2

224

30.6

Impairment and loss on disposal
   of property and equipment

5,762

1.8

2,880

0.9

2,882

>100

Total expenses

315,109

99.7

294,530

96.6

20,579

7.0

Income from operations

853

0.3

10,243

3.4

(9,390
)

(91.7
)

Interest expense

101

*

102

*

(1
)

(1.0
)
Income before income taxes

752

0.2

10,141

3.3

(9,389
)

(92.6
)
Income tax expense

252

*

3,732

1.2

(3,480
)

(93.2
)
Net income

500

0.2

6,409

2.1

(5,909
)

(92.2
)
Net income attributable to non-
   controlling interests

195

*

153

*

42

27.5

Net income attributable to
   Potbelly Corporation

$
305

*

$
6,256

2.1
%

$
(5,951
)

(95.1
)%

*	~~Amount was less than 0.1%~~

~~Revenues~~

Total revenues increased by $11.2 million, or 3.7%, to $316.0 million during the 39 weeks ended September 24, 2017, from $304.8 million during the 39 weeks ended September 25, 2016. The revenue growth was driven by an increase in sales of $27.6 million from shops not yet in our company-operated comparable store sales base and an increase in sales of $0.7 million from franchise royalties and fees. These increases were partially offset by a decrease in sales of $12.6 million, or 4.3%, from company-operated comparable store shops and a decrease in sales of $4.6 million from shops that have closed. The decrease in company-operated comparable store sales resulted from a decrease in traffic partially offset by certain menu price increases.

~~Cost of Goods Sold~~

Cost of goods sold increased by $0.5 million, or 0.6%, to $83.7 million during the 39 weeks ended September 24, 2017, from $83.2 million during the 39 weeks ended September 25, 2016, primarily due to an increase in sales volume. As a percentage of revenues, cost of goods sold decreased to 26.5% during the 39 weeks ended September 24, 2017, from 27.3% during the 39 weeks ended September 25, 2016, primarily driven by certain menu price increases.

~~Labor and Related Expenses~~

Labor and related expenses increased by $5.0 million, or 5.6%, to $93.2 million during the 39 weeks ended September 24, 2017, from $88.3 million during the 39 weeks ended September 25, 2016, primarily due to new shop openings and inflationary wage increases in certain states. As a percentage of revenues, labor and related expenses increased to 29.5% during the 39 weeks ended September 24, 2017, from 29.0% during the 39 weeks ended September 25, 2016, primarily driven by inflationary wage increases in certain states and a decrease in company-operated comparable store shop revenue partially offset by certain menu price increases.

~~Occupancy Expenses~~

Occupancy expenses increased by $3.8 million, or 9.6%, to $42.8 million during the 39 weeks ended September 24, 2017, from $39.0 million during the 39 weeks ended September 25, 2016, primarily due to new shop openings and an increase in real estate taxes, rent expense and common area maintenance. As a percentage of revenues, occupancy expenses increased to 13.5% during the 39 weeks ended September 24, 2017, from 12.8% during the 39 weeks ended September 25, 2016, primarily due to a decrease in company-operated comparable store shop revenue and an increase in real estate taxes, rent expense and common area maintenance.

~~Other Operating Expenses~~

Other operating expenses increased by $3.8 million, or 11.6%, to $36.3 million during the 39 weeks ended September 24, 2017, from $32.6 million during the 39 weeks ended September 25, 2016. The increase was attributable to new shop openings as well as higher utility(a)This adjustment includes costs information technology costs and credit card fees. As a percentage of revenues, other operating expenses increased to 11.5% during the 39 weeks ended September 24, 2017, from 10.7% during the 39 weeks ended September 25, 2016, primarily driven by a decrease in company-operated comparable store shop revenue, higher utility expense, information technology costs and credit card fees.

