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 ☒ 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 ☒ 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.

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

Common stock, $0.01 Par Value – ~~24,804,265~~25,457,575 shares as of ~~September 24, 2017~~July 29, 2018

	September 24,			December 25,			July 1,			December 31,
	2017			2016			2018			2017
Assets
Current assets
Cash and cash equivalents	$	22,178		$	23,379		$	34,310		$	25,530
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 $105 and $129 as of July 1, 2018 and December 31, 2017, respectively								5,659			5,087
Inventories		3,310			3,365			3,262			3,525
Prepaid expenses and other current assets		10,694			8,020			13,242			11,061
Total current assets		42,040			38,551			56,473			45,203

Property and equipment, net		105,379			107,074			99,551			103,859
Indefinite-lived intangible assets		3,404			3,404			3,404			3,404
Goodwill		2,222			2,222			2,222			2,222
Deferred income taxes, non-current		18,381			19,410
Deferred income taxes, noncurrent								9,803			11,202
Deferred expenses, net and other assets		4,804			4,784			4,821			4,840
Total assets	$	176,230		$	175,445		$	176,274		$	170,730

Liabilities and Equity
Current liabilities
Accounts payable	$	4,569		$	3,111		$	4,500		$	3,903
Accrued expenses		24,194			23,082			26,020			23,273
Accrued income taxes		—			1,622			—			176
Total current liabilities		28,763			27,815			30,520			27,352

Deferred rent and landlord allowances		23,000			21,076			22,811			22,987
Other long-term liabilities		2,511			2,318			3,609			3,153
Total liabilities		54,274			51,209			56,940			53,492

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
Warrants		—			909
Common stock, $0.01 par value—authorized 200,000,000 shares; outstanding 25,651,953 and 24,999,688 shares as of July 1, 2018 and December 31, 2017, respectively								327			318
Additional paid-in-capital		414,943			407,622			430,643			421,657
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, 7,104,618 and 6,831,508 shares as of July 1, 2018, and December 31, 2017, respectively								(88,827	)		(85,262	)
Accumulated deficit		(212,729	)		(213,034	)		(223,234	)		(219,990	)
Total stockholders’ equity		121,353			123,485			118,909			116,723
Non-controlling interest		603			751			425			515
Total stockholders' equity		121,956			124,236			119,334			117,238

Total liabilities and equity	$	176,230		$	175,445		$	176,274		$	170,730

See accompanying notes to the unaudited condensed consolidated financial statements.

	For the 13 Weeks Ended					For the 39 Weeks Ended				For the 13 Weeks Ended						For the 26 Weeks Ended
	September 24,			September 25,		September 24,		September 25,		July 1,			June 25,			July 1,			June 25,
	2017			2016		2017		2016		2018			2017			2018			2017
Revenues
Sandwich shop sales, net	$	105,327		$	103,224	$	313,568	$	303,116	$	109,381		$	107,382		$	211,628		$	208,241
Franchise royalties and fees		800			558		2,394		1,657		966			754			1,636		$	1,594
Total revenues		106,127			103,782		315,962		304,773		110,347			108,136			213,264			209,835

Expenses
Sandwich shop operating expenses
Cost of goods sold, excluding depreciation		28,405			28,478		83,703		83,224		28,639			28,635			55,275			55,298
Labor and related expenses		31,187			30,163		93,213		88,260		32,412			31,564			63,991			62,026
Occupancy expenses		14,354			13,111		42,792		39,042		14,985			14,269			29,711			28,438
Other operating expenses		12,464			11,338		36,349		32,570		12,793			12,252			25,293			23,885
General and administrative expenses		12,104			9,999		33,375		30,827		13,440			10,919			25,628			21,271
Depreciation expense		6,315			5,656		18,960		16,996		5,858			6,446			11,684			12,645
Pre-opening costs		336			340		955		731		68			546			136			619
Impairment and loss on disposal of property and equipment		1,536			1,855		5,762		2,880		2,057			3,341			4,081			4,226
Total expenses		106,701			100,940		315,109		294,530		110,252			107,972			215,799			208,408
Income (loss) from operations		(574	)		2,842		853		10,243		95			164			(2,535	)		1,427

Interest expense		32			33		101		102		28			41			55			69
Income (loss) before income taxes		(606	)		2,809		752		10,141		67			123			(2,590	)		1,358
Income tax expense (benefit)		(487	)		960		252		3,732		302			186			(202	)		739
Net income (loss)		(119	)		1,849		500		6,409		(235	)		(63	)		(2,388	)		619
Net income attributable to non-controlling interest		121			54		195		153		125			75			166			74
Net income (loss) attributable to Potbelly Corporation	$	(240	)	$	1,795	$	305	$	6,256	$	(360	)	$	(138	)	$	(2,554	)	$	545

Net income (loss) per common share attributable to common stockholders:
Basic	$	(0.01	)	$	0.07	$	0.01	$	0.24	$	(0.01	)	$	(0.01	)	$	(0.10	)	$	0.02
Diluted	$	(0.01	)	$	0.07	$	0.01	$	0.24	$	(0.01	)	$	(0.01	)	$	(0.10	)	$	0.02
Weighted average shares outstanding:
Basic		24,959,023			25,240,374		25,030,951		25,772,846		25,551,386			25,033,868			25,348,121			25,066,374
Diluted		24,959,023			25,829,970		25,857,083		26,341,913		25,551,386			25,033,868			25,348,121			25,981,051

See accompanying notes to the unaudited condensed consolidated financial statements.

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						Additional Paid-In-		Accumulated			Non- Controlling
	Shares			Amount		Stock			Warrants			Capital		Deficit			Interest			Total Equity
Balance at December 25, 2016		25,139,127		$	309	$	(72,321	)	$	909		$	407,622	$	(213,034	)	$	751		$	124,236
Net income		—			—		—			—			—		545			74			619
Stock-based compensation plans		158,235			2		—			—			1,113		—			—			1,115
Exercise of stock warrants		241,704			2		—			(909	)		2,879		—			—			1,972
Repurchases of common stock		(413,584	)		—		(4,996	)		—			—		—			—			(4,996	)
Distributions to non- controlling interest		—			—		—			—			—		—			(113	)		(113	)
Contributions from non- controlling interest		—			—		—			—			—		—			11			11
Amortization of stock-based compensation		—			—		—			—			1,925		—			—			1,925
Balance at June 25, 2017		25,125,482		$	313	$	(77,317	)	$	—		$	413,539	$	(212,489	)	$	723		$	124,769

Balance at December 31, 2017		24,999,688		$	318	$	(85,262	)	$	—		$	421,657	$	(219,990	)	$	515		$	117,238
Cumulative impact of Topic 606 at 1/1/2018		—			—		—			—			—		(690	)		—			(690	)
Net income (loss)		—			—		—			—			—		(2,554	)		166			(2,388	)
Stock-based compensation plans		925,375			9		—			—			6,735		—			—			6,744
Repurchases of common stock		(264,339	)		—		(3,449	)		—			—		—			—			(3,449	)
Distributions to non- controlling interest		—			—		—			—			—		—			(256	)		(256	)
Treasury shares used for stock-based plans		(8,771	)		—		(116	)		—			—		—			—			(116	)
Amortization of stock-based compensation		—			—		—			—			2,251		—			—			2,251
Balance at July 1, 2018		25,651,953		$	327	$	(88,827	)	$	—		$	430,643	$	(223,234	)	$	425		$	119,334

See accompanying notes to the unaudited condensed consolidated financial statements.

