UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended SeptemberJune 30, 20182019
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Transition Period from to
Commission File Number: 001-36104
Potbelly Corporation
(Exact name of registrant as specified in its charter)
Delaware |
| 36-4466837 |
(State or Other Jurisdiction of Incorporation) |
| (IRS Employer Identification Number) |
111 N. Canal Street, Suite 850 Chicago, Illinois | 60606 | |
(Address of Principal Executive Offices) | (Zip Code) |
111 N. Canal Street, Suite 850
Chicago, Illinois 60606
(Address, including Zip Code, of Principal Executive Offices)
Registrant’s telephone number, including area code:Telephone Number, Including Area Code: (312) 951-0600
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Common Stock, $0.01 par value | PBPB | The NASDAQ Stock Market LLC | ||
(Nasdaq Global Select Market) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
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| Accelerated filer |
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Non-accelerated filer |
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| Smaller reporting company |
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Emerging growth company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Indicate by check mark whether the number of shares outstanding of eachregistrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the issuer’s classesSecurities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ☒ No ☐
As of July 28, 2019, the registrant had 23,768,375 shares of common stock, as of the latest practicable date:
Common stock, $0.01 Par Value – 24,844,824 shares as of October 28, 2018
par value per share, outstanding.
Potbelly Corporation and Subsidiaries
Table of Contents
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PART I. |
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Item 1. |
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Item 2. |
| Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3. |
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Item 4. |
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PART II. |
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Item 1. |
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Item 1A. |
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Item 2. |
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Item 3. | 24 | |||
Item 4. | 24 | |||
Item 5. | 24 | |||
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Item 6. |
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2
ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Potbelly Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
(amounts in thousands, except share and par value data, unaudited)
|
| September 30, |
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| December 31, |
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| June 30, |
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| December 30, |
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| 2018 |
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| 2017 |
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| 2019 |
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| 2018 |
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Assets |
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Current assets |
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Cash and cash equivalents |
| $ | 26,711 |
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| $ | 25,530 |
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| $ | 18,066 |
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| $ | 19,775 |
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Accounts receivable, net of allowances of $124 and $129 as of September 30, 2018 and December 31, 2017, respectively |
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| 5,353 |
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| 5,087 |
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Accounts receivable, net of allowances of $131 and $113 as of June 30, 2019 and December 30, 2018, respectively |
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| 4,545 |
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| 4,737 |
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Inventories |
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| 3,459 |
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| 3,525 |
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| 3,357 |
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| 3,482 |
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Prepaid expenses and other current assets |
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| 10,980 |
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| 11,061 |
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| 8,182 |
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| 11,426 |
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Total current assets |
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| 46,503 |
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| 45,203 |
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| 34,150 |
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| 39,420 |
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Property and equipment, net |
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| 94,237 |
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| 103,859 |
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| 81,628 |
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| 87,782 |
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Right-of-use assets for operating leases |
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| 216,540 |
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| — |
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Indefinite-lived intangible assets |
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| 3,404 |
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| 3,404 |
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| 3,404 |
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| 3,404 |
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Goodwill |
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| 2,222 |
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| 2,222 |
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| 2,222 |
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| 2,222 |
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Deferred income taxes, noncurrent |
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| 12,612 |
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| 11,202 |
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Deferred income taxes |
|
| — |
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| 13,385 |
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Deferred expenses, net and other assets |
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| 7,064 |
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| 4,840 |
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| 6,898 |
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| 7,002 |
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Total assets |
| $ | 166,042 |
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| $ | 170,730 |
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| $ | 344,842 |
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| $ | 153,215 |
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Liabilities and Equity |
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Current liabilities |
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Accounts payable |
| $ | 3,380 |
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| $ | 3,903 |
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| $ | 4,222 |
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| $ | 3,835 |
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Accrued expenses |
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| 23,597 |
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| 23,273 |
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| 21,303 |
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| 25,029 |
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Short-term operating lease liabilities |
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| 29,126 |
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| — |
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Accrued income taxes |
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| — |
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| 176 |
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| 162 |
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| 162 |
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Total current liabilities |
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| 26,977 |
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| 27,352 |
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| 54,813 |
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| 29,026 |
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Deferred rent and landlord allowances |
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| 22,998 |
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| 22,987 |
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| — |
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| 22,905 |
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Long-term operating lease liabilities |
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| 210,898 |
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| — |
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Other long-term liabilities |
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| 5,983 |
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| 3,153 |
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| 6,255 |
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| 5,751 |
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Total liabilities |
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| 55,958 |
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| 53,492 |
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| 271,966 |
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| 57,682 |
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Stockholders’ equity |
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Common stock, $0.01 par value—authorized 200,000,000 shares; outstanding 25,102,339 and 24,999,688 shares as of September 30, 2018 and December 31, 2017, respectively |
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| 329 |
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| 318 |
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Commitments and contingencies (Note 9) |
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Equity |
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Common stock, $0.01 par value—authorized 200,000,000 shares; outstanding 23,768,375 and 24,142,586 shares as of June 30, 2019 and December 30, 2018, respectively |
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| 331 |
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| 330 |
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Additional paid-in-capital |
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| 432,329 |
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| 421,657 |
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| 434,407 |
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| 432,771 |
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Treasury stock, held at cost, 7,804,519 and 6,831,508 shares as of September 30, 2018, and December 31, 2017, respectively |
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| (97,792 | ) |
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| (85,262 | ) | ||||||||
Treasury stock, held at cost, 9,291,732 and 8,801,154 shares as of June 30, 2019, and December 30, 2018, respectively |
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| (111,874 | ) |
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| (108,372 | ) | ||||||||
Accumulated deficit |
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| (225,195 | ) |
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| (219,990 | ) |
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| (250,394 | ) |
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| (229,558 | ) |
Total stockholders’ equity |
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| 109,671 |
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| 116,723 |
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| 72,470 |
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| 95,171 |
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Non-controlling interest |
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| 413 |
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| 515 |
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| 406 |
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| 362 |
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Total stockholders' equity |
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| 110,084 |
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| 117,238 |
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Total equity |
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| 72,876 |
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| 95,533 |
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Total liabilities and equity |
| $ | 166,042 |
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| $ | 170,730 |
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| $ | 344,842 |
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| $ | 153,215 |
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See accompanying notes to the unaudited condensed consolidated financial statements.
3
Potbelly Corporation and Subsidiaries
Condensed Consolidated Statements of Operations
(amounts in thousands, except share and per share data, unaudited)
|
| For the 13 Weeks Ended |
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| For the 39 Weeks Ended |
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| For the 13 Weeks Ended |
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| For the 26 Weeks Ended |
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|
| September 30, |
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| September 24, |
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| September 30, |
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| September 24, |
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| June 30, |
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| July 1, |
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| June 30, |
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| July 1, |
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| 2018 |
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| 2017 |
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| 2018 |
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| 2017 |
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| 2019 |
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| 2018 |
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| 2019 |
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| 2018 |
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Revenues |
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Sandwich shop sales, net |
| $ | 106,238 |
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| $ | 105,327 |
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| $ | 317,866 |
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| $ | 313,568 |
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| $ | 104,801 |
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| $ | 109,381 |
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| $ | 202,059 |
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| $ | 211,628 |
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Franchise royalties and fees |
|
| 758 |
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|
| 800 |
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| 2,394 |
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| $ | 2,394 |
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|
| 829 |
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| 966 |
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| 1,658 |
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| $ | 1,636 |
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Total revenues |
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| 106,996 |
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| 106,127 |
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| 320,260 |
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| 315,962 |
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| 105,630 |
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| 110,347 |
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| 203,717 |
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| 213,264 |
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Expenses |
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Sandwich shop operating expenses |
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Cost of goods sold, excluding depreciation |
|
| 28,455 |
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| 28,405 |
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| 83,730 |
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| 83,703 |
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| 28,264 |
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| 28,639 |
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| 54,242 |
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|
| 55,275 |
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Labor and related expenses |
|
| 32,376 |
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| 31,187 |
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| 96,367 |
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| 93,213 |
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| 32,114 |
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| 32,412 |
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| 64,087 |
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| 63,991 |
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Occupancy expenses |
|
| 15,076 |
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| 14,354 |
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| 44,787 |
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| 42,792 |
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|
| 15,230 |
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| 14,985 |
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| 29,607 |
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| 29,711 |
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Other operating expenses |
|
| 13,357 |
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| 12,464 |
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| 38,650 |
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| 36,349 |
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| 11,816 |
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| 12,793 |
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| 23,961 |
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| 25,293 |
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General and administrative expenses |
|
| 10,087 |
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| 12,104 |
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| 35,715 |
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| 33,375 |
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| 13,843 |
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| 13,440 |
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| 26,552 |
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| 25,628 |
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Depreciation expense |
|
| 5,847 |
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| 6,315 |
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|
| 17,531 |
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| 18,960 |
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|
| 5,585 |
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| 5,858 |
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| 11,121 |
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|
| 11,684 |
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Pre-opening costs |
|
| 109 |
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|
| 336 |
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|
| 245 |
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|
| 955 |
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|
| — |
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|
| 68 |
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|
| 10 |
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|
| 136 |
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Impairment and loss on disposal of property and equipment |
|
| 4,386 |
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|
| 1,536 |
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|
| 8,467 |
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|
| 5,762 |
|
|
| 246 |
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|
| 2,057 |
|
|
| 328 |
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|
| 4,081 |
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Total expenses |
|
| 109,693 |
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|
| 106,701 |
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|
| 325,492 |
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|
| 315,109 |
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|
| 107,098 |
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|
| 110,252 |
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|
| 209,908 |
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|
| 215,799 |
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Income (loss) from operations |
|
| (2,697 | ) |
|
| (574 | ) |
|
| (5,232 | ) |
|
| 853 |
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|
| (1,468 | ) |
|
| 95 |
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|
| (6,191 | ) |
|
| (2,535 | ) |
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Interest expense |
|
| 54 |
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|
| 32 |
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|
| 109 |
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|
| 101 |
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|
| 35 |
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|
| 28 |
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|
| 67 |
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|
| 55 |
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Income (loss) before income taxes |
|
| (2,751 | ) |
|
| (606 | ) |
|
| (5,341 | ) |
|
| 752 |
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|
| (1,503 | ) |
|
| 67 |
|
|
| (6,258 | ) |
|
| (2,590 | ) |
Income tax expense (benefit) |
|
| (909 | ) |
|
| (487 | ) |
|
| (1,111 | ) |
|
| 252 |
|
|
| 246 |
|
|
| 302 |
|
|
| 13,865 |
|
|
| (202 | ) |
Net income (loss) |
|
| (1,842 | ) |
|
| (119 | ) |
|
| (4,230 | ) |
|
| 500 |
| ||||||||||||||||
Net loss |
|
| (1,749 | ) |
|
| (235 | ) |
|
| (20,123 | ) |
|
| (2,388 | ) | ||||||||||||||||
Net income attributable to non-controlling interest |
|
| 119 |
|
|
| 121 |
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|
| 285 |
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|
| 195 |
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|
| 117 |
|
|
| 125 |
|
|
| 182 |
|
|
| 166 |
|
Net income (loss) attributable to Potbelly Corporation |
| $ | (1,961 | ) |
| $ | (240 | ) |
| $ | (4,515 | ) |
| $ | 305 |
| ||||||||||||||||
Net loss attributable to Potbelly Corporation |
| $ | (1,866 | ) |
| $ | (360 | ) |
| $ | (20,305 | ) |
| $ | (2,554 | ) | ||||||||||||||||
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Net income (loss) per common share attributable to common stockholders: |
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Net loss per common share attributable to common stockholders: |
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Basic |
| $ | (0.08 | ) |
| $ | (0.01 | ) |
| $ | (0.18 | ) |
| $ | 0.01 |
|
| $ | (0.08 | ) |
| $ | (0.01 | ) |
| $ | (0.85 | ) |
| $ | (0.10 | ) |
Diluted |
| $ | (0.08 | ) |
| $ | (0.01 | ) |
| $ | (0.18 | ) |
| $ | 0.01 |
|
| $ | (0.08 | ) |
| $ | (0.01 | ) |
| $ | (0.85 | ) |
| $ | (0.10 | ) |
Weighted average shares outstanding: |
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Basic |
|
| 25,369,281 |
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|
| 24,959,023 |
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|
| 25,355,174 |
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|
| 25,030,951 |
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|
| 23,908,095 |
|
|
| 25,551,386 |
|
|
| 24,020,567 |
|
|
| 25,348,121 |
|
Diluted |
|
| 25,369,281 |
|
|
| 24,959,023 |
|
|
| 25,355,174 |
|
|
| 25,857,083 |
|
|
| 23,908,095 |
|
|
| 25,551,386 |
|
|
| 24,020,567 |
|
|
| 25,348,121 |
|
See accompanying notes to the unaudited condensed consolidated financial statements.
