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PBPB Potbelly

Filed: 5 Nov 20, 5:18pm

 

 

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 September 27, 2020

OR

 

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

 

For the Transition Period from                     to                     

Commission File Number: 001-36104

 

Potbelly Corporation

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

36-4466837

(State or Other Jurisdiction of

Incorporation)

 

(IRS Employer

Identification Number)

111 N. Canal Street, Suite 850

Chicago, Illinois

 

60606

(Address of Principal Executive Offices)

 

(Zip Code)

 

Registrant’s Telephone Number, Including Area Code: (312) 951-0600

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

Common Stock, $0.01 par value

 

PBPB

 

The NASDAQ Stock Market LLC

 

 

 

 

(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 October 25, 2020, the registrant had 24,212,000 shares of common stock, $0.01 par value per share, outstanding.

 

 


 

Potbelly Corporation and Subsidiaries

Table of Contents

 

 

 

 

 

Page

PART I.

 

FINANCIAL INFORMATION

 

 

 

 

 

 

Item 1.

 

Financial Statements

 

3

 

 

 

 

 

 

Condensed Consolidated Balance Sheets

 

3

 

 

 

 

 

 

Condensed Consolidated Statements of Operations

 

4

 

 

 

 

 

 

Condensed Consolidated Statements of Equity

 

5

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows

 

7

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

8

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

18

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

28

 

 

 

 

Item 4.

 

Controls and Procedures

 

28

 

 

 

 

PART II.

 

OTHER INFORMATION

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

29

 

 

 

 

Item 1A.

 

Risk Factors

 

29

 

 

 

 

Item 2.

 

Unregistered Sale of Equity Securities and Use of Proceeds

 

29

 

 

 

 

Item 3.

 

Defaults Upon Senior Securities

 

29

 

 

 

 

Item 4.

  

Mine Safety Disclosures

 

29

 

 

 

 

Item 5.

  

Other Information

 

29

 

 

 

 

Item 6.

 

Exhibits

 

30

 

 

 

 

 

 

Signature

 

31

 

2


 

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)

 

 

 

September 27,

 

 

December 29,

 

 

 

2020

 

 

2019

 

Assets

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

23,407

 

 

$

18,806

 

Accounts receivable, net of allowances of $65 and $202 as of September 27, 2020

   and December 29, 2019, respectively

 

 

4,575

 

 

 

4,257

 

Inventories

 

 

2,724

 

 

 

3,473

 

Prepaid expenses and other current assets

 

 

5,372

 

 

 

5,687

 

Total current assets

 

 

36,078

 

 

 

32,223

 

Property and equipment, net

 

 

64,852

 

 

 

79,032

 

Right-of-use assets for operating leases

 

 

196,070

 

 

 

211,988

 

Indefinite-lived intangible assets

 

 

3,404

 

 

 

3,404

 

Goodwill

 

 

2,222

 

 

 

2,222

 

Deferred expenses, net and other assets

 

 

4,178

 

 

 

4,010

 

Total assets

 

$

306,804

 

 

$

332,879

 

Liabilities and Equity

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

5,429

 

 

$

3,886

 

Accrued expenses

 

 

20,008

 

 

 

20,569

 

Short-term operating lease liabilities

 

 

35,434

 

 

 

29,319

 

Total current liabilities

 

 

60,871

 

 

 

53,774

 

Long-term debt

 

 

22,386

 

 

 

 

Long-term operating lease liabilities

 

 

195,681

 

 

 

206,726

 

Other long-term liabilities

 

 

5,775

 

 

 

3,210

 

Total liabilities

 

 

284,713

 

 

 

263,710

 

Commitments and contingencies (Note 10)

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

 

 

 

Common stock, $0.01 par value—authorized 200,000 shares; outstanding

   24,212 and 23,638 shares as of September 27, 2020 and December 29,

   2019, respectively

 

 

338

 

 

 

331

 

Additional paid-in-capital

 

 

438,140

 

 

 

435,278

 

