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 28, 202027, 2021
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 Chicago, Illinois |
| 60606 | |
(Address of Principal Executive Offices) |
| (Zip Code) |
Registrant’s Telephone Number, Including Area Code: (312) 951-0600
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
| Trading Symbol(s) |
| Name of each exchange on which registered |
Common Stock, $0.01 par value |
| PBPB |
| The NASDAQ Stock Market LLC |
|
|
|
| (Nasdaq Global Select Market) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ 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 |
| ☐ |
|
|
|
|
|
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 26, 2020,25, 2021, the registrant had 23,899,00028,257,050 shares of common stock, $0.01 par value per share, outstanding.
Potbelly Corporation and Subsidiaries
Table of Contents
|
|
|
| Page |
PART I. |
|
|
| |
|
|
|
| |
Item 1. |
|
| 3 | |
|
|
|
| |
|
|
| 3 | |
|
|
|
| |
|
|
| 4 | |
|
|
|
| |
|
|
| 5 | |
|
|
|
| |
|
|
| 7 | |
|
|
|
| |
|
| Notes to Condensed Consolidated Financial Statements (Unaudited) |
| 8 |
|
|
|
| |
Item 2. |
| Management’s Discussion and Analysis of Financial Condition and Results of Operations |
| 18 |
|
|
|
| |
Item 3. |
|
|
| |
|
|
|
| |
Item 4. |
|
|
| |
|
|
|
| |
PART II. |
|
|
| |
|
|
|
| |
Item 1. |
|
|
| |
|
|
|
| |
Item 1A. |
|
|
| |
|
|
|
| |
Item 2. |
|
|
| |
|
|
|
| |
Item 3. |
|
|
| |
|
|
|
| |
Item 4. |
|
|
| |
|
|
|
| |
Item 5. |
|
|
| |
|
|
|
| |
Item 6. |
|
|
| |
|
|
|
| |
|
|
|
|
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Potbelly Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
(amounts in thousands, except par value data, unaudited)
|
| June 28, |
|
| December 29, |
|
| June 27, |
|
| December 27, |
| ||||
|
| 2020 |
|
| 2019 |
|
| 2021 |
|
| 2020 |
| ||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 29,092 |
|
| $ | 18,806 |
|
| $ | 11,838 |
|
| $ | 11,126 |
|
Accounts receivable, net of allowances of $58 and $202 as of June 28, 2020 and December 29, 2019, respectively |
|
| 3,357 |
|
|
| 4,257 |
| ||||||||
Accounts receivable, net of allowances of $12 and $47 as of June 27, 2021 and December 27, 2020, respectively |
|
| 6,556 |
|
|
| 4,354 |
| ||||||||
Inventories |
|
| 2,823 |
|
|
| 3,473 |
|
|
| 2,970 |
|
|
| 2,989 |
|
Prepaid expenses and other current assets |
|
| 8,448 |
|
|
| 5,687 |
|
|
| 4,268 |
|
|
| 4,839 |
|
Total current assets |
|
| 43,720 |
|
|
| 32,223 |
|
|
| 25,632 |
|
|
| 23,308 |
|
|
|
|
|
|
|
|
|
| ||||||||
Property and equipment, net |
|
| 68,492 |
|
|
| 79,032 |
|
|
| 53,794 |
|
|
| 61,193 |
|
Right-of-use assets for operating leases |
|
| 205,131 |
|
|
| 211,988 |
|
|
| 175,892 |
|
|
| 189,141 |
|
Indefinite-lived intangible assets |
|
| 3,404 |
|
|
| 3,404 |
|
|
| 3,404 |
|
|
| 3,404 |
|
Goodwill |
|
| 2,222 |
|
|
| 2,222 |
|
|
| 2,222 |
|
|
| 2,222 |
|
Deferred expenses, net and other assets |
|
| 4,303 |
|
|
| 4,010 |
|
|
| 4,190 |
|
|
| 4,089 |
|
Total assets |
| $ | 327,272 |
|
| $ | 332,879 |
|
| $ | 265,134 |
|
| $ | 283,357 |
|
|
|
|
|
|
|
|
|
| ||||||||
Liabilities and Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
| $ | 6,691 |
|
| $ | 3,886 |
|
| $ | 6,937 |
|
| $ | 6,206 |
|
Accrued expenses |
|
| 18,041 |
|
|
| 20,398 |
|
|
| 33,345 |
|
|
| 23,742 |
|
Short-term operating lease liabilities |
|
| 38,653 |
|
|
| 29,319 |
|
|
| 31,508 |
|
|
| 35,325 |
|
Accrued income taxes |
|
| 171 |
|
|
| 171 |
| ||||||||
Current portion of long-term debt |
|
| 1,333 |
|
|
| 333 |
| ||||||||
Total current liabilities |
|
| 63,556 |
|
|
| 53,774 |
|
|
| 73,123 |
|
|
| 65,606 |
|
|
|
|
|
|
|
|
|
| ||||||||
Debt from revolving credit facility |
|
| 23,086 |
|
|
| — |
| ||||||||
Long-term debt, net of current portion |
|
| 9,453 |
|
|
| 15,953 |
| ||||||||
Long-term operating lease liabilities |
|
| 201,754 |
|
|
| 206,726 |
|
|
| 175,220 |
|
|
| 189,146 |
|
Other long-term liabilities |
|
| 4,223 |
|
|
| 3,210 |
|
|
| 4,808 |
|
|
| 7,157 |
|
Total liabilities |
|
| 292,619 |
|
|
| 263,710 |
|
|
| 262,604 |
|
|
| 277,862 |
|
|
|
|
|
|
|
|
|
| ||||||||
Commitments and contingencies (Note 10) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value—authorized 200,000 shares; outstanding 23,898 and 23,638 shares as of June 28, 2020 and December 29, 2019, respectively |
|
| 334 |
|
|
| 331 |
| ||||||||
Common stock, $0.01 par value—authorized 200,000 shares; outstanding 28,171 and 24,323 shares as of June 27, 2021 and December 27, 2020, respectively |
|
| 378 |
|
|
| 339 |
| ||||||||
Warrants |
|
| 2,566 |
|
|
| — |
| ||||||||
Additional paid-in-capital |
|
| 436,536 |
|
|
| 435,278 |
|
|
| 451,475 |
|
|
| 438,174 |
|
Treasury stock, held at cost, 9,490 and 9,465 shares as of June 28, 2020, and December 29, 2019, respectively |
|
| (112,757 | ) |
|
| (112,680 | ) | ||||||||
Treasury stock, held at cost, 9,689 and 9,612 shares as of June 27, 2021, and December 27, 2020, respectively |
|
| (113,951 | ) |
|
| (113,266 | ) | ||||||||
Accumulated deficit |
|
| (289,638 | ) |
|
| (254,081 | ) |
|
| (337,830 | ) |
|
| (319,477 | ) |
Total stockholders’ equity |
|
| 34,475 |
|
|
| 68,848 |
|
|
| 2,638 |
|
|
| 5,770 |
|
Non-controlling interest |
|
| 178 |
|
|
| 321 |
|
|
| (108 | ) |
|
| (275 | ) |
Total equity |
|
| 34,653 |
|
|
| 69,169 |
|
|
| 2,530 |
|
|
| 5,495 |
|
|
|
|
|
|
|
|
|
| ||||||||
Total liabilities and equity |
| $ | 327,272 |
|
| $ | 332,879 |
|
| $ | 265,134 |
|
| $ | 283,357 |
|
See accompanying notes to the unaudited condensed consolidated financial statements.
Potbelly Corporation and Subsidiaries
Condensed Consolidated Statements of Operations
(amounts in thousands, except per share data, unaudited)
|
| For the 13 Weeks Ended |
|
| For the 26 Weeks Ended |
|
| For the 13 Weeks Ended |
|
| For the 26 Weeks Ended |
| ||||||||||||||||||||||
|
| June 28, |
|
| June 30, |
|
| June 28, |
|
| June 30, |
|
| June 27, |
|
|
| June 28, |
|
| June 27, |
|
| June 28, |
| |||||||||
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
|
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||||||||
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Sandwich shop sales, net |
| $ | 55,863 |
|
| $ | 104,801 |
|
| $ | 142,824 |
|
| $ | 202,059 |
|
| $ | 96,777 |
|
|
|
| $ | 55,863 |
|
| $ | 174,279 |
|
| $ | 142,824 |
|
Franchise royalties and fees |
|
| 299 |
|
|
| 829 |
|
|
| 928 |
|
| $ | 1,658 |
|
|
| 714 |
|
|
|
|
| 299 |
|
|
| 1,277 |
|
| $ | 928 |
|
Total revenues |
|
| 56,162 |
|
|
| 105,630 |
|
|
| 143,752 |
|
|
| 203,717 |
|
|
| 97,491 |
|
|
|
|
| 56,162 |
|
|
| 175,556 |
|
|
| 143,752 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Sandwich shop operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Cost of goods sold, excluding depreciation |
|
| 16,108 |
|
|
| 28,264 |
|
|
| 40,282 |
|
|
| 54,242 |
|
|
| 26,341 |
|
|
|
| 16,108 |
|
|
| 47,810 |
|
|
| 40,282 |
| |
Labor and related expenses |
|
| 21,884 |
|
|
| 32,114 |
|
|
| 52,281 |
|
|
| 64,087 |
|
|
| 31,961 |
|
|
|
| 21,884 |
|
|
| 60,575 |
|
|
| 52,281 |
| |
Occupancy expenses |
|
| 14,649 |
|
|
| 15,230 |
|
|
| 29,677 |
|
|
| 29,607 |
|
|
| 13,562 |
|
|
|
| 14,649 |
|
|
| 27,160 |
|
|
| 29,677 |
| |
Other operating expenses |
|
| 10,990 |
|
|
| 11,816 |
|
|
| 23,755 |
|
|
| 23,961 |
|
|
| 14,696 |
|
|
|
| 10,990 |
|
|
| 28,031 |
|
|
| 23,755 |
| |
Advertising |
|
| 384 |
|
|
| 120 |
|
|
| 846 |
|
|
| 561 |
| ||||||||||||||||||
General and administrative expenses |
|
| 8,164 |
|
|
| 13,843 |
|
|
| 18,898 |
|
|
| 26,552 |
|
|
| 9,240 |
|
|
| 7,878 |
|
|
| 16,664 |
|
|
| 17,712 |
| ||
Depreciation expense |
|
| 4,955 |
|
|
| 5,585 |
|
|
| 10,411 |
|
|
| 11,121 |
|
|
| 4,553 |
|
|
| 4,955 |
|
|
| 8,727 |
|
|
| 10,411 |
| ||
Pre-opening costs |
|
| — |
|
|
| — |
|
|
| 64 |
|
|
| 10 |
|
|
| — |
|
|
|
| — |
|
|
| — |
|
|
| 64 |
| |
Impairment and loss on disposal of property and equipment |
|
| 1,299 |
|
|
| 246 |
|
|
| 7,256 |
|
|
| 328 |
| ||||||||||||||||||
Impairment, loss on disposal of property and equipment and shop closures |
|
| 257 |
|
|
|
| 1,465 |
|
|
| 3,379 |
|
|
| 7,881 |
| |||||||||||||||||
Total expenses |
|
| 78,049 |
|
|
| 107,098 |
|
|
| 182,624 |
|
|
| 209,908 |
|
|
| 100,994 |
|
|
|
| 78,049 |
|
|
| 193,192 |
|
|
| 182,624 |
| |
Loss from operations |
|
| (21,887 | ) |
|
| (1,468 | ) |
|
| (38,872 | ) |
|
| (6,191 | ) |
|
| (3,503 | ) |
|
|
|
| (21,887 | ) |
|
| (17,636 | ) |
|
| (38,872 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Interest expense |
|
| 388 |
|
|
| 35 |
|
|
| 462 |
|
|
| 67 |
| ||||||||||||||||||
Interest expense, net |
|
| 185 |
|
|
|
|
| 388 |
|
|
| 472 |
|
|
| 462 |
| ||||||||||||||||
Loss before income taxes |
|
| (22,275 | ) |
|
| (1,503 | ) |
|
| (39,334 | ) |
|
| (6,258 | ) |
|
| (3,688 | ) |
|
|
|
| (22,275 | ) |
|
| (18,108 | ) |
|
| (39,334 | ) |
Income tax expense (benefit) |
|
| 41 |
|
|
| 246 |
|
|
| (3,668 | ) |
|
| 13,865 |
|
|
| 160 |
|
|
|
| 41 |
|
|
| 214 |
|
|
| (3,668 | ) | |
Net loss |
|
| (22,316 | ) |
|
| (1,749 | ) |
|
| (35,666 | ) |
|
| (20,123 | ) |
|
| (3,848 | ) |
|
|
|
| (22,316 | ) |
|
| (18,322 | ) |
|
| (35,666 | ) |
Net income (loss) attributable to non-controlling interest |
|
| (100 | ) |
|
| 117 |
|
|
| (114 | ) |
|
| 182 |
|
|
| 33 |
|
|
|
|
| (100 | ) |
|
| 31 |
|
|
| (114 | ) |
Net loss attributable to Potbelly Corporation |
| $ | (22,216 | ) |
| $ | (1,866 | ) |
| $ | (35,552 | ) |
| $ | (20,305 | ) |
| $ | (3,881 | ) |
|
|
| $ | (22,216 | ) |
| $ | (18,353 | ) |
| $ | (35,552 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Net loss per common share attributable to common stockholders: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Basic |
| $ | (0.93 | ) |
| $ | (0.08 | ) |
| $ | (1.50 | ) |
| $ | (0.85 | ) |
| $ | (0.14 | ) |
| $ | (0.93 | ) |
| $ | (0.68 | ) |
| $ | (1.50 | ) | ||
Diluted |
| $ | (0.93 | ) |
| $ | (0.08 | ) |
| $ | (1.50 | ) |
| $ | (0.85 | ) |
| $ | (0.14 | ) |
| $ | (0.93 | ) |
| $ | (0.68 | ) |
| $ | (1.50 | ) | ||
Weighted average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Basic |
|
| 23,773 |
|
|
| 23,908 |
|
|
| 23,709 |
|
|
| 24,021 |
|
|
| 27,978 |
| 23,773 |
|
|
| 26,961 |
|
|
| 23,709 |
| ||||
Diluted |
|
| 23,773 |
|
|
| 23,908 |
|
|
| 23,709 |
|
|
| 24,021 |
|
|
| 27,978 |
| 23,773 |
|
|
| 26,961 |
|
|
| 23,709 |
|
See accompanying notes to the unaudited condensed consolidated financial statements.