4
Potbelly Corporation and Subsidiaries
Condensed Consolidated Statements of Equity
(amounts in thousands, except share data, unaudited)
|
| Common Stock |
|
| Treasury |
|
|
|
|
|
| Additional Paid-In- |
|
| Accumulated |
|
| Non- Controlling |
|
|
|
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| |||||||||
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| 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 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (4,515 | ) |
|
| 285 |
|
|
| (4,230 | ) |
Stock-based compensation plans |
|
| 1,075,662 |
|
|
| 11 |
|
|
| — |
|
|
| — |
|
|
| 8,156 |
|
|
| — |
|
|
| — |
|
|
| 8,167 |
|
Repurchases of common stock |
|
| (964,240 | ) |
|
| — |
|
|
| (12,414 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (12,414 | ) |
Contributions from non- controlling interest |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 20 |
|
|
| 20 |
|
Distributions to non- controlling interest |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (407 | ) |
|
| (407 | ) |
Treasury shares used for stock-based plans |
|
| (8,771 | ) |
|
| — |
|
|
| (116 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (116 | ) |
Amortization of stock-based compensation |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 2,516 |
|
|
| — |
|
|
| — |
|
|
| 2,516 |
|
Balance at September 30, 2018 |
|
| 25,102,339 |
|
| $ | 329 |
|
| $ | (97,792 | ) |
| $ | — |
|
| $ | 432,329 |
|
| $ | (225,195 | ) |
| $ | 413 |
|
| $ | 110,084 |
|
For the 13 weeks ended: |
| Common Stock |
|
| Treasury |
|
| Additional Paid-In- |
|
| Accumulated |
|
| Non- Controlling |
|
|
|
|
| |||||||||
|
| Shares |
|
| Amount |
|
| Stock |
|
| Capital |
|
| Deficit |
|
| Interest |
|
| Total Equity |
| |||||||
Balance at April 1, 2018 |
|
| 25,286,229 |
|
|
| 321 |
|
|
| (85,441 | ) |
|
| 424,771 |
|
|
| (222,874 | ) |
|
| 556 |
|
| $ | 117,333 |
|
Net income (loss) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (360 | ) |
|
| 125 |
|
|
| (235 | ) |
Stock-based compensation plans |
|
| 625,063 |
|
|
| 6 |
|
|
| — |
|
|
| 4,483 |
|
|
| — |
|
|
| — |
|
|
| 4,489 |
|
Repurchases of common stock |
|
| (259,339 | ) |
|
| — |
|
|
| (3,386 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (3,386 | ) |
Distributions to non-controlling interest |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (256 | ) |
|
| (256 | ) |
Stock-based compensation expense |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,389 |
|
|
| — |
|
|
| — |
|
|
| 1,389 |
|
Balance at July 1, 2018 |
|
| 25,651,953 |
|
| $ | 327 |
|
| $ | (88,827 | ) |
| $ | 430,643 |
|
| $ | (223,234 | ) |
| $ | 425 |
|
| $ | 119,334 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2019 |
|
| 24,038,211 |
|
| $ | 330 |
|
| $ | (109,541 | ) |
| $ | 433,400 |
|
| $ | (248,528 | ) |
| $ | 427 |
|
| $ | 76,088 |
|
Net income (loss) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,866 | ) |
|
| 117 |
|
|
| (1,749 | ) |
Stock-based compensation plans |
|
| 82,694 |
|
|
| 1 |
|
|
| — |
|
|
| 2 |
|
|
| — |
|
|
| — |
|
|
| 3 |
|
Repurchases of common stock |
|
| (350,659 | ) |
|
| — |
|
|
| (2,323 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (2,323 | ) |
Distributions to non-controlling interest |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (177 | ) |
|
| (177 | ) |
Contributions from non-controlling interest |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 39 |
|
|
| 39 |
|
Treasury shares used for stock-based plans |
|
| (1,871 | ) |
|
| — |
|
|
| (10 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (10 | ) |
Stock-based compensation expense |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,005 |
|
|
| — |
|
|
| — |
|
|
| 1,005 |
|
Balance at June 30, 2019 |
|
| 23,768,375 |
|
| $ | 331 |
|
| $ | (111,874 | ) |
| $ | 434,407 |
|
| $ | (250,394 | ) |
| $ | 406 |
|
| $ | 72,876 |
|
See accompanying notes to the unaudited condensed consolidated financial statements.
5
Potbelly Corporation and Subsidiaries
5Condensed Consolidated Statements of Equity
(amounts in thousands, except share data, unaudited)
For the 26 weeks ended: |
| Common Stock |
|
| Treasury |
|
| Additional Paid-In- |
|
| Accumulated |
|
| Non- Controlling |
|
|
|
|
| |||||||||
|
| Shares |
|
| Amount |
|
| Stock |
|
| Capital |
|
| Deficit |
|
| Interest |
|
| Total Equity |
| |||||||
Balance at December 31, 2017 |
|
| 24,999,688 |
|
|
| 318 |
|
|
| (85,262 | ) |
|
| 421,657 |
|
|
| (219,990 | ) |
|
| 515 |
|
| $ | 117,238 |
|
Cumulative impact of Topic 606 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (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 | ) |
Stock-based compensation expense |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 2,251 |
|
|
| — |
|
|
| — |
|
|
| 2,251 |
|
Balance at July 1, 2018 |
|
| 25,651,953 |
|
| $ | 327 |
|
| $ | (88,827 | ) |
| $ | 430,643 |
|
| $ | (223,234 | ) |
| $ | 425 |
|
| $ | 119,334 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 30, 2018 |
|
| 24,142,586 |
|
| $ | 330 |
|
| $ | (108,372 | ) |
| $ | 432,771 |
|
| $ | (229,558 | ) |
| $ | 362 |
|
| $ | 95,533 |
|
Cumulative impact of Topic 842, net of tax of $196 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (531 | ) |
|
| — |
|
| $ | (531 | ) |
Net income (loss) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (20,305 | ) |
|
| 182 |
|
|
| (20,123 | ) |
Stock-based compensation plans |
|
| 116,367 |
|
|
| 1 |
|
|
| — |
|
|
| 172 |
|
|
| — |
|
|
| — |
|
|
| 173 |
|
Repurchases of common stock |
|
| (485,659 | ) |
|
| — |
|
|
| (3,467 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (3,467 | ) |
Distributions to non-controlling interest |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (177 | ) |
|
| (177 | ) |
Contributions from non-controlling interest |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 39 |
|
|
| 39 |
|
Treasury shares used for stock-based plans |
|
| (4,919 | ) |
|
| — |
|
|
| (35 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (35 | ) |
Stock-based compensation expense |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,464 |
|
|
| — |
|
|
| — |
|
|
| 1,464 |
|
Balance at June 30, 2019 |
|
| 23,768,375 |
|
| $ | 331 |
|
| $ | (111,874 | ) |
| $ | 434,407 |
|
| $ | (250,394 | ) |
| $ | 406 |
|
| $ | 72,876 |
|
See accompanying notes to the unaudited condensed consolidated financial statements.
6
Potbelly Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(amounts in thousands, unaudited)
|
| For the 39 Weeks Ended |
|
| For the 26 Weeks Ended |
| ||||||||||
|
| September 30, |
|
| September 24, |
|
| June 30, |
|
| July 1, |
| ||||
|
| 2018 |
|
| 2017 |
|
| 2019 |
|
| 2018 |
| ||||
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
| $ | (4,230 | ) |
| $ | 500 |
| ||||||||
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
| ||||||||
Depreciation |
|
| 17,531 |
|
|
| 18,960 |
| ||||||||
Net loss |
| $ | (20,123 | ) |
| $ | (2,388 | ) | ||||||||
Adjustments to reconcile net loss to net cash provided by operating activities: |
|
|
|
|
|
|
|
| ||||||||
Depreciation expense |
|
| 11,121 |
|
|
| 11,684 |
| ||||||||
Noncash lease expense |
|
| 13,826 |
|
|
| — |
| ||||||||
Deferred income tax |
|
| (98 | ) |
|
| — |
|
|
| 13,790 |
|
|
| (150 | ) |
Deferred rent and landlord allowances |
|
| 12 |
|
|
| 1,924 |
| ||||||||
Amortization of stock compensation expense |
|
| 2,516 |
|
|
| 3,263 |
| ||||||||
Excess tax deficiency from stock-based compensation |
|
| 651 |
|
|
| 292 |
| ||||||||
Stock-based compensation expense |
|
| 1,464 |
|
|
| 2,251 |
| ||||||||
Asset impairment, store closure and disposal of property and equipment |
|
| 8,666 |
|
|
| 5,922 |
|
|
| 433 |
|
|
| 4,221 |
|
Amortization of debt issuance costs |
|
| 28 |
|
|
| 28 |
| ||||||||
Other operating activities |
|
| 18 |
|
|
| 311 |
| ||||||||
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net |
|
| (516 | ) |
|
| (1,422 | ) |
|
| 192 |
|
|
| (822 | ) |
Inventories |
|
| 65 |
|
|
| 54 |
|
|
| 125 |
|
|
| 263 |
|
Prepaid expenses and other assets |
|
| (2,015 | ) |
|
| (2,650 | ) |
|
| 3,322 |
|
|
| (924 | ) |
Accounts payable |
|
| (201 | ) |
|
| 699 |
|
|
| 303 |
|
|
| 676 |
|
Accrued and other liabilities |
|
| 244 |
|
|
| 798 |
| ||||||||
Operating lease liabilities |
|
| (15,281 | ) |
|
| — |
| ||||||||
Accrued expenses and other liabilities |
|
| (2,202 | ) |
|
| 2,745 |
| ||||||||
Net cash provided by operating activities: |
|
| 22,653 |
|
|
| 28,368 |
|
|
| 6,988 |
|
|
| 17,867 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment |
| $ | (16,722 | ) |
| $ | (23,526 | ) |
| $ | (5,230 | ) |
| $ | (11,614 | ) |
Net cash used in investing activities: |
|
| (16,722 | ) |
|
| (23,526 | ) |
|
| (5,230 | ) |
|
| (11,614 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options |
| $ | 8,167 |
|
| $ | 1,181 |
|
| $ | 173 |
|
| $ | 6,744 |
|
Proceeds from exercise of stock warrants |
|
| — |
|
|
| 1,972 |
| ||||||||
Employee taxes on certain stock-based payment arrangements |
|
| (116 | ) |
|
| — |
|
|
| (35 | ) |
|
| (512 | ) |
Treasury stock repurchases |
|
| (12,414 | ) |
|
| (8,853 | ) |
|
| (3,467 | ) |
|
| (3,449 | ) |
Distributions to non-controlling interest |
|
| (177 | ) |
|
| (256 | ) | ||||||||
Contributions from non-controlling interest |
|
| 20 |
|
|
| 11 |
|
|
| 39 |
|
|
| — |
|
Distributions to non-controlling interest |
|
| (407 | ) |
|
| (354 | ) | ||||||||
Net cash used in financing activities: |
|
| (4,750 | ) |
|
| (6,043 | ) | ||||||||
Net cash (used in) provided by financing activities: |
|
| (3,467 | ) |
|
| 2,527 |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
| 1,181 |
|
|
| (1,201 | ) |
|
| (1,709 | ) |
|
| 8,780 |
|
Cash and cash equivalents at beginning of period |
|
| 25,530 |
|
|
| 23,379 |
|
|
| 19,775 |
|
|
| 25,530 |
|
Cash and cash equivalents at end of period |
| $ | 26,711 |
|
| $ | 22,178 |
|
| $ | 18,066 |
|
| $ | 34,310 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid |
| $ | 249 |
|
| $ | 3,346 |
|
| $ | 180 |
|
| $ | 244 |
|
Interest paid |
|
| 85 |
|
|
| 73 |
|
|
| 48 |
|
|
| 38 |
|
Supplemental non-cash investing and financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid liability for purchases of property and equipment |
| $ | 1,178 |
|
| $ | 2,752 |
|
| $ | 583 |
|
| $ | 1,299 |
|
See accompanying notes to the unaudited condensed consolidated financial statements
Potbelly Corporation and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (unaudited)
(1) Organization and Other Matters
Business
Potbelly Corporation (the “Company” or “Potbelly”), through its wholly owned subsidiaries, owns or operates more than 400 company-owned shops in the United States. Additionally, Potbelly franchisees operate more than 5040 shops domestically, in the Middle East, Canada and India.domestically.
Basis of Presentation
The unaudited condensed consolidated financial statements and notes herein should be read in conjunction with the audited consolidated financial statements of Potbelly Corporation and its subsidiaries and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.30, 2018. 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 SeptemberJune 30, 20182019 and December 31, 2017,30, 2018, its statement of operations for the 13 and 3926 weeks ended SeptemberJune 30, 2019 and July 1, 2018, the statement of equity for the 13 and September 24, 201726 weeks ended June 30, 2019 and July 1, 2018 and its statement of cash flows for the 3926 weeks ended SeptemberJune 30, 20182019 and September 24, 2017July 1, 2018 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.
Principles of Consolidation
The unaudited condensed consolidated financial statements include the accounts of Potbelly Corporation; its wholly owned subsidiary, Potbelly Illinois, Inc. (“PII”); PII’s wholly owned subsidiaries, Potbelly Franchising, LLC and Potbelly Sandwich Works, LLC (“LLC”); seven of LLC’s wholly owned subsidiaries and LLC’s seven joint ventures, collectively, the “Company.” All 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 seven joint venture investments. The Company has ownership interests ranging from 51-80% in these consolidated joint ventures.
Fiscal Year
The Company uses a 52/53-week fiscal year that ends on the last Sunday of the calendar period. Approximately every five or six years a 53rd week is added. Fiscal year 2019 and 2018 consistsboth consist of 52 weeks and 2017 consisted of 53 weeks. The fiscal quarters ended SeptemberJune 30, 20182019 and September 24, 2017July 1, 2018 each consisted of 13 weeks.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses and the disclosure of contingent assets and liabilities. Significant estimates include amounts for long-lived assets and income taxes. Actual results could differ from those estimates.
Recent Accounting Pronouncements
In May 2014,On December 31, 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, “Revenue from ContractsCompany adopted ASU 2016-02, “Leases (Topic 842),” along with Customers.” Therelated clarifications and improvements. This pronouncement was issuedrequires lessees to clarifyrecognize a liability for lease obligations, which represents the principles for recognizing revenuediscounted obligation to make future lease payments, and to develop a common revenue standard and disclosure requirements for U.S. GAAP and International Financial Reporting Standards (IFRS). 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 clarificationscorresponding right-of-use asset on the newbalance sheet. The guidance in Accounting Standards Codification (ASC) Topic 606. Potbelly adoptedrequires disclosure of key information about leasing arrangements that is intended to give financial statement users the standard effective January 1, 2018 usingability to assess the modified retrospectiveamount, timing, and potential uncertainty of cash flows related to leases. We elected the optional transition method applied to contracts that were not completedapply the standard as of the effective date of adoption.and therefore, prior period amounts have not been adjusted and continue to be reported in accordance with our historical accounting under previous lease guidance, ASC Topic 840: Leases (Topic 840). The adoption does not haveof Topic 842 had a material impact on sandwich shop sales, but impacted the recognitionconsolidated balance sheets and an immaterial impact on the consolidated statements of franchise revenueoperations, consolidated statements of equity and gift card breakage. Potbelly licenses intellectual property and trademarks to franchisees through franchise arrangements. As partconsolidated statements of these agreements, Potbelly receives an initial franchise fee payment, which historically was recognizedcash flows.