	For the 39 Weeks Ended						For the 26 Weeks Ended
	September 24,			September 25,			July 1,			June 25,
	2017			2016			2018			2017
Cash flows from operating activities:
Net income	$	500		$	6,409
Net income (loss)							$	(2,388	)	$	619
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		18,960			16,996			11,684			12,645
Deferred income tax		—			397			(150	)		974
Deferred rent and landlord allowances		1,924			1,912			(176	)		1,097
Amortization of stock compensation expense		3,263			2,266			2,251			1,925
Excess tax deficiency (benefit) from stock-based compensation		292			(24	)
Excess tax deficiency from stock-based compensation								469			89
Asset impairment, store closure and disposal of property and equipment		5,922			2,897			4,221			4,262
Amortization of debt issuance costs		28			25			18			18
Changes in operating assets and liabilities:
Accounts receivable, net		(1,422	)		(61	)		(822	)		(1,789	)
Inventories		54			141			263			43
Prepaid expenses and other assets		(2,650	)		(457	)		(924	)		(1,376	)
Accounts payable		699			(1,496	)		676			554
Accrued and other liabilities		798			4,566			2,745			(3,921	)
Net cash provided by operating activities		28,368			33,571
Net cash provided by operating activities:								17,867			15,140

Cash flows from investing activities:
Acquisition of franchise shop		—			(1,108	)
Purchases of property and equipment		(23,526	)		(19,883	)		(11,614	)		(15,326	)
Net cash used in investing activities		(23,526	)		(20,991	)
Net cash used in investing activities:								(11,614	)		(15,326	)

Cash flows from financing activities:
Proceeds from exercise of stock options		1,181			5,746			6,744			1,115
Proceeds from exercise of stock warrants		1,972			—			—			1,972
Employee taxes on certain stock-based payment arrangements								(512	)		—
Treasury stock repurchases		(8,853	)		(20,447	)		(3,449	)		(4,996	)
Excess tax benefit from stock-based compensation		—			24
Contributions from non-controlling interest		11			74			—			11
Distributions to non-controlling interest		(354	)		(249	)		(256	)		(113	)
Net cash used in financing activities		(6,043	)		(14,852	)
Net cash provided by (used in) financing activities:								2,527			(2,011	)

Net decrease in cash and cash equivalents		(1,201	)		(2,272	)
Net increase (decrease) in cash and cash equivalents								8,780			(2,197	)
Cash and cash equivalents at beginning of period		23,379			32,006			25,530			23,379
Cash and cash equivalents at end of period	$	22,178		$	29,734		$	34,310		$	21,182

Supplemental cash flow information:
Income taxes paid	$	3,346		$	2,265		$	244		$	3,253
Interest paid		73			82			38			53
Supplemental non-cash investing and financing activities:
Unpaid liability for purchases of property and equipment	$	2,752		$	3,142		$	1,299		$	2,397

See accompanying notes to the unaudited condensed consolidated financial statements

Potbelly Corporation (the “Company” or “Potbelly”), through its wholly-owned subsidiaries, owns or operates ~~or franchises Potbelly Sandwich Shops~~over 400 shops in 31in 32 states and the District of ~~Columbia. The Company also sells~~Columbia, 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 franchiseour franchisees operate over 50 shops domestically, in the Middle ~~East. In July 2015, the Company opened its first franchise shop in the United Kingdom~~East, Canada and ~~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.India.

The unaudited condensed consolidated financial statements and notes herein should be read in conjunction with the audited consolidated financial statements of Potbelly Corporation and its subsidiaries and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December ~~25, 2016.~~31, 2017. The unaudited condensed consolidated financial statements included herein have been prepared by the Company 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 as of ~~September 24, 2017~~July 1, 2018 and December ~~25, 2016,~~31, 2017, its statement of operations for the 13 and 3926 weeks ended ~~September 24,~~July 1, 2018 and June 25, 2017 ~~and September 25, 2016~~ and its statement of cash flows for the 3926 weeks ended ~~September 24,~~July 1, 2018 and June 25, 2017 ~~and September 25, 2016~~ have been included. The consolidated statements of operations for the interim periods presented herein are not necessarily indicative of the results to be expected for the full year.

The Company does not have any components of other comprehensive income recorded within its consolidated financial statements and therefore, does not separately present a statement of comprehensive income in its condensed consolidated financial statements.

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”); eight of LLC’s wholly owned subsidiaries and LLC’s ~~five~~six 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 joint venture investments. The Company has ownership interests ranging from 51-80% in these consolidated joint ventures.

The Company uses a 52/53-week fiscal year that ends on the last Sunday of the calendar period. Approximately every five or six years a 53rd week is added. Fiscal year ~~2017~~2018 consists of 5352 weeks and ~~2016~~2017 consisted of 5253 weeks. The fiscal quarters ended ~~September 24,~~July 1, 2018 and June 25, 2017 ~~and September 25, 2016~~ each consisted of 13 weeks.

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.

InIn May 2014, 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 effective for the annual period beginning after December 15, 2017.~~ In addition, the FASB issued ASU 2016-08, ASU 2016-10 and ASU 2016-12 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~~adopted the standard effective ~~the first quarter of~~January 1, 2018 ~~and apply the amendments~~ using the modified retrospective ~~method.~~method applied to contracts that were not completed as of the date of adoption. The ~~Company has determined that the~~ adoption ~~will~~does not have a material impact on sandwich shop sales, but ~~will impact~~impacted the recognition of franchise revenue and gift card breakage. Potbelly licenses intellectual property and trademarks to franchisees through franchise arrangements. As part of these agreements, Potbelly receives an initial franchise fee payment, which ishistorically was recognized as revenue when the shop ~~opens~~opened. . Under the new guidance, these franchise fees are considered highly dependent upon and interrelated with the franchise right granted in the franchise agreement. As such, these franchise fees are recognized over the contractual term of the franchise agreement. Effective for the annual period beginning January 1, 2018, initial franchise ~~fees will generally be~~fees are recognized as revenue over the ~~life of the contract.~~contractual term. Potbelly sells gift cards to customers and records the sale as a liability. The liability is released once the card is redeemed. Historically, a portion of these gift card sales ~~are~~were not redeemed by the customer (“breakage”). and Potbelly ~~recognizes~~would recognize breakage two years after the period of sale. Effective for the annual period beginning January 1, 2018, expected breakage is ~~anticipated to be~~ recognized as customers redeem the gift cards. Upon adoption of the standard, Potbelly’s accumulated deficit increased by $0.7 million (net of tax). The ~~Company is continuing its assessment, which may identify additional impacts this standard will~~franchise revenue adjustment impacted accrued expenses, other long-term liabilities and deferred income taxes. The breakage adjustment impacted accrued expenses and deferred income taxes. For the 13 weeks ended July 1, 2018, revenue recognized was $0.1 million higher than it would have ~~on its consolidated financial statements~~been under the previous methodology, and ~~related disclosures.~~for the 26 weeks ended July 1, 2018, revenue recognized was $0.2 million higher than it would have been under the previous methodology.

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 asset and a corresponding lease liability. For finance leases, the lessee would recognize interest expense and amortization of the right-of-use asset, ~~and~~while 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 presented in the consolidated financial statements. The Company is currently evaluating the impact ASU 2016-02 will have on its financial position, results 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.