~~General and Administrative Expenses~~

General and administrative expenses increased by $2.6 million, or 8.3%, to $33.4 million during the 39 weeks ended September 24, 2017, from $30.8 million during the 39 weeks ended September 25, 2016. The increase was driven primarily by CEO transition costs of $2.2 million, store closure expenses and advertising costs~~. This increase was partially offset by~~ lower performance-based incentive expenses. As a percentage of revenues, general and administrative expenses increased to 10.6% during the 39 weeks ended September 24, 2017, from 10.1% during the 39 weeks ended September 25, 2016, primarily due to CEO transition costs, store closure expenses and advertising costs. ~~These increases were partially offset by lower performance-based incentive expenses.~~

~~Depreciation Expense~~

Depreciation expense increased by $2.0 million, or 11.6%, to $19.0 million during the 39 weeks ended September 24, 2017, from $17.0 million during the 39 weeks ended September 25, 2016, primarily due to a higher depreciable base related to ~~new shops, existing shop capital investments and investments in technology such as the mobile application. These increases were partially offset by~~ impairment ~~charges taken subsequent to the 39 weeks ended September 25, 2016, which lowered the depreciable base. As a percentage~~ of revenues, depreciation increased to 6.0% during the 39 weeks ended September 24, 2017, from 5.6% during the 39 weeks ended September 25, 2016, driven by a decrease in company-operated comparable store shop revenue and a higher depreciable base related to new shops and existing shop capital investments. These impacts were partially offset by impairment charges taken subsequent to the 39 weeks ended September 25, 2016, which lowered the depreciable base.

~~Pre-Opening Costs~~

~~Pre-opening costs increased by $0.2 million, or 30.6%, to $1.0 million during the 39 weeks ended September 24, 2017, from $0.7 million during the 39 weeks ended September 25, 2016.~~

~~Impairment and Loss on Disposal of Property and Equipment~~

~~Impairment and~~long-lived assets, loss on disposal of property and equipment ~~increased to $5.8 million during the 39 weeks ended September~~ and shop closure expenses.

24 ~~2017, compared to $2.9 million during the 39 weeks ended September 25, 2016. After performing periodic reviews~~

Table of Company shops during the first three quarters of 2017, it was determined that indicators of impairment were present for certain shops as a result of continued underperformance. We performed impairment analyses related to these shops and recorded impairment charges of $5.8 million for the excess of the carrying amount recorded on our balance sheet over the shops’ estimated fair value. We perform impairment analyses on a quarterly basis which involve significant judgment by management including estimates of future cash flows and future growth rates, among other assumptions. Based on our current projections, no impairment, beyond what has already been recorded, has been identified. However, given the current challenges facing the industry and our business, future evaluations could result in additional impairment charges.

Contents

~~Interest Expense~~

~~Interest expense was $101 thousand during the 39 weeks ended September 24, 2017 and $102 thousand during the 39 weeks ended September 25, 2016.~~

~~Income Tax Expense~~

Income tax expense decreased by $3.5 million, or 93.2%, to $0.3 million for the 39 weeks ended September 24, 2017, from $3.7 million for the 39 weeks ended September 25, 2016, primarily attributable to lower pre-tax book income and certain tax benefits. The decrease was partially offset by the adoption of ASU 2016-09, which resulted in the tax effects of equity-based compensation being recorded through the income statement rather than equity. For the 39 weeks ended September 24, 2017, the effective tax rate was 33.5%, compared to 36.8% for the 39 weeks ended September 25, 2016. The decrease in the effective tax rate was primarily driven by lower pre-tax book income and certain tax benefits ~~partially offset by~~ ~~the net effect of the adoption of ASU 2016-09 for stock-based compensation, which increased our tax rate by approximately 38.9%.~~ ~~See Note 1 to the Condensed Consolidated Financial Statements for additional information regarding the adoption of ASU 2016-09.~~

Liquidity and Capital Resources

General

~~Our~~

Potbelly's ongoing primary sources of liquidity and capital resources are cash provided from operating activities, existing cash and cash equivalents, and our credit facility. ~~Our~~In the short term, Potbelly’s primary requirements for liquidity and capital are ~~new shop openings,~~ existing shop capital investments, ~~(maintenance and improvements), repurchases of our common stock,~~maintenance, lease obligations, ~~purchases of existing franchise-operated shops~~working capital and general corporate needs. ~~Our~~Potbelly’s 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. ~~Therefore, we are~~Thus, Potbelly is able to sell certain inventory items before we ~~have~~need to pay our ~~suppliers. 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 March 27, 2022 with a cash balance of $9.5 million and total liquidity (cash plus amounts available under our committed Revolving Credit Facility, which is further described in the section below) of $19.5 million compared to a cash balance of $14.4 million and total liquidity of $28.8 million at the end of the previous quarter. We believe that ~~these sources of liquidity~~cash from our operations and ~~capital~~borrowings under our revolving credit facility will be able to provide sufficient ~~to finance our continued operations and expansion plans~~liquidity for at least the next twelve ~~months.~~