Treasury stock, held at cost, 9,612 and 9,465 shares as of September 27, 2020, and

   December 29, 2019, respectively

 

 

(113,266

)

 

 

(112,680

)

Accumulated deficit

 

 

(303,050

)

 

 

(254,081

)

Total stockholders’ equity

 

 

22,162

 

 

 

68,848

 

Non-controlling interest

 

 

(71

)

 

 

321

 

Total equity

 

 

22,091

 

 

 

69,169

 

Total liabilities and equity

 

$

306,804

 

 

$

332,879

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

3


 

Potbelly Corporation and Subsidiaries

Condensed Consolidated Statements of Operations

(amounts in thousands, except per share data, unaudited)

 

 

 

For the 13 Weeks Ended

 

 

For the 39 Weeks Ended

 

 

 

September 27,

 

 

September 29,

 

 

September 27,

 

 

September 29,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sandwich shop sales, net

 

$

72,189

 

 

$

103,560

 

 

$

215,013

 

 

$

305,619

 

Franchise royalties and fees

 

 

474

 

 

 

678

 

 

 

1,402

 

 

$

2,336

 

Total revenues

 

 

72,663

 

 

 

104,238

 

 

 

216,415

 

 

 

307,955

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sandwich shop operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of goods sold, excluding depreciation

 

 

20,721

 

 

 

27,540

 

 

 

61,003

 

 

 

81,782

 

Labor and related expenses

 

 

25,809

 

 

 

32,430

 

 

 

78,090

 

 

 

96,517

 

Occupancy expenses

 

 

13,904

 

 

 

14,850

 

 

 

43,581

 

 

 

44,457

 

Other operating expenses

 

 

12,126

 

 

 

13,274

 

 

 

35,881

 

 

 

37,235

 

General and administrative expenses

 

 

9,821

 

 

 

11,192

 

 

 

28,094

 

 

 

34,709

 

Depreciation expense

 

 

4,699

 

 

 

5,365

 

 

 

15,110

 

 

 

16,486

 

Pre-opening costs

 

 

 

 

 

16

 

 

 

64

 

 

 

26

 

Impairment, loss on disposal of property and equipment and shop closures

 

 

1,721

 

 

 

1,714

 

 

 

9,602

 

 

 

5,077

 

Total expenses

 

 

88,801

 

 

 

106,381

 

 

 

271,425

 

 

 

316,289

 

Loss from operations

 

 

(16,138

)

 

 

(2,143

)

 

 

(55,010

)

 

 

(8,334

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

268

 

 

 

28

 

 

 

730

 

 

 

95

 

Loss before income taxes

 

 

(16,406

)

 

 

(2,171

)

 

 

(55,740

)

 

 

(8,429

)

Income tax expense (benefit)

 

 

(2,917

)

 

 

66

 

 

 

(6,585

)

 

 

13,931

 

Net loss

 

 

(13,489

)

 

 

(2,237

)

 

 

(49,155

)

 

 

(22,360

)

Net income (loss) attributable to non-controlling interest

 

 

(77

)

 

 

118

 

 

 

(191

)

 

 

300

 

Net loss attributable to Potbelly Corporation

 

$

(13,412

)

 

$

(2,355

)

 

$

(48,964

)

 

$

(22,660

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per common share attributable to common

   stockholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.56

)

 

$

(0.10

)

 

$

(2.06

)

 

$

(0.95

)

Diluted

 

$

(0.56

)

 

$

(0.10

)

 

$

(2.06

)

 

$

(0.95

)

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

23,957

 

 

 

23,740

 

 

 

23,792

 

 

 

23,927

 

Diluted

 

 

23,957

 

 

 

23,740

 

 

 

23,792

 

 

 

23,927

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

4


 

Potbelly Corporation and Subsidiaries

Condensed Consolidated Statements of Equity

(amounts and shares in thousands, 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 June 30, 2019

 

 

23,768

 

 

 

331

 

 

 

(111,874

)

 

 

434,407

 

 

 

(250,394

)

 

 

406

 

 

$

72,876

 