Our practical expedients were as revenue when the shop 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 are recognized as revenue over the 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 were not redeemed by the customer (“breakage”) and Potbelly would recognize breakage two years after the period of sale. Effective for the annual period beginning January 1, 2018, expected breakage is 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 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 September 30, 2018, revenue recognized was $0.1 million higher than it would have been under the previous methodology, and for the 39 weeks ended September 30, 2018, revenue recognized was $0.3 million higher than it would have been under the previous methodology.follows:
In February 2016,
Implications as of December 31, 2018 | |
Practical expedient package | We have not reassessed whether any expired or existing contracts are, or contain, leases. |
We have not reassessed the lease classification for any expired or existing leases. | |
We have not reassessed initial direct costs for any expired or existing leases. | |
Hindsight practical expedient | We have not elected the hindsight practical expedient, which permits the use of hindsight when determining lease term and impairment of operating lease assets. |
The impact on 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 leasesconsolidated balance sheet is 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, 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 July 2018, the FASB issued Accounting Standards Update No. 2018-11 “Leases (Topic 842): Targeted Improvements” (“ASU 2018-11”), which permits companies to initially apply the new leases standard at the date of adoption and not restate periods prior to adoption. The Company plans to adopt ASU 2018-11. The Company is currently evaluating the impact of ASU 2016-02 and anticipates it will be able to complete its analysis of all potential impacts of the standard, implement any system and process changes that might be necessary and educate the appropriate employees with respect to the new standard in order to effectively adopt the standard beginning in the first quarter of 2019.follows:
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| Adjustments Due |
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| |
| December 30, |
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| to the Adoption of |
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| December 31, |
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| 2018 |
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| Topic 842 |
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| 2018 |
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Assets |
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Current assets |
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Cash and cash equivalents | $ | 19,775 |
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| $ | — |
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| $ | 19,775 |
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Accounts receivable, net of allowances of $113 as of December 30, 2018 |
| 4,737 |
|
|
| — |
|
|
| 4,737 |
|
Inventories |
| 3,482 |
|
|
| — |
|
|
| 3,482 |
|
Prepaid expenses and other current assets |
| 11,426 |
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|
| — |
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|
| 11,426 |
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Total current assets |
| 39,420 |
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|
| — |
|
|
| 39,420 |
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Property and equipment, net |
| 87,782 |
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|
| — |
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|
| 87,782 |
|
Right-of-use assets for operating leases |
| — |
|
|
| 232,477 |
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|
| 232,477 |
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Indefinite-lived intangible assets |
| 3,404 |
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|
| — |
|
|
| 3,404 |
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Goodwill |
| 2,222 |
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|
| — |
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|
| 2,222 |
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Deferred income taxes, noncurrent |
| 13,385 |
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|
| 195 |
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| 13,580 |
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Deferred expenses, net and other assets |
| 7,002 |
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|
| — |
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|
| 7,002 |
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Total assets | $ | 153,215 |
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| $ | 232,672 |
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| $ | 385,887 |
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Liabilities and Equity |
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Current liabilities |
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Accounts payable | $ | 3,835 |
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| $ | — |
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| $ | 3,835 |
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Accrued expenses(1) |
| 25,029 |
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| (1,124 | ) |
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| 23,905 |
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Short-term operating lease liabilities |
| — |
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| 28,826 |
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| 28,826 |
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Accrued income taxes |
| 162 |
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|
| — |
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|
| 162 |
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Total current liabilities |
| 29,026 |
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| 27,702 |
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| 56,728 |
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Deferred rent and landlord allowances(1) |
| 22,905 |
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| (22,905 | ) |
|
| — |
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Long-term operating lease liabilities |
| — |
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|
| 228,406 |
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| 228,406 |
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Other long-term liabilities |
| 5,751 |
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|
| — |
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| 5,751 |
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Total liabilities |
| 57,682 |
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|
| 233,203 |
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| 290,885 |
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Stockholders’ equity |
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Common stock, $0.01 par value—authorized 200,000,000 shares; outstanding 24,142,586 shares as of December 30, 2018 |
| 330 |
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|
| — |
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| 330 |
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Additional paid-in-capital |
| 432,771 |
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|
| — |
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| 432,771 |
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Treasury stock, held at cost, 8,801,154 shares as of December 30, 2018 |
| (108,372 | ) |
|
| — |
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|
| (108,372 | ) |
Accumulated deficit(2) |
| (229,558 | ) |
|
| (531 | ) |
|
| (230,089 | ) |
Total stockholders’ equity |
| 95,171 |
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|
| (531 | ) |
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| 94,640 |
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Non-controlling interest |
| 362 |
|
|
| — |
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|
| 362 |
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Total stockholders' equity |
| 95,533 |
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|
| (531 | ) |
|
| 95,002 |
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Total liabilities and equity | $ | 153,215 |
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| $ | 232,672 |
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| $ | 385,887 |
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(1) | Adjustment to reclassify deferred rent and tenant improvement allowance to right-of-use assets for operating leases upon the adoption of Topic 842. |
(2) | The Company recorded a net reduction of $0.5 million to opening accumulated deficit as of December 31, 2018, due to the cumulative impact of adopting Topic 842. |
(2) Revenue
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 time of the customer’s purchase. The Company also receives royalties from franchisees on their respective sales, which are recognized at the point in time the sale is made and invoiced weekly. Potbelly also records revenue from sales over time related to upfront franchise fees, gift card redemptions and breakage. For the 3913 and 26 weeks ended SeptemberJune 30, 2019, revenue recognized from all revenue sources on point in time sales was $105.5 million and $203.3 million, respectively, and revenue recognized from sales over time was $0.1 million and $0.4 million, respectively. For the 13 and 26 weeks ended July 1, 2018, revenue recognized from all revenue sources on point in time sales was $319.8$110.2 million and $212.9 million, respectively, and revenue recognized from sales over time was $0.5 million.$0.2 million and $0.4 million, respectively.
Franchise Revenue
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 unearned portion of the upfront franchise payments.
Gift Card Redemptions / Breakage Revenue
Potbelly sells gift cards to customers, records the sale as a contract liability and recognizes the associated revenue as the gift card is redeemed. A portion of these gift cards are not redeemed by the customer, 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 upfront franchise fees as well asand gift cards. There are no other contract liabilities or contract assets recorded by the Company. The opening and closing balances of the Company’s current and noncurrent contract liabilities from contracts with customers were as follows:
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| Current Contract Liability |
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| Noncurrent Contract Liability |
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| (Thousands) |
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| (Thousands) |
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Beginning balance as of January 1, 2018 |
| $ | (2,325 | ) |
| $ | (2,144 | ) |
Ending balance as of September 30, 2018 |
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| (1,375 | ) |
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| (1,809 | ) |
Decrease in contract liability |
| $ | (950 | ) |
| $ | (335 | ) |
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| Current Contract Liability |
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| Noncurrent Contract Liability |
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| (Thousands) |
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| (Thousands) |
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Beginning balance as of December 31, 2018 |
| $ | (2,184 | ) |
| $ | (1,631 | ) |
Ending balance as of June 30, 2019 |
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| (1,687 | ) |
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| (1,960 | ) |
Increase (decrease) in contract liability |
| $ | (497 | ) |
| $ | 329 |
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The aggregate value of remaining performance obligations on outstanding contracts was $3.2$3.6 million as of SeptemberJune 30, 2018. The decrease in the liability during the 39 weeks ended September 30, 2018 was a result of gift card redemptions offset by purchases of new gift cards and recognition of franchise fees.2019. The 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:
Years Ending |
| Amount |
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| Amount |
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2018 |
| $ | 692 |
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2019 |
|
| 752 |
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| $ | 1,250 |
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2020 |
|
| 212 |
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| 288 |
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2021 |
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| 206 |
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| 246 |
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2022 |
|
| 199 |
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| 199 |
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2023 |
|
| 192 |
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Thereafter |
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| 1,123 |
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| 1,472 |
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Total revenue recognized |
| $ | 3,184 |
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| $ | 3,647 |
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For the 13 and 26 week39s ended June 30, 2019, the amount of revenue recognized related to the December 31, 2018 liability ending balance was $0.6 million and $1.5 million, respectively. For the 13 and 26 weeks ended September 30,July 1, 2018, the amount of revenue recognized related to the January 1, 2018 liability ending balance was $0.3$0.6 million and $1.8$1.6 million, respectively. This revenue related to the recognition of gift card redemptions and upfront franchise fees. For the 3926 weeks ended SeptemberJune 30, 2019 and the 26 weeks ended July 1, 2018, the Company did not recognize any revenue from obligations satisfied (or partially satisfied) in prior periods.
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 and lease right-of-use assets, on a quarterly basis or whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. Shop-level assets and right-of-use assets are grouped at the individual shop-level for the purpose of the impairment assessment. Recoverability of an asset group is measured by a comparison of the carrying amount of an asset group to its estimated undiscounted future cash flows expected to be generated by the asset.asset group. If the carrying amount of the asset group exceeds its estimated undiscounted future cash flows, an impairment charge is recognized as the amount by which the carrying amount of the asset group exceeds the fair value of the asset.asset group. The fair value of the shop assets wasis determined using the discounted future cash flow method of anticipated cash flows through the shop’s lease-end date using fair value measurement inputs classified as Level 3. The fair value of right-of-use assets is estimated using market comparative information for similar properties. Level 3 inputs are derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable. At transition of adoption to ASC 842, the Company impaired $0.7 million of pre-tax right-of-use assets related to previously impaired shops. This amount is recorded, net of tax, as an opening reduction to retained earnings. After performing a periodic review of the Company’s shops during the 13 weeks and 3926 weeks ended SeptemberJune 30, 2018,2019, 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 $4.4 million and $8.5$0.2 million for the 13 and 3926 weeks ended SeptemberJune 30, 2018, respectively.2019. The Company 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
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Assets recognized or disclosed at fair value on the impairment charge for the 13consolidated financial statements on a nonrecurring basis include items such as leasehold improvements, property and 39 weeks ended September 24, 2017, impairment charges of $0.7 million were recorded in relationequipment, operating lease assets, goodwill, and other intangible assets. These assets are measured at fair value if determined to Hurricane Harvey, with insurance recoveries of $0.7 million also recorded within the same caption.be impaired.
(4) Earnings (Loss)Loss Per Share
Basic and diluted income per common share attributable to common stockholders wereare 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. For the 13 and 3926 weeks ended SeptemberJune 30, 2019, and July 1, 2018, the Company had a loss per share, and therefore potentially dilutive shares were excluded for potential stock option exercises.from the calculation.
The following table summarizes the earnings (loss)loss per share calculation:
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| For the 13 Weeks Ended |
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| For the 39 Weeks Ended |
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| For the 13 Weeks Ended |
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| For the 26 Weeks Ended |
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| September 30, |
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| September 24, |
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| September 30, |
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| September 24, |
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| June 30, |
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| July 1, |
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| June 30, |
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| July 1, |
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| 2018 |
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| 2017 |
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| 2018 |
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| 2017 |
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| 2019 |
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| 2018 |
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| 2019 |
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| 2018 |
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Net income (loss) attributable to Potbelly Corporation |
| $ | (1,961 | ) |
| $ | (240 | ) |
| $ | (4,515 | ) |
| $ | 305 |
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Net loss attributable to Potbelly Corporation |
| $ | (1,866 | ) |
| $ | (360 | ) |
| $ | (20,305 | ) |
| $ | (2,554 | ) | ||||||||||||||||
Weighted average common shares outstanding-basic |
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| 25,369,281 |
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| 24,959,023 |
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| 25,355,174 |
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| 25,030,951 |
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| 23,908,095 |
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| 25,551,386 |
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| 24,020,567 |
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| 25,348,121 |
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Plus: Effect of potential stock options exercise |
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| — |
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| — |
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| — |
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| 770,965 |
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| — |
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| — |
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| — |
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| — |
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Plus: Effect of potential warrant exercise |
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| — |
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| — |
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| — |
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| 55,167 |
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Weighted average common shares outstanding-diluted |
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| 25,369,281 |
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| 24,959,023 |
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| 25,355,174 |
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|
| 25,857,083 |
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| 23,908,095 |
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| 25,551,386 |
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| 24,020,567 |
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| 25,348,121 |
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Income (loss) per share available to common stockholders-basic |
| $ | (0.08 | ) |
| $ | (0.01 | ) |
| $ | (0.18 | ) |
| $ | 0.01 |
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Income (loss) per share available to common stockholders-diluted |
| $ | (0.08 | ) |
| $ | (0.01 | ) |
| $ | (0.18 | ) |
| $ | 0.01 |
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Loss per share available to common stockholders-basic |
| $ | (0.08 | ) |
| $ | (0.01 | ) |
| $ | (0.85 | ) |
| $ | (0.10 | ) | ||||||||||||||||
Loss per share available to common stockholders-diluted |
| $ | (0.08 | ) |
| $ | (0.01 | ) |
| $ | (0.85 | ) |
| $ | (0.10 | ) | ||||||||||||||||
Potentially dilutive shares that are considered anti-dilutive: |
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Common share options |
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| 2,050,503 |
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| 4,012,073 |
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| 2,569,808 |
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| 1,151,317 |
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| 2,376,713 |
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| 2,557,475 |
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| 2,381,767 |
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| 2,829,461 |
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In accordance with ASC 740, eachOur interim periodtax provision is considered an integral part of the annual period and tax expense or benefit is measureddetermined using an estimated annual effective tax rate. An enterpriserate and adjusted for discrete taxable events that occur during the quarter. The difference between the effective tax rate in 2019 and 2018 is required,the recording of the valuation allowance in the first quarter of 2019.