Potbelly Corporation and Subsidiaries
Condensed Consolidated Statements of Equity
(amounts and shares in thousands, unaudited)
For the 13 weeks ended: |
| Common Stock |
|
| Treasury |
|
| Additional Paid-In- |
|
| Accumulated |
|
| Non- Controlling |
|
|
|
|
| |||||||||
|
| Shares |
|
| Amount |
|
| Stock |
|
| Capital |
|
| Deficit |
|
| Interest |
|
| Total Equity |
| |||||||
Balance at March 31, 2019 |
|
| 24,038 |
|
|
| 330 |
|
|
| (109,541 | ) |
|
| 433,400 |
|
|
| (248,528 | ) |
|
| 427 |
|
| $ | 76,088 |
|
Net income (loss) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,866 | ) |
|
| 117 |
|
|
| (1,749 | ) |
Stock-based compensation plans |
|
| 83 |
|
|
| 1 |
|
|
| — |
|
|
| 2 |
|
|
| — |
|
|
| — |
|
|
| 3 |
|
Repurchases of common stock |
|
| (351 | ) |
|
| — |
|
|
| (2,323 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (2,323 | ) |
Distributions to non-controlling interest |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (177 | ) |
|
| (177 | ) |
Contributions from non-controlling interest |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 39 |
|
|
| 39 |
|
Treasury shares used for stock-based plans |
|
| (2 | ) |
|
| — |
|
|
| (10 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (10 | ) |
Stock-based compensation expense |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,005 |
|
|
| — |
|
|
| — |
|
|
| 1,005 |
|
Balance at June 30, 2019 |
|
| 23,768 |
|
| $ | 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 |
|
Net income (loss) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (22,216 | ) |
|
| (100 | ) |
|
| (22,316 | ) |
Stock-based compensation plans |
|
| 86 |
|
|
| 2 |
|
|
| — |
|
|
| (2 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
Shares issued for proxy-related expenses |
|
| 130 |
|
|
| 1 |
|
|
| — |
|
|
| 388 |
|
|
| — |
|
|
| — |
|
|
| 389 |
|
Treasury shares used for stock-based plans |
|
| (2 | ) |
|
| — |
|
|
| (6 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (6 | ) |
Distributions to non-controlling interest |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Contributions from non-controlling interest |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Stock-based compensation expense |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 382 |
|
|
| — |
|
|
| — |
|
|
| 382 |
|
Balance at June 28, 2020 |
|
| 23,898 |
|
| $ | 334 |
|
| $ | (112,757 | ) |
| $ | 436,536 |
|
| $ | (289,638 | ) |
| $ | 178 |
|
| $ | 34,653 |
|
For the 13 weeks ended: |
| Common Stock |
|
| Treasury |
|
|
|
|
|
| Additional Paid-In- |
|
| Accumulated |
|
| Non- Controlling |
|
|
|
|
| |||||||||
|
| Shares |
|
| Amount |
|
| Stock |
|
| Warrants |
|
| Capital |
|
| Deficit |
|
| Interest |
|
| Total Equity |
| ||||||||
Balance at March 29, 2020 |
|
| 23,684 |
|
|
| 331 |
|
|
| (112,751 | ) |
|
| — |
|
|
| 435,768 |
|
|
| (267,422 | ) |
|
| 278 |
|
| $ | 56,204 |
|
Net income (loss) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (22,216 | ) |
|
| (100 | ) |
|
| (22,316 | ) |
Stock-based compensation plans |
|
| 84 |
|
|
| 2 |
|
|
| (6 | ) |
|
| — |
|
|
| (2 | ) |
|
| — |
|
|
| — |
|
|
| (6 | ) |
Shares issued for proxy-related expenses |
|
| 130 |
|
|
| 1 |
|
|
| — |
|
|
| — |
|
|
| 388 |
|
|
| — |
|
|
| — |
|
|
| 389 |
|
Stock-based compensation expense |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 382 |
|
|
| — |
|
|
| — |
|
|
| 382 |
|
Balance at June 28, 2020 |
|
| 23,898 |
|
| $ | 334 |
|
| $ | (112,757 | ) |
| $ | — |
|
| $ | 436,536 |
|
| $ | (289,638 | ) |
| $ | 178 |
|
| $ | 34,653 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 28, 2021 |
|
| 27,636 |
|
|
| 372 |
|
|
| (113,266 | ) |
|
| 2,566 |
|
|
| 450,708 |
|
|
| (333,949 | ) |
|
| (141 | ) |
|
| 6,290 |
|
Net income (loss) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (3,881 | ) |
|
| 33 |
|
|
| (3,848 | ) |
Stock-based compensation plans |
|
| 535 |
|
|
| 6 |
|
|
| (685 | ) |
|
| — |
|
|
| (6 | ) |
|
| — |
|
|
| — |
|
|
| (685 | ) |
Proceeds from exercise of stock options |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 219 |
|
|
| — |
|
|
| — |
|
|
| 219 |
|
Issuance of common shares and warrants, net of fees |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (101 | ) |
|
| — |
|
|
| — |
|
|
| (101 | ) |
Stock-based compensation expense |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 655 |
|
|
| — |
|
|
| — |
|
|
| 655 |
|
Balance at June 27, 2021 |
|
| 28,171 |
|
| $ | 378 |
|
| $ | (113,951 | ) |
| $ | 2,566 |
|
| $ | 451,475 |
|
| $ | (337,830 | ) |
| $ | (108 | ) |
| $ | 2,530 |
|
See accompanying notes to the unaudited condensed consolidated financial statements.
Potbelly Corporation and Subsidiaries
Condensed Consolidated Statements of Equity
(amounts and shares in thousands, unaudited)
For the 26 weeks ended: |
| Common Stock |
|
| Treasury |
|
| Additional Paid-In- |
|
| Accumulated |
|
| Non- Controlling |
|
|
|
|
|
| Common Stock |
|
| Treasury |
|
|
|
|
|
| Additional Paid-In- |
|
| Accumulated |
|
| Non- Controlling |
|
|
|
|
| ||||||||||||||||||
|
| Shares |
|
| Amount |
|
| Stock |
|
| Capital |
|
| Deficit |
|
| Interest |
|
| Total Equity |
|
| Shares |
|
| Amount |
|
| Stock |
|
| Warrants |
|
| Capital |
|
| Deficit |
|
| Interest |
|
| Total Equity |
| |||||||||||||||
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 | ) | ||||||||||||||||||||||||||||||||
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) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (20,305 | ) |
|
| 182 |
|
|
| (20,123 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (35,552 | ) |
|
| (114 | ) |
|
| (35,666 | ) |
Stock-based compensation plans |
|
| 116 |
|
|
| 1 |
|
|
| — |
|
|
| 172 |
|
|
| — |
|
|
| — |
|
|
| 173 |
|
|
| 130 |
|
|
| 2 |
|
|
| (77 | ) |
|
| — |
|
|
| (2 | ) |
|
| — |
|
|
| — |
|
|
| (77 | ) |
Repurchases of common stock |
|
| (486 | ) |
|
| — |
|
|
| (3,467 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (3,467 | ) |
|
| 130 |
|
|
| 1 |
|
|
| — |
|
|
| — |
|
|
| 388 |
|
|
| — |
|
|
| — |
|
|
| 389 |
|
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 |
|
| (5 | ) |
|
| — |
|
|
| (35 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (35 | ) | ||||||||||||||||||||||||||||||||
Stock-based compensation expense |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,464 |
|
|
| — |
|
|
| — |
|
|
| 1,464 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 872 |
|
|
| — |
|
|
| — |
|
|
| 872 |
|
Balance at June 30, 2019 |
|
| 23,768 |
|
| $ | 331 |
|
| $ | (111,874 | ) |
| $ | 434,407 |
|
| $ | (250,394 | ) |
| $ | 406 |
|
| $ | 72,876 |
| ||||||||||||||||||||||||||||||||
Balance at June 28, 2020 |
|
| 23,898 |
|
| $ | 334 |
|
| $ | (112,757 | ) |
| $ | — |
|
| $ | 436,536 |
|
| $ | (289,638 | ) |
| $ | 178 |
|
| $ | 34,653 |
| ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 | ) | ||||||||||||||||||||||||||||||||
Balance at December 27, 2020 |
|
| 24,323 |
|
| $ | 339 |
|
| $ | (113,266 | ) |
| $ | — |
|
| $ | 438,174 |
|
| $ | (319,477 | ) |
| $ | (275 | ) |
| $ | 5,495 |
| ||||||||||||||||||||||||||||
Net income (loss) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (35,552 | ) |
|
| (114 | ) |
|
| (35,666 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (18,353 | ) |
|
| 31 |
|
|
| (18,322 | ) |
Stock-based compensation plans |
|
| 154 |
|
|
| 2 |
|
|
| — |
|
|
| (2 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 598 |
|
|
| 7 |
|
|
| (685 | ) |
|
|
|
|
|
| (7 | ) |
|
| — |
|
|
| — |
|
|
| (685 | ) |
Shares issued for proxy-related expenses |
|
| 130 |
|
|
| 1 |
|
|
| — |
|
|
| 388 |
|
|
| — |
|
|
| — |
|
|
| 389 |
| ||||||||||||||||||||||||||||||||
Distributions to non-controlling interest |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (172 | ) |
|
| (172 | ) | ||||||||||||||||||||||||||||||||
Proceeds from exercise of stock options |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 219 |
|
|
| — |
|
|
| — |
|
|
| 219 |
| ||||||||||||||||||||||||||||
Issuance of common shares and warrants, net of fees |
|
| 3,250 |
|
|
| 32 |
|
|
| — |
|
|
| 2,566 |
|
|
| 12,241 |
|
|
| — |
|
|
| — |
|
|
| 14,839 |
| ||||||||||||||||||||||||||||
Contributions from non-controlling interest |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 143 |
|
|
| 143 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 136 |
|
|
| 136 |
|
Treasury shares used for stock-based plans |
|
| (24 | ) |
|
| — |
|
|
| (77 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (77 | ) | ||||||||||||||||||||||||||||||||
Stock-based compensation expense |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 872 |
|
|
| — |
|
|
| — |
|
|
| 872 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 848 |
|
|
| — |
|
|
| — |
|
|
| 848 |
|
Balance at June 28, 2020 |
|
| 23,898 |
|
| $ | 334 |
|
| $ | (112,757 | ) |
| $ | 436,536 |
|
| $ | (289,638 | ) |
| $ | 178 |
|
| $ | 34,653 |
| ||||||||||||||||||||||||||||||||
Balance at June 27, 2021 |
|
| 28,171 |
|
| $ | 378 |
|
| $ | (113,951 | ) |
| $ | 2,566 |
|
| $ | 451,475 |
|
| $ | (337,830 | ) |
| $ | (108 | ) |
| $ | 2,530 |
|
See accompanying notes to the unaudited condensed consolidated financial statements.
Potbelly Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(amounts in thousands, unaudited)
|
| For the 26 Weeks Ended |
|
| For the 26 Weeks Ended |
| ||||||||||
|
| June 28, |
|
| June 30, |
|
| June 27, |
|
| June 28, |
| ||||
|
| 2020 |
|
| 2019 |
|
| 2021 |
|
| 2020 |
| ||||
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
| $ | (35,666 | ) |
| $ | (20,123 | ) |
| $ | (18,322 | ) |
| $ | (35,666 | ) |
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 |
|
| 10,411 |
|
|
| 11,121 |
|
|
| 8,727 |
|
|
| 10,411 |
|
Noncash lease expense |
|
| 14,333 |
|
|
| 13,826 |
|
|
| 12,662 |
|
|
| 14,333 |
|
Deferred income tax |
|
| 9 |
|
|
| 13,790 |
|
|
| 9 |
|
|
| 9 |
|
Stock-based compensation expense |
|
| 872 |
|
|
| 1,464 |
|
|
| 848 |
|
|
| 872 |
|
Asset impairment, store closure and disposal of property and equipment |
|
| 7,689 |
|
|
| 433 |
| ||||||||
Impairment, loss on disposal of property and equipment and shop closures |
|
| 2,826 |
|
|
| 7,272 |
| ||||||||
Other operating activities |
|
| 488 |
|
|
| 18 |
|
|
| 158 |
|
|
| 488 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net |
|
| 937 |
|
|
| 192 |
|
|
| (2,202 | ) |
|
| 937 |
|
Inventories |
|
| 650 |
|
|
| 125 |
|
|
| 19 |
|
|
| 650 |
|
Prepaid expenses and other assets |
|
| (3,000 | ) |
|
| 3,322 |
|
|
| 191 |
|
|
| (3,000 | ) |
Accounts payable |
|
| 3,309 |
|
|
| 303 |
|
|
| 191 |
|
|
| 3,309 |
|
Operating lease liabilities |
|
| (4,060 | ) |
|
| (15,281 | ) |
|
| (17,154 | ) |
|
| (3,643 | ) |
Accrued expenses and other liabilities |
|
| (895 | ) |
|
| (2,202 | ) |
|
| 6,593 |
|
|
| (895 | ) |
Net cash (used in) provided by operating activities: |
|
| (4,923 | ) |
|
| 6,988 |
| ||||||||
Net cash used in operating activities: |
|
| (5,454 | ) |
|
| (4,923 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment |
| $ | (7,333 | ) |
| $ | (5,230 | ) |
| $ | (3,333 | ) |
| $ | (7,333 | ) |
Net cash used in investing activities: |
|
| (7,333 | ) |
|
| (5,230 | ) |
|
| (3,333 | ) |
|
| (7,333 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings under credit facility |
| $ | 39,786 |
|
| $ | — |
|
| $ | 15,500 |
|
| $ | 39,786 |
|
Repayments under credit facility |
|
| (16,700 | ) |
|
| — |
|
|
| (21,000 | ) |
|
| (16,700 | ) |
Payment of debt issuance costs |
|
| (438 | ) |
|
| — |
|
|
| (195 | ) |
|
| (438 | ) |
Proceeds from issuance of common shares and warrants, net of fees |
|
| 14,839 |
|
|
| — |
| ||||||||
Proceeds from exercise of stock options |
|
| — |
|
|
| 173 |
|
|
| 219 |
|
|
| — |
|
Employee taxes on certain stock-based payment arrangements |
|
| (77 | ) |
|
| (35 | ) |
|
| — |
|
|
| (77 | ) |
Treasury stock repurchases |
|
| — |
|
|
| (3,467 | ) | ||||||||
Distributions to non-controlling interest |
|
| (172 | ) |
|
| (177 | ) |
|
| — |
|
|
| (172 | ) |
Contributions from non-controlling interest |
|
| 143 |
|
|
| 39 |
|
|
| 136 |
|
|
| 143 |
|
Net cash provided by (used in) financing activities: |
|
| 22,542 |
|
|
| (3,467 | ) | ||||||||
Net cash provided by financing activities: |
|
| 9,499 |
|
|
| 22,542 |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
| 10,286 |
|
|
| (1,709 | ) | ||||||||
Net increase in cash and cash equivalents |
|
| 712 |
|
|
| 10,286 |
| ||||||||
Cash and cash equivalents at beginning of period |
|
| 18,806 |
|
|
| 19,775 |
|
|
| 11,126 |
|
|
| 18,806 |
|
Cash and cash equivalents at end of period |
| $ | 29,092 |
|
| $ | 18,066 |
|
| $ | 11,838 |
|
| $ | 29,092 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid |
| $ | 18 |
|
| $ | 180 |
|
| $ | 35 |
|
| $ | 18 |
|
Interest paid |
|
| 330 |
|
|
| 48 |
|
|
| 398 |
|
|
| 330 |
|
Supplemental non-cash investing and financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid liability for purchases of property and equipment |
| $ | 183 |
|
| $ | 583 |
|
| $ | 811 |
|
| $ | 183 |
|
Unpaid liability for employee taxes on certain stock-based payment arrangements |
|
| 685 |
|
|
| — |
|
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”, “Potbelly”, “we”, “us” or “Potbelly”“our”), through its wholly owned subsidiaries, owns and operates more than 400398 company-owned shops in the United States. Additionally, Potbelly franchisees operate over 4045 shops 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’sour Annual Report on Form 10-K for the year ended December 29, 2019.27, 2020. The unaudited condensed consolidated financial statements included herein have been prepared by the Companyus 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’sour balance sheet as of June 28, 202027, 2021 and December 29, 2019, its27, 2020, our statement of operations for the 13 and 26 weeks ended June 28, 202027, 2021 and June 30, 2019,28, 2020, the statement of equity for the 13 and 26 weeks ended June 27, 2021 and June 28, 2020, and June 30, 2019, and itsour statement of cash flows for the 26 weeks ended June 28, 202027, 2021 and June 30, 201928, 2020 have been included. The condensed consolidated statements of operations for the interim periods presented herein are not necessarily indicative of the results to be expected for the full year.
The Company doesBeginning with the third quarter of 2020, shop closure and lease termination expenses are being presented within impairment, loss on disposal of property and equipment and shop closures in our condensed consolidated statements of operations. Prior to the third quarter of 2020, shop closure and lease termination expenses were presented within general and administrative expenses. Prior period amounts have been reclassified to conform to the current presentation. This reclassification and certain other reclassifications had no impact on the loss from operations, balance sheets or statements of cash flows.
We do not have any components of other comprehensive income recorded within itsour consolidated financial statements and therefore, does not separately present a statement of comprehensive income in itsour 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. We initially closed the vast majoritycoronavirus, resulting in significant changes to our dining roomsoperations and shifted to off-premise operations only, and we experienced a sudden and drastic decrease in revenues. While the pandemic continues to have an impact on our business, the distribution of COVID-19 vaccines and a decline in positive cases and hospitalizations has resulted in a gradual improvement in our sales during the first half of 2021. Nearly all of our shops have reopened their dining rooms and are no longer subject to the operating restrictions and capacity limits related to COVID-19. We continue to follow guidance from local authorities in determining the appropriate restrictions to put in place for each shop. The majorityshop, including the suspension or reduction of our shops have reopened theirin-shop dining rooms with restrictions, such as social distancing and limited capacities, to ensure the health and safety of our guests and employees.
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 evaluated its goodwill, intangible assets, and long-lived assets, which includes property and equipment and right-of-use assets for operating leases for impairment. The Company did not record any impairment to its goodwill or indefinite-lived intangible assets during the 13 and 26 weeks ended June 28, 2020. The Company recorded an impairment charge for its long-lived assets of $0.9 million and $6.8 million for the 13 and 26 weeks ended June 28, 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 during the first quarter of 2020 primarilyif required due to changes in 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. The Company received $1.1 million of this refundpandemic response in July 2020 and expects to receive the remaining $2.6 million before the end of the current year. See Note 5 for further details. each jurisdiction.