Net income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,355

)

 

 

118

 

 

 

(2,237

)

Stock-based compensation plans

 

 

2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Repurchases of common stock

 

 

(162

)

 

 

 

 

 

(750

)

 

 

 

 

 

 

 

 

 

 

 

(750

)

Distributions to non-controlling

   interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(159

)

 

 

(159

)

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

446

 

 

 

 

 

 

 

 

 

446

 

Balance at September 29, 2019

 

 

23,608

 

 

$

331

 

 

$

(112,624

)

 

$

434,853

 

 

$

(252,749

)

 

$

365

 

 

$

70,176

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at June 28, 2020

 

 

23,898

 

 

$

334

 

 

$

(112,757

)

 

$

436,536

 

 

$

(289,638

)

 

$

178

 

 

$

34,653

 

Net income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(13,412

)

 

 

(77

)

 

 

(13,489

)

Stock-based compensation plans

 

 

437

 

 

 

4

 

 

 

 

 

 

(4

)

 

 

 

 

 

 

 

 

 

Treasury shares used for

   stock-based plans

 

 

(123

)

 

 

 

 

 

(509

)

 

 

 

 

 

 

 

 

 

 

 

(509

)

Distributions to non-controlling

   interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(172

)

 

 

(172

)

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

1,608

 

 

 

 

 

 

 

 

 

1,608

 

Balance at September 27, 2020

 

 

24,212

 

 

$

338

 

 

$

(113,266

)

 

$

438,140

 

 

$

(303,050

)

 

$

(71

)

 

$

22,091

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

5


 

Potbelly Corporation and Subsidiaries

Condensed Consolidated Statements of Equity

(amounts and shares in thousands, unaudited)

 

For the 39 weeks ended:

 

Common Stock

 

 

Treasury

 

 

Additional

Paid-In-

 

 

Accumulated

 

 

Non-

Controlling

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Stock

 

 

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

)

Net income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(22,660

)

 

 

300

 

 

 

(22,360

)

Stock-based compensation plans

 

 

118

 

 

 

1

 

 

 

 

 

 

172

 

 

 

 

 

 

 

 

 

173

 

Repurchases of common stock

 

 

(648

)

 

 

 

 

 

(4,217

)

 

 

 

 

 

 

 

 

 

 

 

(4,217

)

Distributions to non-controlling

   interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(336

)

 

 

(336

)

Contributions from non-controlling

   interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

39

 

 

 

39

 

Treasury shares used for stock-based

   plans

 

 

(5

)

 

 

 

 

 

(35

)

 

 

 

 

 

 

 

 

 

 

 

(35

)

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

1,910

 

 

 

 

 

 

 

 

 

1,910

 

Balance at September 29, 2019

 

 

23,608

 

 

$

331

 

 

$

(112,624

)

 

$

434,853

 

 

$

(252,749

)

 

$

365

 

 

$

70,176

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(48,964

)

 

 

(191

)

 

 

(49,155

)

Stock-based compensation plans

 

 

591

 

 

 

6

 

 

 

 

 

 

(6

)

 

 

 

 

 

 

 

 

 

Shares issued for proxy-related

   expenses

 

 

130

 

 

 

1

 

 

 

 

 

 

388

 

 

 

 

 

 

 

 

 

389

 

Distributions to non-controlling

   interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(344

)

 

 

(344

)

Contributions from non-controlling

   interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

143

 

 

 

143

 

Treasury shares used for stock-based

   plans

 

 

(147

)

 

 

 

 

 

(586

)

 

 

 

 

 

 

 

 

 

 

 

(586

)

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

2,480

 

 

 

 

 

 

 

 

 

2,480

 

Balance at September 27, 2020

 

 

24,212

 

 

$

338

 

 

$

(113,266

)

 

$

438,140

 

 

$

(303,050

)

 

$

(71

)

 

$

22,091

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

6


 

Potbelly Corporation and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(amounts in thousands, unaudited)

 

 

 

For the 39 Weeks Ended

 

 