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 39 Weeks Ended							For the Quarter Ended
	September 24,			September 25,				March 27, 2022		March 28, 2021
	2017			2016
Net cash provided by (used in):							Net cash provided by (used in):
Operating activities	$	28,368		$	33,571		Operating activities	$	(7,739)	$	(9,700)
Investing activities		(23,526	)		(20,991	)	Investing activities	(1,378)		(1,300)
Financing activities		(6,043	)		(14,852	)	Financing activities	4,257		11,381
Net decrease in cash	$	(1,201	)	$	(2,272	)
Net increase (decrease) in cash							Net increase (decrease) in cash	$	(4,860)	$	381

Operating Activities

Net cash ~~provided by~~used in operating activities decreased to ~~$28.4~~$7.7 million for the ~~39 weeks~~quarter ended ~~September 24, 2017,~~March 27, 2022, from ~~$33.6~~cash used in operating activities of $9.7 million for the ~~39 weeks~~quarter ended ~~September 25, 2016.~~March 28, 2021. The ~~$5.2~~$2.0 million ~~decrease~~change in operating cash was primarily driven by ~~changes in certain working capital accounts mainly due to timing. The remainder of the difference was primarily attributable to~~ a decrease in loss from operations compared to the prior year. This was partially offset by the timing of ~~$5.9 million in net income.~~

payment for certain accrued liabilities.

Investing Activities

Net cash used in investing activities increased to ~~$23.5~~$1.4 million for the ~~39 weeks~~quarter ended ~~September 24, 2017,~~March 27, 2022, from ~~$21.0~~$1.3 million for the ~~39 weeks~~quarter ended ~~September 25, 2016.~~March 28, 2021. The $0.1 million increase was primarily due to ~~construction costs for new company-operated shops opened for the 39 weeks ended September 24, 2017, compared to new company-operated shops opened for the 39 weeks ended September 25, 2016, as well as~~an increase in capital expenditures. Capital expenditures ~~for future shop openings, maintaining~~consist primarily of ongoing investment in our ~~existing~~company-owned shops and ~~certain other projects.~~

investment in digital technology. No new company shop construction is currently planned.

Financing Activities

Net cash ~~used in~~provided by financing activities decreased to ~~$6.0~~$4.3 million for the ~~39 weeks~~quarter ended ~~September 24, 2017,~~March 27, 2022, from ~~$14.9~~$11.4 million for the ~~39 weeks~~quarter ended ~~September 25, 2016.~~March 28, 2021. The $7.1 million decrease in ~~net~~financing cash ~~used~~ was primarily driven by $8.9 million of treasury stock repurchased during the 39 weeks ended September 24, 2017, compared to $20.4 million during the 39 weeks ended September 25, 2016. Additionally, Potbelly received $3.2 million innet proceeds gained from the ~~exercise~~SPA in 2021.

Revolving Credit Facility

Table of ~~stock options~~Contents

credit facility agreement, dated as of December 9, 2015, and ~~warrants~~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 credit facility in a maximum principal amount of $25 million.

On January 28, 2022, we entered into Amendment No. 6 (the “Sixth Amendment”) to the ~~39 weeks ended September 24, 2017, compared~~Credit Agreement. The Sixth Amendment, among other things, (i) extended the maturity date under the Credit Agreement from January 31, 2023 to ~~$5.7~~May 31, 2023, (ii) changed the benchmark interest rates under the Credit Agreement for borrowings from the London Interbank Offered Rate (LIBOR) to the Secured Overnight Financing Rate (SOFR) subject to certain adjustments in the Sixth Amendment, (iii) increased the interest rate margin by 75 basis points with respect to any CBFR Loan (as defined in the Credit Agreement), (iv) sets the interest rate margin at 600 basis points with respect to any Term Benchmark Loan (as defined in the Credit Agreement), (v) amended certain financial covenant testing levels, and (vi) amended the definition of subsidiary to exclude the Potbelly Employee Relief Fund NFP, an Illinois not-for-profit corporation.

As of March 27, 2022, we had $14.3 million ~~during~~outstanding under the ~~39 weeks ended September 25, 2016.~~

Credit Agreement. As of December 26, 2021, we had $9.9 million outstanding under the Credit Agreement. We are currently in compliance with all financial debt covenants.