Potbelly primarily earns revenue at a point in time through sales at our sandwich shop locations and records such revenue net of sales-related taxes collected from customers. The payment on these sales is due at the ~~FASB issued ASU No. 2016-09, “Compensation – Stock Compensation (Topic 718).”~~time of the customer’s purchase. The ~~pronouncement simplifies~~Company also receives royalties from franchisees on their respective sales, which are recognized at the ~~accounting~~point in time the sale is made, and invoiced weekly. Potbelly also records revenue from sales over time related to upfront franchise fees, and gift card redemptions and breakage. For the 26 weeks ended July 1, 2018, revenue recognized from all revenue sources on point in time sales was $212.9 million, and revenue recognized from sales over time was $0.4 million.

Potbelly licenses intellectual property and trademarks to franchisees through franchise agreements. As part of these franchise agreements, Potbelly receives an upfront payment from the franchisee, which the Company recognizes over the term of the franchise agreement. The Company records a contract liability for the ~~taxes related~~unearned portion of the upfront franchise payments.

Potbelly sells gift cards to ~~stock-based compensation, including~~customers and records the ~~accounting~~sale as a contract liability and recognizes the associated revenue as the gift card is redeemed. A portion of these gift cards are not redeemed by the customer, which is recognized by the Company 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.

As described above, the Company records current and noncurrent contract liabilities for ~~income taxes, forfeitures and statutory tax withholding requirements,~~upfront franchise fees as well as ~~classification within~~gift cards. There are no other contract liabilities and there are no contract assets recorded by the ~~statement~~Company. The opening and closing balances of ~~cash flows.~~ the Company’s current and noncurrent contract liabilities from contracts with customers were as follows:

The ~~pronouncement is effective for annual periods beginning after December 15, 2016, including annual and interim periods thereafter. Potbelly adopted ASU 2016-09~~aggregate value of remaining performance obligations on outstanding contracts was $3.3 million as of July 1, 2018. The decrease in the ~~first quarter~~liability during the 26 weeks ended July 1, 2018 was a result of ~~2017.~~gift card redemptions offset by purchases of new gift cards and recognition of franchise fees. The ~~primary impact~~Company expects to recognize revenue related to contract liabilities as follows (in thousands), which may vary based upon franchise activity as well as gift card redemption patterns:

For the 13 and 26 weeks ended July 1, 2018, the amount of ~~adoption~~revenue recognized related to the January 1, 2018 liability ending balance was $0.6 million and $1.6 million, respectively. This revenue related to the recognition of ~~excess tax benefits~~gift card redemptions and ~~deficiencies that arise upon vesting or exercise of share-based payments in~~upfront franchise fees. For 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~~26 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,July 1, 2018, the Company ~~now excludes excess tax benefits and deficiencies~~did not recognize any revenue from ~~the assumed proceeds available to repurchase shares~~obligations satisfied (or partially satisfied) in ~~the computation of the Company’s diluted earnings per share.~~prior periods.

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.

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

The Company assesses potential impairments to its long-lived assets, which includes property and equipment, on a quarterly basis or whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. Shop-level assets are grouped at the individual shop-level for the purpose of the impairment assessment. Recoverability of an asset is measured by a comparison of the carrying amount of an asset to its estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of the asset group exceeds its estimated undiscounted future cash flows, an impairment charge is recognized as the amount by which the carrying amount of the asset exceeds the fair value of the asset. The fair value of the shop assets was determined using the discounted future cash flow method of anticipated cash flows through the shop’s lease-end date using fair value measurement inputs classified as Level 3. Level 3 inputs are derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable. After performing a periodic review of the Company’s shops during the 13 weeks and 3926 weeks ended ~~September 24, 2017,~~July 1, 2018, it was determined that indicators of impairment were present for certain shops as a result of continued underperformance. The Company performed an impairment analysis related to these shops and recorded an impairment charge of ~~$1.5~~$2.1 million and ~~$5.8~~$4.1 million for the 13 and 3926 weeks ended ~~September 24, 2017,~~July 1, 2018, respectively. Included within the impairment charge for the 13 and 39 weeks ended September 24, 2017, impairment charges of $0.7 million were recorded in relation to Hurricane Harvey, with insurance recoveries of $0.7 million also recorded within the same caption.The ~~company~~Company recorded an impairment charge of ~~$1.9~~$3.3 million and ~~$2.9~~$4.2 million for the 13 and 3926 weeks ended ~~September~~June 25, ~~2016,~~2017, respectively.

Basic and diluted income per common share attributable to common stockholders was calculated using the weighted average number of common shares outstanding for the period. Diluted income per common share attributable to common stockholders is computed by dividing the income allocated to common stockholders by the weighted average number of fully diluted common shares outstanding. In periods of a net loss, no potential common shares are included in diluted shares outstanding as the effect is ~~anti-dilutive.~~anti-

dilutive. For the 13 and 26 weeks ended ~~September 24, 2017,~~July 1, 2018, the Company had a loss per share, and therefore shares were excluded for potential stock option ~~exercises and warrant~~ exercises.

	For the 13 Weeks Ended					For the 39 Weeks Ended				For the 13 Weeks Ended						For the 26 Weeks Ended
	September 24,			September 25,		September 24,		September 25,		July 1,			June 25,			July 1,			June 25,
	2017			2016		2017		2016		2018			2017			2018			2017
Net income (loss) attributable to Potbelly Corporation	$	(240	)	$	1,795	$	305	$	6,256	$	(360	)	$	(138	)	$	(2,554	)	$	545
Weighted average common shares outstanding-basic		24,959,023			25,240,374		25,030,951		25,772,846		25,551,386			25,033,868			25,348,121			25,066,374
Plus: Effect of potential stock options exercise		—			533,249		770,965		514,257		—			—			—			831,927
Plus: Effect of potential warrant exercise		—			56,347		55,167		54,810		—			—			—			82,750
Weighted average common shares outstanding-diluted		24,959,023			25,829,970		25,857,083		26,341,913		25,551,386			25,033,868			25,348,121			25,981,051
Income (loss) per share available to common stockholders-basic	$	(0.01	)	$	0.07	$	0.01	$	0.24	$	(0.01	)	$	(0.01	)	$	(0.10	)	$	0.02
Income (loss) per share available to common stockholders-diluted	$	(0.01	)	$	0.07	$	0.01	$	0.24	$	(0.01	)	$	(0.01	)	$	(0.10	)	$	0.02
Potentially dilutive shares that are considered anti-dilutive:
Common share options		4,012,073			1,233,294		1,151,317		1,236,599		2,557,475			4,030,128			2,829,461			1,109,681

~~The Company recognized income~~Our 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 of 80.4%,~~and adjusted for discrete taxable events that occur during the 13 weeks ended September 24, 2017, compared to income tax expense of $1.0 million on pre-tax income of $2.8 million, or an effective tax rate of 34.2%, for the 13 weeks ended September 25, 2016. The Company recognized income tax expense of $0.3 million on pre-tax income of $0.8 million, or an effective tax rate of 33.5%, for the 39 weeks ended September 24, 2017, compared to income tax expense 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.quarter. The effective tax rate differed from the federal statutory rate primarily due to ~~a change in earnings and~~ the ~~adoption~~impact of ASU 2016-09, ~~which had an unfavorable impact~~state income taxes, federal and state tax credits, and certain discrete items.

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) was enacted into law making significant changes to the ~~Company’s~~U.S. tax code, including: (1) reducing the U.S. federal corporate tax rate ~~benefit~~from 35 percent to 21 percent; (2) implementing bonus depreciation that will allow for full expensing of ~~7.5%~~qualified property; (3) implementing limitations on the deductibility of certain executive compensation; and (4) changing rules related to uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017.