To preserve financial flexibility, the Company drew the $40.0 million of available capacity under its revolving credit facility on March 17, 2020. The Company subsequently repaid $16.7 million of these borrowings during the 13 weeks ended June 28, 2020. 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 Companywe cannot determine the ultimate impact that the COVID-19 pandemic will have on itsour consolidated financial condition, liquidity, and future results of operations, and therefore any prediction as to the ultimate impact on the Company’sour consolidated financial condition, liquidity, and future results of operations is uncertain.
ResolutionPrinciples of Substantial Doubt Related to Going Concern Assessment
Under ASC 205, Presentation of Financial StatementsConsolidation, 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. As of May 18, 2020, the date of the issuance of the financial statements for the first quarter of 2020, management concluded that there was substantial doubt of its ability to continue as a going concern due to the probable inability to meet its debt covenants for the next year. However, following the successful completion of the second amendment to its Credit Agreement (“the Second Credit Agreement Amendment”) on July 17, 2020 and evaluation of other conditions that exist as of the issuance date of these financial statements, management concluded that the factors that raised substantial doubt have been resolved. See Note 7 for further details of the Second Credit Agreement Amendment.
Principles of Consolidation
The unaudited condensed consolidated financial statements include the accounts of Potbelly Corporation; its wholly owned subsidiary, Potbelly Illinois, Inc. (“PII”); PII’s wholly owned subsidiaries, Potbelly Franchising, LLC and Potbelly Sandwich Works, LLC (“LLC”PSW”); 7 of LLC’sPSW’s wholly owned subsidiaries and LLC’sPSW’s 7 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 CompanyPotbelly has ownership interests ranging from 51-80% in these consolidated joint ventures.
Fiscal Year
The Company usesWe use a 52/53-week fiscal year that ends on the last Sunday of the calendar period. Approximately every five or six years a 53rd week is added. Fiscal year 20202021 and 20192020 both consist of 52 weeks. The fiscal quarters ended June 28, 202027, 2021 and June 30, 201928, 2020 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 30, 2019, the Company28, 2020, we adopted Accounting Standard Update No. 2016-13,2020-06, Financial Instruments—Credit Losses (Topic 326)Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging— Contracts in Entity’s Own Equity (Subtopic 815-40). This pronouncement requiressimplifies the measurementaccounting for certain financial instruments with liability and recognitionequity characteristics, including convertible instruments and contracts on an entity’s own equity. It removes certain criteria that previously had to be satisfied in order to classify a contract as equity and revises the guidance on calculating earnings per share, requiring use of expected credit losses onthe if-converted method for all convertible instruments and rescinding a company’s ability to rebut the presumption of share settlement for instruments that may be settled in cash or other. There was no impact to our financial instruments. ASU 2016-13 replacesstatements or loss per share presentation in the existing incurred loss model with a forward-looking expected credit loss model that requires considerationperiod of a broader range of information to estimate credit losses. The Company recorded a net reduction of $5 thousand to opening accumulated deficit as of December 30, 2019,adoption due to the cumulative impact of adopting Topic 326.this pronouncement.
(2) Revenue
The CompanyWe primarily earnsearn revenue at a point in time for sandwich shop sales, which can occur in person at the shop, over our online or app platforms, or through a third-party platform. Revenue is recorded net of sales-relatedSales taxes collected from customers. The payment oncustomers are excluded from revenues and the obligation is included in accrued liabilities until the taxes are remitted to the appropriate taxing authorities. We have other revenue generating activities outlined below.
Franchise Revenue
We earn an initial franchise fee, a franchise development agreement fee and ongoing royalty fees under our franchise agreements. Initial franchise fees are considered highly dependent upon and interrelated with the franchise right granted in the franchise agreement. As such, these sales is due at the time of the customer’s purchase. The Company also receives royalties from franchisees on their respective sales, whichfranchise fees are recognized atover 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 28, 2020, revenue recognized from all revenue sources on point in time sales was $56.0 million and $143.5 million, respectively, and revenue recognized from sales over time was $0.2 million and $0.3 million, respectively. For the 13 and 26 weeks ended June 30, 2019, revenue recognized from all revenue sources on point in time sales was $105.5 million and $203.3 million, respectively, and revenue recognized from sales over time was $0.1 million and $0.4 million, respectively.
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 thecontractual term of the franchise agreement. The Company recordsWe record a contract liability for the unearned portion of the upfrontinitial franchise payments.fees. Franchise development agreement fees represent the exclusivity rights for a geographical area paid by a third party to develop Potbelly shops for a certain period of time. Franchise development agreement fee payments received by us are recorded as deferred revenue in the consolidated balance sheet and amortized over the life of the franchise development agreement. Royalty fees are based on a percentage of sales and are recorded as revenue as the fees are earned and become receivable from the franchisee.
Gift Card Redemptions / Breakage Revenue
Potbelly sellsWe sell gift cards to customers, recordsrecord the sale as a contract liability and recognizesrecognize 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 Companyus as revenue as a percentage of customers gift card redemptions. The expected breakage amount recognized is determined by a historical data analysis on gift card redemption patterns.
We recognized gift card breakage income of $0.1 million and $0.1 million for the 26 weeks ended June 27, 2021, and June 28, 2020, respectively, which is recorded within net sandwich shop sales in our condensed consolidated statements of operations.
Loyalty Program
During the second quarter of 2020, the Companywe implemented a new customer loyalty program for customers using the Potbelly Perks application at the point of sale. The customer will typically earn 10 points for every dollar spent in addition to any active promotions, and the customer will earn a free entrée after earning 1,000 points. The Company defersWe defer revenue associated with the estimated selling price of points earned by Potbelly Perks members towards free entreesentrées as each point is earned, and a corresponding liability is established in deferred revenue. The deferral is based on the estimated value of the product for which the reward is expected to be redeemed, net of estimated unredeemed points. Once a customer earns a free entrée, that entreeentrée reward will expire after 30 days. Any point in a customer’s account that does not go toward earning a full entrée will expire a year after the point is earned. When points are redeemed, the Company recognizeswe recognize revenue for the redeemed product and reduces deferred revenue.
For the 26 weeks ended June 27, 2021 revenue recognized from all revenue sources on point in time sales was $175.3 million, and revenue recognized from sales over time was $0.3 million. For the 26 weeks ended June 28, 2020, revenue recognized from all revenue sources on point in time sales was $143.5 million, and revenue recognized from sales over time was $0.3 million.
Contract Liabilities
As described above, the Company recordswe record current and noncurrent contract liabilities for upfront franchise fees, gift cards and the loyalty program. There are no other contract liabilities or contract assets recorded by the Company. us.
The opening and closing balances of the Company’sour 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 30, 2019 |
| $ | (1,594 | ) |
| $ | (2,054 | ) |
Ending balance as of June 28, 2020 |
|
| (1,626 | ) |
|
| (1,831 | ) |
Increase (decrease) in contract liability |
| $ | 32 |
|
| $ | (223 | ) |
|
| Current Contract Liability |
|
| Noncurrent Contract Liability |
| ||
|
| (Thousands) |
|
| (Thousands) |
| ||
Beginning balance as of December 27, 2020 |
| $ | (3,138 | ) |
| $ | (1,707 | ) |
Ending balance as of June 27, 2021 |
|
| (3,411 | ) |
|
| (1,562 | ) |
Increase (decrease) in contract liability |
| $ | 273 |
|
| $ | (145 | ) |
The aggregate value of remaining performance obligations on outstanding contracts was $3.5$5.0 million as of June 28, 2020. The Company expects27, 2021. We expect to recognize revenue related to contract liabilities as follows (in thousands), which may vary based upon franchise activity as well as gift card redemption patterns:
Years Ending |
| Amount |
|
| Amount |
| ||
2020 |
| $ | 1,039 |
| ||||
2021 |
|
| 478 |
|
| $ | 1,698 |
|
2022 |
|
| 244 |
|
|
| 1,502 |
|
2023 |
|
| 195 |
|
|
| 285 |
|
2024 |
|
| 162 |
|
|
| 198 |
|
2025 |
|
| 299 |
| ||||
Thereafter |
|
| 1,339 |
|
|
| 991 |
|
Total revenue recognized |
| $ | 3,457 |
|
| $ | 4,973 |
|
For the 13 and 26 weekweeks sended June 27, 2021, the amount of revenue recognized related to the December 27, 2020 liability ending balance was $0.3 million and $0.9 million, respectively. For the 13 weeks and 26 weeks ended June 28, 2020, the amount of revenue recognized related to the December 30,31, 2019 liability ending balance was $0.4 million and $0.9 million, respectively. For the 13 and 26 weeks ended June 30, 2019, the amount of revenue recognized related to the December 30, 2018 liability ending balance was $0.6 million and $1.5 million, respectively. This revenue related to the recognition of gift card redemptions and upfront franchise fees. For the 13 and 26 weeks ended June 27, 2021 and June 28, 2020, and June 30, 2019, the Companywe did 0t recognize any revenue from obligations satisfied (or partially satisfied) in prior periods.
(3) Fair Value Measurement
The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and all other current liabilities approximate fair values due to the short maturities of these balances.
The Company assessesbook value of the long-term debt under the Credit Agreement, subsequently amended most recently as of February 26, 2021 and further discussed in Note 7, is considered to approximate its fair value as of June 27, 2021 as the interest rates are considered in line with current market rates.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Assets recognized or disclosed at fair value on the consolidated financial statements on a nonrecurring basis include items such as leasehold improvements, property and equipment, operating lease assets, goodwill, and other intangible assets. These assets are measured at fair value if determined to be impaired.
We assess potential impairments to itsour long-lived assets, which includes property and equipment and lease right-of-use assets, on a quarterly basis or whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. Shop-level assets and right-of-use assets are grouped at the individual shop-level for the purpose of the impairment assessment. Recoverability of an asset group is measured by a comparison of the carrying amount of an asset group to its estimated undiscounted future cash flows expected to be generated by the asset group. If the carrying amount of the asset group exceeds its estimated undiscounted future cash flows, an impairment charge is recognized as the amount by which the carrying amount of the asset group exceeds the fair value of the asset group. The fair value of the shop assets is determined using the discounted future cash flow method of anticipated cash flows through the shop’s lease-end date using fair value measurement inputs classified as Level 3. The fair value of right-of-use assets is estimated using market comparative information for similar properties. Level 3 inputs are derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable. After performing a periodic review of the Company’sour shops during the 13 weeks and 26 weeks ended June 28, 2020,27, 2021, it was determined that indicators of impairment were present for certain shops as a result of continued underperformance. The Companyunderperformance, primarily related to the impacts of COVID-19. We performed an impairment analysis related to these shops and recorded an impairment charge of $0.9 million$281 thousand and $6.8 million$429 thousand for the 13 and 26 weeks ended June 28, 2020, respectively, primarily driven by the expected impact of the COVID-19 pandemic on future cash flows.27, 2021. 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 and 26 weeks ended June 30, 2019, the Company recorded an impairment charge of $0.2 million.
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 initial 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 duringDuring the first quarter of 2020.2021, we amended the lease for our corporate Support Center office in Chicago to relocate to a different office space within the same building. As such,a result of this relocation, the Company performed an impairment assessment for both goodwill and indefinite lived intangible assets and concluded thatleasehold improvements of the fairoriginal office space were disposed, resulting in a loss on disposal of $2.5 million based on the remaining net book value of these assets exceeded their carrying values. The Company has not recorded any impairment to its goodwill or indefinite-lived intangible assets during the 13 and 26 weeks ended June 28, 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. those assets.
(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, 0 potential common shares are included in diluted shares outstanding as the effect is anti-dilutive. For the 13 and 26 weeks ended June 27, 2021 and June 28, 2020, and June 30, 2019, the Companywe 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 |
| ||||||||||
|
| June 27, |
|
| June 28, |
|
| June 27, |
|
| June 28, |
| ||||
|
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||
Net loss attributable to Potbelly Corporation |
| $ | (3,881 | ) |
| $ | (22,216 | ) |
| $ | (18,353 | ) |
| $ | (35,552 | ) |
Weighted average common shares outstanding-basic |
|
| 27,978 |
|
|
| 23,773 |
|
|
| 26,961 |
|
|
| 23,709 |
|
Plus: Effect of potential stock options exercise |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Weighted average common shares outstanding-diluted |
|
| 27,978 |
|
|
| 23,773 |
|
|
| 26,961 |
|
|
| 23,709 |
|
Loss per share available to common stockholders-basic |
| $ | (0.14 | ) |
| $ | (0.93 | ) |
| $ | (0.68 | ) |
| $ | (1.50 | ) |
Loss per share available to common stockholders-diluted |
| $ | (0.14 | ) |
| $ | (0.93 | ) |
| $ | (0.68 | ) |
| $ | (1.50 | ) |
Potentially dilutive shares that are considered anti-dilutive: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common share options |
|
| 2,002 |
|
|
| 2,998 |
|
|
| 2,048 |
|
|
| 2,646 |
|
|
| For the 13 Weeks Ended |
|
| For the 26 Weeks Ended |
| ||||||||||
|
| June 28, |
|
| June 30, |
|
| June 28, |
|
| June 30, |
| ||||
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Net loss attributable to Potbelly Corporation |
| $ | (22,216 | ) |
| $ | (1,866 | ) |
| $ | (35,552 | ) |
| $ | (20,305 | ) |
Weighted average common shares outstanding-basic |
|
| 23,773 |
|
|
| 23,908 |
|
|
| 23,709 |
|
|
| 24,021 |
|
Plus: Effect of potential stock options exercise |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Weighted average common shares outstanding-diluted |
|
| 23,773 |
|
|
| 23,908 |
|
|
| 23,709 |
|
|
| 24,021 |
|
Loss per share available to common stockholders-basic |
| $ | (0.93 | ) |
| $ | (0.08 | ) |
| $ | (1.50 | ) |
| $ | (0.85 | ) |
Loss per share available to common stockholders-diluted |
| $ | (0.93 | ) |
| $ | (0.08 | ) |
| $ | (1.50 | ) |
| $ | (0.85 | ) |
Potentially dilutive shares that are considered anti-dilutive: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common share options |
|
| 2,998 |
|
|
| 2,377 |
|
|
| 2,646 |
|
|
| 2,382 |
|
(5) Income Taxes
The interim tax provision is determined using an estimated annual effective tax rate and is adjusted for discrete taxable events that occur during the quarter. We regularly assess the need for a valuation allowance related to our deferred tax assets, which includes consideration of both positive and negative evidence related to the likelihood of realization of such deferred tax assets to determine, based on the weight of the available evidence, whether it is more-likely-than-not that some or all of our deferred tax assets will not be realized. In our assessment, we consider recent financial operating results, projected future taxable income, the reversal of existing taxable differences, and tax planning strategies. We recorded a full valuation allowance against our net deferred tax assets during the first quarter of 2019, resulting in a non-cash charge to income tax expense of $13.6 million. We continue to maintain a valuation allowance against all of our deferred tax assets as of June 27, 2021. We did not provide for an income tax benefit on our pre-tax loss for the 13 and 26 weeks ended June 27, 2021 and June 28, 2020. We assess the likelihood of the realization of our deferred tax assets each quarter and the valuation allowance is adjusted accordingly.
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”)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”)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 estimateswe estimated that it willwe would be able to obtain a tax refund of $3.7$6.7 million from the carryback of NOLs and a refund of prior AMT credits. TheWe received the entire amount of the refund during fiscal year 2020. We recognized $3.7 million tax receivable is recorded in other current assets on the Company’s condensed consolidated balance sheet as of June 28, 2020. The Company received $1.1 million of this refund in July 2020 and expects to receive the remaining $2.6 million before the end of the current year.
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 Company recognized an income tax benefit of $3.7 million during the first quarter of 2020 primarily due to the impact of the Cares Act discussed above. The Company recorded a tax expense of $13.6 million during the first quarter of 2019 due to the Company recording a non-cash charge to income tax expense for the recognition of a full valuation allowance against its net deferred tax assets. The Company continues to record a valuation allowance against all of its deferred tax assets as June 28, 2020. The Company did not provide for an income tax benefit on its pre-tax loss for the 13 and 26 weeks ended June 28, 2020 and June 30, 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 considers recent financial operating results, projected future taxable income, the reversal of existing taxable differences, and tax planning strategies. The Company recorded a full valuation allowance against its net deferred tax assets during the first quarter of 2019 resulting in a non-cash charge to income tax expense of $13.6 million. The Company continued to maintain a valuation allowance against all of its deferred tax assets as of June 28, 2020. The Company assesses the likelihood of the realization of its deferred tax assets each quarter and the valuation allowance is adjusted accordingly.