The Company regularly assesses the need for a valuation allowance related to its deferred tax assets, which includes consideration of both positive and negative evidence related to the likelihood of realization of such deferred tax assets to determine, based on the weight of the available evidence, whether it is more-likely-than-not that some or all of its deferred tax assets will not be realized. In its assessment, the Company considered recent financial operating results, the change in projected future taxable income for fiscal year 2019, the reversal of existing taxable temporary differences, and tax planning strategies. As a result of the changes in projected taxable income for 2019, the Company estimates it will be in a cumulative loss position as of December 29, 2019. Therefore, the Company determined that the negative evidence outweighed the positive evidence and, therefore, recorded a full valuation allowance against its net deferred tax assets during the 13 weeks ended March 31, 2019. The Company recorded a non-cash charge to income tax expense of $13.6 million related to the recognition of the valuation allowance during the first quarter of 2019 and continues to record a valuation allowance against all of our deferred tax assets as of June 30, 2019. The Company did not provide for an income tax benefit on the pre-tax loss recorded for the three and six months ended June 30, 2019. This accounting treatment has no effect on the Company’s ability to utilize deferred tax assets to reduce future cash tax payments. The Company will continue to assess the likelihood of the realization of its deferred tax assets at the end of each interim reporting period to make its best estimate ofand the annual effective tax rate for the full fiscal year and use that rate to provide for income taxes on a current year-to-date basis. However, when a reliable estimate of the annual effective tax rate cannotvaluation allowance will be made, the actual effective tax rate for the year-to-date period may be the best estimate of the annual effective tax rate. For the 13 and 39 weeks ended September 30, 2018, the actual year-to-date effective tax rate was used to compute the income tax benefit as a reliable estimate of the annual estimated tax rate cannot be made as nominal changes in projected income or loss result in a significant variance in our estimated effective tax rate. The effective tax rate differed from the federal statutory rate primarily due to the impact of ASU 2016-09, state income taxes, federal and state tax credits and certain discrete items.adjusted accordingly.
On December 22, 2017, (6) Leases
We determine if a contract contains a lease at inception. The Company leases retail shops, warehouse and office space under operating leases. For leases with renewal periods at the Tax CutsCompany’s option, the Company determines the expected lease period based on whether the renewal of any options are reasonably assured at the inception of the lease.
Operating lease assets and Jobs Actliabilities are recognized at the lease commencement date. Operating lease liabilities represent the present value of 2017 (the “Tax Act”) was enacted into law making significant changeslease payments not yet paid. Operating lease assets represent our right to use an underlying asset and are based upon the operating lease liabilities adjusted for prepayments or accrued lease payments, initial direct costs, lease incentives, and impairment of operating lease assets. To determine the present value of lease payments not yet paid, we estimate incremental secured borrowing rates corresponding to the U.S. tax code, including: (1) reducing the U.S. federal corporate tax rate from 35 percent to 21 percent; (2) implementing bonus depreciation that will allow for full expensing of 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 tax effectsmaturities of the Tax Act. SAB 118 providesleases. As we have no outstanding debt nor committed credit facilities, secured or otherwise, we estimate this rate based on prevailing financial market conditions, comparable company and credit analysis, and management judgment.
We recognize expense for these leases on a measurement period that should not extend beyond one year fromstraight-line basis over the Tax Act enactment date for companieslease term. Additionally, tenant incentives used 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 September 30, 2018, the Company has not completed the accounting for the tax effects of enactment of the Tax Act; however, the Company made a reasonable estimate of the effectsfund leasehold improvements are recognized when earned and booked a provisional tax expense adjustment in the fiscal year 2017, the period in which the legislation was enacted. During the 13 and 39 weeks ended September 30, 2018, there have been no adjustments made to the provisional amounts previously recordedreduce our right-of-use asset related to the enactmentlease. These are amortized through the right-of-use asset as reductions of expense over the Tax Act.lease term.
Related to the adoption of Topic 842, our policy elections were as follows:
Separation of lease and non-lease components | We elected this expedient to account for lease and non-lease components as a single component for our entire population of operating lease assets. | |
Short-term policy | We have elected the short-term lease recognition exemption for all applicable classes of underlying assets. Short-term disclosures include only those leases with a term greater than one month and 12 months or less, and expense is recognized on a straight-line basis over the lease term. Leases with an initial term of 12 months or less, that do not include an option to purchase the underlying asset that we are reasonably certain to exercise, are not recorded on the balance sheet. |
Supplemental balance sheet information related to leases was as follows:
|
|
|
| June 30, |
| |
Operating Leases |
| Classification |
| 2019 |
| |
Right-of-use assets |
| Right-of-use assets for operating leases |
| $ | 216,540 |
|
Short-term lease liabilities |
| Short-term operating lease liabilities |
|
| 29,126 |
|
Long-term lease liabilities |
| Long-term operating lease liabilities |
|
| 210,898 |
|
Total lease liabilities |
|
|
|
| 240,024 |
|
(6)Operating lease term and discount rate were as follows:
June 30, | ||||
2019 | ||||
Weighted average remaining lease term (years) | 8.72 | |||
Weighted average discount rate | 8.03 | % |
Certain of the Company’s operating lease agreements include variable payments that are passed through by the landlord, such as common area maintenance and real estate taxes, as well as variable payments based on percentage rent for certain of our shops. Pass-through charges and payments based on percentage rent are included within variable lease cost.
The components of lease cost were as follows:
|
|
|
| 13 weeks ending |
|
| 26 weeks ending |
| ||
|
|
|
| June 30, |
|
| June 30, |
| ||
|
| Classification |
| 2019 |
|
| 2019 |
| ||
Operating lease cost |
| Occupancy and General and administrative expenses |
|
| 11,611 |
|
|
| 22,606 |
|
Variable lease cost |
| Occupancy |
|
| 3,649 |
|
|
| 7,153 |
|
Total lease cost |
|
|
| $ | 15,260 |
|
| $ | 29,759 |
|
Supplemental disclosures of cash flow information related to leases were as follows:
|
| 13 weeks ending |
|
| 26 weeks ending |
| ||
|
| June 30, |
|
| June 30, |
| ||
|
| 2019 |
|
| 2019 |
| ||
Operating cash flows rent paid for operating lease liabilities |
|
| 11,788 |
|
|
| 23,726 |
|
Operating right-of-use assets obtained in exchange for new operating lease liabilities |
|
| 2,735 |
|
|
| 3,657 |
|
Reduction in operating right-of-use assets due to lease terminations |
|
| (1,320 | ) |
|
| (5,847 | ) |
As of June 30, 2019, the Company has additional operating lease payments related to shops not yet open of $4.4 million. These operating leases will commence during the next fiscal year with an average lease term of 12 years.
Maturities of lease liabilities were as follows as of June 30, 2019:
|
| Operating Leases |
| |
Remainder of 2019 |
|
| 23,542 |
|
2020 |
|
| 45,919 |
|
2021 |
|
| 41,664 |
|
2022 |
|
| 36,359 |
|
2023 |
|
| 31,492 |
|
2024 |
|
| 28,775 |
|
Thereafter |
|
| 135,169 |
|
Total lease payments |
|
| 342,920 |
|
Less: imputed interest |
|
| (102,896 | ) |
Present value of lease liabilities |
| $ | 240,024 |
|
As previously disclosed in our 2018 Annual Report on Form 10-K and under the previous lease accounting, maturities of lease liabilities were as follows as of December 30, 2018:
|
| Operating Leases |
| |
2019 |
|
| 47,918 |
|
2020 |
|
| 45,828 |
|
2021 |
|
| 41,497 |
|
2022 |
|
| 36,120 |
|
2023 |
|
| 31,060 |
|
Thereafter |
|
| 138,928 |
|
Total minimum lease payments |
|
| 341,351 |
|
(7) Capital Stock
On May 8, 2018, the Company announced that its Board of Directors authorized a stock repurchase program for up to $65.0 million of its outstanding common stock, replacing the Company’s previous $30.0 million share repurchase program.stock. 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 and Exchange Act of 1934, as amended) or in privately negotiated transactions. The number of common shares actually repurchased, and the timing and price of repurchases, will depend upon market conditions, Securities and Exchange CommissionSEC 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 3913 weeks ended SeptemberJune 30, 2018,2019, the Company repurchased 959,240350,659 shares of its common stock for approximately $12.3$2.3 million under the new stock repurchase program, including cost and hadcommission, in open market transactions. For the 26 weeks ended June 30, 2019, the Company repurchased 5,000485,659 shares of its common stock for approximately $0.1$3.5 million under the previous sharestock repurchase program, including cost and commission, in open market transactions. 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. As a result, the total number of shares registered under the 2013 Long-Term Incentive Plan is 3,500,000.
(7)(8) Stock-Based Compensation
Stock options are awarded under
On May 16, 2019, the 2013Company’s stockholders approved the Potbelly Corporation 2019 Long-Term Incentive Plan to eligible employees (the “2019 Plan”) and, certain non-employee members ofin connection therewith, all equity awards made after that date were made under the Board of Directors.2019 Plan. On June 14, 2018,10, 2019, the Company registered an additional 1,000,0001,200,000 shares of its common stock reserved for issuance under the 2019 Plan. All remaining shares of common stock reserved for issuance under the previous Amended and Restated 2013 Long-Term Incentive Plan and brings the total number of shares registered(the “2013 Plan”) are available for issuance under the plan to 3,500,000.2019 Plan and no future awards will be made under the 2013 Plan. The fair value of stock options is determined using the Black-Scholes option pricing model. The weighted average fair value ofThere were no stock options granted during the 3913 weeks and 26 weeks ended SeptemberJune 30, 2018 was $5.24 per share, as estimated using the following weighted average assumptions: expected life of options – 6.25 years; volatility – 35.39%; risk-free interest rate – 2.85%; and dividend yield – 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.2019.
A summary of stock option activity for the 3926 weeks ended SeptemberJune 30, 20182019 is as follows:
Options |
| Shares (Thousands) |
|
| Weighted Average Exercise Price |
|
| Aggregate Intrinsic Value (Thousands) |
|
| Weighted Average Remaining Term (Years) |
|
| Shares (Thousands) |
|
| Weighted Average Exercise Price |
|
| Aggregate Intrinsic Value (Thousands) |
|
| Weighted Average Remaining Term (Years) |
| ||||||||
Outstanding—December 31, 2017 |
|
| 3,309 |
|
| $ | 10.71 |
|
| $ | 7,699 |
|
|
| 4.90 |
| ||||||||||||||||
Outstanding—December 30, 2018 |
|
| 2,150 |
|
| $ | 11.49 |
|
| $ | 378 |
|
|
| 5.13 |
| ||||||||||||||||
Granted |
|
| 102 |
|
|
| 13.05 |
|
|
|
|
|
|
|
|
|
|
| — |
|
|
| — |
|
|
|
|
|
|
|
|
|
Exercised |
|
| (984 | ) |
|
| 8.30 |
|
|
|
|
|
|
|
|
|
|
| (22 | ) |
|
| 7.93 |
|
|
|
|
|
|
|
|
|
Canceled |
|
| (347 | ) |
|
| 13.61 |
|
|
|
|
|
|
|
|
|
|
| (198 | ) |
|
| 13.54 |
|
|
|
|
|
|
|
|
|
Outstanding—September 30, 2018 |
|
| 2,080 |
|
| $ | 11.60 |
|
| $ | 3,615 |
|
|
| 5.60 |
| ||||||||||||||||
Exercisable—September 30, 2018 |
|
| 1,573 |
|
| $ | 11.04 |
|
| $ | 3,533 |
|
|
| 4.62 |
| ||||||||||||||||
Outstanding—June 30, 2019 |
|
| 1,930 |
|
| $ | 11.32 |
|
| $ | — |
|
|
| 5.04 |
| ||||||||||||||||
Exercisable—June 30, 2019 |
|
| 1,534 |
|
| $ | 11.05 |
|
| $ | — |
|
|
| 4.15 |
|
Stock-based compensation related to stock options is measured at the grant date based on the calculated fair value of the award, and is recognized as expense over the requisite employee service period, which is generally the vesting period of the grant with a corresponding increase to additional paid-in capital. For the 13 weeks and 3926 weeks ended SeptemberJune 30, 2019, the Company recognized stock-based compensation expense related to stock options of $0.3 million and $0.6 million, respectively. For the 13 weeks and 26 weeks ended July 1, 2018, the Company recognized stock-based compensation expense related to stock options of $0.2$0.3 million and $2.5$1.0 million, respectively. For the 13 weeks ended September 24, 2017, the Company recognized stock-based compensation expense of $1.4 million. For the 39 weeks ended September 24, 2017, the Company recognized stock-based compensation expense of $3.3 million. As of SeptemberJune 30, 2018,2019, unrecognized stock-based compensation expense for stock options was $2.8$1.4 million, which will be recognized through fiscal year 2022. The Company records stock-based compensation expense within general and administrative expenses in the condensed consolidated statements of operations.
The Company awards restricted stock units (“RSUs”) to certain employees of the Company and certain non-employee members of its Board of Directors. 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 employee grants vest in one-third increments over a three-year period. For the 13 weeks and 26 weeks ended June 30, 2019, the Company recognized stock-based compensation expense related to RSUs of $0.7 million and $0.9 million, respectively. For the 13 weeks and 26 weeks ended July 1, 2018, the Company recognized stock-based compensation expense related to RSUs of $1.1 million and $1.3 million, respectively. As of June 30, 2019, unrecognized stock-based compensation expense for RSUs was $2.1 million, which will be recognized though fiscal year 2022.