 

September 27,

 

 

September 29,

 

 

 

2020

 

 

2019

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(49,155

)

 

$

(22,360

)

Adjustments to reconcile net loss to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation expense

 

 

15,110

 

 

 

16,486

 

Noncash lease expense

 

 

20,151

 

 

 

21,246

 

Deferred income tax

 

 

14

 

 

 

13,804

 

Stock-based compensation expense

 

 

2,480

 

 

 

1,910

 

Asset impairment, store closure and disposal of property and equipment

 

 

8,873

 

 

 

2,012

 

Other operating activities

 

 

582

 

 

 

33

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable, net

 

 

(281

)

 

 

(347

)

Inventories

 

 

749

 

 

 

165

 

Prepaid expenses and other assets

 

 

49

 

 

 

3,565

 

Accounts payable

 

 

1,918

 

 

 

763

 

Operating lease liabilities

 

 

(10,776

)

 

 

(23,046

)

Accrued expenses and other liabilities

 

 

2,542

 

 

 

(4,368

)

Net cash (used in) provided by operating activities:

 

 

(7,744

)

 

 

9,863

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

$

(8,702

)

 

$

(9,533

)

Net cash used in investing activities:

 

 

(8,702

)

 

 

(9,533

)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Borrowings under credit facility

 

$

49,786

 

 

$

 

Repayments under credit facility

 

 

(37,400

)

 

 

 

Proceeds from Paycheck Protection Program loan

 

 

10,000

 

 

 

 

Payment of debt issuance costs

 

 

(553

)

 

 

(40

)

Proceeds from exercise of stock options

 

 

 

 

 

173

 

Employee taxes on certain stock-based payment arrangements

 

 

(585

)

 

 

(35

)

Treasury stock repurchases

 

 

 

 

 

(4,147

)

Distributions to non-controlling interest

 

 

(344

)

 

 

(337

)

Contributions from non-controlling interest

 

 

143

 

 

 

39

 

Net cash provided by (used in) financing activities:

 

 

21,047

 

 

 

(4,347

)

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

 

4,601

 

 

 

(4,017

)

Cash and cash equivalents at beginning of period

 

 

18,806

 

 

 

19,775

 

Cash and cash equivalents at end of period

 

$

23,407

 

 

$

15,758

 

 

 

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

 

 

 

Income taxes paid

 

$

240

 

 

$

180

 

Interest paid

 

 

468

 

 

 

66

 

Supplemental non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Unpaid liability for purchases of property and equipment

 

$

350

 

 

$

433

 

 

See accompanying notes to the unaudited condensed consolidated financial statements

 

 

7


 

Potbelly Corporation and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements (unaudited)

 

(1) Organization and Other Matters

Business

Potbelly Corporation (the “Company” or “Potbelly”), through its wholly owned subsidiaries, owns and operates more than 400 company-owned shops in the United States. Additionally, Potbelly franchisees operate over 40 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’s Annual Report on Form 10-K for the year ended December 29, 2019. The unaudited condensed consolidated financial statements included herein have been prepared by the Company without audit, pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”) regarding interim financial reporting. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) have been condensed or omitted pursuant to the SEC rules and regulations. In the opinion of management, all adjustments, which are of a normal and recurring nature (except as otherwise noted), that are necessary to present fairly the Company’s balance sheet as of September 27, 2020 and December 29, 2019, its statement of operations for the 13 and 39 weeks ended September 27, 2020 and September 29, 2019, the statement of equity for the 13 and 39 weeks ended September 27, 2020 and September 29, 2019, and its statement of cash flows for the 39 weeks ended September 27, 2020 and September 29, 2019 have been included. The consolidated statements of operations for the interim periods presented herein are not necessarily indicative of the results to be expected for the full year.

Beginning 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 on the 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 had no impact on the loss from operations, balance sheets or statements of cash flows.