(6) Leases
We determine if a contract contains a lease at inception. The Company leasesWe lease retail shops, warehouse and office space under operating leases. For leases with renewal periods at the Company’sour option, the Company determineswe determine 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. The Company estimatesWe estimate this rate based on prevailing financial market conditions, comparable company and credit analysis, and management judgment.
We recognize expense for these leases on a 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.
AsIn fiscal year 2020, as a result of COVID-19, the Company suspended the payment of rent on the majority of its leases and has been inwe held discussions with landlords regarding the restructuring of thoseour leases in light of various contractual and legal defenses. The Companydefenses, and we subsequently entered into 107a total of 342 amendments with our respective landlords through June 27, 2021. The vast majority of these lease amendments were completed during fiscal year 2020, and we are substantially complete with COVID-19-related lease amendments as of June 27, 2021.
During the thirteen13 and 26 weeks ended June 28, 2020. Under these agreements, certain rent payments will be abated, deferred or modified without penalty for various periods, generally covering two to four months of rent payments. In April 2020, the Financial Accounting Standards Board issued guidance allowing entities to make a policy election whether to account for27, 2021, we terminated 1 lease concessions related to the COVID-19 pandemic as lease modifications. The election applies to any lessor-provided lease concession related to the impact of the COVID-19 pandemic, provided the concession does not result in a substantial increase in the rights of the lessor or in the obligations of the lessee. During the thirteen weeks ended June 28, 2020, we received concessions from certain landlords in the form of rent deferrals and abatements which were not substantial,3 leases, respectively. We incurred $0 million and we have elected to not account for these rent concessions as lease modifications.
During the thirteen weeks ended June 28, 2020, the Company terminated the leases for 6 company-owned shops which will be permanently closed. The Company incurred $0.3$0.2 million in lease termination fees related to these leases.leases for the 13 and 26 weeks ended June 27, 2021. Upon termination of these leases during the Company13 weeks ended June 27, 2021, we derecognized ROU assets of $3.6$0.8 million and lease liabilities of $3.8$0.9 million that resulted in a net gain of $0.2$0.1 million that is recorded in generalimpairment, loss on disposal of property and administrative expenses.equipment and shop closures. Upon termination of the leases during the 26 weeks ended June 27, 2021, we derecognized ROU assets of $1.4 million and lease liabilities of $1.6 million that resulted in a net gain of $0.1 million that is recorded in impairment, loss on disposal of property and equipment and shop closures.
Operating lease term and discount rate were as follows:follows.
|
| June 27, |
|
| June 28, |
| ||
|
| 2021 |
|
| 2020 |
| ||
Weighted average remaining lease term (years) |
|
| 7.50 |
|
|
| 8.16 |
|
Weighted average discount rate |
|
| 7.90 | % |
|
| 7.90 | % |
|
| June 28, |
|
| June 30, |
| ||
|
| 2020 |
|
| 2019 |
| ||
Weighted average remaining lease term (years) |
| 8.16 |
|
| 8.72 |
| ||
Weighted average discount rate |
|
| 7.90 | % |
|
| 8.03 | % |
Certain of the Company’sour 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 ended |
| 26 weeks ended |
| ||||||||||||||||
|
|
| June 28, |
| June 30, |
|
| June 28, |
| June 30, |
|
| June 27, |
| June 28, |
| June 27, |
| June 28, |
| ||||||||
| Classification |
| 2020 |
| 2019 |
|
| 2020 |
| 2019 |
| Classification | 2021 |
| 2020 |
| 2021 |
| 2020 |
| ||||||||
Operating lease cost | Occupancy and General and administrative expenses |
|
| 11,817 |
|
| 11,611 |
|
|
| 23,587 |
|
| 22,606 |
| Occupancy and General and administrative expenses |
| 10,296 |
|
| 11,817 |
|
| 20,707 |
|
| 23,587 |
|
Variable lease cost | Occupancy |
|
| 2,918 |
|
| 3,649 |
|
|
| 6,240 |
|
| 7,153 |
| Occupancy |
| 3,236 |
|
| 2,918 |
|
| 6,475 |
|
| 6,240 |
|
Total lease cost |
|
| $ | 14,735 |
| $ | 15,260 |
|
| $ | 29,827 |
| $ | 29,759 |
|
| $ | 13,532 |
| $ | 14,735 |
| $ | 27,182 |
| $ | 29,827 |
|
Supplemental disclosures of cash flow information related to leases were as follows:
|
| 13 weeks ending |
|
| 26 weeks ending |
|
| 13 weeks ended |
|
| 26 weeks ended |
| ||||||||||||||||
|
| June 28, |
| June 30, |
|
| June 28, |
| June 30, |
|
| June 27, |
| June 28, |
|
| June 27, |
| June 28, |
| ||||||||
|
| 2020 |
| 2019 |
|
| 2020 |
| 2019 |
|
| 2021 |
| 2020 |
|
| 2021 |
| 2020 |
| ||||||||
Operating cash flows rent paid for operating lease liabilities |
|
| 1,528 |
|
| 11,788 |
|
|
| 13,507 |
|
| 23,726 |
|
|
| 12,137 |
|
| 1,528 |
|
|
| 25,051 |
|
| 13,507 |
|
Operating right-of-use assets obtained in exchange for new operating lease liabilities |
|
| 8,002 |
| 2,735 |
|
|
| 13,536 |
| 3,657 |
|
|
| 2,938 |
| 8,002 |
|
|
| 4,656 |
| 13,536 |
| ||||
Reduction in operating right-of-use assets due to lease terminations |
|
| (3,442 | ) |
| (1,320 | ) |
|
| (4,881 | ) |
| (5,847 | ) |
|
| 846 |
| 3,442 |
|
|
| 4,140 |
| 4,881 |
|
As of June 28, 2020, the Company27, 2021, we had 0 real estate leases entered into that had not yet commenced.
Maturities of lease liabilities were as follows as of June 28, 2020:
27, 2021:
|
| Operating Leases |
|
| Operating Leases |
| ||
Remainder of 2020 |
|
| 31,433 |
| ||||
2021 |
|
| 46,600 |
| ||||
Remainder of 2021 |
|
| 24,678 |
| ||||
2022 |
|
| 40,477 |
|
|
| 41,201 |
|
2023 |
|
| 35,598 |
|
|
| 37,129 |
|
2024 |
|
| 32,805 |
|
|
| 34,517 |
|
2025 |
|
| 30,552 |
|
|
| 31,611 |
|
2026 |
|
| 27,824 |
| ||||
Thereafter |
|
| 112,663 |
|
|
| 81,849 |
|
Total lease payments |
|
| 330,128 |
|
|
| 278,809 |
|
Less: imputed interest |
|
| (89,721 | ) |
|
| (72,081 | ) |
Present value of lease liabilities |
| $ | 240,407 |
|
| $ | 206,728 |
|
(7) Debt and Credit Facilities
The components of long-term debt were as follows:
|
| June 27, |
|
| December 27, |
| ||
|
| 2021 |
|
| 2020 |
| ||
Revolving credit facility |
| $ | 786 |
|
| $ | 6,286 |
|
Paycheck Protection Program loan |
|
| 10,000 |
|
|
| 10,000 |
|
Less: current portion of long-term debt |
|
| (1,333 | ) |
|
| (333 | ) |
Total long-term debt |
| $ | 9,453 |
|
| $ | 15,953 |
|
|
|
|
|
|
|
|
|
|
Current portion of debt |
| $ | 1,333 |
|
| $ | 333 |
|
Revolving credit facility
On August 7, 2019, the Companywe 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,provided, 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’sour option at either (i) a eurocurrency rate determined by reference to the applicable LIBOR rate plus a specified 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%.specified margin. The applicable margin iswas determined based upon the Company’sour consolidated total leverage ratio. On the last day of each calendar quarter, the Company iswe were 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 iswas no limit on the “restricted payments” (primarily distributions and equity repurchases) that the Companywe 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,As disclosed in our Annual Report on Form 10-K for the fiscal year ended December 27, 2020, during 2020, we drew on the Company fully drew the available capacity of $39.8 million under the Credit Agreement as a precautionary measure in ordercredit facility to increase itsour cash position and preserve financial flexibility in light of currentthe uncertainty in the global markets resulting from the COVID-19 pandemic. In accordance with the terms ofpandemic, and we amended the Credit Agreement the proceeds from these borrowings may in the future be used for working capital, general corporate or other permitted purposes.throughout fiscal year 2020.
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 balance held by JP Morgan declines below $28.0 million. Lastly, the Company was required to pay a fee of 1% of the outstanding loan balance after the signing of the Credit Agreement Amendment.
On July 17, 2020, the CompanyMost recently, we entered into Amendment No. 25 (the “Second“Fifth Amendment”) to the Credit Agreement on February 26, 2021. As a result of the Amendment (i) the maturity date was extended from March 31, 2022 to among other things: (i) reviseJanuary 31, 2023, (ii) the revolving credit commitment decreased from $40 million to $25 million, (iii) the interest rate margin with respect to any Commercial Bank Floating Rate Loan increased to 2.75%, (iv) the interest rate margin with respect to any Eurodollar Loan increased to 5.00%, (v) the definition of EBITDA was amended to exclude non-cash charges/gains in connection with certain equity interests of the Company, (vi) certain borrowing conditions relating to the Company’s Consolidated Cash Balance were instituted, (vii) the Company is permitted to repurchase/redeem its financial covenants; (ii) decreaseequity interests under certain conditions and (viii) the aggregate amountminimum monthly EBITDA and Liquidity thresholds the Company must maintain were revised.
As of loan commitment availableJune 27, 2021, we had $786 thousand outstanding under the Credit Agreement from $40.0 million to $30.0 million after March 31, 2021 and (iii) decrease 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 4.75% or (b) a prime rate as announced by JP Morgan plus 2.25%. Per the terms of the Second Amendment, the Company repaid $14.5 million of its outstanding borrowing at the signing of the Second Amendment, and may reborrow the entire amount available under the credit facility when its cash balance held by JP Morgan declines below $10.0 million in total.Agreement. As of June 28,December 27, 2020, the Companywe had $23.1$6.3 million outstanding under the Credit Agreement. There were 0 borrowings outstanding as of June 30, 2019.
The Second Amendment includes financial covenants that require the Company to (i) maintain periodic minimum liquidity levels through February 28, 2022 ranging from $15.0 million to $30.0 million and (ii) maintain monthly minimum adjusted EBITDA thresholds for specified computation periods through February 28, 2022 ranging from ($18.0) million to $8.3 million. The Company isWe are currently in compliance with all financial debt covenants as of June 28, 2020.covenants.
Paycheck Protection Program Loan
On AprilAugust 10, 2020, Potbelly Sandwich Works, LLC,PSW, an indirect subsidiary of the Company, was grantedentered into a loan (the “Loan”) from JPMorgan Chase Bank, N.A.agreement with Harvest Small Business Finance, LLC in the aggregate amount of $10.0 million (the “Loan”), pursuant to the Paycheck Protection ProgramPPP under Division A, Title Ithe CARES Act. The Loan was necessary to support our ongoing operations due to the economic uncertainty resulting from the COVID-19 pandemic and lack of access to alternative sources of liquidity.
The Loan is scheduled to mature five years from the date on which PSW applies for loan forgiveness under the CARES Act, bears interest at a rate of 1% per annum and is subject to the terms and conditions applicable to loans administered by the U.S. Small Business Administration under the CARES Act. The PPP provides that the use of the Loan amount shall be limited to certain qualifying expenses and may be partially or wholly forgiven in accordance with the requirements set forth in the CARES Act. We have used all of the PPP proceeds toward qualifying expenses and are pursuing forgiveness of the full Loan amount, but we are not able to determine the likelihood or the amount of forgiveness that will be obtained.
We have recorded the amount of the Loan as long-term debt in our condensed consolidated balance sheet as of June 27, 2021, net of the current portion of the Loan which represents the payments that would be due in the next twelve months if we are not able to obtain forgiveness. The related interest has been recorded to interest expense in our condensed consolidated statement of operations for the 13 and 26 weeks ended June 27, 2021.
(8) Restructuring
On November 3, 2020, as part of our COVID-related cost reduction efforts and to better align our general and administrative expenses with future strategy, we made the determination to reorganize and restructure our corporate team. We expect that this restructuring plan will result in annual general and administrative expense savings of $3.5 to $4.0 million. This was enacted Marchaccomplished through corporate expense optimization, consolidating our shop support services, and through other expense and staff reductions. As a result, we reduced corporate employment levels by approximately 35 employees in the fourth quarter of 2020. We substantially completed our planned restructuring actions during 2020, but we will continue to evaluate our cost structure and seek opportunities for further efficiencies and cost savings as part of our ongoing strategy. As such, we may incur additional restructuring related charges or adjustments to previously recorded charges in the future, however, we are unable to estimate the amount of charges at this time.
The accrued restructuring balances as of June 27, 2020. On April 28, 2020, the Company repaid the $10.0 million proceeds from the loan.2021 represent expected future cash payments required to satisfy our remaining obligations, which are expected to be paid throughout 2021.
|
| Total |
| |
|
| (Thousands) |
| |
Balance as of December 27, 2020 |
| $ | 1,489 |
|
Charges incurred |
|
| — |
|
Payments made |
|
| (803 | ) |
Balance as of June 27, 2021 |
| $ | 686 |
|
(8)(9) Capital Stock
On May 8, 2018, the Companywe announced that itsour Board of Directors authorized a stock repurchase program for up to $65.0 million of itsour outstanding common stock. The program permits the Company,us, from time to time, to purchase shares in the open market (including in pre-arranged stock trading plans in accordance with the guidelines specified in Rule 10b5-1 under the Securities and Exchange Act of 1934, as amended) or in privately negotiated transactions. 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 and 26 weeks ended June 28, 2020, the Company27, 2021, we did 0t repurchase any shares of itsour common stock. In light of the COVID-19 pandemic, the Company doeswe do not have plans to repurchase any common stock under itsour stock repurchase program at this time. For
On February 9, 2021, we closed on a Securities Purchase Agreement (the “SPA”) for the sale by us of 3,249,668 shares of our common stock at a par value of $0.01 per share and the issuance of warrants to purchase 1,299,861 shares of common stock at an exercise price of $5.45 per warrant for gross proceeds of $16.0 million, before deducting placement agent fees and offering expenses of approximately $1.0 million. The warrants are initially exercisable commencing August 13, and 26 weeks ended June 30, 2019,2021 through their expiration date of August 12, 2026. The proceeds received from the Company repurchased 350,659SPA were allocated between shares and 485,659 shares of its common stock for approximately $2.3 million and $3.5 million, respectively, underwarrants based on their relative fair values at closing. The warrants were valued utilizing 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.Black-Scholes method.
(9)(10) Stock-Based Compensation
Stock options
The Company hasWe have awarded stock options to certain employees of the Company and certain non-employee members of itson our Board of 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 0 stock options granted during the 13 and 26 weeks ended June 28, 2020.27, 2021.
