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 June 30, 2019March 29, 2020
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) |
Registrant’s Telephone Number, Including Area Code: (312) 951-0600
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
| Trading Symbol(s) |
| Name of each exchange on which registered |
Common Stock, $0.01 par value |
| PBPB |
| The NASDAQ Stock Market LLC |
|
|
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| (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 |
| ☐ |
|
| Accelerated filer |
| ☒ |
Non-accelerated filer |
| ☐ |
|
| Smaller reporting company |
| ☐ |
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 registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ☒ No ☐
As of July 28, 2019,April 26, 2020, the registrant had 23,768,37523,684,000 shares of common stock, $0.01 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 |
| 16 |
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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. |
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Item 4. |
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Item 5. |
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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)
|
| June 30, |
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| December 30, |
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| March 29, |
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| December 29, |
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| 2019 |
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| 2018 |
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| 2020 |
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| 2019 |
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Assets |
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Current assets |
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Cash and cash equivalents |
| $ | 18,066 |
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| $ | 19,775 |
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| $ | 45,816 |
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| $ | 18,806 |
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Accounts receivable, net of allowances of $131 and $113 as of June 30, 2019 and December 30, 2018, respectively |
|
| 4,545 |
|
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| 4,737 |
| ||||||||
Accounts receivable, net of allowances of $258 and $202 as of March 29, 2020 and December 29, 2019, respectively |
|
| 2,651 |
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| 4,257 |
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Inventories |
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| 3,357 |
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| 3,482 |
|
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| 3,245 |
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| 3,473 |
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Prepaid expenses and other current assets |
|
| 8,182 |
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| 11,426 |
|
|
| 8,454 |
|
|
| 5,687 |
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Total current assets |
|
| 34,150 |
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| 39,420 |
|
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| 60,166 |
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| 32,223 |
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Property and equipment, net |
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| 81,628 |
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| 87,782 |
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| 73,006 |
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| 79,032 |
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Right-of-use assets for operating leases |
|
| 216,540 |
|
|
| — |
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| 208,239 |
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| 211,988 |
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Indefinite-lived intangible assets |
|
| 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 |
|
| — |
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| 13,385 |
| ||||||||
Deferred expenses, net and other assets |
|
| 6,898 |
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|
| 7,002 |
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|
| 4,032 |
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|
| 4,010 |
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Total assets |
| $ | 344,842 |
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| $ | 153,215 |
|
| $ | 351,069 |
|
| $ | 332,879 |
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Liabilities and Equity |
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Current liabilities |
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Accounts payable |
| $ | 4,222 |
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| $ | 3,835 |
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| $ | 3,375 |
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| $ | 3,886 |
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Accrued expenses |
|
| 21,303 |
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| 25,029 |
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| 15,656 |
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| 20,398 |
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Short-term operating lease liabilities |
|
| 29,126 |
|
|
| — |
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|
| 29,701 |
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|
| 29,319 |
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Accrued income taxes |
|
| 162 |
|
|
| 162 |
|
|
| 171 |
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|
| 171 |
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Debt from revolving credit facility |
|
| 39,786 |
|
|
| - |
| ||||||||
Total current liabilities |
|
| 54,813 |
|
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| 29,026 |
|
|
| 88,689 |
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| 53,774 |
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Deferred rent and landlord allowances |
|
| — |
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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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| 202,902 |
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| 206,726 |
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Other long-term liabilities |
|
| 6,255 |
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| 5,751 |
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|
| 3,274 |
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|
| 3,210 |
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Total liabilities |
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| 271,966 |
|
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| 57,682 |
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| 294,865 |
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| 263,710 |
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Commitments and contingencies (Note 9) |
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Commitments and contingencies (Note 10) |
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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 |
|
| 331 |
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| 330 |
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Common stock, $0.01 par value—authorized 200,000 shares; outstanding 23,684 and 23,638 shares as of March 29, 2020 and December 29, 2019, respectively |
|
| 331 |
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| 331 |
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Additional paid-in-capital |
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| 434,407 |
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| 432,771 |
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| 435,768 |
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| 435,278 |
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Treasury stock, held at cost, 9,291,732 and 8,801,154 shares as of June 30, 2019, and December 30, 2018, respectively |
|
| (111,874 | ) |
|
| (108,372 | ) | ||||||||
Treasury stock, held at cost, 9,488 and 9,465 shares as of March 29, 2020, and December 29, 2019, respectively |
|
| (112,751 | ) |
|
| (112,680 | ) | ||||||||
Accumulated deficit |
|
| (250,394 | ) |
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| (229,558 | ) |
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| (267,422 | ) |
|
| (254,081 | ) |
Total stockholders’ equity |
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| 72,470 |
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| 95,171 |
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| 55,926 |
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| 68,848 |
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Non-controlling interest |
|
| 406 |
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| 362 |
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| 278 |
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|
| 321 |
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Total equity |
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| 72,876 |
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| 95,533 |
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| 56,204 |
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| 69,169 |
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Total liabilities and equity |
| $ | 344,842 |
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| $ | 153,215 |
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| $ | 351,069 |
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| $ | 332,879 |
|
See accompanying notes to the unaudited condensed consolidated financial statements.
3
Potbelly Corporation and Subsidiaries
Condensed Consolidated Statements of Operations
(amounts in thousands, except share and per share data, unaudited)
|
| For the 13 Weeks Ended |
|
| For the 26 Weeks Ended |
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| For the 13 Weeks Ended |
| |||||||||||||||
|
| June 30, |
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| July 1, |
|
| June 30, |
|
| July 1, |
|
| March 29, |
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| March 31, |
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| 2019 |
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| 2018 |
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| 2019 |
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| 2018 |
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| 2020 |
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| 2019 |
| ||||||
Revenues |
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Sandwich shop sales, net |
| $ | 104,801 |
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| $ | 109,381 |
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| $ | 202,059 |
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| $ | 211,628 |
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| $ | 86,961 |
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| $ | 97,258 |
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Franchise royalties and fees |
|
| 829 |
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| 966 |
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| 1,658 |
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| $ | 1,636 |
|
|
| 629 |
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| 829 |
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Total revenues |
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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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| 87,590 |
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| 98,087 |
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Expenses |
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Sandwich shop operating expenses |
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Cost of goods sold, excluding depreciation |
|
| 28,264 |
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|
| 28,639 |
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| 54,242 |
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| 55,275 |
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|
| 24,174 |
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|
| 25,978 |
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Labor and related expenses |
|
| 32,114 |
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|
| 32,412 |
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| 64,087 |
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| 63,991 |
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|
| 30,397 |
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|
| 31,973 |
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Occupancy expenses |
|
| 15,230 |
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|
| 14,985 |
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|
| 29,607 |
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|
| 29,711 |
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|
| 15,028 |
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|
| 14,377 |
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Other operating expenses |
|
| 11,816 |
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|
| 12,793 |
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|
| 23,961 |
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|
| 25,293 |
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|
| 12,765 |
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|
| 12,145 |
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General and administrative expenses |
|
| 13,843 |
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|
| 13,440 |
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| 26,552 |
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| 25,628 |
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|
| 10,734 |
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|
| 12,709 |
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Depreciation expense |
|
| 5,585 |
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| 5,858 |
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|
| 11,121 |
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| 11,684 |
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|
| 5,456 |
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| 5,536 |
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Pre-opening costs |
|
| — |
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|
| 68 |
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|
| 10 |
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|
| 136 |
|
|
| 64 |
|
|
| 10 |
|
Impairment and loss on disposal of property and equipment |
|
| 246 |
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|
| 2,057 |
|
|
| 328 |
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|
| 4,081 |
|
|
| 5,957 |
|
|
| 82 |
|
Total expenses |
|
| 107,098 |
|
|
| 110,252 |
|
|
| 209,908 |
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|
| 215,799 |
|
|
| 104,575 |
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|
| 102,810 |
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Income (loss) from operations |
|
| (1,468 | ) |
|
| 95 |
|
|
| (6,191 | ) |
|
| (2,535 | ) | ||||||||
Loss from operations |
|
| (16,985 | ) |
|
| (4,723 | ) | ||||||||||||||||
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Interest expense |
|
| 35 |
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|
| 28 |
|
|
| 67 |
|
|
| 55 |
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|
| 74 |
|
|
| 32 |
|
Income (loss) before income taxes |
|
| (1,503 | ) |
|
| 67 |
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|
| (6,258 | ) |
|
| (2,590 | ) | ||||||||
Loss before income taxes |
|
| (17,059 | ) |
|
| (4,755 | ) | ||||||||||||||||
Income tax expense (benefit) |
|
| 246 |
|
|
| 302 |
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|
| 13,865 |
|
|
| (202 | ) |
|
| (3,709 | ) |
|
| 13,619 |
|
Net loss |
|
| (1,749 | ) |
|
| (235 | ) |
|
| (20,123 | ) |
|
| (2,388 | ) |
|
| (13,350 | ) |
|
| (18,374 | ) |
Net income attributable to non-controlling interest |
|
| 117 |
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|
| 125 |
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|
| 182 |
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|
| 166 |
| ||||||||
Net income (loss) attributable to non-controlling interest |
|
| (14 | ) |
|
| 65 |
| ||||||||||||||||
Net loss attributable to Potbelly Corporation |
| $ | (1,866 | ) |
| $ | (360 | ) |
| $ | (20,305 | ) |
| $ | (2,554 | ) |
| $ | (13,336 | ) |
| $ | (18,439 | ) |
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Net loss per common share attributable to common stockholders: |
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Basic |
| $ | (0.08 | ) |
| $ | (0.01 | ) |
| $ | (0.85 | ) |
| $ | (0.10 | ) |
| $ | (0.56 | ) |
| $ | (0.76 | ) |
Diluted |
| $ | (0.08 | ) |
| $ | (0.01 | ) |
| $ | (0.85 | ) |
| $ | (0.10 | ) |
| $ | (0.56 | ) |
| $ | (0.76 | ) |
Weighted average shares outstanding: |
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Basic |
|
| 23,908,095 |
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|
| 25,551,386 |
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|
| 24,020,567 |
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|
| 25,348,121 |
|
|
| 23,646 |
|
|
| 24,133 |
|
Diluted |
|
| 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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|
| 23,646 |
|
|
| 24,133 |
|
See accompanying notes to the unaudited condensed consolidated financial statements.