A summary of RSU activity for the 26 weeks ended June 30, 2019 is as follows:
RSUs |
| Number of RSUs |
|
| Weighted Average Fair Value per Share |
| ||
Non-vested as of December 30, 2018 |
|
| 247 |
|
| $ | 11.99 |
|
Granted |
|
| 306 |
|
|
| 7.02 |
|
Vested |
|
| (93 | ) |
|
| 6.13 |
|
Canceled |
|
| (13 | ) |
|
| 8.46 |
|
Non-vested as of June 30, 2019 |
|
| 447 |
|
| $ | 8.68 |
|
(8)Performance stock units
The Company awards performance share units (“PSUs”) to eligible employees; the PSUs are subject to service and performance vesting conditions. In March of 2019 the Company issued 188,414 PSUs with a grant date fair value of $8.46 per share. The PSUs will vest based on the Company’s achievement of certain targets related to adjusted EBITDA and same store sales goals. The PSUs will vest fully on the third anniversary of the grant date. The quantity of shares that will vest ranges from 0% to 200% of the targeted number of shares. If the defined minimum targets are not met, then no shares will vest. For the 13 weeks and 26 weeks ended June 30, 2019, the expense associated with the PSUs was not material.
(9) Commitments and Contingencies
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 October 2017, plaintiffs filed a purported collective and class action lawsuit (the “Complaint”) in the United States District Court for the Southern District of New York against the Company alleging violations of 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 our assistant managers and violated NYLL by not paying spread-of-hours pay. Potbelly believesThe Complaint was brought as a nationwide “collective action” under the assistant managers were properly classifiedFLSA and as a “class action” under state and federal law. The Company intends to vigorously defend this action. This case is at an early stage, and Potbelly is therefore unable to make a reasonable estimateNYLL. Since the filing of the probable loss or rangeComplaint, the plaintiffs filed a proposed amended complaint removing the NYLL class claim, but adding a proposed Illinois state law class action. In May 2019, the parties participated in a mediation and resolved the claims, subject to court approval. All charges related to the claims are reflected in the statement of losses, if any, that might arise from this matter.operations.
(10) Subsequent Event
On August 7, 2019, the Company entered into a second amended and restated revolving credit facility agreement (the "Credit Agreement") with JPMorgan Chase Bank, N.A. that expires in July 2022. The Credit Agreement amended and restated that certain amended and restated revolving credit facility agreement, dated as of December 9, 2015, and amended on May 3, 2019 (collectively, the "Prior Credit Agreement") with JPMorgan Chase Bank, N.A. The Credit Agreement provides, among other things, for a revolving credit facility in a maximum principal amount $40 million, with possible future increases of up to $20 million under an expansion feature. Borrowings under the credit facility generally bear interest at the Company’s option at either (i) a eurocurrency rate determined by reference to the applicable LIBOR rate plus a margin ranging from 1.25% 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 the Company’s consolidated total leverage ratio. On the last day of each calendar quarter, the Company is required to pay a commitment fee of 0.20% per annum in respect of any unused commitments under the credit facility. So long as certain total leverage ratios, EBITDA thresholds and minimum liquidity requirements are met and no default or event of default has occurred or would result, there is no limit on the “restricted payments” (primarily distributions and equity repurchases) that the Company may make, provided that proceeds of the loans under the credit agreement may not be used for purposes of making restricted payments.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
The following discussion of our financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q and with our audited consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017.30, 2018. This discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the Private Securities Litigation Reform Act of 1995, and involves numerous risks and uncertainties. Forward-looking statements may include, among others, statements relating to: our future financial position and results of operations, business strategy, budgets, projectedestimated costs associated with our closure of underperforming shops, and plansthe implementation and objectivesresults of management for future operations.strategic initiatives. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts and generally contain words such as “believes,” “expects,” “may,” “will,” “should,” “seeks,” “intends,” “plans,” “strives,” “goal,” “estimates,” “forecasts,” “projects” or “anticipates” and the negative of these terms or similar expressions. Our forward-looking statements are subject to risks and uncertainties, which may cause actual results to differ materially from those projected or implied by the forward-looking statement, due to reasons including, but not limited to, competition; general economic conditions; our ability to manage our growth and successfully implement our business strategy; pricethe success of our initiatives to increase sales and availability of commodities;traffic; changes in laborcommodity, energy and other costs; consumer confidenceour ability to attract and spending patterns;retain management and employees; consumer reaction to industry-related public health issues and perceptions of food safety; our ability to manage our growth; reputational and brand issues; price and availability of commodities; consumer confidence and spending patterns; and weather conditions. Forward-looking statements are based on current expectations and assumptions and currently available data and are neither predictions nor guarantees of future events or performance. You should not place undue reliance on forward-looking statements, which speak only as of the date hereof. See “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements” included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017,30, 2018, 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.
Overview
Potbelly Corporation (the “Company” or “Potbelly”) is a neighborhood sandwich concept that has been feeding customers’ smiles with warm, toasty sandwiches, signature salads, hand-dipped shakes and other fresh menu items, customized just the way customers want them, for more than 40 years. Potbelly promises Fresh, Fast & Friendly service in an environment that reflects the local neighborhood. 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.
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 forto create an experience people love to share thanks to our customers to feel that we are their “Neighborhood Sandwich Shop”craveable food, quirky personality and to tell others about their great experience.amazing people. Our Mission is to makehelp people really happy, to make more money and to improve every day. Our Passion is to be “The Best Place for Lunch.”love lunch again. 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 25, 2016 |
|
| 411 |
|
|
| 30 |
|
|
| 13 |
|
|
| 43 |
|
|
| 454 |
| ||||||||||||||||||||
Shops opened |
|
| 22 |
|
|
| 10 |
|
|
| 3 |
|
|
| 13 |
|
|
| 35 |
| ||||||||||||||||||||
Shops closed |
|
| (7 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (7 | ) | ||||||||||||||||||||
Shops as of September 24, 2017 |
|
| 426 |
|
|
| 40 |
|
|
| 16 |
|
|
| 56 |
|
|
| 482 |
| ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Operated |
|
| Domestic |
|
| International |
|
| Total |
|
| Company |
| |||||
Shops as of December 31, 2017 |
|
| 437 |
|
|
| 39 |
|
|
| 16 |
|
|
| 55 |
|
|
| 492 |
|
|
| 437 |
|
|
| 39 |
|
|
| 16 |
|
|
| 55 |
|
|
| 492 |
|
Shops opened |
|
| 6 |
|
|
| 2 |
|
|
| 2 |
|
|
| 4 |
|
|
| 10 |
|
|
| 5 |
|
|
| 2 |
|
|
| 2 |
|
|
| 4 |
|
|
| 9 |
|
Shops closed |
|
| (8 | ) |
|
| (2 | ) |
|
| (4 | ) |
|
| (6 | ) |
|
| (14 | ) |
|
| (6 | ) |
|
| — |
|
|
| (1 | ) |
|
| (1 | ) |
|
| (7 | ) |
Shops as of September 30, 2018 |
|
| 435 |
|
|
| 39 |
|
|
| 14 |
|
|
| 53 |
|
|
| 488 |
| ||||||||||||||||||||
Shops as of July 1, 2018 |
|
| 436 |
|
|
| 41 |
|
|
| 17 |
|
|
| 58 |
|
|
| 494 |
| ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
Shops as of December 30, 2018 |
|
| 437 |
|
|
| 41 |
|
|
| 8 |
|
|
| 49 |
|
|
| 486 |
| ||||||||||||||||||||
Shops opened |
|
| 1 |
|
|
| 5 |
|
|
| — |
|
|
| 5 |
|
|
| 6 |
| ||||||||||||||||||||
Shops closed |
|
| (9 | ) |
|
| (2 | ) |
|
| (7 | ) |
|
| (9 | ) |
|
| (18 | ) | ||||||||||||||||||||
Shops as of June 30, 2019 |
|
| 429 |
|
|
| 44 |
|
|
| 1 |
|
|
| 45 |
|
|
| 474 |
|
13 Weeks Ended SeptemberJune 30, 20182019 Compared to 13 Weeks Ended September 24, 2017July 1, 2018
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 30, 2018 |
|
| % of Revenues |
|
| September 24, 2017 |
|
| % of Revenues |
|
| Increase (Decrease) |
|
| Percent Change |
|
| June 30, 2019 |
|
| % of Revenues |
|
| July 1, 2018 |
|
| % of Revenues |
|
| Increase (Decrease) |
|
| Percent Change |
| ||||||||||||
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sandwich shop sales, net |
| $ | 106,238 |
|
|
| 99.3 | % |
| $ | 105,327 |
|
|
| 99.2 | % |
| $ | 911 |
|
|
| 0.9 | % |
| $ | 104,801 |
|
|
| 99.2 | % |
| $ | 109,381 |
|
|
| 99.1 | % |
| $ | (4,580 | ) |
|
| (4.2 | )% |
Franchise royalties and fees |
|
| 758 |
|
|
| 0.7 |
|
|
| 800 |
|
|
| 0.8 |
|
|
| (42 | ) |
|
| (5.3 | ) |
|
| 829 |
|
|
| 0.8 |
|
|
| 966 |
|
|
| 0.9 |
|
|
| (137 | ) |
|
| (14.2 | ) |
Total revenues |
|
| 106,996 |
|
|
| 100.0 |
|
|
| 106,127 |
|
|
| 100.0 |
|
|
| 869 |
|
|
| 0.8 |
|
|
| 105,630 |
|
|
| 100.0 |
|
|
| 110,347 |
|
|
| 100.0 |
|
|
| (4,717 | ) |
|
| (4.3 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sandwich shop operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold, excluding depreciation |
|
| 28,455 |
|
|
| 26.6 |
|
|
| 28,405 |
|
|
| 26.8 |
|
|
| 50 |
|
|
| 0.2 |
|
|
| 28,264 |
|
|
| 26.8 |
|
|
| 28,639 |
|
|
| 26.0 |
|
|
| (375 | ) |
|
| (1.3 | ) |
Labor and related expenses |
|
| 32,376 |
|
|
| 30.3 |
|
|
| 31,187 |
|
|
| 29.4 |
|
|
| 1,189 |
|
|
| 3.8 |
|
|
| 32,114 |
|
|
| 30.4 |
|
|
| 32,412 |
|
|
| 29.4 |
|
|
| (298 | ) |
|
| (0.9 | ) |
Occupancy expenses |
|
| 15,076 |
|
|
| 14.1 |
|
|
| 14,354 |
|
|
| 13.5 |
|
|
| 722 |
|
|
| 5.0 |
|
|
| 15,230 |
|
|
| 14.4 |
|
|
| 14,985 |
|
|
| 13.6 |
|
|
| 245 |
|
|
| 1.6 |
|
Other operating expenses |
|
| 13,357 |
|
|
| 12.5 |
|
|
| 12,464 |
|
|
| 11.7 |
|
|
| 893 |
|
|
| 7.2 |
|
|
| 11,816 |
|
|
| 11.2 |
|
|
| 12,793 |
|
|
| 11.6 |
|
|
| (977 | ) |
|
| (7.6 | ) |
General and administrative expenses |
|
| 10,087 |
|
|
| 9.4 |
|
|
| 12,104 |
|
|
| 11.4 |
|
|
| (2,017 | ) |
|
| (16.7 | ) |
|
| 13,843 |
|
|
| 13.1 |
|
|
| 13,440 |
|
|
| 12.2 |
|
|
| 403 |
|
|
| 3.0 |
|
Depreciation expense |
|
| 5,847 |
|
|
| 5.5 |
|
|
| 6,315 |
|
|
| 6.0 |
|
|
| (468 | ) |
|
| (7.4 | ) |
|
| 5,585 |
|
|
| 5.3 |
|
|
| 5,858 |
|
|
| 5.3 |
|
|
| (273 | ) |
|
| (4.7 | ) |
Pre-opening costs |
|
| 109 |
|
|
| 0.1 |
|
|
| 336 |
|
|
| 0.3 |
|
|
| (227 | ) |
|
| (67.6 | ) |
|
| — |
|
| * |
|
|
| 68 |
|
| * |
|
|
| (68 | ) |
|
| (100.0 | ) | ||
Impairment and loss on disposal of property and equipment |
|
| 4,386 |
|
|
| 4.1 |
|
|
| 1,536 |
|
|
| 1.4 |
|
|
| 2,850 |
|
| >100 |
|
|
| 246 |
|
|
| 0.2 |
|
|
| 2,057 |
|
|
| 1.9 |
|
|
| (1,811 | ) |
|
| (88.0 | ) | |
Total expenses |
|
| 109,693 |
|
|
| 102.5 |
|
|
| 106,701 |
|
|
| 100.5 |
|
|
| 2,992 |
|
|
| 2.8 |
|
|
| 107,098 |
|
| >100 |
|
|
| 110,252 |
|
|
| 99.9 |
|
|
| (3,154 | ) |
|
| (2.9 | ) | |
Loss from operations |
|
| (2,697 | ) |
|
| (2.5 | ) |
|
| (574 | ) |
|
| (0.5 | ) |
|
| (2,123 | ) |
| >100 |
| |||||||||||||||||||||||||
Income (loss) from operations |
|
| (1,468 | ) |
|
| (1.4 | ) |
|
| 95 |
|
| * |
|
|
| (1,563 | ) |
| >(100) |
| ||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
| 54 |
|
|
| 0.1 |
|
|
| 32 |
|
| * |
|
|
| 22 |
|
|
| 68.8 |
|
|
| 35 |
|
| * |
|
|
| 28 |
|
| * |
|
|
| 7 |
|
|
| 25.0 |
| |||
Loss before income taxes |
|
| (2,751 | ) |
|
| (2.6 | ) |
|
| (606 | ) |
|
| (0.6 | ) |
|
| (2,145 | ) |
| >100 |
| |||||||||||||||||||||||||
Income tax benefit |
|
| (909 | ) |
|
| (0.8 | ) |
|
| (487 | ) |
|
| (0.5 | ) |
|
| (422 | ) |
|
| 86.7 |
| ||||||||||||||||||||||||
Income (loss) before income taxes |
|
| (1,503 | ) |
|
| (1.4 | ) |
|
| 67 |
|
| * |
|
|
| (1,570 | ) |
| >(100) |
| ||||||||||||||||||||||||||
Income tax benefit (expense) |
|
| 246 |
|
|
| 0.2 |
|
|
| 302 |
|
|
| 0.3 |
|
|
| (56 | ) |
|
| (18.5 | ) | ||||||||||||||||||||||||
Net loss |
|
| (1,842 | ) |
|
| (1.7 | ) |
|
| (119 | ) |
|
| (0.1 | ) |
|
| (1,723 | ) |
| >100 |
|
|
| (1,749 | ) |
|
| (1.7 | ) |
|
| (235 | ) |
|
| (0.2 | ) |
|
| (1,514 | ) |
| >100 |
| ||
Net income attributable to non-controlling interest |
|
| 119 |
|
|
| 0.1 |
|
|
| 121 |
|
|
| 0.1 |
|
|
| (2 | ) |
|
| (1.7 | ) |
|
| 117 |
|
|
| 0.1 |
|
|
| 125 |
|
|
| 0.1 |
|
|
| (8 | ) |
|
| (6.4 | ) |
Net loss attributable to Potbelly Corporation |
| $ | (1,961 | ) |
|
| (1.8 | )% |
| $ | (240 | ) |
|
| (0.2 | )% |
| $ | (1,721 | ) |
| >100% |
|
| $ | (1,866 | ) |
|
| (1.8 | )% |
| $ | (360 | ) |
|
| (0.3 | )% |
| $ | (1,506 | ) |
| >100% |
|
* | Amount is less than 0.1% |
Revenues
Total revenues increaseddecreased by $0.9$4.7 million, or 0.8%4.3%, to 107.0$105.6 million during the 13 weeks ended SeptemberJune 30, 2018,2019, from $106.1$110.3 million during the 13 weeks ended September 24, 2017.July 1, 2018. The revenue growthdecrease was driven by a $4.3 million, or 4.0%, decrease in sales from company-operated comparable store shops and a decrease in sales of $2.0 million from shops that have closed. These decreases were partially offset by an increase in sales of $3.0 million from shops not yet in our company-operated comparable store sales base. These increases were partially offset by a decrease in sales of $0.2 million, or 0.2%, from company-operated comparable storesbase and a decrease in sales of $1.9 million from shops that have closed. The decreaseopened in company-operated comparable store sales resulted from a decrease in traffic, partially offset by an increase in average transaction size.2019.