A summary of stock option activity for the 26 weeks ended June 28, 202027, 2021 is as follows:
Options |
| Shares (Thousands) |
|
| Weighted Average Exercise Price |
|
| Aggregate Intrinsic Value (Thousands) |
|
| Weighted Average Remaining Term (Years) |
| ||||
Outstanding—December 27, 2020 |
|
| 1,233 |
|
| $ | 10.68 |
|
| $ | — |
|
|
| 2.49 |
|
Granted |
|
| — |
|
|
| — |
|
|
|
|
|
|
|
|
|
Exercised |
|
| (31 | ) |
|
| 7.24 |
|
|
|
|
|
|
|
|
|
Canceled |
|
| (664 | ) |
|
| 9.75 |
|
|
|
|
|
|
|
|
|
Outstanding—June 27, 2021 |
|
| 538 |
|
|
| 12.03 |
|
| $ | — |
|
|
| 2.75 |
|
Exercisable—June 27, 2021 |
|
| 535 |
|
| $ | 12.02 |
|
| $ | — |
|
|
| 2.73 |
|
Options |
| Shares (Thousands) |
|
| Weighted Average Exercise Price |
|
| Aggregate Intrinsic Value (Thousands) |
|
| Weighted Average Remaining Term (Years) |
| ||||
Outstanding—December 29, 2019 |
|
| 1,774 |
|
| $ | 11.34 |
|
| $ | — |
|
|
| 4.33 |
|
Granted |
|
| — |
|
|
| — |
|
|
|
|
|
|
|
|
|
Exercised |
|
| — |
|
|
| — |
|
|
|
|
|
|
|
|
|
Canceled |
|
| (33 | ) |
|
| 10.51 |
|
|
|
|
|
|
|
|
|
Outstanding—June 28, 2020 |
|
| 1,741 |
|
|
| 11.35 |
|
| $ | — |
|
|
| 3.76 |
|
Exercisable—June 28, 2020 |
|
| 1,576 |
|
| $ | 11.14 |
|
| $ | — |
|
|
| 3.38 |
|
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 and 26 weeks ended June 27, 2021, we recognized stock-based compensation expense related to stock options of less than $0.1 million. For the 13 and 26 weeks ended June 28, 2020, the Companywe recognized stock-based compensation expense related to stock options of $0.1 million and $0.3 million, respectively. For the 13 and 26 weeks ended June 30, 2019, the Company recognized stock-based compensation expense related to stock options of $0.3 million and $0.6 million, respectively. As of June 28, 2020,27, 2021, unrecognized stock-based compensation expense for stock options was $0.5less than 0.1 million, which will be recognized through fiscal year 2022. The Company recordsWe record stock-based compensation expense within general and administrative expenses in the condensed consolidated statements of operations.
Restricted stock units
The Company awardsWe award restricted stock units (“RSUs”) to certain employees of the Company and certain non-employee members of itson our Board of Directors. ThePrior to 2021, the Board of Director grants havehad a vesting schedule of 50% on the first anniversary of the grant date and 50% on the second anniversary of the grant date. Beginning with the annual grant made in the second quarter of 2021, the Board of Director grants fully vest on the first anniversary of the grant date, or upon termination from the Board of Directors for any reason other than for cause, a pro rata portion of the shares vest on the termination date. The employee grants vest in one-third increments over a three-year period. For the 13 and 26 weeks ended June 27, 2021, we recognized stock-based compensation expense related to RSUs of $0.3 million and $0.4 million, respectively. For the 13 and 26 weeks ended June 28, 2020, the Companywe recognized stock-based compensation expense related to RSUs of $0.3 million and $0.6 million, respectively. For the 13 and 26 weeks ended June 30, 2019, the Company recognized stock-based compensation expense related to RSUs of $0.7 million and $0.9 million, respectively.million. As of June 28, 2020,27, 2021, unrecognized stock-based compensation expense for RSUs was $3.2$4.1 million, which will be recognized though fiscal year 2023.2024.
A summary of RSU activity for the 26 weeks ended June 28, 202027, 2021 is as follows:
RSUs |
| Number of RSUs (Thousands) |
|
| Weighted Average Fair Value per Share |
|
| Number of RSUs (Thousands) |
|
| Weighted Average Fair Value per Share |
| ||||
Non-vested as of December 29, 2019 |
|
| 463 |
|
| $ | 7.59 |
| ||||||||
Non-vested as of December 27, 2020 |
|
| 994 |
|
| $ | 3.35 |
| ||||||||
Granted |
|
| 963 |
|
|
| 2.48 |
|
|
| 595 |
|
|
| 6.12 |
|
Vested |
|
| (168 | ) |
|
| 2.68 |
|
|
| (143 | ) |
|
| 7.90 |
|
Canceled |
|
| (1 | ) |
|
| 2.98 |
|
|
| (13 | ) |
|
| — |
|
Non-vested as of June 28, 2020 |
|
| 1,257 |
|
| $ | 3.55 |
| ||||||||
Non-vested as of June 27, 2021 |
|
| 1,433 |
|
| $ | 4.39 |
|
Performance stock units
The Company awardsWe award performance share units (“PSUs”) to eligiblecertain of our employees. In June 2020 the Company issued 774,761The PSUs with ahave certain vesting conditions based upon our financial performance or our stock price.
We grant date fair value of $1.50PSUs that was established using a Monte Carlo simulation model. These PSUs are subject to service and market vesting conditions. The PSUs will vest over the performance periodfair market value of May 15, 2020 through May 15, 2025.each grant was established using a Monte Carlo simulation model. Participants are entitled to receive a specified number of shares of the Company’sour common stock contingent on the achievement of a stock return on the Company'sour common stock. CompensationFor the 13 and 26 weeks ended June 27, 2021, we recognized stock-based compensation expense for these awards will be amortized over an average expected service period of 1.8 years.
In March 2019 the Company issued 188,414 PSUs with a grant date fair valuemarket vesting conditions of $8.46 per share. The$0.3 million and $0.4 million, respectively.
A summary of activity for PSUs will vest based on the Company’s achievement of certain targets related to adjusted EBITDA and same store sales goals, subject to continued service through the performance period. 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. Forwith market vesting conditions for the 26 weeks ended June 28, 2020 and June 30, 2019, 0 expense was recognized related to PSUs.27, 2021 is as follows:
PSUs |
| Number of PSUs (Thousands) |
|
| Weighted Average Fair Value per Share |
| ||
Non-vested as of December 27, 2020 |
|
| 502 |
|
|
| 1.38 |
|
Granted |
|
| 130 |
|
|
| 8.43 |
|
Vested |
|
| (502 | ) |
|
| 6.76 |
|
Canceled |
|
| — |
|
|
| — |
|
Non-vested as of June 27, 2021 |
|
| 130 |
|
| $ | 8.43 |
|
(10)
(11) Commitments and Contingencies
The Company isWe are subject to legal proceedings, claims and liabilities, such as employment-related claims and slip and fall cases, which arise in the ordinary course of business and are generally covered by insurance. 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’sour financial position or results of operations and cash flows.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, which received final court approval on February 4, 2020. All charges related to the claims are reflected in the statement of operations.
(11)(12) Related Party Transactions
On May 10, 2020,In connection with our sale of common stock and warrants to purchase common stock in February 2021 in a private placement, certain of our stockholders that owned greater than 5% of our outstanding shares prior to the Company entered intoclosing of the private placement purchased shares of common stock and warrants to purchase common stock on the same terms as the other shares and warrants that were offered and sold in the offering. The purchasers included the following stockholders, none of which owned more than 8.5% of our outstanding common stock prior to the closing of the private placement: 201,514 shares of common stock and warrants to purchase 80,605 shares of common stock were purchased by 180 Degree Capital Corp., for an aggregate purchase price of approximately $1.0 million and 164,875 shares of common stock and warrants to purchase 65,950 shares of common stock were purchased by B&W Pension Trust (of which 180 Degree Capital Corp. is the investment advisor and may be deemed to be a Settlement Agreement (the “Settlement Agreement”) withbeneficial owner of such shares), for an aggregate purchase price of approximately $0.8 million; 223,904 shares of common stock and warrants to purchase 89,561 shares of common stock were purchased by Agman Investments LLC, for an aggregate purchase price of approximately $1.1 million; 366,389 shares of common stock and warrants to purchase 146,555 shares of common stock were purchased by funds controlled by Ancora Holdings Inc., for an aggregate purchase price of approximately $1.8 million; 193,372 shares of common stock and warrants to purchase 77,348 shares of common stock were purchased by Chain of Lakes Investment Fund, LLC, for an aggregate purchase price of approximately $0.9 million; and 407,099 shares of common stock were purchased by Intrinsic Investment Holdings, LLC, the Vann A. Avedisian Trust U/A 8/29/85, Vann A. Avedisian, KGT Investments, LLC, The Khimji Foundation, Mahmood Khimji, Bryant L. Keil and Neil Luthra (the foregoing, collectively with eachfor an aggregate purchase price of their respective affiliates, the “Vann Group”). In connection with the Settlement Agreement with the Vann Group, the Company issued 130,000 shares of common stock (including 41,311 shares issued to the Vann A. Avedisian Trust U/A 8/29/85, 43,571 shares issued to KGT Investments, LLC and 45,118 shares issued to The Khimji Foundation) to reimburse the Vann Group for its documented out-of-pocket costs, fees and expenses incurred in connection with the Settlement Agreement. The Company recorded expense of $0.4 million within general and administrative expenses related to the issuance of these shares. Based on a report of Schedule 13D filed May 11, 2020 by the Vann Group, the Vann Group beneficially owns 8.7% of the common stock of the Company.approximately $2.0 million.
(12) Subsequent Events
Credit Facility
A second amendment to the Credit Agreement was entered into as of July 17, 2020. See Note 7 for further details.
Lease Terminations
As disclosed in Note 6, the Company continues to have discussions with its landlords about deferral or abatement of rent, restructured lease terms, and early terminations. Since June 28, 2020, the Company has terminated the leases for 9 company-owned shops which have been permanently closed. The Company incurred $0.5 million in lease termination fees related to these leases.
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 29, 2019.27, 2020. 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: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 potential future impact of COVID-19 outbreak;on our business and results of operations; compliance with covenants in our credit facility; competition; general economic conditions; our ability to successfully implement our business strategy; the success of our initiatives to increase sales and traffic; changes in commodity, energy and other costs; our ability to attract and retain management and employees; consumer reaction to industry-related public health issues and perceptions of food safety; our ability to manage our growth; reputational and brand issues; price and availability of commodities; consumer confidence and spending patterns; and weather conditions. Forward-looking statements are based on current expectations and assumptions and currently available data and are neither predictions nor guarantees of future events or performance. You should not place undue reliance on forward-looking statements, which speak only as of the date hereof. See “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements” included in our Annual Report on Form 10-K for the fiscal year ended December 29, 2019 and our Quarterly Report on Form 10-Q for the quarter ended March 29,27, 2020, for a discussion of factors that could cause our actual results to differ from those expressed or implied by forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law.
Business
Potbelly Corporation is a neighborhood sandwich concept that has been a much-needed lunch-break escapefeeding customers’ smiles with warm, toasty sandwiches, signature salads, hand-dipped shakes and other fresh menu items, customized just the way customers want them, for more than 40 years. Potbelly owns and operates Potbelly Sandwich Shop concepts in the United States. The CompanyWe also hashave 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 haswe have one operating segment and one reportable segment.
Our new “Traffic-Driven Profitability” 5-pillar strategic plan includes a prioritized set of low-cost strategic investments that we believe will deliver strong returns. The 5 pillars are:
• | Craveable Quality Food at a Great Value |
• | People Creating Good Vibes |
• | Customer Experiences that Drive Traffic Growth |
• | Digitally Driven Awareness, Connection and Traffic |
• | Franchise Focused Development |
Our shop model is designed to generate, and has generated, strong cash flow, attractive shop-level financial results and high returns on investment. We operate our shops successfully in a wide range of geographic markets, population densities and real estate settings. We aim to generate average shop-level profit margins, a non-GAAP measure, that range from the mid to high teens to above 20%. Our ability to achieve such margins and returns depends on a number of factors. For example, we face increasing labor and commodity costs, which we have partially offset by increasing menu prices. Although there is no guarantee that we will be able to maintain these returns, we believe our attractive shop economics support our ability to profitably grow our brand in new and existing markets.
The table below sets forth a rollforward of company-operated and franchise operated activities:
|
| Company- |
|
| Franchise-Operated |
|
| Total |
|
| Company- |
|
| Franchise- |
|
| Total |
| ||||||||||||||
|
| Operated |
|
| Domestic |
|
| International |
|
| Total |
|
| Company |
| |||||||||||||||||
Shops as of December 30, 2018 |
|
| 437 |
|
|
| 41 |
|
|
| 8 |
|
|
| 49 |
|
|
| 486 |
| ||||||||||||
Shops opened |
|
| 1 |
|
|
| 5 |
|
|
| — |
|
|
| 5 |
|
|
| 6 |
| ||||||||||||
Shops closed |
|
| (9 | ) |
|
| (2 | ) |
|
| (7 | ) |
|
| (9 | ) |
|
| (18 | ) | ||||||||||||
Shops as of June 30, 2019 |
|
| 429 |
|
|
| 44 |
|
|
| 1 |
|
|
| 45 |
|
|
| 474 |
| ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Operated |
|
| Operated |
|
| Company |
| |||
Shops as of December 29, 2019 |
|
| 428 |
|
|
| 46 |
|
|
| — |
|
|
| 46 |
|
|
| 474 |
|
|
| 428 |
|
|
| 46 |
|
|
| 474 |
|
Shops opened |
|
| 3 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 3 |
|
|
| 3 |
|
|
| — |
|
|
| 3 |
|
Shops closed |
|
| (7 | ) |
|
| (2 | ) |
|
| — |
|
|
| (2 | ) |
|
| (9 | ) |
|
| (7 | ) |
|
| (2 | ) |
|
| (9 | ) |
Shops as of June 28, 2020 |
|
| 424 |
|
|
| 44 |
|
|
| — |
|
|
| 44 |
|
|
| 468 |
|
|
| 424 |
|
|
| 44 |
|
|
| 468 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
Shops as of December 27, 2020 |
|
| 400 |
|
|
| 46 |
|
|
| 446 |
| ||||||||||||||||||||
Shops opened |
|
| — |
|
|
| 1 |
|
|
| 1 |
| ||||||||||||||||||||
Shops closed |
|
| (2 | ) |
|
| (2 | ) |
|
| (4 | ) | ||||||||||||||||||||
Shops as of June 27, 2021 |
|
| 398 |
|
|
| 45 |
|
|
| 443 |
|
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 ofcoronavirus, resulting in significant changes to our company-owned shops remain open in accordance with guidance from local authorities, these measures resulted in us closing the vast majority our dining roomsoperations and shifting to off-premise operations only, and we experienced a sudden and drastic decrease in revenues. Since the onset ofWhile the pandemic local regulations continuecontinues to changehave an impact on our business, the distribution of COVID-19 vaccines and a decline in response topositive cases and hospitalizations has resulted in a gradual improvement in our sales during the changing environment, and somefirst half of 2021. Nearly all of our shops have reopened their dining rooms and are ableno longer subject to operate with limited dine-in capacity.operating restrictions and capacity limits related to COVID-19. We are continuingcontinue to monitor these regulationsfollow guidance from local authorities in determining the appropriate restrictions to put in place for each shop, including the suspension or reduction of in-shop dining if required due to changes in the pandemic response in each jurisdiction where we operate in order to adjust our operations accordingly.jurisdiction.
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 iswe are closely monitoring the impact of the pandemic on all aspects of itsour business, including how it will impact itsour customers, employees, suppliers, vendors, business partners, and distribution channels. The Company isWe are unable to predict the impact that COVID-19 will have on itsour financial position and operating results due to numerous uncertainties, however, the Company iswe are continually assessing the evolving impact of the COVID-19 pandemic and intendsintend to make adjustments to itsour responses accordingly.
As the COVID-19 pandemic emerged, the Company’sour 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 personal protective equipment to our shop employees and implemented daily temperature checks and screening before each shift. We continue to adhere to our stringent food safety and quality assurance programs. We have implemented strict sanitation protocols for our shops including disinfecting high-touch areas and providing tamper-evident stickers on all pickup and delivery orders. We are monitoring recommendations from the CDCCenters for Disease Control 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, material disruptions in our supply chain. As of August 5, 2020, 41June 27, 2021, 6 of the Company’sour shops remain temporarily closed. 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 weeksMany 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, comparable same-store sales reached a low point with a decrease of 67.7% at the end of March. We reported a decrease in comparable same-store sales of 10.1% for the quarter ended March 29, 2020 compared to the prior year. Same-store sales steadily improved throughout the second quarter and ended with a decrease in same-store sales of 41.5% for the quarter. As our shops, were subject to restrictions on dine-in capacity, ourspecifically those in suburban and urban residential locations are now operating near or above pre-COVID-19 levels, but other shops, have increased off-premise operations, continuing to provide delivery, in-shop pick-up, drive-thru, or curbside pick-up services. We continue to follow guidance from local authoritiesespecially those in determiningcentral business districts, are still operating materially below those levels. While the appropriate restrictions to put in place for each shop. The majority of our shops have reopened their dining rooms withand are operating without mandated restrictions, such as social distancing and limited capacities,we continue to ensure the health and safety of our guests and employees.offer convenient off-premise options for customers. Customers can place off-premise orders through Potbelly.com and the Potbelly app, or through DoorDash, Grubhub, andPostmates, Uber Eats and other marketplaces nationwide. We launchedcontinue to evaluate our product offerings and service methods to ensure we are aligned with the Potbelly Pantry program, which allowspreferences of our customers to purchase Potbelly products in bulk as a response to changing customer needs during the pandemic. We also introduced Family Meal Deals which allow customers to purchase a combination of sandwiches, salads, sides, shakes, and other menu items for a family or group at a reduced price.pandemic evolves.