4
Potbelly Corporation and Subsidiaries
Condensed Consolidated Statements of Equity
(amounts and shares in thousands, except share data, unaudited)
For the 13 weeks ended: |
| Common Stock |
|
| Treasury |
|
| Additional Paid-In- |
|
| Accumulated |
|
| Non- Controlling |
|
|
|
|
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| Common Stock |
|
| Treasury |
|
| Additional Paid-In- |
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| Accumulated |
|
| Non- Controlling |
|
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| ||||||||||||||||||
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| Shares |
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| Amount |
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| Stock |
|
| Capital |
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| Deficit |
|
| Interest |
|
| Total Equity |
|
| 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 |
| ||||||||||||||||||||||||||||
Balance at December 30, 2018 |
|
| 24,143 |
|
|
| 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) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (360 | ) |
|
| 125 |
|
|
| (235 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (18,439 | ) |
|
| 65 |
|
|
| (18,374 | ) |
Stock-based compensation plans |
|
| 625,063 |
|
|
| 6 |
|
|
| — |
|
|
| 4,483 |
|
|
| — |
|
|
| — |
|
|
| 4,489 |
|
|
| 33 |
|
|
| — |
|
|
| — |
|
|
| 170 |
|
|
| — |
|
|
| — |
|
|
| 170 |
|
Repurchases of common stock |
|
| (259,339 | ) |
|
| — |
|
|
| (3,386 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (3,386 | ) |
|
| (135 | ) |
|
| — |
|
|
| (1,144 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,144 | ) |
Distributions to non-controlling interest |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (256 | ) |
|
| (256 | ) | ||||||||||||||||||||||||||||
Treasury shares used for stock-based plans |
|
| (3 | ) |
|
| — |
|
|
| (25 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (25 | ) | ||||||||||||||||||||||||||||
Stock-based compensation expense |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,389 |
|
|
| — |
|
|
| — |
|
|
| 1,389 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 459 |
|
|
| — |
|
|
| — |
|
|
| 459 |
|
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 |
|
| $ | 330 |
|
| $ | (109,541 | ) |
| $ | 433,400 |
|
| $ | (248,528 | ) |
| $ | 427 |
|
| $ | 76,088 |
| ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2019 |
|
| 24,038,211 |
|
| $ | 330 |
|
| $ | (109,541 | ) |
| $ | 433,400 |
|
| $ | (248,528 | ) |
| $ | 427 |
|
| $ | 76,088 |
| ||||||||||||||||||||||||||||
Balance at December 29, 2019 |
|
| 23,638 |
|
| $ | 331 |
|
| $ | (112,680 | ) |
| $ | 435,278 |
|
| $ | (254,081 | ) |
| $ | 321 |
|
| $ | 69,169 |
| ||||||||||||||||||||||||||||
Cumulative impact of Topic 326, net of tax of $2 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (5 | ) |
|
| — |
|
|
| (5 | ) | ||||||||||||||||||||||||||||
Net income (loss) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,866 | ) |
|
| 117 |
|
|
| (1,749 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (13,336 | ) |
|
| (14 | ) |
|
| (13,350 | ) |
Stock-based compensation plans |
|
| 82,694 |
|
|
| 1 |
|
|
| — |
|
|
| 2 |
|
|
| — |
|
|
| — |
|
|
| 3 |
|
|
| 68 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Repurchases of common stock |
|
| (350,659 | ) |
|
| — |
|
|
| (2,323 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (2,323 | ) | ||||||||||||||||||||||||||||
Treasury shares used for stock-based plans |
|
| (22 | ) |
|
| — |
|
|
| (71 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (71 | ) | ||||||||||||||||||||||||||||
Distributions to non-controlling interest |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (177 | ) |
|
| (177 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (172 | ) |
|
| (172 | ) |
Contributions from non-controlling interest |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 39 |
|
|
| 39 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 143 |
|
|
| 143 |
|
Treasury shares used for stock-based plans |
|
| (1,871 | ) |
|
| — |
|
|
| (10 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (10 | ) | ||||||||||||||||||||||||||||
Stock-based compensation expense |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,005 |
|
|
| — |
|
|
| — |
|
|
| 1,005 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 490 |
|
|
| — |
|
|
| — |
|
|
| 490 |
|
Balance at June 30, 2019 |
|
| 23,768,375 |
|
| $ | 331 |
|
| $ | (111,874 | ) |
| $ | 434,407 |
|
| $ | (250,394 | ) |
| $ | 406 |
|
| $ | 72,876 |
| ||||||||||||||||||||||||||||
Balance at March 29, 2020 |
|
| 23,684 |
|
| $ | 331 |
|
| $ | (112,751 | ) |
| $ | 435,768 |
|
| $ | (267,422 | ) |
| $ | 278 |
|
| $ | 56,204 |
|
See accompanying notes to the unaudited condensed consolidated financial statements.
5
Potbelly Corporation and Subsidiaries
Condensed 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 26 Weeks Ended |
|
| For the 13 Weeks Ended |
| ||||||||||
|
| June 30, |
|
| July 1, |
|
| March 29, |
|
| March 31, |
| ||||
|
| 2019 |
|
| 2018 |
|
| 2020 |
|
| 2019 |
| ||||
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
| $ | (20,123 | ) |
| $ | (2,388 | ) |
| $ | (13,350 | ) |
| $ | (18,374 | ) |
Adjustments to reconcile net loss to net cash provided by operating activities: |
|
|
|
|
|
|
|
| ||||||||
Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
|
|
|
|
| ||||||||
Depreciation expense |
|
| 11,121 |
|
|
| 11,684 |
|
|
| 5,456 |
|
|
| 5,536 |
|
Noncash lease expense |
|
| 13,826 |
|
|
| — |
|
|
| 7,295 |
|
|
| 7,829 |
|
Deferred income tax |
|
| 13,790 |
|
|
| (150 | ) |
|
| 5 |
|
|
| 13,580 |
|
Stock-based compensation expense |
|
| 1,464 |
|
|
| 2,251 |
|
|
| 490 |
|
|
| 459 |
|
Asset impairment, store closure and disposal of property and equipment |
|
| 433 |
|
|
| 4,221 |
|
|
| 6,236 |
|
|
| 87 |
|
Other operating activities |
|
| 18 |
|
|
| 311 |
|
|
| 20 |
|
|
| 9 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net |
|
| 192 |
|
|
| (822 | ) |
|
| 1,620 |
|
|
| (811 | ) |
Inventories |
|
| 125 |
|
|
| 263 |
|
|
| 228 |
|
|
| 189 |
|
Prepaid expenses and other assets |
|
| 3,322 |
|
|
| (924 | ) |
|
| (3,252 | ) |
|
| 1,455 |
|
Accounts payable |
|
| 303 |
|
|
| 676 |
|
|
| (767 | ) |
|
| (130 | ) |
Operating lease liabilities |
|
| (15,281 | ) |
|
| — |
|
|
| (7,653 | ) |
|
| (7,860 | ) |
Accrued expenses and other liabilities |
|
| (2,202 | ) |
|
| 2,745 |
|
|
| (4,144 | ) |
|
| (4,342 | ) |
Net cash provided by operating activities: |
|
| 6,988 |
|
|
| 17,867 |
| ||||||||
Net cash used in operating activities: |
|
| (7,816 | ) |
|
| (2,373 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment |
| $ | (5,230 | ) |
| $ | (11,614 | ) |
| $ | (4,860 | ) |
| $ | (2,572 | ) |
Net cash used in investing activities: |
|
| (5,230 | ) |
|
| (11,614 | ) |
|
| (4,860 | ) |
|
| (2,572 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings under credit facility |
| $ | 39,786 |
|
| $ | — |
| ||||||||
Proceeds from exercise of stock options |
| $ | 173 |
|
| $ | 6,744 |
|
|
| — |
|
|
| 170 |
|
Employee taxes on certain stock-based payment arrangements |
|
| (35 | ) |
|
| (512 | ) |
|
| (71 | ) |
|
| (25 | ) |
Treasury stock repurchases |
|
| (3,467 | ) |
|
| (3,449 | ) |
|
| — |
|
|
| (1,144 | ) |
Distributions to non-controlling interest |
|
| (177 | ) |
|
| (256 | ) |
|
| (172 | ) |
|
| — |
|
Contributions from non-controlling interest |
|
| 39 |
|
|
| — |
|
|
| 143 |
|
|
| — |
|
Net cash (used in) provided by financing activities: |
|
| (3,467 | ) |
|
| 2,527 |
| ||||||||
Net cash provided by (used in) financing activities: |
|
| 39,686 |
|
|
| (999 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
| (1,709 | ) |
|
| 8,780 |
|
|
| 27,010 |
|
|
| (5,944 | ) |
Cash and cash equivalents at beginning of period |
|
| 19,775 |
|
|
| 25,530 |
|
|
| 18,806 |
|
|
| 19,775 |
|
Cash and cash equivalents at end of period |
| $ | 18,066 |
|
| $ | 34,310 |
|
| $ | 45,816 |
|
| $ | 13,831 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid |
| $ | 180 |
|
| $ | 244 |
|
| $ | 9 |
|
| $ | 4 |
|
Interest paid |
|
| 48 |
|
|
| 38 |
|
|
| 25 |
|
|
| 24 |
|
Supplemental non-cash investing and financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid liability for purchases of property and equipment |
| $ | 583 |
|
| $ | 1,299 |
|
| $ | 1,091 |
|
| $ | 161 |
|
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 thanover 40 shops domestically.in the United States.
Basis of Presentation
The unaudited condensed consolidated financial statements and notes herein should be read in conjunction with the audited consolidated financial statements of Potbelly Corporation and its subsidiaries and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 30, 2018.29, 2019. 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 positionbalance sheet as of June 30, 2019March 29, 2020 and December 30, 2018,29, 2019, its statement of operations for the 13 and 26 weeks ended June 30,March 29, 2020 and March 31, 2019, and July 1, 2018, the statement of equity for the 13 and 26 weeks ended June 30,March 29, 2020 and March 31, 2019, and July 1, 2018 and its statement of cash flows for the 2613 weeks ended June 30,March 29, 2020 and March 31, 2019 and July 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.
COVID-19
On January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus ("COVID-19") and the risks to the international community as the virus spreads globally. On March 11, 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally. In response to the pandemic, many states and jurisdictions in which we operate have issued stay-at-home orders and other measures aimed at slowing the spread of the coronavirus. While most of our company-owned shops remain open in accordance with guidance from local authorities, these measures resulted in us closing the vast majority our dining rooms and shifting to off-premise operations only, and we experienced a sudden and drastic decrease in revenues.
The disruption in operations and reduction in revenues have led the Company to consider the impact of the COVID-19 pandemic on the recoverability of its assets, including property and equipment, right-of-use assets for operating leases, goodwill and intangible assets, and others.
Due to the impact of the COVID-19 pandemic, the Company performed impairment analyses of its goodwill, intangible assets, and long-lived assets, which includes property and equipment and right-of-use assets for operating leases, as of March 29, 2020. The impairment assessments for both goodwill and indefinite lived intangible assets resulted in the conclusion that the fair value of these assets exceeded their carrying values. Accordingly, the Company did not record any impairment to its goodwill or indefinite-lived intangible assets during the thirteen weeks ended March 29, 2020. The Company recorded an impairment charge for its long-lived assets of $5.9 million for the 13 weeks ended March 29, 2020, primarily driven by the expected impact of the COVID-19 pandemic on future cash flows. The ultimate severity and longevity of the COVID-19 pandemic is unknown, and therefore, it is possible that impairments could be identified in future periods, and such amounts could be material. See Note 3 for further details.
The Company recognized an income tax benefit of $3.7 million for the thirteen weeks ended March 29, 2020 primarily due to the impact of the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”). The Company estimates that it will be able to obtain a tax refund of $3.7 million from the carryback of NOLs and a refund of prior AMT credits. See Note 5 for further details.
To preserve financial flexibility, the Company drew the $40.0 million of available capacity under its revolving credit facility. Due to the pandemic’s impact on revenues, the Company is in discussions with its lender regarding modifications to financial covenants related to the revolving credit facility. See Note 7 for further details.
The full impact of the COVID-19 outbreak continues to evolve as of the date of this report. Due to the rapid development and fluidity of this situation, the Company cannot determine the ultimate impact that the COVID-19 pandemic will have on its consolidated financial condition, liquidity, and future results of operations, and therefore any prediction as to the ultimate material adverse impact on the Company’s consolidated financial condition, liquidity, and future results of operations is uncertain.