Cost of Goods Sold
Cost of goods sold increaseddecreased by $50 thousand,$0.4 million, or 0.2%1.3%, to $28.5$28.3 million during the 13 weeks ended SeptemberJune 30, 2018,2019, from $28.4$28.6 million during the 13 weeks ended September 24, 2017.July 1, 2018. This decrease was primarily driven by a decrease in shop revenue. As a percentage of revenues, cost of goods sold decreasedincreased to 26.6% during the 13 weeks ended September 30, 2018, from 26.8% during the 13 weeks ended September 24 2017,June 30, 2019, from 26.0% during the 13 weeks ended July 1, 2018, primarily driven by higher discounting and cost inflation in certain products, partially offset by certain menu price increases.
Labor and related expenses increaseddecreased by $1.2$0.3 million, or 3.8%0.9%, to $32.1 million during the 13 weeks ended June 30, 2019, from $32.4 million during the 13 weeks ended September 30,July 1, 2018, from $31.2 million during the 13 weeks ended September 24, 2017, primarily due to new shop openings and inflationary wage increases in certain states, which was partially offset by a decrease in expense from closed shops.shops and labor management, partially offset by inflationary wage increases in certain states. As a percentage of revenues, labor and related expenses increased to 30.3%30.4% during the 13 weeks ended SeptemberJune 30, 2018,2019, from 29.4% during the 13 weeks ended September 24, 2017,July 1, 2018, primarily driven by new shop openings and inflationary wage increases in certain states and sales deleverage in certain labor related costs, which was partially offset by a decrease in expense from closed shops.
Occupancy Expenses
Occupancy expenses increased by $0.7$0.2 million, or 5.0%1.6%, to $15.1$15.2 million during the 13 weeks ended SeptemberJune 30, 2018,2019, from $14.4$15.0 million during the 13 weeks ended September 24, 2017July 1, 2018 primarily due to inflation in certain occupancy related costs, including lease renewals, real estate taxes and common area maintenance. These increases weremaintenance, partially offset by a decrease in occupancy expenses related to closed shops.shop closures. As a percentage of revenues, occupancy expenses increased to 14.1%14.4% during the 13 weeks ended SeptemberJune 30, 2018,2019, from 13.5%13.6% during the 13 weeks ended September 24, 2017,July 1, 2018, 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
Other operating expenses increaseddecreased by $0.9$1.0 million, or 7.2%7.6%, to $13.4$11.8 million during the 13 weeks ended SeptemberJune 30, 2018,2019, from $12.5$12.8 million during the 13 weeks ended September 24, 2017.July 1, 2018. The increasedecrease was primarily attributable to items such as repairs, credit card fees,a decrease in music, utilities, and other expenses not directly variable with sales.supplies, partially offset by an increase in delivery and third-party sales expense. As a percentage of revenues, other operating expenses increaseddecreased slightly to 12.5%11.2% during the 13 weeks ended SeptemberJune 30, 2018,2019, from 11.7%11.6% during the 13 weeks ended September 24, 2017,July 1, 2018, primarily driven by sales deleverage in operating expense items such as repairs, credit card fees, utilities and other expenses not directly variable with sales.
General and Administrative Expenses
General and administrative expenses decreasedincreased by $2.0$0.4 million, or 16.7%3.0%, to $10.1$13.8 million during the 13 weeks ended SeptemberJune 30, 2018,2019, from $12.1$13.4 million during the 13 weeks ended September 24, 2017.July 1, 2018. The decreaseincrease was driven primarily by an increase in advertising, professional services, and lease exit costs, partially offset by a decrease in restructuring costs, stock-based compensation expense and performance-based incentive expenses. As a percentage of revenues, general and administrative expenses decreasedincreased to 9.4%13.1% during the 13 weeks ended SeptemberJune 30, 2018,2019, from 11.4%12.2% during the 13 weeks ended September 24, 2017,July 1, 2018, primarily due to an increase in advertising, professional services and lease exit costs, partially offset by a decrease in restructuring costs, stock-based compensation expense and performance-based incentive expenses.
Depreciation Expense
Depreciation expense decreased by $0.5$0.3 million, or 7.4%4.7%, to $5.8$5.6 million during the 13 weeks ended SeptemberJune 30, 2018,2019, from $6.3$5.9 million during the 13 weeks ended September 24, 2017.July 1, 2018. The decrease was driven primarily by a lower depreciable base related to impairment charges taken subsequent to the 13 weeks ended September 24, 2017,July 1, 2018, as well as lower depreciation associated with longer expected useful lives for leasehold improvements at new shops and leasehold improvements at legacy shops with shorter expected useful lives being fully depreciated. These decreases were partially offset by existing shop capital investments and investments in technology such as the mobile application, which increased the depreciable base. As a percentage of revenues, depreciation was 5.3% during the 13 weeks ended June 30, 2019, and the 13 weeks ended July 1, 2018.
Pre-Opening Costs
Pre-opening costs were $0 during the 13 weeks ended June 30, 2019 and $68 thousand during the 13 weeks ended July 1, 2018. The decrease was due to no new company-operated shop openings in the second quarter of 2019.
Impairment and Loss on Disposal of Property and Equipment and Right-of-Use Lease Assets
Impairment and loss on disposal of property and equipment and right-of-use lease assets decreased to $0.2 million during the 13 weeks ended June 30, 2019, from $2.1 million during the 13 weeks ended July 1, 2018. After performing periodic reviews of Company shops during the second quarter of 2019, it was determined that indicators of impairment were present for certain shops. The Company performed impairment analyses related to these shops and recorded an impairment charge of $0.2 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 $35 thousand during the 13 weeks ended June 30, 2019 and $28 thousand during the 13 weeks ended July 1, 2018.
Income Tax Expense
Income tax expense was $0.2 million for the 13 weeks ended June 30, 2019, compared to expense of $0.3 million for the 13 weeks ended July 1, 2018.
26 Weeks Ended June 30, 2019 Compared to 26 Weeks Ended July 1, 2018
The following table presents information comparing the components of net income for the periods indicated (dollars in thousands):
|
| For the 26 Weeks Ended |
|
|
|
|
|
|
|
|
| |||||||||||||
|
| June 30, 2019 |
|
| % of Revenues |
|
| July 1, 2018 |
|
| % of Revenues |
|
| Increase (Decrease) |
|
| Percent Change |
| ||||||
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sandwich shop sales, net |
| $ | 202,059 |
|
|
| 99.2 | % |
| $ | 211,628 |
|
|
| 99.2 | % |
| $ | (9,569 | ) |
|
| (4.5 | )% |
Franchise royalties and fees |
|
| 1,658 |
|
|
| 0.8 |
|
|
| 1,636 |
|
|
| 0.8 |
|
|
| 22 |
|
|
| 1.3 | % |
Total revenues |
|
| 203,717 |
|
|
| 100.0 |
|
|
| 213,264 |
|
|
| 100.0 |
|
|
| (9,547 | ) |
|
| (4.5 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sandwich shop operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold, excluding depreciation |
|
| 54,242 |
|
|
| 26.6 |
|
|
| 55,275 |
|
|
| 25.9 |
|
|
| (1,033 | ) |
|
| (1.9 | ) |
Labor and related expenses |
|
| 64,087 |
|
|
| 31.5 |
|
|
| 63,991 |
|
|
| 30.0 |
|
|
| 96 |
|
|
| 0.2 |
|
Occupancy expenses |
|
| 29,607 |
|
|
| 14.5 |
|
|
| 29,711 |
|
|
| 13.9 |
|
|
| (104 | ) |
|
| (0.4 | ) |
Other operating expenses |
|
| 23,961 |
|
|
| 11.8 |
|
|
| 25,293 |
|
|
| 11.9 |
|
|
| (1,332 | ) |
|
| (5.3 | ) |
General and administrative expenses |
|
| 26,552 |
|
|
| 13.0 |
|
|
| 25,628 |
|
|
| 12.0 |
|
|
| 924 |
|
|
| 3.6 |
|
Depreciation expense |
|
| 11,121 |
|
|
| 5.5 |
|
|
| 11,684 |
|
|
| 5.5 |
|
|
| (563 | ) |
|
| (4.8 | ) |
Pre-opening costs |
|
| 10 |
|
| * |
|
|
| 136 |
|
| * |
|
|
| (126 | ) |
|
| (92.6 | ) | ||
Impairment and loss on disposal of property and equipment |
|
| 328 |
|
|
| 0.2 |
|
|
| 4,081 |
|
|
| 1.9 |
|
|
| (3,753 | ) |
|
| (92.0 | ) |
Total expenses |
|
| 209,908 |
|
| >100 |
|
|
| 215,799 |
|
| >100 |
|
|
| (5,891 | ) |
|
| (2.7 | ) | ||
Income (loss) from operations |
|
| (6,191 | ) |
|
| (3.0 | ) |
|
| (2,535 | ) |
|
| (1.2 | ) |
|
| (3,656 | ) |
| >100 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
| 67 |
|
| * |
|
|
| 55 |
|
| * |
|
|
| 12 |
|
|
| 21.8 |
| ||
Income (loss) before income taxes |
|
| (6,258 | ) |
|
| (3.1 | ) |
|
| (2,590 | ) |
|
| (1.2 | ) |
|
| (3,668 | ) |
| >100 |
| |
Income tax expense (benefit) |
|
| 13,865 |
|
|
| 6.8 |
|
|
| (202 | ) |
| * |
|
|
| 14,067 |
|
| >(100) |
| ||
Net income (loss) |
|
| (20,123 | ) |
|
| (9.9 | ) |
|
| (2,388 | ) |
|
| (1.1 | ) |
|
| (17,735 | ) |
| >100 |
| |
Net income attributable to non- controlling interests |
|
| 182 |
|
| * |
|
|
| 166 |
|
| * |
|
|
| 16 |
|
|
| 9.6 |
| ||
Net income (loss) attributable to Potbelly Corporation |
| $ | (20,305 | ) |
|
| (10.0 | )% |
| $ | (2,554 | ) |
|
| (1.2 | )% |
| $ | (17,751 | ) |
| >100 |
|
* | Amount is less than 0.1% |
Revenues
Total revenues decreased by $9.5 million, or 4.5%, to $203.7 million during the 26 weeks ended June 30, 2019, from $213.3 million during the 26 weeks ended July 1, 2018. The revenue decrease was driven by a $9.0 million, or 4.4%, decrease in sales from company-operated comparable store shops and a decrease in sales of $3.9 million from shops that have closed. These decreases were partially offset by an increase in sales from shops not yet in our company-operated comparable store sales base and shops that opened in 2019.
Cost of goods sold decreased by $1.0 million, or 1.9%, to $54.2 million during the 26 weeks ended June 30, 2019, from $55.3 million during the 26 weeks ended July 1, 2018. This decrease was primarily driven by a decrease in shop revenue. As a percentage of revenues, cost of goods sold increased to 26.6% during the 26 weeks ended June 30, 2019, from 25.9% during the 26 weeks ended July 1, 2018, primarily driven by higher discounting and cost inflation in certain products, partially offset by certain menu price increases.