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

COVID-19

On January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus ("COVID-19") and the risks to the international community as the virus spreads globally. On March 11, 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally.  In response to the pandemic, many states and jurisdictions in which we operate have issued stay-at-home orders and other measures aimed at slowing the spread of the coronavirus.  We initially closed the vast majority of our dining rooms and shifted to off-premise operations only, and we experienced a sudden and drastic decrease in revenues. Nearly all of our shops have reopened their dining rooms with restrictions, such as social distancing and limited capacities, to ensure the health and safety of our guests and employees.  We continue to follow 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.

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 39 weeks ended September 27, 2020. The Company recorded impairment charges for its long-lived assets of $1.2 million and $8.0 million, respectively, for the 13 and 39 weeks ended September 27, 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.

8


 

The Company recognized an income tax benefit of $6.7 million during 2020 primarily due to the impact of the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) which enables the Company to obtain a tax refund from the carryback of net operating losses (“NOLs”) and a refund of prior alternative minimum tax (“AMT”) credits. The Company received $6.0 million of this refund during the third quarter of 2020 and expects to receive the remaining $0.7 million before the end of the current year. See Note 5 for further details.  

To preserve financial flexibility, the Company borrowed the $39.8 million of available capacity under its revolving credit facility on March 17, 2020. The Company subsequently repaid $27.4 million of these borrowings through the third quarter of 2020. On August 10, 2020, the Company entered into a loan agreement with Harvest Small Business Finance, LLC in the aggregate amount of $10.0 million pursuant to the Paycheck Protection Program (“PPP”) under the CARES Act.  As of September 27, 2020, the Company had total liquidity of $50.8 million, consisting of cash and cash equivalents and amounts available on its revolving credit facility. See Note 7 for further details.  

The full impact of the COVID-19 outbreak continues to evolve as of the date of this report. Due to the rapid development and fluidity of this situation, the Company cannot determine the ultimate impact that the COVID-19 pandemic will have on its consolidated financial condition, liquidity, and future results of operations, and therefore any prediction as to the ultimate impact on the Company’s consolidated financial condition, liquidity, and future results of operations is uncertain.

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 (“PSW”); 7 of PSW’s wholly owned subsidiaries and PSW’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 Company has ownership interests ranging from 51-80% in these consolidated joint ventures.

Fiscal Year

The Company uses a 52/53-week fiscal year that ends on the last Sunday of the calendar period. Approximately every five or six years a 53rd week is added. Fiscal year 2020 and 2019 both consist of 52 weeks. The fiscal quarters ended September 27, 2020 and September 29, 2019 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 Company adopted Accounting Standard Update No. 2016-13, Financial Instruments—Credit Losses (Topic 326). This pronouncement requires the measurement and recognition of expected credit losses on financial instruments. ASU 2016-13 replaces the existing incurred loss model with a forward-looking expected credit loss model that requires consideration of a broader range of information to estimate credit losses. The Company recorded a net reduction of $5 thousand to opening accumulated deficit as of December 30, 2019, due to the cumulative impact of adopting Topic 326.

(2) Revenue

The Company primarily earns 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-related taxes collected from customers. The payment on these sales is due at the time of the customer’s purchase. The Company also receives royalties from franchisees on their respective sales, which are recognized at the point in time the sale is made and invoiced weekly. Potbelly also records revenue from sales over time related to upfront franchise fees, gift card redemptions and breakage. For the 13 and 39 weeks ended September 27, 2020, revenue recognized from all revenue sources on point in time sales was $72.5 million and $216.0 million, respectively, and revenue recognized from sales over time was $0.1 million and $0.4 million, respectively. For the 13 and 39 weeks ended September 29, 2019, revenue recognized from all revenue sources on point in time sales was $103.9 million and $307.2 million, respectively, and revenue recognized from sales over time was $0.4 million and $0.8 million, respectively.

9


 

Franchise Revenue

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

Gift Card Redemptions / Breakage Revenue

Potbelly sells gift cards to customers, records the sale as a contract liability and recognizes the associated revenue as the gift card is redeemed. A portion of these gift cards are not redeemed by the customer, which is recognized by the Company as revenue as a percentage of customers gift card redemptions. The expected breakage amount recognized is determined by a historical data analysis on gift card redemption patterns.