Going Concern
Under ASC 205, Presentation of Financial Statements, the Company is required to consider and has evaluated whether there is substantial doubt that it has the ability to meet its obligations within one year from the financial statement issuance date. This assessment also includes the Company’s consideration of any management plans to alleviate such doubts. The conditions described above related to the COVID-19 pandemic have had a material adverse impact on the Company’s revenues, profitability, and cash flows. Because of these conditions, the Company has concluded that it is probable that it will not be in compliance with certain financial covenants of the Credit Agreement Amendment, which are further described in Note 7, for a period of one year from the financial statement issuance date. The probable inability of the Company to meet its current covenant requirements raises substantial doubt on the Company’s ability to meet its obligations within one year from the financial statement issuance date and to continue as a going concern. If the Company is unable to maintain compliance with the covenants contained in the current Credit Agreement, it may be unable to make additional borrowings on any undrawn amounts and may be required to repay its then outstanding borrowings. The Company is in continued negotiations with its current lender and expects further amendments to the Credit Agreement as needed to maintain compliance with future financial covenants, but we cannot make any assurances regarding the likelihood, certainty or exact timing of further amendments to the Credit Agreement. The Company is also evaluating various alternatives to improve its liquidity, including but not limited to, lease concessions and deferrals, further reductions of operating and capital expenditures, and raising additional capital.
The condensed consolidated financial statements included in this interim report on Form 10-Q do not include any adjustments that might result from the outcome of this uncertainty.
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 20192020 and 20182019 both consist of 52 weeks. The fiscal quarters ended June 30,March 29, 2020 and March 31, 2019 and July 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
On December 31, 2018,30, 2019, the Company adopted ASU 2016-02, “LeasesAccounting Standard Update No. 2016-13, Financial Instruments—Credit Losses (Topic 842),” along with related clarifications and improvements.326). This pronouncement requires lesseesthe measurement and recognition of expected credit losses on financial instruments. ASU 2016-13 replaces the existing incurred loss model with a forward-looking expected credit loss model that requires consideration of a broader range of information to recognizeestimate credit losses. The Company recorded a liability for lease obligations, which represents the discounted obligationnet reduction of $5 thousand to make future lease payments, and a corresponding right-of-use asset on the balance sheet. The guidance requires disclosure of key information about leasing arrangements that is intended to give financial statement users the ability to assess the amount, timing, and potential uncertainty of cash flows related to leases. We elected the optional transition method to apply the standardopening accumulated deficit as of December 30, 2019, due to the effective date and therefore, prior period amounts have not been adjusted and continue to be reported in accordance with our historical accounting under previous lease guidance, ASCcumulative impact of adopting Topic 840: Leases (Topic 840). The adoption of Topic 842 had a material impact on the consolidated balance sheets and an immaterial impact on the consolidated statements of operations, consolidated statements of equity and consolidated statements of cash flows.326.
Our practical expedients were as follows:(2) Revenue
| |
|
|
| |
| |
|
|
The impact on the consolidated balance sheet is as follows:
|
|
|
|
| Adjustments Due |
|
|
|
|
| |
| December 30, |
|
| to the Adoption of |
|
| December 31, |
| |||
| 2018 |
|
| Topic 842 |
|
| 2018 |
| |||
Assets |
|
|
|
|
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents | $ | 19,775 |
|
| $ | — |
|
| $ | 19,775 |
|
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 |
|
|
| — |
|
|
| 11,426 |
|
Total current assets |
| 39,420 |
|
|
| — |
|
|
| 39,420 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net |
| 87,782 |
|
|
| — |
|
|
| 87,782 |
|
Right-of-use assets for operating leases |
| — |
|
|
| 232,477 |
|
|
| 232,477 |
|
Indefinite-lived intangible assets |
| 3,404 |
|
|
| — |
|
|
| 3,404 |
|
Goodwill |
| 2,222 |
|
|
| — |
|
|
| 2,222 |
|
Deferred income taxes, noncurrent |
| 13,385 |
|
|
| 195 |
|
|
| 13,580 |
|
Deferred expenses, net and other assets |
| 7,002 |
|
|
| — |
|
|
| 7,002 |
|
Total assets | $ | 153,215 |
|
| $ | 232,672 |
|
| $ | 385,887 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Equity |
|
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
|
|
|
|
Accounts payable | $ | 3,835 |
|
| $ | — |
|
| $ | 3,835 |
|
Accrued expenses(1) |
| 25,029 |
|
|
| (1,124 | ) |
|
| 23,905 |
|
Short-term operating lease liabilities |
| — |
|
|
| 28,826 |
|
|
| 28,826 |
|
Accrued income taxes |
| 162 |
|
|
| — |
|
|
| 162 |
|
Total current liabilities |
| 29,026 |
|
|
| 27,702 |
|
|
| 56,728 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred rent and landlord allowances(1) |
| 22,905 |
|
|
| (22,905 | ) |
|
| — |
|
Long-term operating lease liabilities |
| — |
|
|
| 228,406 |
|
|
| 228,406 |
|
Other long-term liabilities |
| 5,751 |
|
|
| — |
|
|
| 5,751 |
|
Total liabilities |
| 57,682 |
|
|
| 233,203 |
|
|
| 290,885 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity |
|
|
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value—authorized 200,000,000 shares; outstanding 24,142,586 shares as of December 30, 2018 |
| 330 |
|
|
| — |
|
|
| 330 |
|
Additional paid-in-capital |
| 432,771 |
|
|
| — |
|
|
| 432,771 |
|
Treasury stock, held at cost, 8,801,154 shares as of December 30, 2018 |
| (108,372 | ) |
|
| — |
|
|
| (108,372 | ) |
Accumulated deficit(2) |
| (229,558 | ) |
|
| (531 | ) |
|
| (230,089 | ) |
Total stockholders’ equity |
| 95,171 |
|
|
| (531 | ) |
|
| 94,640 |
|
Non-controlling interest |
| 362 |
|
|
| — |
|
|
| 362 |
|
Total stockholders' equity |
| 95,533 |
|
|
| (531 | ) |
|
| 95,002 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity | $ | 153,215 |
|
| $ | 232,672 |
|
| $ | 385,887 |
|
|
|
| The Company |
(2) Revenue
Potbelly primarily earns revenue at a point in time through sales at ourfor sandwich shop locations and records such revenuesales which can occur in person at the shop, over our web or app platform, or through a third-party platform. Revenue is recorded 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 13 and 26 weeks ended June 30,March 29, 2020, revenue recognized from all revenue sources on point in time sales was $87.5 million, and revenue recognized from sales over time was $0.1 million. For the 13 weeks ended March 31, 2019, revenue recognized from all revenue sources on point in time sales was $105.5$97.8 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 $110.2 million and $212.9 million, respectively, and revenue recognized from sales over time was $0.2 million and $0.4 million, respectively.$0.3 million.
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.
Contract Liabilities
As described above, the Company records current and noncurrent contract liabilities for upfront franchise fees and 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:
|
| Current Contract Liability |
|
| Noncurrent Contract Liability |
| ||
|
| (Thousands) |
|
| (Thousands) |
| ||
Beginning balance as of December 31, 2018 |
| $ | (2,184 | ) |
| $ | (1,631 | ) |
Ending balance as of June 30, 2019 |
|
| (1,687 | ) |
|
| (1,960 | ) |
Increase (decrease) in contract liability |
| $ | (497 | ) |
| $ | 329 |
|
|
| Current Contract Liability |
|
| Noncurrent Contract Liability |
| ||
|
| (Thousands) |
|
| (Thousands) |
| ||
Beginning balance as of December 30, 2019 |
| $ | (1,594 | ) |
| $ | (2,054 | ) |
Ending balance as of March 29, 2020 |
|
| (1,264 | ) |
|
| (1,984 | ) |
Decrease in contract liability |
| $ | (330 | ) |
| $ | (70 | ) |
The aggregate value of remaining performance obligations on outstanding contracts was $3.6$3.2 million as of June 30, 2019.March 29, 2020. 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 |
|
| Amount |
| ||
2019 |
| $ | 1,250 |
| ||||
2020 |
|
| 288 |
|
| $ | 942 |
|
2021 |
|
| 246 |
|
|
| 302 |
|
2022 |
|
| 199 |
|
|
| 240 |
|
2023 |
|
| 192 |
|
|
| 206 |
|
2024 |
|
| 174 |
| ||||
Thereafter |
|
| 1,472 |
|
|
| 1,384 |
|
Total revenue recognized |
| $ | 3,647 |
|
| $ | 3,248 |
|
For the 13 and 26 weeks ended JuneMarch 29, 2020, the amount of revenue recognized related to the December 30, 2019 liability ending balance was $0.5 million. For the 13 weeks ended March 31, 2019, the amount of revenue recognized related to the December 31,30, 2018 liability ending balance was $0.6 million and $1.5 million, respectively. For the 13 and 26 weeks ended July 1, 2018, the amount of revenue recognized related to the January 1, 2018 liability ending balance was $0.6 million and $1.6 million, respectively.$0.8 million. This revenue related to the recognition of gift card redemptions and upfront franchise fees. For the 2613 weeks ended June 30,March 29, 2020 and March 31, 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 group. If the carrying amount of the asset group exceeds its estimated undiscounted future cash flows, an impairment charge is recognized as the amount by which the carrying amount of the asset group exceeds the fair value of the asset group. The fair value of the shop assets is determined using the discounted future cash flow method of anticipated cash flows through the shop’s lease-end date using fair value measurement inputs classified as Level 3. The fair value of right-of-use assets is estimated using market comparative information for similar properties. Level 3 inputs are derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable. 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 and 26 weeks ended June 30, 2019,March 29, 2020, 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 $0.2$5.9 million for the 13 and 26 weeks ended June 30, 2019. TheMarch 29, 2020, primarily driven by the expected impact of the COVID-19 pandemic on future cash flows. The ultimate severity and longevity of the COVID-19 pandemic is unknown, and therefore, it is possible that impairments could be identified in future periods, and such amounts could be material. After performing a periodic review of the Company’s shops during the 13 weeks ended March 31, 2019, it was determined that there were no indicators of impairment for the quarter ended March 31, 2019 and accordingly, the Company recorded anno impairment charge of $2.1 million and $4.1 million for the 13 and 26 weeks ended July 1, 2018, respectively.March 31, 2019.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Assets recognized or disclosed at fair value on the consolidated financial statements on a nonrecurring basis include items such as leasehold improvements, property and equipment, operating lease assets, goodwill, and other intangible assets. These assets are measured at fair value if determined to be impaired.
The Company reviews indefinite-lived intangible assets, which includes goodwill and tradenames, annually at fiscal year-end for impairment or more frequently if events or circumstances indicate that the carrying value may not be recoverable. Due to the recent impact of the COVID-19 pandemic to the global economy, including but not limited to, the volatility of the Company's stock price as well as that of its competitors, declining sales at the Company's restaurants and the challenging environment for the restaurant industry generally, the Company determined that there were indicators of potential impairment of its goodwill and indefinite-lived intangible assets during the thirteen weeks ended March 29, 2020. As such, the Company performed an impairment assessment for both goodwill and indefinite lived intangible assets and concluded that the fair value of these assets exceeded their carrying values. Accordingly, the Company did not record any impairment to its goodwill or indefinite-lived intangible assets during the thirteen weeks ended March 29, 2020. The ultimate severity and longevity of the COVID-19 pandemic is unknown, and therefore, it is possible that impairments could be identified in future periods, and such amounts could be material.