Labor and Related Expenses
Labor and related expenses increased by $0.1 million, or 0.2%, to $64.1 million during the 26 weeks ended June 30, 2019, from $64.0 million during the 26 weeks ended July 1, 2018. As a percentage of revenues, labor and related expenses increased to 31.5% during the 26 weeks ended June 30, 2019, from 30.0% during the 26 weeks ended July 1, 2018. These increases were primarily driven by inflationary wage increases in certain states and sales deleverage in certain labor related costs, which was partially offset by a decrease in expense from closed shops and labor management.
Occupancy Expenses
Occupancy expenses decreased by $0.1 million, or 0.4%, to $29.6 million during the 26 weeks ended June 30, 2019, from $29.7 million during the 26 weeks ended July 1, 2018, primarily due to a decrease in occupancy expenses related to closed shops. This decrease was partially offset by 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 14.5% during the 26 weeks ended June 30, 2019, from 13.9% during the 26 weeks ended July 1, 2018, 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
Other operating expenses decreased by $1.3 million, or 5.3%, to $24.0 million during the 26 weeks ended June 30, 2019, from $25.3 million during the 26 weeks ended July 1, 2018. The decrease was primarily attributable to items such as music, supplies, utilities and certain other expenses. As a percentage of revenues, other operating expenses decreased to 11.8% during the 26 weeks ended June 30, 2019, from 11.9% during the 26 weeks ended July 1, 2018. This slight decrease was primarily driven by music, supplies, utilities and other expenses not directly variable with sales.
General and Administrative Expenses
General and administrative expenses increased by $0.9 million, or 3.6%, to $26.6 million during the 26 weeks ended June 30, 2019, from $25.6 million during the 26 weeks ended July 1, 2018. As a percentage of revenues, general and administrative expenses increased to 13.0% during the 26 weeks ended June 30, 2019, from 12.0% during the 26 weeks ended July 1, 2018. These increases was driven primarily by an increase in advertising, professional services, and lease exit costs, partially offset by a decrease in restructuring costs, stock-based compensation expense and performance-based incentive expenses.
Depreciation Expense
Depreciation expense decreased by $0.6 million, or 4.8%, to $11.1 million during the 26 weeks ended June 30, 2019, from $11.7 million during the 26 weeks ended July 1, 2018, driven primarily by a lower depreciable base related to impairment charges taken subsequent to the 26 weeks ended July 1, 2018, as well as lower depreciation associated 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 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 towas 5.5% during the 1326 weeks ended SeptemberJune 30, 2018, from 6.0% during2019, and the 1326 weeks ended September 24, 2017. This decrease was driven by a lower depreciable base related to impairment charges taken subsequent to the 13 weeks ended September 24, 2017, as well as lower depreciation associated with longer expected useful lives for leasehold improvements and leasehold improvements at legacy shops with shorter expected useful lives being fully depreciated.July 1, 2018.
Pre-Opening Costs
Pre-opening costs decreased by $0.2$0.1 million, or 67.6%92.6%, to $10 thousand during the 26 weeks ended June 30, 2019, from $0.1 million during the 1326 weeks ended September 30, 2018, from $0.3 million during the 13 weeks ended September 24, 2017. As a percentage of revenues, pre-opening costs decreased to 0.1% during the 13 weeks ended September 24, 2018, from 0.3% during the 13 weeks ended September 24, 2017. These decreases wereJuly 1, 2018. The decrease was driven primarily by fewer shops opened during the 1326 weeks ended SeptemberJune 30, 20182019 compared to the 1326 weeks ended September 24, 2017.July 1, 2018.
Impairment and Loss on Disposal of Property and Equipment
Impairment and loss on disposal of property and equipment increaseddecreased to $4.4$0.3 million during the 1326 weeks ended SeptemberJune 30, 2018, from $1.52019, compared to $4.1 million during the 1326 weeks ended September 24, 2017. After performing periodic reviews of Company shops during the third 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 $4.4 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 involve 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
Interest expense was $54 thousand during the 13 weeks ended September 30, 2018 and $32 thousand during the 13 weeks ended September 24, 2017.
Income Tax Expense
In accordance with ASC 740, each interim period is considered an integral part of the annual period and tax expense or benefit is measured using an estimated annual effective tax rate. An enterprise is required, at the end of each interim reporting period, to make its best estimate of the annual effective tax rate for the full fiscal year and use that rate to provide for income taxes on a current year-to-date-basis. However, when a reliable estimate of the annual effective tax rate cannot be made, the actual effective tax rate for the year-to-date period may be the best estimate of the annual effective tax rate. For the 13 and 39 weeks ended September 30, 2018, the actual year-to-date effective tax rate was used to compute the income tax benefit, as a reliable estimate of the annual estimated tax rate cannot be made as nominal changes in projected income or loss result in a significant variance in our estimated effective tax rate. The effective tax rate differed from the federal statutory rate primarily due to the impact of ASU 2016-09, state income taxes, federal and state tax credits and certain discrete items.
Income tax benefit increased by $0.4 million, or 86.7%, to a benefit of $0.9 million for the 13 weeks ended September 30, 2018, from a benefit of $0.5 million for the 13 weeks ended September 24, 2017, primarily attributable to the increase in the pre-tax book loss, offset by certain discrete items. For the 13 weeks ended September 30, 2018, the effective tax rate was 33.0%, compared to 80.4% for the 13 weeks ended September 24, 2017. The change in the effective tax rate was driven by the increase in the pre-tax book loss, offset by certain discrete items.
39 Weeks Ended September 30, 2018 Compared to 39 Weeks Ended September 24, 2017
The following table presents information comparing the components of net income for the periods indicated (dollars in thousands):
|
| For the 39 Weeks Ended |
|
|
|
|
|
|
|
|
| |||||||||||||
|
| September 30, 2018 |
|
| % of Revenues |
|
| September 24, 2017 |
|
| % of Revenues |
|
| Increase (Decrease) |
|
| Percent Change |
| ||||||
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sandwich shop sales, net |
| $ | 317,866 |
|
|
| 99.3 | % |
| $ | 313,568 |
|
|
| 99.2 | % |
| $ | 4,298 |
|
|
| 1.4 | % |
Franchise royalties and fees |
|
| 2,394 |
|
|
| 0.7 |
|
|
| 2,394 |
|
|
| 0.8 |
|
|
| 0 |
|
| * |
| |
Total revenues |
|
| 320,260 |
|
|
| 100.0 |
|
|
| 315,962 |
|
|
| 100.0 |
|
|
| 4,298 |
|
|
| 1.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sandwich shop operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold, excluding depreciation |
|
| 83,730 |
|
|
| 26.1 |
|
|
| 83,703 |
|
|
| 26.5 |
|
|
| 27 |
|
| * |
| |
Labor and related expenses |
|
| 96,367 |
|
|
| 30.1 |
|
|
| 93,213 |
|
|
| 29.5 |
|
|
| 3,154 |
|
|
| 3.4 |
|
Occupancy expenses |
|
| 44,787 |
|
|
| 14.0 |
|
|
| 42,792 |
|
|
| 13.5 |
|
|
| 1,995 |
|
|
| 4.7 |
|
Other operating expenses |
|
| 38,650 |
|
|
| 12.1 |
|
|
| 36,349 |
|
|
| 11.5 |
|
|
| 2,301 |
|
|
| 6.3 |
|
General and administrative expenses |
|
| 35,715 |
|
|
| 11.2 |
|
|
| 33,375 |
|
|
| 10.6 |
|
|
| 2,340 |
|
|
| 7.0 |
|
Depreciation expense |
|
| 17,531 |
|
|
| 5.5 |
|
|
| 18,960 |
|
|
| 6.0 |
|
|
| (1,429 | ) |
|
| (7.5 | ) |
Pre-opening costs |
|
| 245 |
|
|
| 0.1 |
|
|
| 955 |
|
|
| 0.3 |
|
|
| (710 | ) |
|
| (74.3 | ) |
Impairment and loss on disposal of property and equipment |
|
| 8,467 |
|
|
| 2.6 |
|
|
| 5,762 |
|
|
| 1.8 |
|
|
| 2,705 |
|
|
| 46.9 |
|
Total expenses |
|
| 325,492 |
|
|
| 101.6 |
|
|
| 315,109 |
|
|
| 99.7 |
|
|
| 10,383 |
|
|
| 3.3 |
|
Income (loss) from operations |
|
| (5,232 | ) |
|
| (1.6 | ) |
|
| 853 |
|
|
| 0.3 |
|
|
| (6,085 | ) |
| >(100) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
| 109 |
|
| * |
|
|
| 101 |
|
| * |
|
|
| 8 |
|
|
| 7.9 |
| ||
Income (loss) before income taxes |
|
| (5,341 | ) |
|
| (1.7 | ) |
|
| 752 |
|
|
| 0.2 |
|
|
| (6,093 | ) |
| >(100) |
| |
Income tax expense (benefit) |
|
| (1,111 | ) |
|
| (0.3 | ) |
|
| 252 |
|
|
| 0.1 |
|
|
| (1,363 | ) |
| >(100) |
| |
Net income (loss) |
|
| (4,230 | ) |
|
| (1.3 | ) |
|
| 500 |
|
|
| 0.2 |
|
|
| (4,730 | ) |
| >(100) |
| |
Net income attributable to non- controlling interests |
|
| 285 |
|
|
| 0.1 |
|
|
| 195 |
|
|
| 0.1 |
|
|
| 90 |
|
|
| 46.2 |
|
Net income (loss) attributable to Potbelly Corporation |
| $ | (4,515 | ) |
|
| (1.4 | )% |
| $ | 305 |
|
|
| 0.1 | % |
| $ | (4,820 | ) |
| >(100)% |
|
|
|
Revenues
Total revenues increased by $4.3 million, or 1.4%, to $320.3 million during the 39 weeks ended September 30, 2018, from $316.0 million during the 39 weeks ended September 24, 2017. The revenue growth was driven by an increase in sales of $15.5 million from shops not yet in our company-operated comparable store sales base. This increase was partially offset by a decrease in sales of $3.9 million, or 1.3%, from company-operated comparable stores and a decline of $7.3 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.
Cost of Goods Sold
Cost of goods sold increased by $27 thousand, or less than 0.1%, to $83.7 million during the 39 weeks ended September 30, 2018, from $83.7 million during the 39 weeks ended September 24, 2017. As a percentage of revenues, cost of goods sold decreased to 26.1% during the 39 weeks ended September 30, 2018, from 26.5% during the 39 weeks ended September 24, 2017, primarily driven by certain menu price increases.
Labor and related expenses increased by $3.2 million, or 3.4%, to $96.4 million during the 39 weeks ended September 30, 2018, from $93.2 million during the 39 weeks ended September 24, 2017, primarily due to new shop openings and inflationary wage increases in certain states, which was partially offset by a decrease in expense from closed shops. As a percentage of revenues, labor and related expenses increased to 30.1% during the 39 weeks ended September 30, 2018, from 29.5% during the 39 weeks ended September 24, 2017, primarily driven by a decrease in company-operated comparable store revenue and inflationary wage increases in certain states, which was partially offset by a decrease in expense from closed shops.
Occupancy Expenses
Occupancy expenses increased by $2.0 million, or 4.7%, to $44.8 million during the 39 weeks ended September 30, 2018, from $42.8 million during the 39 weeks ended September 24, 2017, primarily due to inflation in certain occupancy related costs, including lease renewals, real estate taxes and common area maintenance. These increases were partially offset by a decrease in occupancy expenses related to closed shops. As a percentage of revenues, occupancy expenses increased to 14.0% during the 39 weeks ended September 30, 2018, from 13.5% during the 39 weeks ended September 24, 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
Other operating expenses increased by $2.3 million, or 6.3%, to $38.7 million during the 39 weeks ended September 30, 2018, from $36.3 million during the 39 weeks ended September 24, 2017. The increase was primarily attributable to items such as repairs, credit card fees, utilities and other expenses not directly variable with sales. As a percentage of revenues, other operating expenses increased to 12.1% during the 39 weeks ended September 30, 2018, from 11.5% during the 39 weeks ended September 24, 2017. This increase was primarily driven by sales deleverage in operating expense items such as repairs, credit card fees, utilities and other expenses not directly variable with sales.
General and Administrative Expenses
General and administrative expenses increased by $2.3 million, or 7.0%, to $35.7 million during the 39 weeks ended September 30, 2018, from $33.4 million during the 39 weeks ended September 24, 2017. The increase was driven primarily by restructuring costs of $1.6 million, proxy related costs of $0.8 million and an increase in advertising costs. This increase was partially offset by a decrease in stock-based compensation expense. As a percentage of revenues, general and administrative expenses increased to 11.2% during the 39 weeks ended September 30, 2018, from 10.6% during the 39 weeks ended September 24, 2017. The increase was driven primarily by restructuring costs of $1.6 million, proxy related costs of $0.8 million and an increase in advertising costs. This increase was partially offset by a decrease in stock-based compensation expense.
Depreciation Expense
Depreciation expense decreased by $1.4 million, or 7.5%, to $17.5 million during the 39 weeks ended September 30, 2018, from $19.0 million during the 39 weeks ended September 24, 2017, driven primarily by a lower depreciable base related to impairment charges taken subsequent to the 39 weeks ended September 24, 2017, as well as lower depreciation associated 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 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 39 weeks ended September 30, 2018, from 6.0% during the 39 weeks ended September 24, 2017, driven primarily by a lower depreciable base related to impairment charges taken subsequent to the 39 weeks ended September 24, 2017, as well as lower depreciation associated with all 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
Pre-opening costs decreased by $0.7 million, or 74.3%, to $0.2 million during the 39 weeks ended September 30, 2018, from $1.0 million during the 39 weeks ended September 24, 2017. As a percentage of revenues, pre-opening costs decreased to 0.1% during the 39 weeks ended September 30, 2018, from 0.3% during the 39 weeks ended September 24, 2017. These decreases were driven primarily by fewer shops opened during the 39 weeks ended September 30, 2018 compared to the 39 weeks ended September 24, 2017.