On that same date, the SEC staff also issued Staff Accounting Bulletin (SAB) 118, which provides guidance on accounting for the ~~13 weeks ended September 24, 2017 and an unfavorable impact~~tax effects of ~~38.9%~~the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740. A company must reflect the income tax effects of those aspects of the Tax Act for which accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete, but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements.

At July 1, 2018, the Company has not completed the accounting for the ~~39 weeks ended September 24, 2017.~~tax effects of enactment of the Tax Act; however, the Company made a reasonable estimate of the effects and booked a provisional tax expense adjustment in the fiscal year 2017, ~~See Note 1 for additional information regarding~~ the ~~adoption~~period in which the legislation was enacted. During the second quarter, there have been no adjustments made to the provisional amounts previously recorded related to the enactment of ~~ASU 2016-09.~~the Tax Act.

On ~~September~~May 8, ~~2016,~~2018, the Company announced that its Board of Directors authorized a ~~share~~stock repurchase program offor up to ~~$30.0~~$65.0 million of its outstanding common stock, replacing the Company’s ~~common stock. The Company’s~~ previous ~~$35.0~~$30.0 million share repurchase ~~program, authorized in September 2015, was completed in July 2016.~~program. 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 Securities Exchange Act of 1934, as amended) or in privately negotiated transactions. ~~During~~The number of common shares actually repurchased, and the 39timing and price of repurchases, will depend upon market conditions, Securities and Exchange Commission 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 26 weeks ended ~~September 24, 2017,~~July 1, 2018, the Company repurchased ~~745,496~~259,339 shares of its common stock for approximately ~~$8.9~~$3.3 million under the new stock repurchase program and had repurchased 5,000 shares of its common stock for approximately $0.1 million under the previous share repurchase program, including cost and commission, in open market transactions. ~~As of September 24, 2017, the remaining dollar value of authorization 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 statements of equity.

On June 14, 2018, the Company registered 1,000,000 additional shares of its common stock, par value $0.01, reserved for issuance under the Amended and Restated 2013 Long-Term Incentive Plan. This brings the total number of shares registered under the 2013 Long-Term Incentive Plan to 3,500,000.

Stock options are awarded under the 2013 Long-Term Incentive Plan to eligible ~~employees.~~employees and certain non-employee members of the Board of Directors. On June 14, 2018, the Company registered an additional 1,000,000 shares of its common stock reserved for issuance under the 2013 Long-Term Incentive Plan and brings the total number of shares registered under the plan to 3,500,000. 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 3926 weeks ended ~~September 24, 2017~~July 1, 2018 was ~~$4.58~~$5.24 per share, as estimated using the following weighted average assumptions: expected life of options – 6.25 years; volatility – ~~36.37%~~35.39%; risk-free interest rate – ~~2.23%~~2.85%; and dividend yield – ~~0.0%~~0.00%. 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 3926 weeks ended ~~September 24, 2017~~July 1, 2018 is as follows:

The company also awards restricted stock units (“RSUs”) to certain non-employee members of its Board of Directors and the senior leadership team. In May 2017, the Company issued 153,369 shares of RSUs with 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 Board of Directors. The RSUs had a grant-date fair value of $11.15 upon issuance. The Board of Director grants have a vesting schedule of 50% on the first anniversary of the grant date and 50% on the second anniversary of the grant date. The senior leadership team grants vest in one-third increments over a three-year period beginning in March 2018.

Stock-based compensation 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. For the 13 and 26 weeks ended ~~September 24, 2017,~~July 1, 2018, the Company recognized stock-based compensation expense of $1.4 million ~~of which $0.6~~and $2.3 million, ~~was related to Chief Executive Officer (CEO) transition costs.~~respectively. For the 3913 and 26 weeks ended ~~September 24,~~June 25, 2017, the Company 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 of $0.8~~$1.1 million and ~~$2.3~~$1.9 million, respectively. As of ~~September 24, 2017,~~July 1, 2018, unrecognized stock-based compensation expense was ~~$4.9~~$3.6 million, which will be recognized through fiscal year ~~2021.~~2022. The Company records stock-based compensation expense within general and administrative expenses in the condensed consolidated statements of operations.

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

In ~~2016,~~October 2017, plaintiffs filed a purported collective and class action lawsuit in the United States District Court for the Southern District of New York against the Company ~~received notice~~alleging violations of ~~a potential claim alleging that it violated~~ the Fair Labor Standards Act (FLSA) and New York Labor Law (NYLL). The plaintiffs allege that the Company violated the FLSA and NYLL by not paying overtime compensation to ~~its~~our assistant managers ~~whom~~and violated NYLL by not paying spread-of-hours pay. Potbelly believes the ~~Company had classified as exempt employees. Although the Company believes that its~~ assistant managers were properly classified ~~as exempt~~ under ~~both~~state and federal law. The Company intends to vigorously defend this action. This case is at an early stage, and ~~state laws, the Company agreed~~Potbelly is therefore unable to ~~mediate the matter. On February 20, 2017, the parties entered into~~make 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 partreasonable estimate of the ~~settlement process, a complaint was filed on February 17, 2017 in the Circuit Court~~probable loss or range of the Fifteenth Judicial Circuit in and for Palm Beach County, Florida. A motion seeking the Court’s approval 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.losses, if any, that might arise from this matter.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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.~~31, 2017. 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, business strategy, budgets, projected costs and plans and objectives of management for future operations. 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, our ability to manage our growth and successfully implement our business strategy; price and availability of commodities; changes in labor costs; consumer confidence and spending patterns; consumer reaction to industry-related public health issues and perceptions of food safety; 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,~~31, 2017, for a discussion of factors that could cause our actual results to differ from those expressed or implied by forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law.

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

We believe that a key to our past and future success is our culture. It is embodied in The Potbelly Advantage, which is an expression of our Vision, Mission, Passion and Values and the foundation of everything we do. Our Vision is for our customers to feel that we are their “Neighborhood Sandwich Shop” and to tell others about their great experience. Our Mission is to make people really happy, to make more money and to improve every day. Our Passion is to be “The Best Place for Lunch.” Our Values embody both how we lead and how we behave and form the cornerstone of our culture. We use simple language that resonates from the frontline associate to the most senior levels of the organization, creating shared expectations and accountabilities in how we approach our day-to-day activities. We strive to be a fun, friendly and hardworking group of people who enjoy taking care of our customers, while at the same time taking care of each other.

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

	Company-			Franchise-Operated									Total			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
																Operated			Domestic		International			Total			Company
Shops as of December 25, 2016		411			30			13			43			454			411			30		13			43			454
Shops opened		22			10			3			13			35			16			8		3			11			27
Shops closed		(7	)		—			—			—			(7	)		(3	)		—		—			—			(3	)
Shops as of September 24, 2017		426			40			16			56			482
Shops as of June 25, 2017																	424			38		16			54			478

Shops as of December 31, 2017																	437			39		16			55			492
Shops opened																	5			2		2			4			9
Shops closed																	(6	)		—		(1	)		(1	)		(7	)
Shops as of July 1, 2018																	436			41		17			58			494

In the third quarter of 2017 Potbelly experienced temporary shop closures in Texas due to Hurricane Harvey. In total, 22 shops were affected, with one shop being significantly damaged. Included within Potbelly’s Condensed Consolidated Statements of Operations within impairment and loss on disposal of property and equipment, impairment charges of $0.7 were million recorded in relation to this shop, with insurance recoveries of $0.7 million also recorded within the same caption.