(4) Loss Per Share
Basic and diluted income per common share attributable to common stockholders are 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 26 weeks ended June 30,March 29, 2020, and March 31, 2019, and July 1, 2018, the Company had a loss per share, and therefore potentially dilutive shares were excluded from the calculation.
The following table summarizes the loss per share calculation:
|
| For the 13 Weeks Ended |
|
| For the 26 Weeks Ended |
|
| For the 13 Weeks Ended |
| |||||||||||||||
|
| June 30, |
|
| July 1, |
|
| June 30, |
|
| July 1, |
|
| March 29, |
|
| March 31, |
| ||||||
|
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
|
| 2020 |
|
| 2019 |
| ||||||
Net loss attributable to Potbelly Corporation |
| $ | (1,866 | ) |
| $ | (360 | ) |
| $ | (20,305 | ) |
| $ | (2,554 | ) |
| $ | (13,336 | ) |
| $ | (18,439 | ) |
Weighted average common shares outstanding-basic |
|
| 23,908,095 |
|
|
| 25,551,386 |
|
|
| 24,020,567 |
|
|
| 25,348,121 |
|
|
| 23,646 |
|
|
| 24,133 |
|
Plus: Effect of potential stock options exercise |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Weighted average common shares outstanding-diluted |
|
| 23,908,095 |
|
|
| 25,551,386 |
|
|
| 24,020,567 |
|
|
| 25,348,121 |
|
|
| 23,646 |
|
|
| 24,133 |
|
Loss per share available to common stockholders-basic |
| $ | (0.08 | ) |
| $ | (0.01 | ) |
| $ | (0.85 | ) |
| $ | (0.10 | ) |
| $ | (0.56 | ) |
| $ | (0.76 | ) |
Loss per share available to common stockholders-diluted |
| $ | (0.08 | ) |
| $ | (0.01 | ) |
| $ | (0.85 | ) |
| $ | (0.10 | ) |
| $ | (0.56 | ) |
| $ | (0.76 | ) |
Potentially dilutive shares that are considered anti-dilutive: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common share options |
|
| 2,376,713 |
|
|
| 2,557,475 |
|
|
| 2,381,767 |
|
|
| 2,829,461 |
|
|
| 2,294 |
|
|
| 2,387 |
|
Our
On March 27, 2020, the CARES Act was enacted into law. The CARES Act is a tax and spending package intended to provide economic relief to address the impact of the COVID-19 pandemic. The CARES Act includes several significant business tax provisions that, among other things, would eliminate the taxable income limit for certain net operating losses (“NOLs”) and allow businesses to carry back NOLs arising in 2018, 2019, and 2020 to the five prior tax years, accelerate refunds of previously generated corporate alternative minimum tax (“AMT”) credits, loosen the business interest limitation under section 163(j), and fix the qualified improvement property regulations in the 2017 Tax Cuts and Jobs Act. As a result of the CARES Act, the Company estimates that it will be able to obtain a tax refund of $3.7 million from the carryback of NOLs and a refund of prior AMT credits.
The interim tax provision is determined using an estimated annual effective tax rate and is adjusted for discrete taxable events that occur during the quarter. The difference betweenCompany recognized an income tax benefit of $3.7 million for the effective tax rate in 2019 and 2018 isthirteen weeks ended March 29, 2020 primarily due to the recordingimpact of the Cares Act discussed above. The Company recorded a tax expense of $13.6 million for the thirteen weeks ended March 31, 2019 due to the Company recording a non-cash charge to income tax expense for the recognition of a full valuation allowance inagainst its net deferred tax assets. The Company continues to record a valuation allowance against all of its deferred tax assets as March 29, 2020. The Company did not provide for an income tax benefit on its pre-tax loss for the first quarter of13 weeks ended March 29, 2020 and March 31, 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 consideredconsiders 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, theThe 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 continuescontinue 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.March 29, 2020. 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 valuation allowance will be adjusted accordingly.
accordingly
(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 Company’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 liabilities are recognized at the lease commencement date. Operating lease liabilities represent the present value of lease 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 maturities of the leases. As we have no outstanding debt nor committed credit facilities, secured or otherwise, we estimateThe Company estimates this rate based on prevailing financial market conditions, comparable company and credit analysis, and management judgment.
We recognize expense for these leases on a straight-line basis over the lease term. Additionally, tenant incentives used to fund leasehold improvements are recognized when earned and reduce our right-of-use asset related to the lease. These are amortized through the right-of-use asset as reductions of expense over the lease term.
Related to the adoption of Topic 842, our policy elections were as follows:
|
| |
|
|
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 |
|
Operating lease term and discount rate were as follows:
| ||||
| ||||
|
| |||
|
|
|
|
| March 29, |
|
| March 31, |
| ||
|
| 2020 |
|
| 2019 |
| ||
Weighted average remaining lease term (years) |
| 8.33 |
|
| 8.90 |
| ||
Weighted average discount rate |
|
| 7.90 | % |
|
| 8.01 | % |
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 |
|
|
| 13 weeks ending |
|
| 13 weeks ending |
| ||||
|
|
|
| June 30, |
|
| June 30, |
|
|
| March 29, |
|
| March 31, |
| ||||
|
| Classification |
| 2019 |
|
| 2019 |
| Classification |
| 2020 |
|
| 2019 |
| ||||
Operating lease cost |
| Occupancy and General and administrative expenses |
|
| 11,611 |
|
|
| 22,606 |
| Occupancy and General and administrative expenses |
|
| 11,770 |
|
|
| 10,995 |
|
Variable lease cost |
| Occupancy |
|
| 3,649 |
|
|
| 7,153 |
| Occupancy |
|
| 3,322 |
|
|
| 3,504 |
|
Total lease cost |
|
|
| $ | 15,260 |
|
| $ | 29,759 |
|
|
| $ | 15,092 |
|
| $ | 14,499 |
|
Supplemental disclosures of cash flow information related to leases were as follows:
|
| 13 weeks ending |
|
| 26 weeks ending |
|
| 13 weeks ending |
|
| 13 weeks ending |
| ||||
|
| June 30, |
|
| June 30, |
|
| March 29, |
|
| March 31, |
| ||||
|
| 2019 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Operating cash flows rent paid for operating lease liabilities |
|
| 11,788 |
|
|
| 23,726 |
|
|
| 11,979 |
|
|
| 11,938 |
|
Operating right-of-use assets obtained in exchange for new operating lease liabilities |
|
| 2,735 |
|
|
| 3,657 |
|
|
| 5,534 |
|
|
| 922 |
|
Reduction in operating right-of-use assets due to lease terminations |
|
| (1,320 | ) |
|
| (5,847 | ) |
|
| 1,439 |
|
|
| — |
|
As of June 30, 2019,March 29, 2020, the Company has additional operating lease payments related to shopshad no real estate leases entered into that had 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.commenced.
Maturities of lease liabilities were as follows as of June 30, 2019:March 29, 2020:
|
| Operating Leases |
|
| Operating Leases |
| ||
Remainder of 2019 |
|
| 23,542 |
| ||||
2020 |
|
| 45,919 |
| ||||
Remainder of 2020 |
|
| 34,954 |
| ||||
2021 |
|
| 41,664 |
|
|
| 44,610 |
|
2022 |
|
| 36,359 |
|
|
| 39,071 |
|
2023 |
|
| 31,492 |
|
|
| 34,321 |
|
2024 |
|
| 28,775 |
|
|
| 31,180 |
|
2025 |
|
| 28,836 |
| ||||
Thereafter |
|
| 135,169 |
|
|
| 112,902 |
|
Total lease payments |
|
| 342,920 |
|
|
| 325,874 |
|
Less: imputed interest |
|
| (102,896 | ) |
|
| (93,271 | ) |
Present value of lease liabilities |
| $ | 240,024 |
|
| $ | 232,603 |
|
(7) Debt and Credit Facilities
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. (“JPMorgan”) that expires in July 2022. The Credit Agreement amends and restates 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. 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 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.
On March 17, 2020, the Company fully drew the available capacity of $39.8 million under its Revolving Credit Facility as a precautionary measure in order to increase its cash position and preserve financial flexibility in light of current uncertainty in the global markets resulting from the COVID-19 pandemic. In accordance with the terms of its Revolving Credit Facility, the proceeds from these borrowings may in the future be used for working capital, general corporate or other permitted purposes. As previously disclosed in our 2018 Annual Report on Form 10-K andof March 29, 2020, the Company had $39.8 million outstanding under the previous lease accounting, maturities of lease liabilitiesCredit Agreement. There were as followsno borrowings outstanding as of DecemberMarch 31, 2019.
The Credit Agreement was subsequently amended as of May 15, 2020 (the “Credit Agreement Amendment”) to, among other things (i) change the maturity date from July 31, 2022 to March 31, 2022; (ii) eliminate the $20.0 million expansion feature; (iii) amend the interest rate to the Company’s option at either (a) a eurocurrency rate determined by reference to the applicable LIBOR rate with a 1.00% floor plus a margin of 5.00% or (b) a prime rate as announced by JP Morgan plus 4.00%; (iv) amend the commitment fee to 1.00% per annum in respect of any unused commitments under the credit facility; (v) implement additional restrictions on restricted payments, acquisitions and other indebtedness; and (vi) implement additional financial covenants. Per the terms of the Credit Agreement Amendment, the Company repaid $15.0 million of its outstanding borrowing at the signing of the Credit Agreement Amendment, and may re-borrow this $15.0 million when its cash balances held by JP Morgan declines below $28.0 million. Lastly, the Company is required to pay an upfront fee of 1% of the outstanding loan balance within fifteen business days of the signing of the Credit Agreement Amendment.
The Credit Agreement Amendment includes financial covenants that require the Company to maintain minimum liquidity levels, minimum building adjusted EBITDA, maximum total debt to adjusted EBITDA and a minimum trailing twelve months (“TTM”) adjusted EBITDA. The Company is required to maintain (i) a minimum liquidity level of $45.0 million at April 30, 2018:2020 and $32.5 million at May 31, 2020; (ii) a minimum building adjusted EBITDA of ($8.5) million for April 2020 and ($16.0) million for the period of April 2020 through May 2020; (iii) a maximum total debt to adjusted EBITDA ratio of 2.25 to 1.00 beginning June 30, 2020; and (iv) a minimum TTM adjusted EBITDA of $16.0 million beginning June 30, 2020, $15.0 million beginning September 30, 2020 and $17.0 million beginning September 30, 2021. Compliance with the financial covenants was waived for March 29, 2020 as part of the Credit Agreement Amendment. The Company expects that it will be in compliance with the revised covenants for the April and May 2020 reporting periods. The Company concluded that without any additional changes, it would likely not meet the maximum total debt to adjusted EBITDA and/or the minimum TTM adjusted EBITDA requirements beginning with the month of June 2020, in which case the lenders would have the ability to demand repayment of the outstanding debt at such time. Accordingly, the outstanding balance is presented as a current liability as of March 29, 2020 based on the guidance in ASC 470, Debt.
|
| 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)(8) 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. The 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, SEC requirements and other factors. Purchases may be started or stopped at any time without prior notice depending on market conditions and other factors. For the 13 weeks ended June 30,March 29, 2020, the Company did not repurchase any shares of its common stock. Due to the COVID-19 pandemic, the Company does not have plans to repurchase any common stock under its share repurchase program at this time. For the 13 weeks ended March 31, 2019, the Company repurchased 350,659135,000 shares of its common stock for approximately $2.3 million under the stock repurchase program, including cost and commission, in open market transactions. For the 26 weeks ended June 30, 2019, the Company repurchased 485,659 shares of its common stock for approximately $3.5$1.1 million under the stock 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.