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 adjustedcontinually adjust shop-level labor and reduced purchases of inventory to align with newcurrent levels of demand. We have reduced advertising and marketing expenditures. We enacted a hiring freeze, and all business travel has been suspended. AsAt the onset of the beginningpandemic, we implemented a strategy to reduce costs and preserve cash, and we continue to be thoughtful and judicious regarding our operating expenses during the uncertainty of the secondpandemic. Additionally, we announced a corporate restructuring plan that was executed during the fourth quarter of 2020 we temporarily reduced salaries for allthat is expected to reduce annual general and administrative expenses by $3.5 million to $4.0 million. The Plan consisted of corporate employees, suspended merit increases, promotions, bonuses,expense optimization, consolidation of shop support services, and certain benefits,other expense and furloughed approximately one-third of our corporate employees. The Board of Directors has elected to temporarily defer compensation. We havestaff reductions.
In fiscal year 2020, we suspended the payment of rent on the majority of our leases and are inentered into discussions with our landlords regarding the restructuring of those leases in light of various contractual and legal defenses. As of August 5, 2020,June 27, 2021, we have
amended approximately 342 of the lease agreements for 187 of our shops, which include rent abatements, rent deferrals, and/or modified lease terms to reduce ongoing rent, and we have completed early terminations of leases for 1530 of our shops. The vast majority of these lease amendments were completed during fiscal year 2020, and we are substantially complete with COVID-19-related lease amendments as of June 27, 2021.
Shop Development – The Company hasWe halted capital investment in new company-owned shops, except for shops that arewere substantially complete, as well as all non-essential capital expenditures. The Company doesWe do not have plans to begin construction on any company-owned shops until the impact of the pandemic is behind us.
We will continue to actively monitor the evolving situation and may take further actions that alter our business operations as may be required by federal, state or local authorities or that we determine are in the best interests of our employees, customers, franchisees, stakeholders and communities.
13 Weeks Ended June 28, 202027, 2021 Compared to 13 Weeks Ended June 30, 201928, 2020
The following table presents information comparing the components of net incomeloss for the periods indicated (dollars in thousands):
|
| For the 13 Weeks Ended |
|
|
|
|
|
|
|
|
|
| For the 13 Weeks Ended |
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||
|
| June 28, 2020 |
|
| % of Revenues |
|
| June 30, 2019 |
|
| % of Revenues |
|
| Increase (Decrease) |
|
| Percent Change |
|
| June 27, 2021 |
|
| % of Revenues |
|
| June 28, 2020 |
|
| % of Revenues |
|
| Increase (Decrease) |
|
| Percent Change |
| ||||||||||||
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sandwich shop sales, net |
| $ | 55,863 |
|
|
| 99.5 | % |
| $ | 104,801 |
|
|
| 99.2 | % |
| $ | (48,938 | ) |
|
| (46.7 | )% |
| $ | 96,777 |
|
|
| 99.3 | % |
| $ | 55,863 |
|
|
| 99.5 | % |
| $ | 40,914 |
|
|
| 73.2 | % |
Franchise royalties and fees |
|
| 299 |
|
|
| 0.5 |
|
|
| 829 |
|
|
| 0.8 |
|
|
| (530 | ) |
|
| (63.9 | ) |
|
| 714 |
|
|
| 0.7 |
|
|
| 299 |
|
|
| 0.5 |
|
|
| 415 |
|
|
| 138.8 |
|
Total revenues |
|
| 56,162 |
|
|
| 100.0 |
|
|
| 105,630 |
|
|
| 100.0 |
|
|
| (49,468 | ) |
|
| (46.8 | ) |
|
| 97,491 |
|
|
| 100.0 |
|
|
| 56,162 |
|
|
| 100.0 |
|
|
| 41,329 |
|
|
| 73.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Percentages stated as a percent of sandwich shop sales, net) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sandwich shop operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold, excluding depreciation |
|
| 16,108 |
|
|
| 28.8 |
|
|
| 28,264 |
|
|
| 27.0 |
|
|
| (12,156 | ) |
|
| (43.0 | ) |
|
| 26,341 |
|
|
| 27.2 |
|
|
| 16,108 |
|
|
| 28.8 |
|
|
| 10,233 |
|
|
| 63.5 |
|
Labor and related expenses |
|
| 21,884 |
|
|
| 39.2 |
|
|
| 32,114 |
|
|
| 30.6 |
|
|
| (10,230 | ) |
|
| (31.9 | ) |
|
| 31,961 |
|
|
| 33.0 |
|
|
| 21,884 |
|
|
| 39.2 |
|
|
| 10,077 |
|
|
| 46.0 |
|
Occupancy expenses |
|
| 14,649 |
|
|
| 26.2 |
|
|
| 15,230 |
|
|
| 14.5 |
|
|
| (581 | ) |
|
| (3.8 | ) |
|
| 13,562 |
|
|
| 14.0 |
|
|
| 14,649 |
|
|
| 26.2 |
|
|
| (1,087 | ) |
|
| (7.4 | ) |
Other operating expenses |
|
| 10,990 |
|
|
| 19.7 |
|
|
| 11,816 |
|
|
| 11.3 |
|
|
| (826 | ) |
|
| (7.0 | ) |
|
| 14,696 |
|
|
| 15.2 |
|
|
| 10,990 |
|
|
| 19.7 |
|
|
| 3,706 |
|
|
| 33.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Percentages stated as a percent of total revenues) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising |
|
| 384 |
|
|
| 0.4 |
|
|
| 120 |
|
|
| 0.2 |
|
|
| 264 |
|
|
| 220.0 |
| ||||||||||||||||||||||||
General and administrative expenses |
|
| 8,164 |
|
|
| 14.5 |
|
|
| 13,843 |
|
|
| 13.1 |
|
|
| (5,679 | ) |
|
| (41.0 | ) |
|
| 9,240 |
|
|
| 9.5 |
|
|
| 7,878 |
|
|
| 14.0 |
|
|
| 1,362 |
|
|
| 17.3 |
|
Depreciation expense |
|
| 4,955 |
|
|
| 8.8 |
|
|
| 5,585 |
|
|
| 5.3 |
|
|
| (630 | ) |
|
| (11.3 | ) |
|
| 4,553 |
|
|
| 4.7 |
|
|
| 4,955 |
|
|
| 8.8 |
|
|
| (402 | ) |
|
| (8.1 | ) |
Pre-opening costs |
|
| — |
|
| * |
|
|
| — |
|
| * |
|
|
| — |
|
|
| 0.0 |
|
|
| — |
|
| * |
|
|
| — |
|
| * |
|
|
| — |
|
|
| 0.0 |
| ||||
Impairment and loss on disposal of property and equipment |
|
| 1,299 |
|
|
| 2.3 |
|
|
| 246 |
|
|
| 0.2 |
|
|
| 1,053 |
|
| >100 |
| |||||||||||||||||||||||||
Impairment, loss on disposal of property and equipment and shop closures |
|
| 257 |
|
|
| 0.3 |
|
|
| 1,465 |
|
|
| 2.6 |
|
|
| (1,208 | ) |
|
| (82.5 | ) | ||||||||||||||||||||||||
Total expenses |
|
| 78,049 |
|
| >100 |
|
|
| 107,098 |
|
| >100 |
|
|
| (29,049 | ) |
|
| (27.1 | ) |
|
| 100,994 |
|
| >100 |
|
|
| 78,049 |
|
| >100 |
|
|
| 22,945 |
|
|
| 29.4 |
| ||||
Loss from operations |
|
| (21,887 | ) |
|
| (39.0 | ) |
|
| (1,468 | ) |
|
| (1.4 | ) |
|
| (20,419 | ) |
| >100 |
|
|
| (3,503 | ) |
|
| (3.6 | ) |
|
| (21,887 | ) |
|
| (39.0 | ) |
|
| 18,384 |
|
|
| (84.0 | ) | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
| 388 |
|
|
| 0.7 |
|
|
| 35 |
|
| * |
|
|
| 353 |
|
| >100 |
| ||||||||||||||||||||||||||
Interest expense, net |
|
| 185 |
|
|
| 0.2 |
|
|
| 388 |
|
|
| 0.7 |
|
|
| (203 | ) |
|
| (52.3 | ) | ||||||||||||||||||||||||
Loss before income taxes |
|
| (22,275 | ) |
|
| (39.7 | ) |
|
| (1,503 | ) |
|
| (1.4 | ) |
|
| (20,772 | ) |
| >100 |
|
|
| (3,688 | ) |
|
| (3.8 | ) |
|
| (22,275 | ) |
|
| (39.7 | ) |
|
| 18,587 |
|
|
| (83.4 | ) | |
Income tax expense (benefit) |
|
| 41 |
|
| * |
|
|
| 246 |
|
|
| 0.2 |
|
|
| (205 | ) |
|
| (83.3 | ) |
|
| 160 |
|
| * |
|
|
| 41 |
|
| * |
|
|
| 119 |
|
|
| 290.2 |
| |||
Net loss |
|
| (22,316 | ) |
|
| (39.7 | ) |
|
| (1,749 | ) |
|
| (1.7 | ) |
|
| (20,567 | ) |
| >100 |
|
|
| (3,848 | ) |
|
| (3.9 | ) |
|
| (22,316 | ) |
|
| (39.7 | ) |
|
| 18,468 |
|
|
| (82.8 | ) | |
Net income (loss) attributable to non-controlling interest |
|
| (100 | ) |
|
| (0.2 | ) |
|
| 117 |
|
|
| 0.1 |
|
|
| (217 | ) |
| >(100) |
|
|
| 33 |
|
|
| 0.0 |
|
|
| (100 | ) |
| * |
|
|
| 133 |
|
| >(100) |
| |||
Net loss attributable to Potbelly Corporation |
| $ | (22,216 | ) |
|
| (39.6 | )% |
| $ | (1,866 | ) |
|
| (1.8 | )% |
| $ | (20,350 | ) |
| >100% |
|
| $ | (3,881 | ) |
|
| (4.0 | )% |
| $ | (22,216 | ) |
|
| (39.6 | )% |
| $ | 18,335 |
|
|
| (82.5 | )% |
* | Amount is less than 0.1% |
Revenues
Total revenues decreasedincreased by $49.5$41.3 million, or 46.8%73.6%, to $97.5 million during the 13 weeks ended June 27, 2021, from $56.2 million during the 13 weeks ended June 28, 2020, from $105.6 million during2020. This increase was primarily driven by the 13 weeks ended June 30, 2019. The revenue decreaseeasing of the government restrictions previously imposed by federal, state and local governments, as a result of the COVID-19 pandemic. This resulted in an increase for the quarter was driven by a $39.6of $38.1 million, or 41.5%70.0%, decrease in sales from company-operated comparable store shops and a decreasesales. The increases in sales during the second quarter of $15.52021 also included sales of $3.9 million fromdue to shops that were temporarily closed in the prior year and have since reopened, partially offset by shops that have permanently closed. This was partially offsetclosed in the last year. Additionally, revenue from franchise royalties and fees increased by a $5.3$0.4 million, increase from shops not yet in our company-operated comparable store sales base.or 138.8%.
Cost of Goods Sold
Cost of goods sold decreasedincreased by $12.2$10.2 million, or 43.0%63.5%, to $26.3 million during the 13 weeks ended June 27, 2021, from $16.1 million during the 13 weeks ended June 28, 2020, from $28.3 million during the 13 weeks ended June 30, 2019.2020. This decreaseincrease was primarily driven by a decreasean increase in shop revenue. As a percentage of sandwich shop sales, cost of goods sold increaseddecreased to 27.2% during the 13 weeks ended June 27, 2021, from 28.8% during the 13 weeks ended June 28, 2020, from 27.0% during the 13 weeks ended June 30, 2019, primarily driven shift in product mix due to increase in off-premise sales and by cost inflation in certain products, partially offset byincreased menu price increases. prices, including differential pricing on third-party delivery marketplaces.
Labor and Related Expenses
Labor and related expenses decreasedincreased by $10.2$10.1 million, or 31.9%46.0%, to $21.9$32.0 million during the 13 weeks ended June 28, 2020,27, 2021, from $32.1$21.9 million for the 13 weeks ended June 30, 2019,28, 2020, primarily due to labor management amid a decreasedriven by an increase in shop revenue and a decrease in expense from closed shops, partially offset by wage inflation.revenue. As a percentage of sandwich shop sales, labor and related expenses increaseddecreased to 33.0% during the 13 weeks ended June 27, 2021, from 39.2% duringfor the 13 weeks ended June 28, 2020, from 30.6% during the 13 weeks ended June 30, 2019, primarily driven by sales deleverageleverage in certain labor related costs not directly variable with sales, partially offset by a decrease in expense from closed shops.sales.
Occupancy Expenses
Occupancy expenses decreased by $0.6$1.1 million, or 3.8%7.4%, to $13.6 million during the 13 weeks ended June 27, 2021, from $14.6 million during the 13 weeks ended June 28, 2020, from $15.2 million during the 13 weeks ended June 30, 2019 primarily due to a decrease in expenses related to closed shops. As a percentage of sandwich shop sales, occupancy expenses increaseddecreased to 14.0% for the 13 weeks ended June 28, 2021, from 26.2% duringfor the 13 weeks ended June 28, 2020, from 14.5% during the 13 weeks ended June 30, 2019, primarily due to increased sales deleverage and inflationleverage in certain occupancy related costs includingwhich are not variable with sales, as well as the impact of lease renewals, real estate taxesconcessions and common area maintenance.restructurings over the last year.
Other Operating Expenses
Other operating expenses decreasedincreased by $0.8$3.7 million, or 7.0%33.7%, to $14.7 million during the 13 weeks ended June 27, 2021, from $11.0 million during the 13 weeks ended June 28, 2020, from $11.8 million during the 13 weeks ended June 30, 2019.2020. The decreaseincrease was primarily attributablerelated to a decreasean increase in certain items variable with sales, partially offset by higher expenses relatedincluding fees to third-party delivery partnerships driven by increased sales in that channel.partners. As a percentage of sandwich shop sales, other operating expenses increaseddecreased to 15.2% for the 13 weeks ended June 27, 2021, from 19.7% duringfor the 13 weeks ended June 28, 2020, from 11.3%primarily driven by sales leverage in operating expense items that are not directly variable with sales.
Advertising
Advertising expenses increased by 220.8% to $385 thousand during the 13 weeks ended June 30, 2019, primarily driven by sales deleverage in operating expense items such as utilities, higher expenses related to third-party delivery partnerships driven by increased sales in that channel and other expenses not directly variable with sales.
27, 2021, from $120 thousand during the 13 weeks ended June 27, 2020.
General and Administrative Expenses
General and administrative expenses decreasedincreased by $5.7$1.4 million, or 41.0%17.3%, to $8.2$9.2 million during the 13 weeks ended June 28, 2020,27, 2021, from $13.8$7.9 million during the 13 weeks ended June 30, 2019.27, 2020. The decreaseincrease was driven primarily by a decrease in advertising costs, as well as a decrease in payroll costs as a resultthe accrual of furloughs of approximately one-third of corporate employees. annual bonuses for 2021. As a percentage of revenues, general and administrative expenses increaseddecreased to 14.5% during9.5% for the 13 weeks ended June 28, 2020,27, 2021, from 13.1% during14.0% for the 13 weeks ended June 30, 2019,27, 2020, primarily driven by a decrease in shop revenue, partially offset by reductions in advertising and payroll costs noted above.increased sales leverage.
Depreciation Expense
Depreciation expense decreased by $0.6$0.4 million, or 11.3%8.1%, to $4.6 million during the 13 weeks ended June 27, 2021, from $5.0 million during the 13 weeks ended June 28, 2020, from $5.6 million during the 13 weeks ended June 30, 2019.2020. The decrease was driven primarily by a lower depreciable base related to a decrease in the number of company-operated shops and impairment charges taken in prior periods. 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 8.8%4.7% during the 13 weeks ended June 28, 202027, 2021 and was 5.3%8.8% for the 13 weeks ended June 30, 2019.28, 2020.
Pre-Opening Costs
There were no pre-opening costs during the 13 weeks ended June 28, 202027, 2021 and June 30, 2019.28, 2020.
Impairment, and Loss on Disposal of Property and Equipment and Right-of-Use Lease AssetsShop Closures
Impairment, and loss on disposal of property and equipment and right-of-use lease assets increasedshop closures decreased by $1.2 million, or 82.5%, to $1.3$0.3 million during the 13 weeks ended June 27, 2021, from $1.5 million during the 13 weeks ended June 28, 2020, from $0.2 million2020.