13 Weeks Ended ~~September 24, 2017~~July 1, 2018 Compared to 13 Weeks Ended ~~September~~June 25, ~~2016~~2017

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

	For the 13 Weeks Ended																	For the 13 Weeks Ended
	September 24, 2017			% of Revenues			September 25, 2016		% of Revenues			Increase (Decrease)			Percent Change			July 1, 2018			% of Revenues			June 25, 2017				% of Revenues			Increase (Decrease)			Percent Change
Revenues
Sandwich shop sales, net	$	105,327			99.2	%	$	103,224		99.5	%	$	2,103			2.0	%	$	109,381			99.1	%	$	107,382				99.3	%	$	1,999			1.9	%
Franchise royalties and fees		800			0.8			558		0.5			242			43.4			966			0.9			754				0.7			212			28.1
Total revenues		106,127			100.0			103,782		100.0			2,345			2.3			110,347			100.0			108,136				100.0			2,211			2.0

Expenses
Sandwich shop operating expenses
Cost of goods sold, excluding depreciation		28,405			26.8			28,478		27.4			(73	)		(0.3	)		28,639			26.0			28,635				26.5			4		*
Labor and related expenses		31,187			29.4			30,163		29.1			1,024			3.4			32,412			29.4			31,564				29.2			848			2.7
Occupancy expenses		14,354			13.5			13,111		12.6			1,243			9.5			14,985			13.6			14,269				13.2			716			5.0
Other operating expenses		12,464			11.7			11,338		10.9			1,126			9.9			12,793			11.6			12,252				11.3			541			4.4
General and administrative expenses		12,104			11.4			9,999		9.6			2,105			21.1			13,440			12.2			10,919				10.1			2,521			23.1
Depreciation expense		6,315			6.0			5,656		5.4			659			11.7			5,858			5.3			6,446				6.0			(588	)		(9.1	)
Pre-opening costs		336			0.3			340		0.3			(4	)		(1.2	)		68			0.1			546		��		0.5			(478	)		(87.5	)
Impairment and loss on disposal of property and equipment		1,536			1.4			1,855		1.8			(319	)		(17.2	)		2,057			1.9			3,341				3.1			(1,284	)		(38.4	)
Total expenses		106,701			100.5			100,940		97.3			5,761			5.7			110,252			99.9			107,972				99.8			2,280			2.1
Income (loss) from operations		(574	)		(0.5	)		2,842		2.7			(3,416	)	>(100)
Income from operations																			95			0.1			164				0.2			(69	)		(42.1	)

Interest expense		32		*				33	*				(1	)		(3.0	)		28		*				41			*				(13	)		(31.7	)
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)
Income before income taxes																			67			0.1			123				0.1			(56	)		(45.5	)
Income tax expense																			302			0.3			186				0.2			116			62.4
Net loss																			(235	)		(0.2	)		(63	)			(0.1	)		(172	)	>100
Net income attributable to non-controlling interest		121			0.1			54	*				67		>100				125			0.1			75				0.1			50			66.7
Net income (loss) attributable to Potbelly Corporation	$	(240	)		(0.2	)%	$	1,795		1.7	%	$	(2,035	)	>(100)%
Net loss attributable to Potbelly Corporation																		$	(360	)		(0.3	)%	$	(138	)			(0.1	)%	$	(222	)	>100%

Total revenues increased by ~~$2.3~~$2.2 million, or ~~2.3%~~2.0%, to ~~$106.1~~110.3 million during the 13 weeks ended ~~September 24, 2017,~~July 1, 2018, from ~~$103.8~~$108.1 million during the 13 weeks ended ~~September~~June 25, ~~2016.~~2017. The revenue growth was driven by an increase in sales of ~~$9.5~~$4.8 million from shops not yet in our company-operated comparable store sales ~~base and an increase in sales of $0.2 million from franchise royalties and fees.~~base. These increases were partially offset by a decrease in sales of ~~$4.7~~$0.2 million, or ~~4.8%~~0.2%, from company-operated comparable ~~store shops~~stores and a decrease in sales of ~~$2.7~~$2.6 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.~~an increase in average transaction size.

Cost of goods sold ~~decreased~~increased by ~~$0.1 million,~~$4 thousand, or ~~0.3%~~less than 0.1%, to ~~$28.4~~$28.6 million during the 13 weeks ended ~~September 24, 2017,~~July 1, 2018, from ~~$28.5~~$28.6 million during the 13 weeks ended ~~September~~June 25, ~~2016, primarily due to a decrease in input costs, which were partially offset by an increase in costs due to an increase in sales volume.~~2017. As a percentage of revenues, cost of goods sold decreased to ~~26.8%~~26.0% during the 13 weeks ended ~~September 24, 2017,~~July 1, 2018, from ~~27.4%~~26.5% during the 13 weeks ended ~~September~~June 25, ~~2016,~~2017, primarily driven by certain menu price ~~increases partially offset by inflation.~~increases.

Labor and related expenses increased by ~~$1.0~~$0.8 million, or ~~3.4%~~2.7%, to ~~$31.2~~$32.4 million during the 13 weeks ended ~~September 24, 2017,~~July 1, 2018, from ~~$30.2~~$31.6 million during the 13 weeks ended ~~September~~June 25, ~~2016,~~2017, primarily due to new shop openings and inflationary wage increases in certain states, which was partially offset by a decrease in expense from ~~company-operated comparable store~~closed shops. As a percentage of revenues, labor and related expenses increased to 29.4% during the 13 weeks ended ~~September 24, 2017,~~July 1, 2018, from ~~29.1%~~29.2% during the 13 weeks ended ~~September~~June 25, ~~2016,~~2017, primarily driven by ~~a decrease in company-operated comparable store~~new shop ~~revenue~~openings and inflationary wage increases in certain ~~states~~.states.

Occupancy expenses increased by ~~$1.2~~$0.7 million, or ~~9.5%~~5.0%, to ~~$14.4~~$15.0 million during the 13 weeks ended ~~September 24, 2017,~~July 1, 2018, from ~~$13.1~~$14.3 million during the 13 weeks ended ~~September~~June 25, ~~2016,~~2017 primarily due to ~~new shop openings and an increase~~inflation in certain occupancy related costs, including lease renewals, real estate taxes ~~rent expense~~ and common area maintenance. ~~These increases were partially offset by a decrease in expenses from shops that have closed.~~ As a percentage of revenues, occupancy expenses increased to ~~13.5%~~13.6% during the 13 weeks ended ~~September 24, 2017,~~July 1, 2018, from ~~12.6%~~13.2% during the 13 weeks ended ~~September~~June 25, ~~2016,~~2017, primarily due to ~~a decrease~~sales deleverage and inflation in ~~company-operated comparable store shop revenue and an increase in~~certain occupancy related costs, including lease renewals, real estate taxes ~~rent expense~~ and common area maintenance. ~~These increases in the percentage of revenue were partially offset by a decrease in expenses from shops that have closed.~~

Other operating expenses increased by ~~1.1~~$0.5 million, or ~~9.9%~~4.4%, to ~~$12.5~~$12.8 million during the 13 weeks ended ~~September 24, 2017,~~July 1, 2018, from ~~$11.3~~$12.3 million during the 13 weeks ended ~~September~~June 25, ~~2016.~~2017. The increase was primarily attributable to ~~new shop openings~~items such as ~~well as higher utility costs, information technology costs, credit card fees~~repairs, maintenance, utilities, and ~~shop repairs.~~other expenses not directly variable with sales. As a percentage of revenues, other operating expenses increased to ~~11.7%~~11.6% during the 13 weeks ended ~~September 24, 2017,~~July 1, 2018, from ~~10.9%~~11.3% during the 13 weeks ended ~~September~~June 25, ~~2016,~~2017, primarily driven by ~~a decrease~~sales deleverage in ~~company-operated comparable store shop revenue, higher utility costs~~operating expense items such as repairs, maintenance, utilities, and ~~information technology costs.~~other expenses not directly variable with sales.