(8)(9) Stock-Based Compensation
Stock options
On May 16, 2019, the Company’s stockholders approved the Potbelly Corporation 2019 Long-Term Incentive Plan (the “2019 Plan”) and, in connection therewith, all equity awards made after that date were made under the 2019 Plan. On June 10, 2019,The Company has awarded stock options to certain employees of the Company registered 1,200,000 sharesand certain non-employee members of its common stock reserved for issuance under the 2019 Plan. All remaining sharesBoard of common stock reserved for issuance under the previous Amended and Restated 2013 Long-Term Incentive Plan (the “2013 Plan”) are available for issuance under the 2019 Plan and no future awards will be made under the 2013 Plan.Directors. The grants generally vest over a four-year period. The fair value of stock options is determined using the Black-Scholes option pricing model. There were no stock options granted during the 13 weeks and 26 weeks ended June 30, 2019.March 29, 2020.
A summary of stock option activity for the 2613 weeks ended June 30, 2019March 29, 2020 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 30, 2018 |
|
| 2,150 |
|
| $ | 11.49 |
|
| $ | 378 |
|
|
| 5.13 |
| ||||||||||||||||
Outstanding—December 29, 2019 |
|
| 1,774 |
|
| $ | 11.34 |
|
| $ | — |
|
|
| 4.33 |
| ||||||||||||||||
Granted |
|
| — |
|
|
| — |
|
|
|
|
|
|
|
|
|
|
| — |
|
|
| — |
|
|
|
|
|
|
|
|
|
Exercised |
|
| (22 | ) |
|
| 7.93 |
|
|
|
|
|
|
|
|
|
|
| — |
|
|
| — |
|
|
|
|
|
|
|
|
|
Canceled |
|
| (198 | ) |
|
| 13.54 |
|
|
|
|
|
|
|
|
|
|
| (33 | ) |
|
| 10.51 |
|
|
|
|
|
|
|
|
|
Outstanding—June 30, 2019 |
|
| 1,930 |
|
| $ | 11.32 |
|
| $ | — |
|
|
| 5.04 |
| ||||||||||||||||
Exercisable—June 30, 2019 |
|
| 1,534 |
|
| $ | 11.05 |
|
| $ | — |
|
|
| 4.15 |
| ||||||||||||||||
Outstanding—March 29, 2020 |
|
| 1,741 |
|
|
| 11.35 |
|
| $ | — |
|
|
| 4.01 |
| ||||||||||||||||
Exercisable—March 29, 2020 |
|
| 1,563 |
|
| $ | 11.12 |
|
| $ | — |
|
|
| 3.60 |
|
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 26ended March 29, 2020, the Company recognized stock-based compensation expense related to stock options of $0.2 million. For the 13 weeks ended June 30,March 31, 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 $0.3 million and $1.0 million, respectively.million. As of June 30, 2019,March 29, 2020, unrecognized stock-based compensation expense for stock options was $1.4$0.6 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 26ended March 29, 2020, the Company recognized stock-based compensation expense related to RSUs of $0.3 million. For the 13 weeks ended June 30,March 31, 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.$0.2 million. As of June 30, 2019,March 29, 2020, unrecognized stock-based compensation expense for RSUs was $2.1$1.9 million, which will be recognized though fiscal year 2022.2023.
A summary of RSU activity for the 2613 weeks ended June 30, 2019March 29, 2020 is as follows:
RSUs |
| Number of RSUs |
|
| Weighted Average Fair Value per Share |
|
| Number of RSUs (Thousands) |
|
| Weighted Average Fair Value per Share |
| ||||
Non-vested as of December 30, 2018 |
|
| 247 |
|
| $ | 11.99 |
| ||||||||
Non-vested as of December 29, 2019 |
|
| 463 |
|
| $ | 7.59 |
| ||||||||
Granted |
|
| 306 |
|
|
| 7.02 |
|
|
| 158 |
|
|
| 3.88 |
|
Vested |
|
| (93 | ) |
|
| 6.13 |
|
|
| (68 | ) |
|
| 3.18 |
|
Canceled |
|
| (13 | ) |
|
| 8.46 |
|
|
| — |
|
|
| — |
|
Non-vested as of June 30, 2019 |
|
| 447 |
|
| $ | 8.68 |
| ||||||||
Non-vested as of March 29, 2020 |
|
| 553 |
|
| $ | 6.38 |
|
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 ended March 29, 2020 and 26 weeks ended June 30,March 31, 2019, theno expense associated with the PSUs was not material.recognized related to PSUs.
(9)(10) 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. The Complaint was brought as a nationwide “collective action” under the FLSA and as a “class action” under NYLL. Since the filing of the Complaint, 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 towhich received final court approval.approval on February 4, 2020. All charges related to the claims are reflected in the statement of operations.
(10)(11) Subsequent EventEvents
Paycheck Protection Program Loan
On August 7, 2019,April 10, 2020, Potbelly Sandwich Works, LLC, an indirect subsidiary of the Company, entered intowas granted a second amended and restated revolving credit facility agreementloan (the "Credit Agreement"“Loan”) withfrom 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 asthe aggregate amount 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$10.0 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 referencepursuant 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 uponPaycheck Protection Program under Division A, Title I of the Company’s consolidated total leverage ratio.CARES Act, which was enacted March 27, 2020. On the last day of each calendar quarter,April 28, 2020, the Company is required to pay a commitment fee of 0.20% per annum in respect of any unused commitments underrepaid 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$10.0 million proceeds from the “restricted payments” (primarily distributions and equity repurchases) thatloan.
Credit Facility
On May 15, 2020, the Company may make, provided that proceeds of the loans under the credit agreement may not be usedentered in to an amendment to its Credit Agreement. See Note 7 for purposes of making restricted payments.further details.
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 30, 2018.29, 2019. 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, estimated costs associated with our closure of underperforming shops, and the implementation and results of 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, the COVID-19 outbreak; compliance with covenants in our credit facility; competition; general economic conditions; our ability to successfully implement our business strategy; the success of our initiatives to increase sales and traffic; changes in commodity, energy and other costs; our ability to attract and retain management and employees; consumer reaction to industry-related public health issues and perceptions of food safety; our ability to manage our growth; reputational and brand issues; price and availability of commodities; consumer confidence and spending patterns; and weather conditions. Forward-looking statements are based on current expectations and assumptions and currently available data and are neither predictions nor guarantees of future events or performance. You should not place undue reliance on forward-looking statements, which speak only as of the date hereof. See “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements” included in our Annual Report on Form 10-K for the fiscal year ended December 30, 2018,29, 2019, 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.
OverviewBusiness
Potbelly Corporation is a neighborhood sandwich concept that has been feeding customers’ smiles with warm, toasty sandwiches, signature salads, hand-dipped shakes and other fresh menu items, customized just the way customers want them,a much-needed lunch-break escape for more than 40 years. Potbelly promises Fresh, Fast & Friendly serviceowns and operates Potbelly Sandwich Shop concepts in an environment that reflects the local neighborhood. United States. The Company also has domestic franchise operations of Potbelly Sandwich Shop concepts. Potbelly’s chief operating decision maker is our Chief Executive Officer. Based on how our Chief Executive Officer reviews financial performance and allocates resources on a recurring basis, the Company has one operating segment and one reportable segment.
Our employees are trainedshop model is designed to engage withgenerate, and has generated, strong cash flow, attractive shop-level financial results and high returns on investment. We operate our customersshops successfully in a genuine waywide range of geographic markets, population densities and real estate settings. We aim to providegenerate average shop-level profit margins, a personalized experience.non-GAAP measure, that range from the high teens to above 20%. Our shops feature vintage design elementsability to achieve such margins and locally-themed décor inspiredreturns depends on a number of factors. For example, we face increasing labor and commodity costs, which we have partially offset by the neighborhoodincreasing menu prices. Although there is no guarantee that we believe create a lively atmosphere. Through this combination,will be able to maintain these returns, we believe we are creating a devoted base of Potbelly fans that return againour attractive shop economics support our ability to profitably grow our brand in new 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 and Values, and the foundation of everything we do. Our Vision is to create an experience people love to share thanks to our craveable food, quirky personality and amazing people. Our Mission is to help people 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.existing markets.
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 31, 2017 |
|
| 437 |
|
|
| 39 |
|
|
| 16 |
|
|
| 55 |
|
|
| 492 |
| ||||||||||||||||||||
Shops opened |
|
| 5 |
|
|
| 2 |
|
|
| 2 |
|
|
| 4 |
|
|
| 9 |
| ||||||||||||||||||||
Shops closed |
|
| (6 | ) |
|
| — |
|
|
| (1 | ) |
|
| (1 | ) |
|
| (7 | ) | ||||||||||||||||||||
Shops as of July 1, 2018 |
|
| 436 |
|
|
| 41 |
|
|
| 17 |
|
|
| 58 |
|
|
| 494 |
| ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Operated |
|
| Domestic |
|
| International |
|
| Total |
|
| Company |
| |||||
Shops as of December 30, 2018 |
|
| 437 |
|
|
| 41 |
|
|
| 8 |
|
|
| 49 |
|
|
| 486 |
|
|
| 437 |
|
|
| 41 |
|
|
| 8 |
|
|
| 49 |
|
|
| 486 |
|
Shops opened |
|
| 1 |
|
|
| 5 |
|
|
| — |
|
|
| 5 |
|
|
| 6 |
|
|
| 1 |
|
|
| 2 |
|
|
| — |
|
|
| 2 |
|
|
| 3 |
|
Shops closed |
|
| (9 | ) |
|
| (2 | ) |
|
| (7 | ) |
|
| (9 | ) |
|
| (18 | ) |
|
| (7 | ) |
|
| — |
|
|
| (1 | ) |
|
| (1 | ) |
|
| (8 | ) |
Shops as of June 30, 2019 |
|
| 429 |
|
|
| 44 |
|
|
| 1 |
|
|
| 45 |
|
|
| 474 |
| ||||||||||||||||||||
Shops as of March 31, 2019 |
|
| 431 |
|
|
| 43 |
|
|
| 7 |
|
|
| 50 |
|
|
| 481 |
| ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
Shops as of December 29, 2019 |
|
| 428 |
|
|
| 46 |
|
|
| — |
|
|
| 46 |
|
|
| 474 |
| ||||||||||||||||||||
Shops opened |
|
| 3 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 3 |
| ||||||||||||||||||||
Shops closed |
|
| (4 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (4 | ) | ||||||||||||||||||||
Shops as of March 29, 2020 |
|
| 427 |
|
|
| 46 |
|
|
| — |
|
|
| 46 |
|
|
| 473 |
|
Impact of COVID-19 on Our Business
On January 30, 2020, the WHO announced a global health emergency because of COVID-19 and the risks to the international community as the virus spreads globally. On March 11, 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally. The COVID-19 pandemic has significantly impacted economic conditions in the United States where all our shops are located. In response to the pandemic, many states and jurisdictions in which we operate have issued stay-at-home orders and other measures aimed at slowing the spread of the coronavirus. While most of our company-owned shops remain open in accordance with guidance from local authorities, these measures resulted in us closing the vast majority our dining rooms and shifting to off-premise operations only, and we experienced a sudden and drastic decrease in revenues.