After performing a periodic review of our shops during the 13 weeks ended June 30, 2019 primarily due to the expected impact of COVID-19 on future cash flows. After performing periodic reviews of Company shops during the second quarter of 2020,27, 2021, it was determined that indicators of impairment were present for certain shops. The Companyshops as a result of continued underperformance. We performed an impairment analysesanalysis related to these shops and recorded an impairment charge of $0.9 million$281 thousand for the excess13 weeks ended June 27, 2021. The ultimate severity and longevity of the carrying amount recorded on the balance sheet over the shops’ estimated fair value. The Company performs impairment analyses whenever events or changes in circumstances indicate that carrying amount may not be recoverableCOVID-19 pandemic is unknown, and exceeds the fair value, 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, therefore, it is possible that non-cash impairments could be identified in tangiblefuture periods, and such amounts could be material.
During the 13 weeks ended June 27, 2021, we terminated 1 lease. We incurred $0 million in lease termination fees related to the lease for the 13 weeks ended June 27, 2021. Upon termination of the lease during the 13 weeks ended June 27, 2021, we derecognized ROU assets of $0.8 million and lease liabilities of $0.9 million that resulted in the future. However, the likelihood or the amounta net gain of an additional$0.1 million that is recorded in impairment, charge cannot be reasonably estimated at this time.loss on disposal of property and equipment and shop closures.
Interest Expense, Net
InterestNet interest expense was $185 thousand during the 13 weeks ended June 27, 2021 and $388 thousand during the 13 weeks ended June 28, 2020 and $35 thousand during the 13 weeks ended June 30, 2019,2020. The increase was primarily driven by an increasea decrease in average outstanding borrowings on our revolving credit facility.
Income Tax Expense
The Company recorded aWe recognized income tax expense of $160 thousand for the 13 weeks ended June 27, 2021. We recognized income tax expense of $41 thousand for the thirteen weeks ended June 28, 2020, and $246 thousand for the thirteen weeks ended June 30, 2019.2020.
26 Weeks Ended June 28, 202027, 2021 Compared to 26 Weeks Ended June 30, 201928, 2020
The following table presents information comparing the components of net incomeloss for the periods indicated (dollars in thousands):
|
| For the 26 Weeks Ended |
|
|
|
|
|
|
|
|
|
| For the 26 Weeks Ended |
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||
|
| June 28, 2020 |
|
| % of Revenues |
|
| June 30, 2019 |
|
| % of Revenues |
|
| Increase (Decrease) |
|
| Percent Change |
|
| June 27, 2021 |
|
| % of Revenues |
|
| June 28, 2020 |
|
| % of Revenues |
|
| Increase (Decrease) |
|
| Percent Change |
| ||||||||||||
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sandwich shop sales, net |
| $ | 142,824 |
|
|
| 99.4 | % |
| $ | 202,059 |
|
|
| 99.2 | % |
| $ | (59,235 | ) |
|
| (29.3 | )% |
| $ | 174,279 |
|
|
| 99.3 | % |
| $ | 142,824 |
|
|
| 99.4 | % |
| $ | 31,455 |
|
|
| 22.0 | % |
Franchise royalties and fees |
|
| 928 |
|
|
| 0.6 |
|
|
| 1,658 |
|
|
| 0.8 |
|
|
| (730 | ) |
|
| (44.0 | ) |
| $ | 1,277 |
|
|
| 0.7 |
|
|
| 928 |
|
|
| 0.6 |
|
|
| 349 |
|
|
| 37.6 |
|
Total revenues |
|
| 143,752 |
|
|
| 100.0 |
|
|
| 203,717 |
|
|
| 100.0 |
|
|
| (59,965 | ) |
|
| (29.4 | ) |
|
| 175,556 |
|
|
| 100.0 |
|
|
| 143,752 |
|
|
| 100.0 |
|
|
| 31,804 |
|
|
| 22.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Percentages stated as a percent of sandwich shop sales, net) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sandwich shop operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold, excluding depreciation |
|
| 40,282 |
|
|
| 28.2 |
|
|
| 54,242 |
|
|
| 26.8 |
|
|
| (13,960 | ) |
|
| (25.7 | ) |
|
| 47,810 |
|
|
| 27.4 |
|
|
| 40,282 |
|
|
| 28.2 |
|
|
| 7,528 |
|
|
| 18.7 |
|
Labor and related expenses |
|
| 52,281 |
|
|
| 36.6 |
|
|
| 64,087 |
|
|
| 31.7 |
|
|
| (11,806 | ) |
|
| (18.4 | ) |
|
| 60,575 |
|
|
| 34.8 |
|
|
| 52,281 |
|
|
| 36.6 |
|
|
| 8,294 |
|
|
| 15.9 |
|
Occupancy expenses |
|
| 29,677 |
|
|
| 20.8 |
|
|
| 29,607 |
|
|
| 14.7 |
|
|
| 70 |
|
|
| 0.2 |
|
|
| 27,160 |
|
|
| 15.6 |
|
|
| 29,677 |
|
|
| 20.8 |
|
|
| (2,517 | ) |
|
| (8.5 | ) |
Other operating expenses |
|
| 23,755 |
|
|
| 16.6 |
|
|
| 23,961 |
|
|
| 11.9 |
|
|
| (206 | ) |
|
| (0.9 | ) |
|
| 28,031 |
|
|
| 16.1 |
|
|
| 23,755 |
|
|
| 16.6 |
|
|
| 4,276 |
|
|
| 18.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Percentages stated as a percent of total revenues) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising |
|
| 846 |
|
|
| 0.5 |
|
|
| 561 |
|
|
| 0.4 |
|
|
| 285 |
|
|
| 50.8 |
| ||||||||||||||||||||||||
General and administrative expenses |
|
| 18,898 |
|
|
| 13.1 |
|
|
| 26,552 |
|
|
| 13.0 |
|
|
| (7,654 | ) |
|
| (28.8 | ) |
|
| 16,664 |
|
|
| 9.5 |
|
|
| 17,712 |
|
|
| 12.3 |
|
|
| (1,048 | ) |
|
| (5.9 | ) |
Depreciation expense |
|
| 10,411 |
|
|
| 7.2 |
|
|
| 11,121 |
|
|
| 5.5 |
|
|
| (710 | ) |
|
| (6.4 | ) |
|
| 8,727 |
|
|
| 5.0 |
|
|
| 10,411 |
|
|
| 7.2 |
|
|
| (1,684 | ) |
|
| (16.2 | ) |
Pre-opening costs |
|
| 64 |
|
| * |
|
|
| 10 |
|
| * |
|
|
| 54 |
|
| >100 |
|
|
| — |
|
| * |
|
|
| 64 |
|
| * |
|
|
| (64 | ) |
|
| (100.0 | ) | |||||
Impairment and loss on disposal of property and equipment |
|
| 7,256 |
|
|
| 5.0 |
|
|
| 328 |
|
|
| 0.2 |
|
|
| 6,928 |
|
| >100 |
| |||||||||||||||||||||||||
Impairment, loss on disposal of property and equipment and shop closures |
|
| 3,379 |
|
|
| 1.9 |
|
|
| 7,881 |
|
|
| 5.5 |
|
|
| (4,502 | ) |
|
| (57.1 | ) | ||||||||||||||||||||||||
Total expenses |
|
| 182,624 |
|
| >100 |
|
|
| 209,908 |
|
| >100 |
|
|
| (27,284 | ) |
|
| (13.0 | ) |
|
| 193,192 |
|
| >100 |
|
|
| 182,624 |
|
| >100 |
|
|
| 10,568 |
|
|
| 5.8 |
| ||||
Loss from operations |
|
| (38,872 | ) |
|
| (27.0 | ) |
|
| (6,191 | ) |
|
| (3.0 | ) |
|
| (32,681 | ) |
| >100 |
|
|
| (17,636 | ) |
|
| (10.0 | ) |
|
| (38,872 | ) |
|
| (27.0 | ) |
|
| 21,236 |
|
|
| (54.6 | ) | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
| 462 |
|
|
| 0.3 |
|
|
| 67 |
|
| * |
|
|
| 395 |
|
| >100 |
| ||||||||||||||||||||||||||
Interest expense, net |
|
| 472 |
|
|
| 0.3 |
|
|
| 462 |
|
|
| 0.3 |
|
|
| 10 |
|
|
| 2.2 |
| ||||||||||||||||||||||||
Loss before income taxes |
|
| (39,334 | ) |
|
| (27.4 | ) |
|
| (6,258 | ) |
|
| (3.1 | ) |
|
| (33,076 | ) |
| >100 |
|
|
| (18,108 | ) |
|
| (10.3 | ) |
|
| (39,334 | ) |
|
| (27.4 | ) |
|
| 21,226 |
|
|
| (54.0 | ) | |
Income tax expense (benefit) |
|
| (3,668 | ) |
|
| (2.6 | ) |
|
| 13,865 |
|
|
| 6.8 |
|
|
| (17,533 | ) |
| >(100) |
|
|
| 214 |
|
| * |
|
|
| (3,668 | ) |
| * |
|
|
| 3,882 |
|
| >(100) |
| ||||
Net loss |
|
| (35,666 | ) |
|
| (24.8 | ) |
|
| (20,123 | ) |
|
| (9.9 | ) |
|
| (15,543 | ) |
|
| 77.2 |
|
|
| (18,322 | ) |
|
| (10.4 | ) |
|
| (35,666 | ) |
|
| (24.8 | ) |
|
| 17,344 |
|
|
| (48.6 | ) |
Net income attributable to non- controlling interests |
|
| (114 | ) |
|
| (0.1 | ) |
|
| 182 |
|
|
| 0.1 |
|
|
| (296 | ) |
| >(100) |
|
|
| 31 |
|
| * |
|
|
| (114 | ) |
|
| (0.1 | ) |
|
| 145 |
|
| >(100) |
| |||
Net loss attributable to Potbelly Corporation |
| $ | (35,552 | ) |
|
| (24.7 | )% |
| $ | (20,305 | ) |
|
| (10.0 | )% |
| $ | (15,247 | ) |
|
| 75.1 |
|
| $ | (18,353 | ) |
|
| (10.5 | )% |
| $ | (35,552 | ) |
|
| (24.7 | )% |
| $ | 17,199 |
|
|
| (48.4 | ) |
* | Amount is less than 0.1% |
Revenues
Total revenues decreasedincreased by $60.0$31.8 million, or 29.4%22.1%, to $175.6 million during the 26 weeks ended June 27, 2021, from $143.8 million during the 26 weeks ended June 28, 2020, from $203.7 million during the 26 weeks ended June 30, 2019. The revenue decrease2020. This increase was primarily driven by the easing of the government restrictions previously imposed by federal, state and local governments, as a $53.7result of the COVID-19 pandemic. This resulted in an increase of $35.6 million, or 25.5%26.6%, decrease in sales from company-operated comparable store shops andsales, partially offset by a decrease in sales of $15.5$5.4 million fromdue to shops that have permanently closed. This was partially offsetclosed during the last year. Additionally, revenue from franchise royalties and fees increased by a $9.1$0.3 million, increase from shops not yet in our company-operated comparable store sales base.or 37.6%.
Cost of Goods Sold
Cost of goods sold decreasedincreased by $14.0$7.5 million, or 25.7%18.7%, to $47.8 million during the 26 weeks ended June 27, 2021, from $40.3 million during the 26 weeks ended June 28, 2020, from $54.2 million during the 26 weeks ended June 30, 2019.2020. This decreaseincrease was primarily driven by a decreasean increase in shop revenue. As a percentage of sandwich shop sales, cost of goods sold increaseddecreased to 27.4% during the 26 weeks ended June 27, 2021, from 28.2% during the 26 weeks ended June 28, 2020, from 26.8% during the 26 weeks ended June 30, 2019, primarily driven by shift in product mix due to increase in off-premise sales and inflation in certain products, partially offset byincreased menu price increases.prices.
Labor and Related Expenses
Labor and related expenses decreasedincreased by $11.8$8.3 million, or 18.4%15.9%, to $52.3$60.6 million during the 26 weeks ended June 28, 2020,27, 2021, from $64.1$52.3 million for the 26 weeks ended June 30, 2019,28, 2020, primarily due to labor management amid a decreasedriven by an increase in shop revenue and a decrease in expense from closed shops, partially offset by wage inflation.revenue. As a percentage of sandwich shop sales, labor and related expenses increaseddecreased to 34.8% during the 26 weeks ended June 27, 2021, from 36.6% duringfor the 26 weeks ended June 28, 2020, from 31.7% during the 26 weeks ended June 30, 2019, primarily driven by sales deleverageleverage in certain labor related costs not directly variable with sales, partially offset by a decrease in expense from closed shops.sales.
Occupancy Expenses
Occupancy expenses increaseddecreased by $0.1$2.5 million, or 0.2%8.5%, to $27.2 million during the 26 weeks ended June 27, 2021, from $29.7 million during the 26 weeks ended June 28, 2020 from $29.6 million during the 26 weeks ended June 30, 2019 primarily due to inflationa decrease in certain occupancyexpenses related costs, including lease renewals, real estate taxes and common area maintenance.to closed shops. As a percentage of sandwich shop sales, occupancy expenses increaseddecreased to 15.6% for the 26 weeks ended June 27, 2021, from 20.8% duringfor the 26 weeks ended June 28, 2020, from 14.7% during the 26 weeks ended June 30, 2019, primarily due to increased sales deleverage and inflationleverage in certain occupancy related costs, including lease renewals, real estate taxesconcessions and common area maintenance.renewals.
Other Operating Expenses
Other operating expenses decreasedincreased by $0.2$4.3 million, or 0.9%18.0%, to $28.0 million during the 26 weeks ended June 27, 2021, from $23.8 million during the 26 weeks ended June 28, 2020, from $24.0 million during the 26 weeks ended June 30, 2019.2020. The decreaseincrease was primarily attributablerelated to a decreasean increase in certain items variable with sales, partially offset by higher expenses relatedincluding fees to third-party delivery partnerships driven by increased sales in that channel.partners. As a percentage of sandwich shop sales, other operating expenses decreased to 16.1% for the 26 weeks ended June 27, 2021, from 16.6% for the 26 weeks ended June 28, 2020, primarily driven by sales leverage in operating expense items that are not directly variable with sales.
Advertising
Advertising expenses increased by 51.0% to 16.6%$847 thousand during the 26 weeks ended June 27, 2021, from $561 thousand during the 26 weeks ended June 28, 2020, from 11.9% during the 26 weeks ended June 30, 2019, primarily driven by sales deleverage in operating expense items such as utilities and other expenses not directly variable with sales.
2020.
General and Administrative Expenses
General and administrative expenses decreased by $7.7$1.0 million, or 28.8%5.9%, to $18.9$16.7 million during the 26 weeks ended June 21, 2021, from $17.7 million during the 26 weeks ended June 28, 2020, from $26.6 million during the 26 weeks ended June 30, 2019. The2020. This decrease was primarily driven primarily by a decrease in lease exit costs, payroll costs as a result of furloughsthe restructuring plan enacted during the fourth quarter of approximately one-third2020 and decreased professional fees associated with the shareholder proxy matter in the second quarter of corporate employees, and advertising costs. 2020, partially offset by increased expense for the accrual of annual bonuses for 2021. As a percentage of revenues, general and administrative expenses increaseddecreased to 13.1% during9.5% for the 26 weeks ended June 27, 2021, from 12.3% for the 26 weeks ended June 28, 2020, from 13.0% during the 26 weeks ended June 30, 2019, primarily due to a decrease in shop revenue, partially offsetdriven by reductions in advertising and payroll costs noted above.increased sales leverage.
Depreciation Expense
Depreciation expense decreased by $0.7$1.7 million, or 6.4%16.2%, to $8.7 million during the 26 weeks ended June 27, 2021, from $10.4 million during the 26 weeks ended June 28, 2020, from $11.1 million during the 26 weeks ended June 30, 2019.2020. The decrease was driven primarily by a lower depreciable base related to a decrease in the number of company-operated shops and impairment charges taken in prior periods. 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 7.2%5.0% during the 26 weeks ended June 28, 202027, 2021, and was 5.5%7.2% for the 26 weeks ended June 30, 2019.28, 2020.
Pre-Opening Costs
There were no pre-opening costs during the 26 weeks ended June 27, 2021. Pre-opening costs were $64 thousand during the 26 weeks ended June 28, 2020, and $10 thousand during the 26 weeks ended June 30, 2019.2020.