General and administrative expenses increased by ~~$2.1~~$2.5 million, or ~~21.1%~~23.1%, to ~~$12.1~~$13.4 million during the 13 weeks ended ~~September 24, 2017,~~July 1, 2018, from ~~$10.0~~$10.9 million during the 13 weeks ended ~~September~~June 25, ~~2016.~~2017. The increase was driven primarily by restructuring costs of $1.3 million, Chief Executive Officer (CEO) transition costs of ~~$1.2~~$0.4 million ~~advertising costs~~ and store closure expenses. ~~These increases were partially offset by~~ ~~lower performance-based incentive expenses.~~ As a percentage of revenues, general and administrative expenses increased to ~~11.4%~~12.2% during the 13 weeks ended ~~September 24, 2017,~~July 1, 2018, from ~~9.6%~~10.1% during the 13 weeks ended ~~September~~June 25, ~~2016,~~2017, primarily due to restructuring costs of $1.3 million, CEO transition costs of ~~$1.2~~$0.4 million ~~advertising costs~~ and store closure ~~expenses. These increase were partially offset by~~ ~~lower performance-based incentive~~ expenses.

Depreciation expense ~~increased~~decreased by ~~0.7~~$0.6 million, or ~~11.7%~~9.1%, to ~~$6.3~~$5.9 million during the 13 weeks ended ~~September 24, 2017,~~July 1, 2018, from ~~$5.7~~$6.4 million during the 13 weeks ended ~~September~~June 25, ~~2016,~~2017. The decrease was driven primarily ~~due to~~by a ~~higher~~lower depreciable base related to impairment charges taken subsequent to the 13 weeks ended June 25, 2017, as well as lower depreciation associated with new shops with longer expected useful lives for leasehold improvements and leasehold improvements at legacy shops with shorter expected useful lives being fully depreciated. These decreases were partially offset by new shops, existing shop capital investments and investments in technology such as the mobile ~~application. These increases were partially offset~~application, which increased the depreciable base. As a percentage of revenues, depreciation decreased to 5.3% during the 13 weeks ended July 1, 2018, from 6.0% during the 13 weeks ended June 25, 2017. This decrease was driven by a lower depreciable base related to impairment charges taken subsequent to the 13 weeks ended ~~September~~June 25, ~~2016, which lowered the depreciable base. As a percentage of revenues,~~2017, as well as lower depreciation increased to 6.0% during the 13 weeks ended September 24, 2017, from 5.4% during the 13 weeks ended September 25, 2016, driven by a decrease in company-operated comparable store shop revenue and a higher depreciable base related toassociated with new shops with longer expected useful lives for leasehold improvements 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.~~leasehold improvements at legacy shops with shorter expected useful lives being fully depreciated.

Pre-opening costs ~~were $0.3~~decreased by $0.5 million, or 87.5%, to $0.1 million during the 13 weeks ended ~~September 24, 2017 and September~~July 1, 2018, from $0.5 million during the 13 weeks ended June 25, ~~2016.~~2017. As a percentage of revenues, pre-opening costs decreased to 0.1% during the 13 weeks ended July 1, 2018, from 0.5% during the 13 weeks ended June 25, 2017. These decreases were driven primarily by fewer shops opened during the 13 weeks ended July 1, 2018 compared to the 13 weeks ended June 25, 2017.

Impairment and loss on disposal of property and equipment decreased to ~~$1.5~~$2.1 million during the 13 weeks ended ~~September 24, 2017,~~July 1, 2018, from ~~$1.9~~$3.3 million during the 13 weeks ended ~~September~~June 25, ~~2016.~~2017. After performing periodic reviews of Company shops during the ~~third~~second quarter of 2018, it was determined that indicators of impairment were present for certain shops as a result of continued underperformance. The Company performed impairment analyses related to these shops and recorded an impairment charge of $2.1 million for the excess of the carrying amount recorded on the balance sheet over the shops’ estimated fair value. The Company performs impairment analyses on a quarterly basis, which involves significant judgment by management including estimates of future cash flows and future growth rates, among other assumptions. Based on the Company’s 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.

Interest expense was $28 thousand during the 13 weeks ended July 1, 2018 and $41 thousand during the 13 weeks ended June 25, 2017.

Income tax expense increased by $0.1 million, or 62.4%, to $0.3 million for the 13 weeks ended July 1, 2018, from $0.2 million for the 13 weeks ended June 25, 2017, primarily attributable to the impact of ASU 2016-09. For the 13 weeks ended July 1, 2018, the effective tax rate was 450.7%, compared to 151.2% for the 13 weeks ended June 25, 2017. The change in the effective tax rate was driven by the impact of ASU 2016-09.

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

	For the 26 Weeks Ended
	July 1, 2018			% of Revenues			June 25, 2017		% of Revenues			Increase (Decrease)			Percent Change
Revenues
Sandwich shop sales, net	$	211,628			99.2	%	$	208,241		99.2	%	$	3,387			1.6	%
Franchise royalties and fees		1,636			0.8			1,594		0.8			42			2.6
Total revenues		213,264			100.0			209,835		100.0			3,429			1.6

Expenses
Sandwich shop operating expenses
Cost of goods sold, excluding depreciation		55,275			25.9			55,298		26.4			(23	)	*
Labor and related expenses		63,991			30.0			62,026		29.6			1,965			3.2
Occupancy expenses		29,711			13.9			28,438		13.6			1,273			4.5
Other operating expenses		25,293			11.9			23,885		11.4			1,408			5.9
General and administrative expenses		25,628			12.0			21,271		10.1			4,357			20.5
Depreciation expense		11,684			5.5			12,645		6.0			(961	)		(7.6	)
Pre-opening costs		136			0.1			619		0.3			(483	)		(78.0	)
Impairment and loss on disposal of property and equipment		4,081			1.9			4,226		2.0			(145	)		(3.4	)
Total expenses		215,799			101.2			208,408		99.3			7,391			3.5
Income (loss) from operations		(2,535	)		(1.2	)		1,427		0.7			(3,962	)	>(100)

Interest expense		55		*				69	*				(14	)		(20.3	)
Income (loss) before income taxes		(2,590	)		(1.2	)		1,358		0.6			(3,948	)	>(100)
Income tax expense (benefit)		(202	)		(0.1	)		739		0.4			(941	)	>(100)
Net income (loss)		(2,388	)		(1.1	)		619		0.3			(3,007	)	>(100)
Net income attributable to non- controlling interests		166			0.1			74	*				92		>100
Net income (loss) attributable to Potbelly Corporation	$	(2,554	)		(1.2	)%	$	545		0.3	%	$	(3,099	)	>(100)%

Total revenues increased by $3.4 million, or 1.6%, to $213.3 million during the 26 weeks ended July 1, 2018, from $209.8 million during the 26 weeks ended June 25, 2017. The revenue growth was driven by an increase in sales of $12.5 million from shops not yet in our company-operated comparable store sales base. This increase was partially offset by a decrease in sales of $3.7 million, or 1.8%, from company-operated comparable stores and a decline of $5.5 million from shops that have closed. The decrease in company-operated comparable store sales resulted from a decrease in traffic, partially offset by an increase in average transaction size and certain menu price increases.