The COVID-19 pandemic has adversely affected, and will continue to adversely affect, our operations and financial results for the foreseeable future. There are many uncertainties regarding the current coronavirus COVID-19 pandemic, and the Company is closely monitoring the impact of the pandemic on all aspects of its business, including how it will impact its customers, employees, suppliers, vendors, business partners, and distribution channels. The Company is unable to predict the impact that COVID-19 will have on its financial position and operating results due to numerous uncertainties, however, the Company is continually assessing the evolving impact of the COVID-19 pandemic and intends to make adjustments to its responses accordingly.
As the COVID-19 pandemic emerged, the Company’s first priority was and continues to be ensuring the health and safety of our employees as we serve our customers and communities. We have provided masks, gloves, and other protective equipment to our shop employees, and we continue to adhere to our stringent food safety and quality assurance programs. We are monitoring recommendations from the CDC and will make necessary adjustments to align with emerging best practices. We have been in regular contact with our supply chain partners and we have not experienced, nor do we foresee, disruptions in our supply chain. As of May 15, 2020, 52 of the Company’s shops were closed temporarily. We have implemented a strategy to reduce costs and preserve cash. Please see the “Liquidity and Capital Resources” section below for additional details.
Revenue – Through the first ten weeks of 2020, we saw comparable same-store-sales increase 2.5% and the Company was on pace to record the first positive quarterly comparable same-store-sales since 2016. Due to the negative impact of the COVID-19 pandemic, we reported a decrease in comparable same-store-sales of 10.1% for the quarter ended March 29, 2020 compared to the prior year. As our shops have shifted to off-premise operations only, we are continuing to provide delivery, in-shop pick-up, drive-thru, or curbside pick-up services. Customers can place off-premise orders through Potbelly.com and the Potbelly app, or through DoorDash, Grubhub, and Uber Eats marketplaces nationwide. The Company launched the Potbelly Pantry program, which allows customers to purchase Potbelly products in bulk as a response to changing customer needs during the pandemic.
Operating Costs - We have implemented measures to reduce operating costs and general and administrative expenses in response to the negative impact the pandemic has had on our business. We have adjusted shop-level labor and reduced purchases of inventory to align with new levels of demand. We have reduced advertising and marketing expenditures. We enacted a hiring freeze, and all business travel has been suspended. As of the beginning of the second quarter of 2020, we temporarily reduced salaries for all corporate employees, suspended merit increases, promotions, bonuses, and certain benefits, furloughed approximately one-third of corporate employees. The Board of Directors have elected to temporarily defer compensation. We have suspended the payment of rent on the majority of our leases and are in discussions with our landlords regarding the restructuring of those leases in light of various contractual and legal defenses.
Shop Development – The Company has halted capital investment in new company-owned shops, except for shops that are substantially complete, as well as all non-essential capital expenditures. The Company does not have plans to begin construction on any company-owned shops until the impact of the pandemic is behind us.
We will continue to actively monitor the evolving situation and may take further actions that alter our business operations as may be required by federal, state or local authorities or that we determine are in the best interests of our employees, customers, franchisees, stakeholders and communities.
13 Weeks Ended June 30, 2019March 29, 2020 Compared to 13 Weeks Ended July 1, 2018March 31, 2019
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 |
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||
|
| June 30, 2019 |
|
| % of Revenues |
|
| July 1, 2018 |
|
| % of Revenues |
|
| Increase (Decrease) |
|
| Percent Change |
|
| March 29, 2020 |
|
| % of Revenues |
|
| March 31, 2019 |
|
| % of Revenues |
|
| Increase (Decrease) |
|
| Percent Change |
| ||||||||||||
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sandwich shop sales, net |
| $ | 104,801 |
|
|
| 99.2 | % |
| $ | 109,381 |
|
|
| 99.1 | % |
| $ | (4,580 | ) |
|
| (4.2 | )% |
| $ | 86,961 |
|
|
| 99.3 | % |
| $ | 97,258 |
|
|
| 99.2 | % |
| $ | (10,297 | ) |
|
| (10.6 | )% |
Franchise royalties and fees |
|
| 829 |
|
|
| 0.8 |
|
|
| 966 |
|
|
| 0.9 |
|
|
| (137 | ) |
|
| (14.2 | ) |
|
| 629 |
|
|
| 0.7 |
|
|
| 829 |
|
|
| 0.8 |
|
|
| (200 | ) |
|
| (24.1 | ) |
Total revenues |
|
| 105,630 |
|
|
| 100.0 |
|
|
| 110,347 |
|
|
| 100.0 |
|
|
| (4,717 | ) |
|
| (4.3 | ) |
|
| 87,590 |
|
|
| 100.0 |
|
|
| 98,087 |
|
|
| 100.0 |
|
|
| (10,497 | ) |
|
| (10.7 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Percentages stated as a percent of sandwich shop sales, net) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||
Sandwich shop operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold, excluding depreciation |
|
| 28,264 |
|
|
| 26.8 |
|
|
| 28,639 |
|
|
| 26.0 |
|
|
| (375 | ) |
|
| (1.3 | ) |
|
| 24,174 |
|
|
| 27.8 |
|
|
| 25,978 |
|
|
| 26.7 |
|
|
| (1,804 | ) |
|
| (6.9 | ) |
Labor and related expenses |
|
| 32,114 |
|
|
| 30.4 |
|
|
| 32,412 |
|
|
| 29.4 |
|
|
| (298 | ) |
|
| (0.9 | ) |
|
| 30,397 |
|
|
| 35.0 |
|
|
| 31,973 |
|
|
| 32.9 |
|
|
| (1,576 | ) |
|
| (4.9 | ) |
Occupancy expenses |
|
| 15,230 |
|
|
| 14.4 |
|
|
| 14,985 |
|
|
| 13.6 |
|
|
| 245 |
|
|
| 1.6 |
|
|
| 15,028 |
|
|
| 17.3 |
|
|
| 14,377 |
|
|
| 14.8 |
|
|
| 651 |
|
|
| 4.5 |
|
Other operating expenses |
|
| 11,816 |
|
|
| 11.2 |
|
|
| 12,793 |
|
|
| 11.6 |
|
|
| (977 | ) |
|
| (7.6 | ) |
|
| 12,765 |
|
|
| 14.7 |
|
|
| 12,145 |
|
|
| 12.5 |
|
|
| 620 |
|
|
| 5.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||
(Percentages stated as a percent of total revenues) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||
General and administrative expenses |
|
| 13,843 |
|
|
| 13.1 |
|
|
| 13,440 |
|
|
| 12.2 |
|
|
| 403 |
|
|
| 3.0 |
|
|
| 10,734 |
|
|
| 12.3 |
|
|
| 12,709 |
|
|
| 13.0 |
|
|
| (1,975 | ) |
|
| (15.5 | ) |
Depreciation expense |
|
| 5,585 |
|
|
| 5.3 |
|
|
| 5,858 |
|
|
| 5.3 |
|
|
| (273 | ) |
|
| (4.7 | ) |
|
| 5,456 |
|
|
| 6.2 |
|
|
| 5,536 |
|
|
| 5.6 |
|
|
| (80 | ) |
|
| (1.4 | ) |
Pre-opening costs |
|
| — |
|
| * |
|
|
| 68 |
|
| * |
|
|
| (68 | ) |
|
| (100.0 | ) |
|
| 64 |
|
| * |
|
|
| 10 |
|
| * |
|
|
| 54 |
|
| >100 |
| |||||
Impairment and loss on disposal of property and equipment |
|
| 246 |
|
|
| 0.2 |
|
|
| 2,057 |
|
|
| 1.9 |
|
|
| (1,811 | ) |
|
| (88.0 | ) |
|
| 5,957 |
|
|
| 6.8 |
|
|
| 82 |
|
| * |
|
|
| 5,875 |
|
| >100 |
| ||
Total expenses |
|
| 107,098 |
|
| >100 |
|
|
| 110,252 |
|
|
| 99.9 |
|
|
| (3,154 | ) |
|
| (2.9 | ) |
|
| 104,575 |
|
| >100 |
|
|
| 102,810 |
|
| >100 |
|
|
| 1,765 |
|
|
| 1.7 |
| |||
Income (loss) from operations |
|
| (1,468 | ) |
|
| (1.4 | ) |
|
| 95 |
|
| * |
|
|
| (1,563 | ) |
| >(100) |
| ||||||||||||||||||||||||||
Loss from operations |
|
| (16,985 | ) |
|
| (19.4 | ) |
|
| (4,723 | ) |
|
| (4.8 | ) |
|
| (12,262 | ) |
| >100 |
| |||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
| 35 |
|
| * |
|
|
| 28 |
|
| * |
|
|
| 7 |
|
|
| 25.0 |
|
|
| 74 |
|
| * |
|
|
| 32 |
|
| * |
|
|
| 42 |
|
| >100 |
| |||||
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 | ) | ||||||||||||||||||||||||
Loss before income taxes |
|
| (17,059 | ) |
|
| (19.5 | ) |
|
| (4,755 | ) |
|
| (4.8 | ) |
|
| (12,304 | ) |
| >100 |
| |||||||||||||||||||||||||
Income tax expense (benefit) |
|
| (3,709 | ) |
|
| (4.2 | ) |
|
| 13,619 |
|
|
| 13.9 |
|
|
| (17,328 | ) |
| >(100) |
| |||||||||||||||||||||||||
Net loss |
|
| (1,749 | ) |
|
| (1.7 | ) |
|
| (235 | ) |
|
| (0.2 | ) |
|
| (1,514 | ) |
| >100 |
|
|
| (13,350 | ) |
|
| (15.2 | ) |
|
| (18,374 | ) |
|
| (18.7 | ) |
|
| 5,024 |
|
|
| (27.3 | ) | |
Net income attributable to non-controlling interest |
|
| 117 |
|
|
| 0.1 |
|
|
| 125 |
|
|
| 0.1 |
|
|
| (8 | ) |
|
| (6.4 | ) | ||||||||||||||||||||||||
Net income (loss) attributable to non-controlling interest |
|
| (14 | ) |
| * |
|
|
| 65 |
|
| * |
|
|
| (79 | ) |
| >(100) |
| |||||||||||||||||||||||||||
Net loss attributable to Potbelly Corporation |
| $ | (1,866 | ) |
|
| (1.8 | )% |
| $ | (360 | ) |
|
| (0.3 | )% |
| $ | (1,506 | ) |
| >100% |
|
| $ | (13,336 | ) |
|
| (15.2 | )% |
| $ | (18,439 | ) |
|
| (18.8 | )% |
| $ | 5,103 |
|
|
| (27.7 | )% |
* | Amount is less than 0.1% |
Revenues
Total revenues decreased by $4.7$10.5 million, or 4.3%10.7%, to $105.6$87.6 million during the 13 weeks ended June 30, 2019,March 29, 2020, from $110.3$98.1 million during the 13 weeks ended July 1, 2018.March 31, 2019. The Company’s comparable store sales increased 2.5% during the first 10 weeks of the quarter before experiencing the impact of the COVID-19 pandemic. The revenue decrease for the quarter was driven by a $4.3$9.6 million, or 4.0%10.1%, decrease in sales from company-operated comparable store shops and a decrease in sales of $2.0$0.7 million from shops that have closed.closed and $0.4 million from shops not yet in our company-operated comparable store sales base. 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 2019.2020.