Paycheck Protection Program Loan

The Loan is 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 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 have used all of the PPP proceeds toward qualifying expenses and are pursuing forgiveness of the full Loan amount, but we are not able to determine the likelihood or the amount of forgiveness that will be obtained.

We have recorded the amount of the Loan as long-term debt (current and non-current) in our condensed consolidated balance sheet March 27, 2022 and the related interest has been recorded to interest expense in our condensed consolidated statement of operations.

Stock Repurchase Program

On ~~September~~May 8, ~~2016, the Company~~2018, we announced that ~~its~~our Board of Directors authorized a ~~share~~stock repurchase program offor up to ~~$30.0~~$65.0 million of ~~the Company’s~~our outstanding common stock. The ~~Company’s previous $35.0 million share repurchase program, authorized in September 2015, was completed in July 2016.~~ ~~The current~~ program permits ~~the Company,~~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. ~~During~~The number of common shares actually repurchased, and the ~~39 weeks~~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 24, 2017, the Company repurchased 745,496~~March 27, 2022, we did not repurchase any shares of our common stock ~~for approximately $8.9 million, including cost and commission, in open market transactions. As of September 24, 2017, the remaining dollar value of authorization~~ under the ~~share~~stock repurchase program. In light of the COVID-19 pandemic, we do not have plans to repurchase any common stock under our stock repurchase program was $18.8 million, which does not include commission. Repurchased shares are included as treasury stock in the condensed consolidated balance sheets and the condensed consolidated statements of equity.

~~Credit Facility~~

at this time.

Equity Offering Program

On ~~December 9, 2015,~~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 ~~amended and restated five-year revolving credit facility agreement that expires~~aggregate offering price of up to $40.0 million (the “Shares”), from time to time, in ~~November 2020. The credit agreement provides, among other things, for a revolving credit facility in a maximum principal amount~~our sole discretion, through an “at the market” equity offering program under which William Blair will act as sales agent. As of ~~$50.0 million, with possible future increases to $75.0 million under an expansion feature. Borrowings~~March 27, 2022, we have not sold any shares under the credit facility generally bear interest at our option at either (i) a eurocurrency rate determined by reference to the applicable London Interbank Offered Rate (LIBOR) plus a margin ranging from 1.00% to 1.75% or (ii) a prime rate as announced by JP Morgan Chase plus a margin ranging from 0.00% to 0.50%. The applicable margin is determined based upon our consolidated total leverage ratio. On the last day of each calendar quarter, we are required to pay a commitment fee ranging from 0.125% to 0.20% per annum in respect of any unused commitments under the credit facility, with the specific rate determined based upon our consolidated total leverage ratio. So long as the leverage ratios are met, there is no limit on the “restricted payments” (primarily distributions and equity repurchases) that we may make. As of September 24, 2017, we had no amounts outstanding under the credit facility.

sales agreement.

Critical Accounting ~~Policies and~~ Estimates

Table of Contents

Our discussion and analysis of ~~our~~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. ~~Significant estimates include amounts for long-lived assets and income taxes.~~ Actual results could differ from those estimates. Critical accounting ~~policies~~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 ~~had~~have made no significant changes in our critical accounting estimates since ~~our~~the last annual report. Our critical accounting estimates are identified and described in our annual consolidated financial statements and related notes.

~~Off-Balance Sheet Arrangements~~

As of September 24, 2017, we do not have any off-balance sheet arrangements, synthetic leases, investments in special purpose entities or undisclosed borrowings or debt that would be required to be disclosed pursuant to Item 303 of Regulation S-K under the Exchange Act.

New and Revised Financial Accounting Standards

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

ITEM 3. QUANTITATIVE AND ~~QUALITATI~~VEQUALITATIVE 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 ~~25, 2016.~~26, 2021. Our exposures to market risk have not changed materially since December ~~25, 2016.~~

26, 2021.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Our management, with the participation of our ~~interim~~ 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~~Act) as of ~~September 24, 2017.~~March 27, 2022. Based upon that evaluation, our ~~interim~~ Chief Executive Officer and Chief Financial Officer ~~has~~have concluded that, as of ~~September 24, 2017,~~March 27, 2022, 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 ~~SEC~~Securities and Exchange Commission and is accumulated and communicated to our management, including our ~~interim~~ 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 ~~fiscal~~ quarter ended ~~September 24, 2017~~March 27, 2022 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