Impairment and Loss on Disposal of Property and Equipment
Impairment and loss on disposal of property and equipment increased to $8.5 million during the 39 weeks ended September 30, 2018, compared to $5.8 million during the 39 weeks ended September 24, 2017.July 1, 2018. After performing periodic reviews of Company shops during the first second and thirdsecond quarter of 2018,2019, 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 $8.5$0.2 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
Interest expense was $0.1 million$67 thousand for the 3926 weeks ended SeptemberJune 30, 2018 and September 24, 2017.$55 thousand for the 26 weeks ended July 1, 2018.
Income Tax Expense
In accordance with ASC 740, each interim period is considered an integral part of the annual period and tax expense or benefit is measured using an estimated annual effective tax rate. An enterprise is required, at the end of each interim reporting period, to make its best estimate of the annual effective tax rate for the full fiscal year and use that rate to provide for income taxes on a current year-to-date basis. However, when a reliable estimate of the annual effective tax rate cannot be made, the actual effective tax rate for the year-to-date period may be the best estimate of the annual effective tax rate. For the 13 and 39 weeks ended September 30, 2018, the actual year-to-date effective tax rate was used to compute the income tax benefit, as a reliable estimate of the annual estimated tax rate cannot be made as nominal changes in projected income or loss result in a significant variance in our estimated effective tax rate. The effective tax rate differed from the federal statutory rate primarily due to the impact of ASU 2016-09, state income taxes, federal and state tax credits and certain discrete items. (Benefit)
Income tax expense decreasedincreased by $1.4$14.1 million, or more than 100%, to $13.9 million for the 26 weeks ended June 30, 2019, from a benefit of $1.1$0.2 million for the 3926 weeks ended September 30, 2018, from an expense of $0.3 million for the 39 weeks ended September 24, 2017,July 1, 2018. The change was primarily attributable to the valuation allowance on deferred tax assets recorded by the Company during the first quarter of 2019, as a result of the changes in projected taxable income for 2019. The Company estimates it will be in a cumulative loss position as of December 29, 2019. Therefore, the Company determined that the negative evidence outweighed the positive evidence and, therefore, recorded a full valuation allowance against its net deferred tax assets. The Company recorded a non-cash charge to income tax expense of $13.6 million related to the recognition of the valuation allowance and did not provide for an income tax benefit on the pre-tax book loss recorded for the 26 weeks ended June 30, 2019. This accounting treatment has no effect on the Company’s ability to utilize deferred tax assets to reduce future cash tax payments. The Company will continue to assess the likelihood of the realization of its deferred tax assets at the end of each reporting period and the change in the federal tax rate from 35.0 percent to 21.0 percent. For the 39 weeks ended September 30, 2018, the effective tax rate was 20.8%, compared to 33.5% for the 39 weeks ended September 24, 2017. The change in the effective tax rate was driven by a pre-tax book loss and the change in the federal statutory tax rate from 35 percent to 21 percent, as well as certain discrete items.valuation allowance will be adjusted accordingly.
Liquidity and Capital Resources
General
Potbelly’s ongoing primary sources of liquidity and capital resources are cash provided from operating activities, existing cash and cash equivalents and the Company’s credit facility. Potbelly’s primary requirements for liquidity and capital are new shop openings, existing shop capital investments, (maintenance and improvements),maintenance, repurchases of Company common stock, lease obligations, working capital and general corporate needs. Potbelly’s requirement for working capital is not significant since the Company’s customers pay for their food and beverage purchases in cash or payment cards (credit or debit) at the time of sale. Thus, Potbelly is able to sell certain inventory items before the Company needs to pay its suppliers for such items. Company shops do not require significant inventories or receivables. Potbelly believes that these sources of liquidity and capital will be sufficient to finance 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):
|
| For the 39 Weeks Ended |
|
| For the 26 Weeks Ended |
| ||||||||||
|
| September 30, |
|
| September 24, |
|
| June 30, |
|
| July 1, |
| ||||
|
| 2018 |
|
| 2017 |
|
| 2019 |
|
| 2018 |
| ||||
Net cash provided by (used in): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities |
| $ | 22,653 |
|
| $ | 28,368 |
|
| $ | 6,988 |
|
| $ | 17,867 |
|
Investing activities |
|
| (16,722 | ) |
|
| (23,526 | ) |
|
| (5,230 | ) |
|
| (11,614 | ) |
Financing activities |
|
| (4,750 | ) |
|
| (6,043 | ) |
|
| (3,467 | ) |
|
| 2,527 |
|
Net increase (decrease) in cash |
| $ | 1,181 |
|
| $ | (1,201 | ) |
| $ | (1,709 | ) |
| $ | 8,780 |
|
Net cash provided by operating activities decreased to $22.7$7.0 million for the 3926 weeks ended SeptemberJune 30, 2018,2019, from $28.4$17.9 million for the 3926 weeks ended September 24, 2017.July 1, 2018. The $5.7$10.9 million decrease was primarily driven by an increase in loss from operations.operations, as well as timing of payment for certain liabilities.
Net cash used in investing activities decreased to $16.7$5.2 million for the 3926 weeks ended SeptemberJune 30, 2018,2019, from $23.5$11.6 million for the 3926 weeks ended September 24, 2017.July 1, 2018. The decrease was primarily due to fewer shops opened and under construction during the 3926 weeks ended SeptemberJune 30, 20182019 compared to the 3926 weeks ended September 24, 2017.July 1, 2018.
Financing Activities
Net cash used in financing activities was $4.8$3.5 million for the 3926 weeks ended SeptemberJune 30, 2018,2019, compared to $6.0 million net cash used inprovided by financing activities of $2.5 million for the 3926 weeks ended September 24, 2017.July 1, 2018. The change in financing cash was primarily driven by $8.2$6.6 million decrease in proceeds from the exercise of stock options during the 3926 weeks ended SeptemberJune 30, 2018, compared to $1.2 million during the 39 weeks ended September 24, 2017. Additionally, $0.1 million in employee taxes related to stock-based payment arrangements were withheld and paid during the 39 weeks ended September 30, 2018.2019.
Stock Repurchase Program
On May 8, 2018, the Company announced that its Board of Directors authorized a stock repurchase program for up to $65.0 million of its outstanding common stock. The stock repurchase program replaced the previous program, authorized in September 2016. Under the previous program, during the 39 weeks ended September 30, 2018, the Company repurchased 5,000 shares of its common stock for approximately $0.1 million, including costs and commissions, in 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 ActAct) or in privately negotiated transactions. Under the current program, duringfor the 3926 weeks ended SeptemberJune 30, 2018,2019, the Company repurchased 959,240485,659 shares of its common stock for approximately $12.3$3.5 million under the stock repurchase program, including costscost and commissions,commission, in open market transactions. The number of shares of common stock repurchased in the future, and the timing and price of repurchases, will depend upon market conditions, Securities and Exchange Commission requirementsliquidity needs 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.
Credit Facility
On December 9, 2015,August 7, 2019, the Company entered into ana second amended and restated five-year revolving credit facility agreement (the "Credit Agreement") with JPMorgan Chase Bank, N.A. that expires in November 2020.July 2022. The Credit Agreement amended and restated that certain amended and restated revolving credit facility agreement, dated as of December 9, 2015, and amended on May 3, 2019 (collectively, the "Prior Credit Agreement") with JPMorgan Chase Bank, N.A. The Credit Agreement provides, among other things, for a revolving credit facility in a maximum principal amount of $40 million, with possible future increases of up to $20 million under an expansion feature. Borrowings under the credit facility generally bear interest at the Company’s option at either (i) a eurocurrency rate determined by reference to the applicable LIBOR rate plus a margin ranging from 1.25% 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 the Company’s consolidated total leverage ratio. On the last day of each calendar quarter, the Company is required to pay a commitment fee of 0.20% per annum in respect of any unused commitments under the credit facility. So long as certain total leverage ratios, EBITDA thresholds and minimum liquidity requirements are met and no default or event of default has occurred or would result, there is no limit on the “restricted payments” (primarily distributions and equity repurchases) that the Company may make, provided that proceeds of the loans under the credit agreement provides,may not be used for purposes of making restricted payments.
The Prior Credit Agreement provided, 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 bearbore 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 iswas determined based upon our consolidated total leverage ratio. On the last day of each calendar quarter, the Company iswas 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. As long as the leverage ratios arewere met, there iswas no limit on the “restricted payments” (primarily distributions and equity repurchases) that the Company may make.have made. As of Septemberthe 26 weeks ended June 30, 2018 and for the 39 week period ended September 30, 2018,2019, the Company had no amounts outstanding under the credit facility.Prior Credit Agreement.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with 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. 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. Potbelly had no significant changes in our critical accounting estimates since the last annual report. The Company’s critical accounting estimates are identified and described in our annual consolidated financial statements and related notes.
Off-Balance Sheet Arrangements
As of SeptemberJune 30, 2018,2019, 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.
New and Revised Financial Accounting Standards
See Note 1 to the Consolidated Financial Statements for a description of recently issued Financial Accounting Standards.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For quantitative and qualitative disclosures about market risk, see Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2017.30, 2018. Our exposures to market risk have not changed materially since December 31, 2017.30, 2018.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Principal 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 SeptemberJune 30, 2018.2019. Based upon that evaluation, our Chief Executive Officer and Principal Financial Officer have concluded that, as of SeptemberJune 30, 2018,2019, our disclosure controls and procedures were effective in ensuring that information required to be disclosed in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and is accumulated and communicated to our management, including our Chief Executive Officer and Principal Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the fiscalsecond quarter ended SeptemberJune 30, 20182019 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
Information pertaining to legal proceedings is provided in Note 89 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 31, 2017.30, 2018. There have been no material changes to our Risk Factors as previously reported.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table contains information regarding purchases of our common stock made by or on behalf of Potbelly Corporation during the 13 weeks ended SeptemberJune 30, 2018:2019:
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) |
| ||||
July 2, 2018 - July 29, 2018 |
|
| 245,000 |
|
| $ | 12.76 |
|
|
| 245,000 |
|
| $ | 58,492,804 |
|
July 30, 2018 - August 26, 2018 |
|
| 204,901 |
|
| $ | 12.74 |
|
|
| 204,901 |
|
| $ | 55,882,418 |
|
August 27, 2018 - September 30, 2018 |
|
| 250,000 |
|
| $ | 12.86 |
|
|
| 250,000 |
|
| $ | 52,667,634 |
|
Total: |
|
| 699,901 |
|
|
|
|
|
|
| 699,901 |
|
|
|
|
|
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) |
| ||||
April 1, 2019 - April 28, 2019 |
|
| 95,000 |
|
| $ | 9.03 |
|
|
| 95,000 |
|
| $ | 40,186,965 |
|
April 29, 2019 - May 26, 2019 |
|
| 99,900 |
|
| $ | 6.98 |
|
|
| 99,900 |
|
| $ | 39,489,427 |
|
May 27, 2019 - June 30, 2019 |
|
| 157,630 |
|
| $ | 4.89 |
|
|
| 155,759 |
|
| $ | 38,728,687 |
|
Total: |
|
| 352,530 |
|
|
|
|
|
|
| 350,659 |
|
|
|
|
|
(1) | Average price paid per share excludes commissions. |
(2) | On May 8, 2018, the Company announced that its Board of Directors authorized a stock repurchase program for up to $65.0 million of its outstanding common stock. The |
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
On August 7, 2019, the Company entered into a second amended and restated revolving credit facility agreement (the "Credit Agreement") with JPMorgan Chase Bank, N.A. that expires in July 2022. The Credit Agreement amended and restated that certain amended and restated revolving credit facility agreement, dated as of December 9, 2015, and amended on May 3, 2019 (collectively, the "Prior Credit Agreement") with JPMorgan Chase Bank, N.A. The Credit Agreement provides, among other things, for a revolving credit facility in a maximum principal amount of $40 million, with possible future increases of up to $20 million under an expansion feature. Borrowings under the credit facility generally bear interest at the Company’s option at either (i) a eurocurrency rate determined by reference to the applicable LIBOR rate plus a margin ranging from 1.25% 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 the Company’s consolidated total leverage ratio. On the last day of each calendar quarter, the Company is required to pay a commitment fee of 0.20% per annum in respect of any unused commitments under the credit facility. So long as certain total leverage ratios and minimum liquidity requirements, EBITDA thresholds and minimum liquidity requirements are met and no default or event of default has occurred or would result, there is no limit on the “restricted payments” (primarily distributions and equity repurchases) that the Company may make, provided that proceeds of the loans under the credit agreement may not be used for purposes of making restricted payments.
The following exhibits are either provided with this Quarterly Report on Form 10-Q or are incorporated herein by reference.
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Exhibit No. |
| Description |
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10.3 | ||
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31.1 |
| Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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31.2 |
| |
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32.1 |
| |
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101.INS |
| XBRL Instance Document |
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| |
101.SCH |
| XBRL Taxonomy Extension Schema Document |
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| |
101.CAL |
| XBRL Taxonomy Extension Calculation Linkbase Document |
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101.LAB |
| XBRL Taxonomy Extension Label Linkbase Document |
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101.PRE |
| XBRL Taxonomy Extension Presentation Linkbase Document |
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| |
101.DEF |
| XBRL Taxonomy Extension Definition Linkbase Document |
* | Filed herewith. |
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.
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| POTBELLY CORPORATION |
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Date: |
| By: | /s/ |
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| (Principal Financial Officer) |
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