Cost of goods sold decreased by $23 thousand, or less than 0.1%, to $55.3 million during the 26 weeks ended July 1, 2018, from $55.3 million during the 26 weeks ended June 25, 2017. As a percentage of revenues, cost of goods sold decreased to 25.9% during the 26 weeks ended July 1, 2018, from 26.4% during the 26 weeks ended June 25, 2017, primarily driven by certain menu price increases.

Labor and related expenses increased by $2.0 million, or 3.2%, to $64.0 million during the 26 weeks ended July 1, 2018, from $62.0 million during the 26 weeks ended June 25, 2017, primarily due to new shop openings and inflationary wage increases in certain states. As a percentage of revenues, labor and related expenses increased to 30.0% during the 26 weeks ended July 1, 2018, from 29.6% during the 26 weeks ended June 25, 2017, primarily driven by a decrease in company-operated comparable store revenue and inflationary wage increases in certain states.

Occupancy expenses increased by $1.3 million, or 4.5%, to $29.7 million during the 26 weeks ended July 1, 2018, from $28.4 million during the 26 weeks ended June 25, 2017, primarily due to inflation in certain occupancy related costs, including lease renewals, real estate taxes and common area maintenance. As a percentage of revenues, occupancy expenses increased to 13.9% during the 26 weeks ended July 1, 2018, from 13.6% during the 26 weeks ended June 25, 2017, primarily due to sales deleverage and inflation in certain occupancy related costs, including lease renewals, real estate taxes and common area maintenance.

Other operating expenses increased by $1.4 million, or 5.9%, to $25.3 million during the 26 weeks ended July 1, 2018, from $23.9 million during the 26 weeks ended June 25, 2017. The increase was primarily attributable to items such as repairs, maintenance, utilities, and other expenses not directly variable with sales. As a percentage of revenues, other operating expenses increased to 11.9% during the 26 weeks ended July 1, 2018, from 11.4% during the 26 weeks ended June 25, 2017. This increase was primarily driven by sales deleverage in operating expense items such as repairs, maintenance, utilities, and other expenses not directly variable with sales.

General and administrative expenses increased by $4.4 million, or 20.5%, to $25.6 million during the 26 weeks ended July 1, 2018, from $21.3 million during the 26 weeks ended June 25, 2017. The increase was driven primarily by restructuring costs of $1.3 million, CEO transition costs of $0.7 million and proxy related costs of $0.7 million. As a percentage of revenues, general and administrative expenses increased to 12.0% during the 26 weeks ended July 1, 2018, from 10.1% during the 26 weeks ended June 25, 2017. This increase was driven primarily by restructuring costs of $1.3 million, CEO transition costs of $0.7 million and proxy related costs of $0.7 million.

Depreciation expense decreased by $1.0 million, or 7.6%, to $11.7 million during the 26 weeks ended July 1, 2018, from $12.6 million during the 26 weeks ended June 25, 2017, driven primarily by a lower depreciable base related to impairment charges taken subsequent to the 26 weeks ended June 25, 2017, as well as lower depreciation associated with new shops with longer expected useful lives for leasehold improvements and leasehold improvements at legacy shops with shorter expected useful lives being fully depreciated. These decreases were partially offset by new shops, existing shop capital investments and investments in technology such as the mobile application, which increased the depreciable base. As a percentage of revenues, depreciation decreased to 5.5% during the 26 weeks ended July 1, 2018, from 6.0% during the 26 weeks ended June 25, 2017, driven primarily by a lower depreciable base related to impairment charges taken subsequent to the 26 weeks ended June 25, 2017, as well as lower depreciation associated with new shops with longer expected useful lives for leasehold improvements and leasehold improvements at legacy shops with shorter expected useful lives being fully depreciated.

Pre-opening costs decreased by $0.5 million, or 78.0%, to $0.1 million during the 26 weeks ended July 1, 2018, from $0.6 million during the 26 weeks ended June 25, 2017. As a percentage of revenues, pre-opening costs decreased to 0.1% during the 26 weeks ended July 1, 2018, from 0.3% during the 26 weeks ended June 25, 2017. These decreases were driven primarily by fewer shops opened during the 26 weeks ended July 1, 2018 compared to the 26 weeks ended June 25, 2017.

Impairment and loss on disposal of property and equipment decreased to $4.1 million during the 26 weeks ended July 1, 2018, compared to $4.2 million during the 26 weeks ended June 25, 2017. After performing periodic reviews of Company shops during the first and second quarter of 2018, 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 an impairment ~~charge~~charges of ~~$1.5~~$4.1 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.

Interest expense was ~~$32 thousand during~~$0.1 million for the 1326 weeks ended ~~September 24, 2017~~July 1, 2018 and ~~$33 thousand during the 13 weeks ended September~~June 25, ~~2016.~~2017.

Income tax expense decreased by ~~$1.5~~$0.9 million, or ~~150.7%~~more than 100%, to a benefit of ~~0.5~~$0.2 million for the 1326 weeks ended ~~September 24, 2017,~~July 1, 2018, from ~~$1.0~~an expense of $0.7 million for the 1326 weeks ended ~~September~~June 25, ~~2016,~~2017, primarily attributable to ~~lower~~a pre-tax book ~~income~~loss and ~~certain tax benefits. The decrease was partially offset by~~ the ~~adoption of Accounting Standards Update (ASU) 2016-09, which resulted~~change in the federal tax ~~effects of equity-based compensation being recorded through the income statement rather than equity.~~rate from 35 percent to 21 percent. For the 1326 weeks ended ~~September 24, 2017,~~July 1, 2018, the effective tax rate was ~~80.4%~~7.8%, compared to ~~34.2%~~54.4% for the 1326 weeks ended ~~September~~June 25, ~~2016.~~2017. The ~~increase~~change in the effective tax rate was driven by ~~lower~~a pre-tax book ~~income~~loss and ~~certain tax benefits~~ ~~partially offset by~~ the ~~net effect of~~change in the ~~adoption of ASU 2016-09 for stock-based compensation, which impacted our~~federal tax rate ~~by 7.5%.~~ ~~See Note 1~~from 35 percent 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 for the periods indicated (dollars in thousands):~~

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
)%

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 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 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 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 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 openings21 percent, as well as higher utility 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 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 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 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 increased to $5.8 million during the 39 weeks ended September 24, 2017, compared to $2.9 million during the 39 weeks ended September 25, 2016. After performing periodic reviews 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.

~~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 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.~~discrete items.

~~Our~~Potbelly’s ongoing primary sources of liquidity and capital resources are cash provided from operating activities, existing cash and cash equivalents and ~~our~~the Company’s credit facility. ~~Our~~Potbelly’s primary requirements for liquidity and capital are new shop openings, existing shop capital investments (maintenance and improvements), repurchases of ~~our~~Company common stock, lease obligations, ~~purchases of existing franchise-operated shops~~and working capital and general corporate needs. ~~Our~~Potbelly’s requirement for working capital is not significant since ~~our~~the Company’s 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~~the Company needs to pay ~~our suppliers. Our~~its suppliers for such items. Company shops do not require significant inventories or receivables. ~~We believe~~Potbelly believes that these sources of liquidity and capital will be sufficient to finance ~~our~~the Company’s continued operations and expansion plans for at least the next twelve months.