~~The certification required by Section 302~~

Table of ~~the Sarbanes-Oxley Act of 2002 is filed as exhibit 31.1 to this Quarterly Report on Form 10-Q.~~

Contents

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Information pertaining to legal proceedings is provided in Note 711 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 ~~25, 2016.~~26, 2021. 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 ~~13 weeks~~quarter ended ~~September 24, 2017:~~

Period

Total Number of
Shares
Purchased

Average Price Paid
per Share (1)

Total Number of Shares
Purchased as Part of
Publicly Announced
Program (2)

Maximum Value of
Shares that May Yet
be Purchased Under
the Program (2)

June 26, 2017 - July 23, 2017

94,200

$
12.06

94,200

21,559,335

July 24, 2017 - August 20, 2017

117,712

$
11.30

117,712

20,229,449

August 21, 2017 - September 24, 2017

120,000

$
11.54

120,000

18,844,811

Total:

331,912

331,912

~~(1)~~

~~Average price paid per share excludes commissions.~~

March 27, 2022 (in thousands, except per share data):

~~(2)~~

On September 8, 2016, the Company announced that its Board of Directors approved a share repurchase program, authorizing us to repurchase up to $30.0 million of our common stock. The Company’s previous $35.0 million share repurchase program, authorized in September 2015, was completed in July 2016. The current program permits the Company, from time to time, to purchase shares in the open market (including in pre-arranged stock trading plans in accordance with the guidelines specified in Rule 10b5-1 under the Exchange Act) or in privately negotiated transactions. No time limit has been set for the completion of the repurchase program and the program may be suspended or discontinued at any time.


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 - March 27, 2022	46	$	6.04	—	$	37,982
Total:	46			—

(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 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.

Table of Contents

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
31.1
~~10.1~~		Letter Agreement between Potbelly Corporation and Michael Coyne, dated July 18, 2017 (filed as Exhibit 10.1 to Form 8-K (File No. 001-36104) filed July 18, 2017 and incorporated herein by reference). †

~~10.2~~	Retention Agreement between Potbelly Corporation and Michael Coyne, dated July 17, 2017 (filed as Exhibit 10.2 to Form 8-K (File No. 001-36104) filed July 18, 2017 and incorporated herein by reference). †

~~10.3~~	Retention Agreement between Potbelly Corporation and Matthew Revord, dated July 17, 2017 (filed as Exhibit 10.3 to Form 8-K (File No. 001-36104) filed July 18, 2017 and incorporated herein by reference). †

~~10.4~~	Retention Agreement between Potbelly Corporation and Julie Younglove-Webb, dated July 17, 2017 (filed as Exhibit 10.4 to Form 8-K (File No. 001-36104) filed July 18, 2017 and incorporated herein by reference). †

~~31.1~~	Certification of ~~Chief~~Principal Executive Officer ~~and Chief~~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 ~~Chief~~Principal Executive Officer and ~~Chief~~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.LAB~~ 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

~~101.DEF~~ 104			Cover Page Interactive Data File (embedded within the Inline XBRL ~~Taxonomy Extension Definition Linkbase Document~~

†	~~Management contract or compensatory plan~~ document)

Table of Contents~~SIGNATURE~~

SIGNATURE

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

	~~POTBELLY CORPORATION~~
			POTBELLY CORPORATION
~~Date: November 3, 2017~~		~~By:~~	~~/s/ Michael Coyne~~
Date: May 5, 2022		By:	~~Michael Coyne~~ /s/ Steven Cirulis
			~~Interim Chief Executive Officer and~~ Steven Cirulis
			Chief Financial Officer
			(~~Principal Executive Officer and~~ Principal Financial Officer)