Cost of goods sold decreased by $0.4$1.8 million, or 1.3%6.9%, to $28.3$24.2 million during the 13 weeks ended June 30, 2019,March 29, 2020, from $28.6$26.0 million during the 13 weeks ended July 1, 2018.March 31, 2019. This decrease was primarily driven by a decrease in shop revenue. As a percentage of revenues,sandwich shop sales, cost of goods sold increased to 26.8%27.8% during the 13 weeks ended June 30, 2019,March 29, 2020, from 26.0%26.7% during the 13 weeks ended July 1, 2018,March 31, 2019, primarily driven by higher discounting and cost inflation in certain products and reserves for inventory spoilage from the decrease in sales, partially offset by certain menu price increases.
Labor and Related Expenses
Labor and related expenses decreased by $0.3$1.6 million, or 0.9%4.9%, to $32.1$30.4 million during the 13 weeks ended June 30, 2019,March 29, 2020, from $32.4 million during$32.0 for the 13 weeks ended July 1, 2018,March 31, 2019, primarily due to labor management amid a decrease in shop revenue and a decrease in expense from closed shops, and labor management, partially offset by inflationary wage increases in certain states.inflation. As a percentage of revenues,sandwich shop sales, labor and related expenses increased to 30.4%35.0% during the 13 weeks ended June 30, 2019,March 29, 2020, from 29.4%32.9% during the 13 weeks ended July 1, 2018,March 31, 2019, primarily driven by inflationary wage increases in certain states and sales deleverage in certain labor related costs which wasnot directly variable with sales, partially offset by a decrease in expense from closed shops.
Occupancy Expenses
Occupancy expenses increased by $0.2$0.7 million, or 1.6%4.5%, to $15.2 million during the 13 weeks ended June 30, 2019, from $15.0 million during the 13 weeks ended July 1, 2018March 29, 2020, from $14.4 million during the 13 weeks ended March 31, 2019 primarily due to inflation in certain occupancy related costs, including lease renewals, real estate taxes and common area maintenance, partially offset by shop closures.a decrease in expense related to closed shops. As a percentage of revenues,sandwich shop sales, occupancy expenses increased to 14.4%17.3% during the 13 weeks ended June 30, 2019,March 29, 2020, from 13.6%14.8% during the 13 weeks ended July 1, 2018,March 31, 2019, 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 decreasedincreased by $1.0$0.6 million, or 7.6%5.1%, to $11.8 million during the 13 weeks ended June 30, 2019, from $12.8 million during the 13 weeks ended July 1, 2018. The decrease was primarily attributable to a decrease in music, utilities, and supplies, partially offset by an increase in delivery and third-party sales expense. As a percentage of revenues, other operating expenses decreased slightly to 11.2%March 29, 2020, from $12.1 million during the 13 weeks ended June 30, 2019, from 11.6%March 31, 2019. The increase was primarily attributable to higher expenses related to third-party delivery partnerships driven by increased sales in that channel, partially offset by a decrease in certain items variable with sales. As a percentage of sandwich shop sales, other operating expenses increased to 14.7% during the 13 weeks ended July 1, 2018,March 29, 2020, from 12.5% during the 13 weeks ended March 31, 2019, primarily driven by sales deleverage in operating expense items such as utilities and other expenses not directly variable with sales.
General and Administrative Expenses
General and administrative expenses increaseddecreased by $0.4$2.0 million, or 3.0%15.5%, to $13.8$10.7 million during the 13 weeks ended June 30, 2019,March 29, 2020, from $13.4$12.7 million during the 13 weeks ended July 1, 2018.March 31, 2019. The increasedecrease was driven primarily by an increasea decrease in advertising, professional services, and lease exit costs partially offset by a decrease in restructuringand advertising costs stock-based compensation expense and performance-based incentive expenses. As a percentage of revenues, general and administrative expenses increaseddecreased to 13.1%12.3% during the 13 weeks ended June 30, 2019,March 29, 2020, from 12.2%13.0% during the 13 weeks ended July 1, 2018,March 31, 2019, primarily due to an increasea decrease 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.advertising costs.
Depreciation Expense
Depreciation expense decreased by $0.3$0.1 million, or 4.7%1.4%, to $5.6$5.5 million during the 13 weeks ended June 30, 2019,March 29, 2020, from $5.9$5.5 million during the 13 weeks ended July 1, 2018.March 31, 2019. The decrease was driven primarily by a lower depreciable base related to impairment charges taken subsequent toa decrease in the 13 weeks ended July 1, 2018,number of company-operated shops, 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%6.2% during the 13 weeks ended June 30, 2019,March 29, 2020 and was 5.6% for the 13 weeks ended July 1, 2018.March 31, 2019.
Pre-Opening Costs
Pre-opening costs were $0 during the 13 weeks ended June 30, 2019 and $68$64 thousand during the 13 weeks ended July 1, 2018.March 29, 2020 and $10 thousand during the 13 weeks ended March 31, 2019. The decreaseincrease was due to no3 new company-operated shop openings in the secondfirst quarter of 2020 compared to 1 shop opening in the first 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 decreasedincreased to $0.2$6.0 million during the 13 weeks ended June 30, 2019,March 29, 2020, from $2.1$0.1 million during the 13 weeks ended July 1, 2018.March 31, 2019 primarily due to the expected impact of COVID-19 on future cash flows. After performing periodic reviews of Company shops during the secondfirst quarter of 2019,2020, 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$5.9 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.
The COVID-19 outbreak has had a significant impact on the global economy, including declining sales at our restaurants and the overall challenging environment for the restaurant industry. Given the high degree of uncertainty as to whether, when or the manner in which the conditions surrounding the pandemic will change, including the timing of any lifting of restrictions on restaurant operating hours, dine-in limitations or other restrictions that largely limited restaurants to take-out and delivery sales, customer engagement with our brand, the short- and long-term impact on consumer discretionary spending and overall global economic conditions, it is possible that non-cash impairments could be identified in tangible assets in the future. However, given the current challenges facinglikelihood or the industry and our business, future evaluations could result in additionalamount of an impairment charges.charge cannot be reasonably estimated at this time.
Interest expense was $35$74 thousand during the 13 weeks ended June 30, 2019March 29, 2020 and $28$32 thousand during the 13 weeks ended July 1, 2018.March 31, 2019.
Income Tax Expense
IncomeThe Company recognized an income tax expense was $0.2benefit of $3.7 million for the 13thirteen 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 |
|
|
|
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,March 29, 2020 primarily due to a decreasediscrete tax benefit recorded for the carryback of NOLs and a refund of prior AMT credits allowed under the CARES Act, which the Company estimates will result 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 percentagetax refund 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.$3.7 million. The decrease was primarily attributable to items such as music, supplies, utilities and certain other expenses. AsCompany recorded a percentagetax expense 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 was 5.5% during the 26 weeks ended June 30, 2019, and the 26 weeks ended July 1, 2018.
Pre-Opening Costs
Pre-opening costs decreased by $0.1 million, or 92.6%, to $10 thousand during the 26 weeks ended June 30, 2019, from $0.1 million during the 26 weeks ended July 1, 2018. The decrease was driven primarily by fewer shops opened during the 26 weeks ended June 30, 2019 compared to the 26 weeks ended July 1, 2018.
Impairment and Loss on Disposal of Property and Equipment
Impairment and loss on disposal of property and equipment decreased to $0.3 million during the 26 weeks ended June 30, 2019, compared to $4.1 million during the 26 weeks ended July 1, 2018. After performing periodic reviews of Company shops during the first and second quarter of 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 $0.2$13.6 million for the excess ofthirteen weeks ended March 31, 2019 due to the carrying amount recorded on our balance sheet over the shops’ estimated fair value. We perform impairment analyses onCompany recording 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
Interestnon-cash charge to income tax expense was $67 thousand for the 26 weeks ended June 30, 2018 and $55 thousand for the 26 weeks ended July 1, 2018.
Income Tax Expense (Benefit)
Income tax expense increased by $14.1 million, or more than 100%, to $13.9 million for the 26 weeks ended June 30, 2019, from a benefitrecognition of $0.2 million for the 26 weeks ended 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 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 valuation allowance will be adjusted accordingly.
Liquidity and Capital Resources
General
Historically, 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, 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
The COVID-19 pandemic’s impact on our operations and expansion plansrevenues has significantly affected our ability to generate cash from operations. To preserve financial flexibility, the Company drew the $40.0 million of available capacity under its revolving credit facility. The Company ended the quarter with a cash balance of $45.8 million compared to a balance of $18.8 million at December 29, 2019. The increase in the cash balance is primarily due to the borrowing under its Revolving Credit Facility.
Due to the dramatic impact of the pandemic on operations and sales, we suspended the payment of rent on the majority of our leases. We are in discussions with our landlords regarding the restructuring of those leases in light of various contractual and legal defenses. While we are having ongoing conversations with landlords in various markets in seeking commercially reasonable lease concessions given the current environment, we have not yet confirmed significant concessions for at least the next twelve months.remainder of the year. Future lease amendments resulting from these discussions may have a material impact on our liquidity.
We are expecting to receive a $3.7 million tax refund in 2020 due to the provisions of the CARES Act regarding the carryback of NOLs and the refund of prior AMT credits. We have elected to defer the employer-paid portion of social security taxes which is expected to defer approximately $3.0 to $4.0 million of cash payments from 2020 in to 2021 and 2022.
The following table presents summary cash flow information for the periods indicated (in thousands):
|
| For the 26 Weeks Ended |
|
| For the 13 Weeks Ended |
| ||||||||||
|
| June 30, |
|
| July 1, |
|
| March 29, |
|
| March 31, |
| ||||
|
| 2019 |
|
| 2018 |
|
| 2020 |
|
| 2019 |
| ||||
Net cash provided by (used in): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities |
| $ | 6,988 |
|
| $ | 17,867 |
|
| $ | (7,816 | ) |
| $ | (2,373 | ) |
Investing activities |
|
| (5,230 | ) |
|
| (11,614 | ) |
|
| (4,860 | ) |
|
| (2,572 | ) |
Financing activities |
|
| (3,467 | ) |
|
| 2,527 |
|
|
| 39,686 |
|
|
| (999 | ) |
Net increase (decrease) in cash |
| $ | (1,709 | ) |
| $ | 8,780 |
|
| $ | 27,010 |
|
| $ | (5,944 | ) |
Operating Activities
Net cash provided byused in operating activities decreasedincreased to $7.0$7.8 million for the 2613 weeks ended June 30, 2019,March 29, 2020, from $17.9$2.4 million for the 2613 weeks ended July 1, 2018.March 31, 2019. The $10.9$5.4 million decreaseincrease was primarily driven by an increase in loss from operations, as well as timing of payment for certain liabilities.
Net cash used in investing activities decreasedincreased to $5.2$4.9 million for the 2613 weeks ended June 30, 2019,March 29, 2020, from $11.6$2.6 million for the 2613 weeks ended July 1, 2018.March 31, 2019. The decreaseincrease was primarily due to fewermore shops opened and under construction during the 2613 weeks ended June 30, 2019March 29, 2020 compared to the 2613 weeks ended July 1, 2018.March 31, 2019. Due to the COVID-19 pandemic, capital expenditures have been reduced to essential maintenance and safety.