Impairment, and Loss on Disposal of Property and Equipment and Right-of-Use Lease AssetsShop Closures
Impairment, and loss on disposal of property and equipment and right-of-use lease assets increasedshop closures decreased by $4.5 million, or 57.1%, to $7.3$3.4 million during the 26 weeks ended June 27, 2021, from $7.9 million during the 26 weeks ended June 28, 2020, from $0.3 million2020.
After performing a periodic review of our shops during the 26 weeks ended June 30, 2019 primarily due to the expected impact of COVID-19 on future cash flows. After performing periodic reviews of Company shops during the second quarter of 2020,27, 2021, it was determined that indicators of impairment were present for certain shops. The Companyshops as a result of continued underperformance. We performed an impairment analysesanalysis related to these shops and recorded an impairment charge of $6.8 million$429 thousand for the excess26 weeks ended June 27, 2021. The ultimate severity and longevity of the carrying amount recorded on the balance sheet over the shops’ estimated fair value. The Company performs impairment analyses whenever events or changes in circumstances indicate that carrying amount may not be recoverableCOVID-19 pandemic is unknown, and exceeds the fair value, 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, therefore, it is possible that non-cash impairments could be identified in tangiblefuture periods, and such amounts could be material.
During the 26 weeks ended June 27, 2021, we terminated 3 leases. We incurred $0.2 million in lease termination fees related to these leases for the 26 weeks ended June 27, 2021. Upon termination of leases during the 26 weeks ended June 27, 2021, we derecognized ROU assets of $1.4 million and lease liabilities of $1.6 million that resulted in a net gain of $0.1 million that is recorded in impairment, loss on disposal of property and equipment and shop closures.
During the future. However,first quarter of 2021, we amended the likelihood orlease for our corporate Support Center office in Chicago to relocate to a different office space. As a result of this relocation, the amountleasehold improvements of an additional impairment charge cannot be reasonably estimated at this time.the original office space were disposed, resulting in a loss on disposal of $2.5 million.
Interest Expense, Net
InterestNet interest expense was $472 thousand during the 26 weeks ended June 27, 2021 and $462 thousand during the 26 weeks ended June 28, 2020 and $672020.
Income Tax Expense
We recognized income tax expense of $214 thousand duringfor the 26 weeks ended June 30, 2019, driven by an increase in outstanding borrowings on our revolving credit facility.
Income Tax Expense
The Company27, 2021. We recognized an income tax benefit of $3.7 million for the 26 weeks ended June 28, 2020 primarily due to a discrete tax benefit recorded for the carryback of net operating losses (“NOLs”)NOLs and a refund of prior alternative minimum tax (“AMT”)AMT credits allowed under the CARES Act, which the Company estimates will result in a tax refund of $3.7 million. The Company recorded a tax expense of $13.9 million for the 26 weeks ended June 30, 2019 primarily due to the Company recording a non-cash charge to income tax expense for the recognition of a full valuation allowance against its net deferred tax assets.Act.
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’sour 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’sour 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 needswe need to pay itsour suppliers for such items. Company shops do not require significant inventories or receivables.
The COVID-19 pandemic’s impact on our operations and revenues hashad significantly affected our ability to generate cash from operations.operations in 2020. To preserve financial flexibility, the Company drew $39.8 million under itswe have utilized our revolving credit facility in March 2020. The Companyto fund operations.
We ended the second quarter of 2021 with a cash balance of $29.1$11.8 million and total liquidity (cash plus amounts available on our Revolving Credit Facility) of $35.3 million compared to a balance of $18.8$11.5 million at December 29, 2019. The increase in the cash balance is primarily due to the borrowing under its revolving credit facility. Totaland total liquidity (cash plus amounts available on the revolving credit facility) was $45.8of $33.5 million as of June 28, 2020 compared to $45.8 million as of March 29, 2020 and $58.8 million as of December 29, 2019.
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 the remainder of the year. As of August 5, 2020, we have amended the lease agreements for 187 of our shops, which include rent abatements, rent deferrals, and/or modified lease terms to reduce ongoing rent, and we have completed early terminations of leases for 15 of our shops. Future lease amendments resulting from these discussions may have a material impact on our liquidity.
We are expecting to receive a $3.7 million of income tax refunds in 2020 due to the provisions of the CARES Act regarding the carryback of NOLs and the refund of prior AMT credits. We received $1.1 million of this refund in July 2020, and we expect to receive the remaining $2.6 million beforeat the end of the current year. previous quarter. We have electedbelieve that cash from our operations and borrowings under our revolving credit facility will be able to deferprovide sufficient liquidity for at least 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. During the second quarter of 2020, $1.2 million of payroll tax expenses were deferred and are accrued within other long-term liabilities.next twelve months.
On February 9, 2021, we closed on a Securities Purchase Agreement (the “SPA”) for the sale of 3,249,668 shares of our common stock at a par value of $0.01 per share and the issuance of warrants to purchase 1,299,861 shares of common stock at an exercise price of $5.45 per warrant for gross proceeds of $16.0 million, before deducting placement agent fees and offering expenses of approximately $1.0 million. The warrants are initially exercisable commencing August 13, 2021 through their expiration date of August 12, 2026.
Cash Flows
The following table presents summary cash flow information for the periods indicated (in thousands):
|
| For the 26 Weeks Ended |
|
| For the 26 Weeks Ended |
| ||||||||||
|
| June 28, |
|
| June 30, |
|
| June 27, |
|
| June 28, |
| ||||
|
| 2020 |
|
| 2019 |
|
| 2021 |
|
| 2020 |
| ||||
Net cash provided by (used in): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities |
| $ | (4,923 | ) |
| $ | 6,988 |
|
| $ | (5,454 | ) |
| $ | (4,923 | ) |
Investing activities |
|
| (7,333 | ) |
|
| (5,230 | ) |
|
| (3,333 | ) |
|
| (7,333 | ) |
Financing activities |
|
| 22,542 |
|
|
| (3,467 | ) |
|
| 9,499 |
|
|
| 22,542 |
|
Net increase (decrease) in cash |
| $ | 10,286 |
|
| $ | (1,709 | ) |
| $ | 712 |
|
| $ | 10,286 |
|
Operating Activities
Net cash used in operating activities increased to $5.5 million for the 26 weeks ended June 27, 2021, from cash used in operating activities of $4.9 million for the 26 weeks ended June 28, 2020, from cash provided by operating activities of $7.0 million for the 26 weeks ended June 30, 2019.2020. The $11.9$0.6 million change in operating cash was primarily driven by an increase in loss from operations, offset by the timing of payment for certain liabilities, including the deferral of rent for mostmany of our shops in the second quarterprior year. Approximately $3.7 million of 2020.deferred rent from 2020 was repaid in the 26 weeks ended June 27, 2021. This was partially offset by a decrease in loss from operations compared to the prior year.
Investing Activities
Net cash used in investing activities increaseddecreased to $3.3 million for the 26 weeks ended June 27, 2021, from $7.3 million for the 26 weeks ended June 28, 2020, from $5.22020. The $4.0 million for the 26 weeks ended June 30, 2019. The increasedecrease was primarily due to a reduction of capital expenditures related to new shop construction, primarily occurring in the first quarter.construction. Due to the COVID-19 pandemic, capital expenditures have been limited to essential maintenancereduced and safety.no new company shop construction is planned.
Financing Activities
Net cash provided by financing activities increaseddecreased to $9.5 million for the 26 weeks ended June 27, 2021, from $22.5 million for the 26 weeks ended June 28, 2020, from net cash used in financing activities of $3.52020. The $13.0 million for the 26 weeks ended June 30, 2019. The change in financing cash was primarily driven by net borrowings under the Credit Facility, of $23.1 million and a decrease in repurchases of treasury stock of $3.5 million duringpartially offset by the 26 weeks ended June 28, 2020.net proceeds from the SPA.
Revolving Credit Facility
On August 7, 2019, the Companywe 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,provided, 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’sour option at either (i) a eurocurrency rate determined by reference to the applicable LIBOR rate plus a specified margin ranging from 1.25% to 1.75% or (ii) a prime rate as announced by JPMorganJP Morgan plus a margin ranging from 0.00% to 0.50%.specified margin. The applicable margin iswas determined based upon the Company’sour consolidated total leverage ratio. On the last day of each calendar quarter, the Company iswe were 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 iswas no limit on the “restricted payments” (primarily distributions and equity repurchases) that the Companywe 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,As disclosed in our Annual Report on Form 10-K for the fiscal year ended December 27, 2020, we drew on the Company fully drew the available capacity of $39.8 million under its Revolving Credit Facility as a precautionary measure in ordercredit facility to increase itsour cash position and preserve financial flexibility in light of currentthe 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.
The Credit Agreement was subsequentlypandemic, and we 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.throughout fiscal year 2020.
On July 17, 2020,Most recently, we entered into Amendment No. 25 (the “Second“Fifth Amendment”) to the Credit Agreement on February 26, 2021. As a result of the Amendment (i) the maturity date was extended from March 31, 2022 to among other things: (i) reviseJanuary 31, 2023, (ii) the revolving credit commitment decreased from $40 million to $25 million, (iii) the interest rate margin with respect to any Commercial Bank Floating Rate Loan increased to 2.75%, (iv) the interest rate margin with respect to any Eurodollar Loan increased to 5.00%, (v) the definition of EBITDA was amended to exclude non-cash charges/gains in connection with certain equity interests of the Company, (vi) certain borrowing conditions relating to the Company’s Consolidated Cash Balance were instituted, (vii) the Company is permitted to repurchase/redeem its financial covenants; (ii) decreaseequity interests under certain conditions and (viii) the aggregate amountminimum monthly EBITDA and Liquidity thresholds the Company must maintain were revised.
As of loan commitment availableJune 27, 2021, we had $786 thousand outstanding under the Credit Agreement from $40.0 million to $30.0 million after March 31, 2021 and (iii) decrease 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 4.75% or (b) a prime rate as announced by JP Morgan plus 2.25%. Per the terms of the Second Amendment, the Company repaid $14.5 million of its outstanding borrowing at the signing of the Second Amendment, and may reborrow the entire amount available under the credit facility when its cash balance held by JP Morgan declines below $10.0 million in total.Agreement. As of June 28,27, 2020, the Companywe had $23.1 million outstanding under the Credit Agreement. There were no borrowings outstanding as of June 30, 2019.
The Second Amendment includes financial covenants that require the Company to (i) maintain periodic minimum liquidity levels through February 28, 2022 ranging from $15.0 million to $30.0 million and (ii) maintain monthly minimum adjusted EBITDA thresholds for specified computation periods through February 28, 2022 ranging from ($18.0) million to $8.3 million. The Company isWe are currently in compliance with all financial debt covenantscovenants.
Paycheck Protection Program Loan
On August 10, 2020, PSW, an indirect subsidiary of the Company, entered into a loan agreement with Harvest Small Business Finance, LLC in the aggregate amount of $10.0 million (the “Loan”), pursuant to the PPP under the CARES Act. The Loan was necessary to support our ongoing operations due to the economic uncertainty resulting from the COVID-19 pandemic and lack of access to alternative sources of liquidity.
The Loan is scheduled to mature five years from the date on which PSW applies for loan forgiveness under the CARES Act, bears interest at a rate of 1% per annum and is subject to the terms and conditions applicable to loans administered by the U.S. Small Business Administration under the CARES Act. The PPP provides that the use of the Loan amount shall be limited to certain qualifying expenses and may be partially or wholly forgiven in accordance with the requirements set forth in the CARES Act. We have used all of the PPP proceeds toward qualifying expenses and are pursuing forgiveness of the full Loan amount, but we are not able to determine the likelihood or the amount of forgiveness that will be obtained.
We have recorded the amount of the Loan as long-term debt in our condensed consolidated balance sheet as of June 28, 2020. 27, 2021, net of the current portion of the Loan which represents the payments that would be due in the next twelve months if we are not able to obtain forgiveness. The related interest has been recorded to interest expense in our condensed consolidated statement of operations for the 13 and 26 weeks ended June 27, 2021.
Stock Repurchase Program
On May 8, 2018, the Companywe announced that itsour Board of Directors authorized a stock repurchase program for up to $65.0 million of itsour outstanding common stock. The program permits the Company,us, from time to time, to purchase shares in the open market (including in pre-arranged stock trading plans in accordance with the guidelines specified in Rule 10b5-1 under the 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 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.
For the 13 and 26 weeks ended June 28, 2020, the Company27, 2021, we did not repurchase any shares of itsour common stock. In light of the COVID-19 pandemic, the Company doeswe do not have plans to repurchase any common stock under itsour stock 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 basesWe base 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’sOur critical accounting estimates are identified and described in our annual consolidated financial statements and related notes.
Off-Balance Sheet Arrangements
As of June 28, 2020, the Company does27, 2021, we do not have any off-balance sheet arrangements, synthetic leases, investments in special purpose entities or undisclosed borrowings or debt that would be required to be disclosed pursuant to Item 303 of Regulation S-K under the Exchange Act.
New and Revised Financial Accounting Standards
See Note 1 to the Consolidated Financial Statements for a description of recently issued Financial Accounting Standards.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For quantitative and qualitative disclosures about market risk, see Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” of our Annual Report on Form 10-K for the fiscal year ended December 30, 2019 and Item 3, “Quantitative and Qualitative Disclosures About Market Risk,” of our Quarterly Report on Form 10-Q for the quarter ended March 29,27, 2020. Our exposures to market risk have not changed materially since March 29,December 27, 2020.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of June 28, 2020.27, 2021. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of June 28, 2020,27, 2021, our disclosure controls and procedures were effective in ensuring that information required to be disclosed in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the second quarter ended June 28, 202027, 2021 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Information pertaining to legal proceedings is provided in Note 1011 to the Condensed Consolidated Financial Statements and is incorporated by reference herein.
ITEM 1A. RISK FACTORS
A description of the risk factors associated with our business is contained in Item 1A, “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 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. 27, 2020. There have been no material changes to our Risk Factors as previously reported.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
The following table contains information regarding purchases of our common stock made by or on behalf of Potbelly Corporation during the 13 weeks ended June 28, 2020:27, 2021 (in thousands, except per share data):
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) |
| ||||
March 30, 2020 - April 26, 2020 |
|
| — |
|
| $ | — |
|
|
| — |
|
| $ | 37.9 |
|
April 27, 2020 - May 24, 2020 |
|
| — |
|
| $ | — |
|
|
| — |
|
| $ | 37.9 |
|
May 25, 2020 - June 28, 2020 |
|
| 2 |
|
| $ | 2.85 |
|
|
| — |
|
| $ | 37.9 |
|
Total: |
|
| 2 |
|
|
|
|
|
|
| — |
|
|
|
|
|
Period |
| Total Number of Shares Purchased (1) |
|
| Average Price Paid per Share |
|
| Total Number of Shares Purchased as Part of Publicly Announced Program (2) |
|
| Maximum Value of Shares that May Yet be Purchased Under the Program (2) |
| ||||
March 29, 2021 -June 27, 2021 |
|
| 77 |
|
| $ | 8.90 |
|
|
| — |
|
| $ | 37,982 |
|
Total: |
|
| 77 |
|
|
|
|
|
|
| — |
|
|
|
|
|
(1) |
|
(2) | On May 8, 2018, |
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS
The following exhibits are either provided with this Quarterly Report on Form 10-Q or are incorporated herein by reference.
Exhibit No. |
| Description |
| ||
| ||
|
| |
| ||
| ||
| ||
|
|
|
|
|
|
31.1 |
| |
|
| |
31.2 |
| |
|
|
|
32.1 |
| |
|
|
|
101.INS |
| Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document. |
|
| |
101.SCH |
| Inline XBRL Taxonomy Extension Schema Document |
|
| |
101.CAL |
| Inline XBRL Taxonomy Extension Calculation Linkbase Document |
|
| |
101.DEF |
| Inline XBRL Taxonomy Extension Definition Linkbase Document |
|
| |
101.LAB |
| Inline XBRL Taxonomy Extension Label Linkbase Document |
|
| |
101.PRE |
| Inline XBRL Taxonomy Extension Presentation Linkbase Document |
|
|
|
104 |
| Cover Page Interactive Data File (embedded within the Inline XBRL document) |
† | ||
Management contract or compensatory plan |
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
| POTBELLY CORPORATION |
|
|
|
|
Date: August 5, |
| By: | /s/ Steven Cirulis |
|
|
| Steven Cirulis |
|
|
| Chief Financial Officer |
|
|
| (Principal Financial Officer) |
3132