	Common Stock					Treasury						Additional Paid-In-			Accumulated			Non- Controlling
	Shares			Amount		Stock			Warrants			Capital			Deficit			Interest			Total Equity
Balance at December 27, 2015		26,304,261		$	303	$	(50,000	)	$	909		$	399,458		$	(221,246	)	$	789		$	130,213
Net income		—			—		—			—			—			6,256			153			6,409
Stock-based compensation plans		511,781			5		—			—			5,414			—			—			5,419
Excess tax deficiencies associated with exercise of stock options		—			—		—			—			(605	)		—			—			(605	)
Repurchases of common stock		(1,574,316	)		—		(20,447	)		—			—			—			—			(20,447	)
Distributions to non- controlling interest		—			—		—			—			—			—			(249	)		(249	)
Contributions from non- controlling interest		—			—		—			—			—			—			74			74
Amortization of stock-based compensation		—			—		—			—			2,266			—			—			2,266
Balance at September 25, 2016		25,241,726		$	308	$	(70,447	)	$	909		$	406,533		$	(214,990	)	$	767		$	123,080
Balance at December 25, 2016		25,139,127		$	309	$	(72,321	)	$	909		$	407,622		$	(213,034	)	$	751		$	124,236
Net income		—			—		—			—			—			305			195			500
Stock-based compensation plans		168,930			2		—			—			1,179			—			—			1,181
Exercise of stock warrants		241,704			2		—			(909	)		2,879			—			—			1,972
Repurchases of common stock		(745,496	)		—		(8,853	)		—			—			—			—			(8,853	)
Distributions to non- controlling interest		—			—		—			—			—			—			(354	)		(354	)
Contributions from non- controlling interest		—			—		—			—			—			—			11			11
Amortization of stock-based compensation		—			—		—			—			3,263			—			—			3,263
Balance at September 24, 2017		24,804,265		$	313	$	(81,174	)	$	—		$	414,943		$	(212,729	)	$	603		$	121,956

	Company-			Franchise-Operated									Total
	Operated			Domestic			International			Total			Company
Shops as of December 27, 2015		372			24			12			36			408
Shops opened		15			5			2			7			22
Shops purchased from franchisee		1			(1	)		—			(1	)		—
Shops closed		(1	)		—			(1	)		(1	)		(2	)
Shops as of September 25, 2016		387			28			13			41			428

Shops as of December 25, 2016		411			30			13			43			454
Shops opened		22			10			3			13			35
Shops closed		(7	)		—			—			—			(7	)
Shops as of September 24, 2017		426			40			16			56			482

	For the 13 Weeks Ended
	September 24, 2017			% of Revenues			September 25, 2016		% of Revenues			Increase (Decrease)			Percent Change
Revenues
Sandwich shop sales, net	$	105,327			99.2	%	$	103,224		99.5	%	$	2,103			2.0	%
Franchise royalties and fees		800			0.8			558		0.5			242			43.4
Total revenues		106,127			100.0			103,782		100.0			2,345			2.3

Expenses
Sandwich shop operating expenses
Cost of goods sold, excluding depreciation		28,405			26.8			28,478		27.4			(73	)		(0.3	)
Labor and related expenses		31,187			29.4			30,163		29.1			1,024			3.4
Occupancy expenses		14,354			13.5			13,111		12.6			1,243			9.5
Other operating expenses		12,464			11.7			11,338		10.9			1,126			9.9
General and administrative expenses		12,104			11.4			9,999		9.6			2,105			21.1
Depreciation expense		6,315			6.0			5,656		5.4			659			11.7
Pre-opening costs		336			0.3			340		0.3			(4	)		(1.2	)
Impairment and loss on disposal of property and equipment		1,536			1.4			1,855		1.8			(319	)		(17.2	)
Total expenses		106,701			100.5			100,940		97.3			5,761			5.7
Income (loss) from operations		(574	)		(0.5	)		2,842		2.7			(3,416	)	>(100)

Interest expense		32		*				33	*				(1	)		(3.0	)
Income (loss) before income taxes		(606	)		(0.6	)		2,809		2.7			(3,415	)	>(100)
Income tax expense (benefit)		(487	)		(0.5	)		960		0.9			(1,447	)	>(100)
Net income (loss)		(119	)	*				1,849		1.8			(1,968	)	>(100)
Net income attributable to non-controlling interest		121			0.1			54	*				67		>100
Net income (loss) attributable to Potbelly Corporation	$	(240	)		(0.2	)%	$	1,795		1.7	%	$	(2,035	)	>(100)%

Period	Total Number of Shares Purchased		Average Price Paid per Share (1)		Total Number of Shares Purchased as Part of Publicly Announced Program (2)		Maximum Value of Shares that May Yet be Purchased Under the Program (2)
June 26, 2017 - July 23, 2017		94,200	$	12.06		94,200		21,559,335
July 24, 2017 - August 20, 2017		117,712	$	11.30		117,712		20,229,449
August 21, 2017 - September 24, 2017		120,000	$	11.54		120,000		18,844,811
Total:		331,912				331,912