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

Net cash provided by operating activities ~~decreased~~increased to ~~$28.4~~$17.9 million for the 3926 weeks ended ~~September 24, 2017,~~July 1, 2018, from ~~$33.6~~$15.1 million for the 3926 weeks ended ~~September~~June 25, ~~2016.~~2017. The ~~$5.2~~$2.7 million ~~decrease~~increase 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 of $5.9 million in net income.~~

Net cash used in investing activities ~~increased~~decreased to ~~$23.5~~$11.6 million for the 3926 weeks ended ~~September 24, 2017,~~July 1, 2018, from ~~$21.0~~$15.3 million for the 3926 weeks ended ~~September~~June 25, ~~2016.~~2017. The ~~increase~~decrease was primarily due to ~~construction costs for new company-operated~~fewer shops opened ~~for~~during the 3926 weeks ended ~~September 24, 2017,~~July 1, 2018 compared to ~~new company-operated shops opened for~~ the 3926 weeks ended ~~September~~June 25, ~~2016, as well as capital expenditures for future shop openings, maintaining our existing shops and certain other projects.~~2017, partially offset by an increase in information technology improvements.

Net cash provided by financing activities was $2.5 million for the 26 weeks ended July 1, 2018, compared to $2.0 million net cash used in financing activities ~~decreased to $6.0 million~~ for the 3926 weeks ended ~~September 24, 2017, from $14.9 million for the 39 weeks ended September~~June 25, ~~2016.~~2017. The ~~decrease~~change 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~~$6.7 million in proceeds from the exercise of stock options ~~and warrants~~ during the 3926 weeks ended ~~September 24, 2017,~~July 1, 2018, compared to ~~$5.7~~$1.1 million during the 3926 weeks ended ~~September~~June 25, ~~2016.~~2017. Additionally, $0.5 million in employee taxes related to stock-based payment arrangements were withheld and paid during the 26 weeks ended July 1, 2018.

On ~~September~~May 8, ~~2016,~~2018, the Company announced that its Board of Directors authorized a ~~share~~stock repurchase program offor up to ~~$30.0~~$65.0 million of ~~the Company’s~~its outstanding common stock. The ~~Company’s~~stock repurchase program replaced the previous ~~$35.0 million share repurchase~~ program, authorized in September ~~2015, was completed~~2016. Under the previous program, during the 26 weeks ended July 1, 2018, the Company repurchased 5,000 shares of its common stock for approximately $0.1 million, including costs and commissions, in ~~July 2016.~~ open market transactions. 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 ~~of 1934, as amended)~~ or in privately negotiated transactions. ~~During~~Under the 39current program, during the 26 weeks ended ~~September 24, 2017,~~July 1, 2018, the Company repurchased ~~745,496~~259,339 shares of ~~our~~its common stock for approximately ~~$8.9~~$3.3 million, including ~~cost~~costs and ~~commission,~~commissions, in open market transactions. AsThe number of ~~September 24, 2017,~~shares of common stock repurchased in the ~~remaining dollar value~~future, and the timing and price of ~~authorization under the share repurchase program was $18.8 million, which does not include commission.~~repurchases, will depend upon market conditions, Securities and Exchange Commission requirements, and other factors. Purchases may be started or stopped at any time without prior notice depending on market conditions and other factors. Repurchased shares are included as treasury stock in the condensed consolidated balance sheets and the condensed consolidated statements of equity.

On December 9, 2015, wethe Company entered into an amended and restated five-year revolving credit facility agreement that expires in November 2020. The credit agreement provides, among other things, for a revolving credit facility in a maximum principal amount of $50.0 million, with possible future increases to $75.0 million under an expansion feature. Borrowings under the credit facility generally bear interest at our option at either (i) a eurocurrency rate determined by reference to the applicable 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~~the Company is 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 wethe Company may make. As of ~~September 24, 2017, we~~July 1, 2018, the Company had no amounts outstanding under the credit facility.

Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with 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 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~~The Company bases 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. WePotbelly had no significant changes in our critical accounting estimates since ~~our~~the last annual report. ~~Our~~The Company’s critical accounting estimates are identified and described in our annual consolidated financial statements and related notes.

As of ~~September 24, 2017, we do~~July 1, 2018, the Company does 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.

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.~~31, 2017. Our exposures to market risk have not changed materially since December ~~25, 2016.~~31, 2017.

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 as of ~~September 24, 2017.~~July 1, 2018. Based upon that evaluation, our ~~interim~~ Chief Executive Officer and Chief Financial Officer ~~has~~have concluded that, as of ~~September 24, 2017,~~July 1, 2018, 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.

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~~July 1, 2018 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

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

Information pertaining to legal proceedings is provided in Note 78 to the Condensed Consolidated Financial Statements and is incorporated by reference herein.

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.~~31, 2017. There have been no material changes to our Risk Factors as previously reported.

The following table contains information regarding purchases of our common stock made by or on behalf of Potbelly Corporation during the 13 weeks ended ~~September 24, 2017:~~July 1, 2018:

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

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.


Large accelerated filer	☐		Accelerated filer	☒

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

Emerging growth company	☒

		Page
PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements	3

	Condensed Consolidated Balance Sheets	3

	Condensed Consolidated Statements of Operations	4

	Condensed Consolidated ~~Statement~~Statements of Equity	5

	Condensed Consolidated Statements of Cash Flows	6

	Notes to Condensed Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	20

Item 4.	Controls and Procedures	20

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	21

Item 1A.	Risk Factors	21

Item 2.	Unregistered Sale of Equity Securities and Use of Proceeds	21

Item 6.	Exhibits	22

	Signature	23

	Current Contract Liability			Noncurrent Contract Liability
	(Thousands)			(Thousands)
Beginning balance as of January 1, 2018	$	(2,325	)	$	(2,144	)
Ending balance as of July 1, 2018		(1,415	)		(1,862	)
Decrease in contract liability	$	(910	)	$	(282	)

Options	Shares (Thousands)			Weighted Average Exercise Price		Aggregate Intrinsic Value (Thousands)		Weighted Average Remaining Term (Years)		Shares (Thousands)			Weighted Average Exercise Price		Aggregate Intrinsic Value (Thousands)		Weighted Average Remaining Term (Years)
Outstanding—December 25, 2016		4,013		$	10.61	$	13,455		4.78
Outstanding—December 31, 2017											3,309		$	10.71	$	7,699		4.90
Granted		263			11.55						102			13.05
Exercised		(125	)		9.48						(835	)		8.08
Canceled		(68	)		15.23						(105	)		13.30
Outstanding—September 24, 2017		4,083		$	10.63	$	7,390		4.44
Exercisable—September 24, 2017		3,288		$	10.06	$	7,185		3.54
Outstanding—July 1, 2018											2,471		$	11.68	$	4,890		5.83
Exercisable—July 1, 2018											1,830		$	11.16	$	4,649		4.84

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

Years Ending	Amount
2018	$	1,262
2019		334
2020		208
2021		201
2022		193
Thereafter		1,079
Total revenue recognized	$	3,277


Exhibit No.		Description

~~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 Executive Officer ~~and~~pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

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

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

101.INS		XBRL Instance Document

101.SCH		XBRL Taxonomy Extension Schema Document

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB		XBRL Taxonomy Extension Label Linkbase Document

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document

		POTBELLY CORPORATION

Date: ~~November 3, 2017~~August 8, 2018	By:	/s/ Michael Coyne
		Michael Coyne
		~~Interim Chief Executive Officer and~~ Chief Financial Officer
		(Principal ~~Executive Officer and Principal~~ Financial Officer)