Financing Activities
Net cash provided by financing activities increased to $39.7 million for the 13 weeks ended March 29, 2020, from net cash used in financing activities was $3.5of $1.0 million for the 2613 weeks ended June 30, 2019, compared to net cash provided by financing activities of $2.5 million for the 26 weeks ended July 1, 2018.March 31, 2019. The change in financing cash was primarily driven by $6.6a borrowing under the Credit Facility of $39.8 million and a decrease in repurchases of treasury stock of $1.1 million during the 13 weeks ended March 29, 2020, partially offset by a $0.2 million decrease in proceeds from the exercise of stock options during the 2613 weeks ended June 30, 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 program permits the Company, from time to time, to purchase shares in the open market (including in pre-arranged stock trading plans in accordance with the guidelines specified in Rule 10b5-1 under the Exchange Act) or in privately negotiated transactions. Under the program, for the 26 weeks ended June 30, 2019, the Company repurchased 485,659 shares of its common stock for approximately $3.5 million under the stock repurchase program, including cost and 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, liquidity 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.March 29, 2020.
Credit Facility
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. (“JPMorgan”) that expires in July 2022. The Credit Agreement amendedamends and restatedrestates 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.JPMorgan. 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 ChaseJPMorgan 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 agreementCredit Agreement may not be used for purposes of making restricted payments.
On March 17, 2020, the Company fully drew the available capacity of $39.8 million under its Revolving Credit Facility as a precautionary measure in order to increase its cash position and preserve financial flexibility in light of current uncertainty in the global markets resulting from the COVID-19 pandemic. In accordance with the terms of its Revolving Credit Facility, the proceeds from these borrowings may in the future be used for working capital, general corporate or other permitted purposes. As of March 29, 2020, the Company had $39.8 million outstanding under the Credit Agreement. There were no borrowings outstanding as of March 31, 2019.
The Prior Credit Agreement provided,was subsequently amended as of May 15, 2020 (the “Credit Agreement Amendment”) to, among other things for a revolving credit facility in a maximum principal amount of $50.0(i) change the maturity date from July 31, 2022 to March 31, 2022; (ii) eliminate the $20.0 million with possible future increasesexpansion feature; (iii) amend the interest rate to $75.0 million under an expansion feature. Borrowings under the credit facility generally bore interest at ourCompany’s option at either (i)(a) a eurocurrency rate determined by reference to the applicable London Interbank Offered Rate (LIBOR)LIBOR rate with a 1.00% floor plus a margin ranging from 1.00% to 1.75%of 5.00% or (ii)(b) a prime rate as announced by JP Morgan Chase plus a margin ranging from 0.00% to 0.50%. The applicable margin was determined based upon our consolidated total leverage ratio. On4.00%; (iv) amend the last day of each calendar quarter, the Company was required to pay a commitment fee ranging from 0.125% to 0.20%1.00% per annum in respect of any unused commitments under the credit facility,facility; (v) implement additional restrictions on restricted payments, acquisitions and other indebtedness; and (vi) implement additional financial covenants. Per the terms of the Credit Agreement Amendment, the Company repaid $15.0 million of its outstanding borrowing at the signing of the Credit Agreement Amendment, and may re-borrow this $15.0 million when its cash balances held by JP Morgan declines below $28.0 million. Lastly, the Company is required to pay an upfront fee of 1% of the outstanding loan balance within fifteen business days of the signing of the Credit Agreement Amendment.
The Credit Agreement Amendment includes financial covenants that require the Company to maintain minimum liquidity levels, minimum building adjusted EBITDA, maximum total debt to adjusted EBITDA and a minimum trailing twelve months (“TTM”) adjusted EBITDA. The Company is required to maintain (i) a minimum liquidity level of $45.0 million at April 30, 2020 and $32.5 million at May 31, 2020; (ii) a minimum building adjusted EBITDA of ($8.5) million for April 2020 and ($16.0) million for the period of April 2020 through May 2020; (iii) a maximum total debt to adjusted EBITDA ratio of 2.25 to 1.00 beginning June 30, 2020; and (iv) a minimum TTM adjusted EBITDA of $16.0 million beginning June 30, 2020, $15.0 million beginning September 30, 2020 and $17.0 million beginning September 30, 2021. Compliance with the specific rate determinedfinancial covenants was waived for March 29, 2020 as part of the Credit Agreement Amendment. The Company expects that it will be in compliance with the revised covenants for the April and May 2020 reporting periods. The Company concluded that without any additional changes, it would likely not meet the maximum total debt to adjusted EBITDA and/or the minimum TTM adjusted EBITDA requirements beginning with the month of June 2020, in which case the lenders would have the ability to demand repayment of the outstanding debt at such time. Accordingly, the outstanding balance is presented as a current liability as of March 29, 2020 based upon our consolidated total leverage ratio. As long as the leverage ratios were met, there was no limit on the “restricted payments” (primarily distributionsguidance in ASC 470, Debt.
The Company is in continued negotiations with its current lender and equity repurchases) thatexpects further amendments to the Credit Agreement as needed to maintain compliance with future financial covenants, but we cannot make any assurances regarding the likelihood, certainty or exact timing of further amendments to the Credit Agreement.
The Company is also evaluating various alternatives to improve its liquidity, including but not limited to, lease concessions and deferrals, further reductions of operating and capital expenditures, and raising additional capital.
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 program permits the Company, from time to time, to purchase shares in the open market (including in pre-arranged stock trading plans in accordance with the guidelines specified in Rule 10b5-1 under the Exchange Act) or in privately negotiated transactions. The number of shares of common stock repurchased in the future, and the timing and price of repurchases, will depend upon market conditions, liquidity needs and other factors. Purchases may have made. Asbe 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.
For the 2613 weeks ended June 30, 2019,March 29, 2020, the Company had no amounts outstandingdid not repurchase any shares of its common stock. Due to the COVID-19 pandemic, the Company does not have plans to repurchase any common stock under the Prior Credit Agreement.its share repurchase program at this time.
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 June 30, 2019,March 29, 2020, 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 quantitativeInterest Rate Risk
We are exposed to interest rate risk through fluctuations in interest rates on our debt obligations. Our Revolving Credit Facility bears interest at a floating rate. We seek to manage exposure to adverse interest rate changes through our normal operating and qualitative disclosures aboutfinancing activities. As of March 29, 2020, the Company had $39.8 million outstanding under the Credit Agreement.
Commodity Price Risk
We purchase certain products that are affected by commodity prices and are, therefore, subject to price volatility caused by weather, market conditions, seasonality, production, availability and other factors which are not considered predictable or within our control. Although these products are subject to changes in commodity prices, certain purchasing contracts or pricing arrangements used contain risk see Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,”management techniques designed to minimize price volatility. In many cases, we believe we will be able to address material commodity cost increases by adjusting menu pricing or making other operational adjustments that increase productivity. However, increases in commodity prices, without adjustments to menu prices, could increase restaurant operating costs as a percentage of restaurant sales. We could also experience shortages of key ingredients if our Annual Report on Form 10-K forsuppliers need to close or restrict operations due to the fiscal year ended December 30, 2018. Our exposures to market risk have not changed materially since December 30, 2018.impact of the COVID-19 pandemic.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and PrincipalChief 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 ActAct) as of June 30, 2019.March 29, 2020. Based upon that evaluation, our Chief Executive Officer and PrincipalChief Financial Officer have concluded that, as of June 30, 2019,March 29, 2020, 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 PrincipalChief 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 secondfirst quarter ended June 30, 2019March 29, 2020 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 910 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 30, 2018. There have been no material changes to our Risk Factors as previously reported.29, 2019. In light of the rapidly evolving COVID-19 pandemic, the Company filed Form 8-Ks on March 20, 2020 and May 8, 2020 for the purpose of supplementing the risk factors disclosed in Item 1A of its Annual Report on Form 10-K for the fiscal year ended December 29, 2019.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table contains information regarding purchases of our common stock made by or on behalf of Potbelly Corporation during the 13 weeks ended June 30, 2019:March 29, 2020:
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 |
|
|
|
|
|
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) |
| ||||
December 30, 2019 - January 26, 2020 |
|
| — |
|
| $ | — |
|
|
| — |
|
| $ | 37.9 |
|
January 27, 2020 - February 23, 2020 |
|
| — |
|
| $ | — |
|
|
| — |
|
| $ | 37.9 |
|
February 24, 2020 - March 29, 2020 |
|
| 22 |
|
| $ | 3.19 |
|
|
| — |
|
| $ | 37.9 |
|
Total: |
|
| 22 |
|
|
|
|
|
|
| — |
|
|
|
|
|
(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 program permits the Company, from time to time, to purchase shares in the open market (including in pre-arranged stock trading plans in accordance with the guidelines specified in Rule 10b5-1 under the Exchange Act or in privately negotiated |
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
On August 7, 2019,May 15, 2020, 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. Thean amendment to 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,to, among other things for a revolving credit facility in a maximum principal amount of $40(i) change the maturity date from July 31, 2022 to March 31, 2022; (ii) eliminate the $20.0 million with possible future increases of upexpansion feature; (iii) amend the interest rate to $20 million under an expansion feature. Borrowings under the credit facility generally bear interest at the Company’s option at either (i)(a) a eurocurrency rate determined by reference to the applicable LIBOR rate with a 1.00% floor plus a margin ranging from 1.25% to 1.75%of 5.00% or (ii)(b) 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 upon4.00%; (iv) amend 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%to 1.00% per annum in respect of any unused commitments under the credit facility. So long as certain total leverage ratiosfacility; (v) implement additional restrictions on restricted payments, acquisitions and other indebtedness; and (vi) implement additional financial covenants. Per the terms of the Credit Agreement Amendment, the Company repaid $15.0 million of its outstanding borrowing at the signing of the Credit Agreement Amendment, and may re-borrow this $15.0 million when its cash balances held by JP Morgan declines below $28.0 million. Lastly, the Company is required to pay an upfront fee of 1% of the outstanding loan balance within fifteen business days of the signing of the Credit Agreement Amendment.
The Credit Agreement Amendment includes financial covenants that require the Company to maintain minimum liquidity requirements,levels, minimum building adjusted EBITDA, thresholdsmaximum total debt to adjusted EBITDA and a minimum trailing twelve months
adjusted EBITDA. The Company is required to maintain (i) a minimum liquidity requirements are metlevel of $45.0 million at April 30, 2020 and no default or event$32.5 million at May 31, 2020; (ii) a minimum building adjusted EBITDA of default has occurred or would result, there is no limit on($8.5) million for April 2020 and ($16.0) million for the “restricted payments” (primarily distributionsperiod of April 2020 through May 2020; (iii) a maximum total debt to adjusted EBITDA ratio of 2.25 to 1.00 beginning June 30, 2020; and equity repurchases) that(iv) a minimum TTM adjusted EBITDA of $16.0 million beginning June 30, 2020, $15.0 million beginning September 30, 2020 and $17.0 million beginning September 30, 2021. Compliance with the Company may make, provided that proceedsfinancial covenants was waived for March 29, 2020 as part of the loans under the credit agreement may not be used for purposes of making restricted payments.Credit Agreement Amendment.
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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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 |
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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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| Chief Financial Officer |
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| (Principal Financial Officer) |
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