Loyalty Program

During the second quarter of 2020, the Company 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, and the customer will earn a free entrée after earning 1,000 points.  The Company defers revenue associated with the estimated selling price of points earned by Potbelly Perks members towards free entrées 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 entrée reward will expire after 30 days. Any point in a customer’s account that does not go toward earning a full entrée will expire a year after the point is earned. When points are redeemed, the Company recognizes revenue for the redeemed product and reduces deferred revenue.

Contract Liabilities

As described above, the Company records 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. The opening and closing balances of the Company’s current and noncurrent contract liabilities from contracts with customers were as follows:

 

 

 

Current Contract

Liability

 

 

Noncurrent Contract

Liability

 

 

 

(Thousands)

 

 

(Thousands)

 

Beginning balance as of December 30, 2019

 

$

(1,594

)

 

$

(2,054

)

Ending balance as of September 27, 2020

 

 

(2,627

)

 

 

(1,786

)

Increase (decrease) in contract liability

 

$

1,033

 

 

$

(268

)

 

The aggregate value of remaining performance obligations on outstanding contracts was $4.4 million as of September 27, 2020. The Company expects to recognize revenue related to contract liabilities as follows (in thousands), which may vary based upon franchise activity as well as gift card redemption patterns:

 

Years Ending

 

Amount

 

2020

 

$

820

 

2021

 

 

1,565

 

2022

 

 

303

 

2023

 

 

219

 

2024

 

 

188

 

Thereafter

 

 

1,318

 

Total revenue recognized

 

$

4,413

 

 

For the 13 and 39 weeks ended September 27, 2020, the amount of revenue recognized related to the December 30, 2019 liability ending balance was $0.1 million and $0.9 million, respectively. For the 13 and 39 weeks ended September 29, 2019, the amount of revenue recognized related to the December 31, 2018 liability ending balance was $0.2 million and $1.7 million, respectively. This revenue related to the recognition of gift card redemptions and upfront franchise fees. For the 13 and 39 weeks ended September 27, 2020 and September 29, 2019, the Company did 0t recognize any revenue from obligations satisfied (or partially satisfied) in prior periods.

10


 

(3) Fair Value Measurement

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

The Company assesses potential impairments to its long-lived assets, which includes property and equipment and lease right-of-use assets, on a quarterly basis or whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. Shop-level assets and right-of-use assets are grouped at the individual shop-level for the purpose of the impairment assessment. Recoverability of an asset group is measured by a comparison of the carrying amount of an asset group to its estimated undiscounted future cash flows expected to be generated by the asset group. If the carrying amount of the asset group exceeds its estimated undiscounted future cash flows, an impairment charge is recognized as the amount by which the carrying amount of the asset group exceeds the fair value of the asset group. The fair value of the shop assets is determined using the discounted future cash flow method of anticipated cash flows through the shop’s lease-end date using fair value measurement inputs classified as Level 3. The fair value of right-of-use assets is estimated using market comparative information for similar properties. Level 3 inputs are derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable. After performing a periodic review of the Company’s shops during the 13 and 39 weeks ended September 27, 2020, it was determined that indicators of impairment were present for certain shops as a result of continued underperformance. The Company performed an impairment analysis related to these shops and recorded an impairment charge of $1.2 million and $8.0 million for the 13 and 39 weeks ended September 27, 2020, respectively, primarily driven by the expected impact of the COVID-19 pandemic on future cash flows. The ultimate severity and longevity of the COVID-19 pandemic is unknown, and therefore, it is possible that impairments could be identified in future periods, and such amounts could be material. After performing a periodic review of the Company’s shops during the 13 and 39 weeks ended September 29, 2019, the Company recorded an impairment charge of $1.5 million and $1.7 million, respectively.

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 impact of the COVID-19 pandemic to the global economy, including but not limited to, the volatility of the Company's stock price as well as that of its competitors, declining sales at the Company's restaurants and the challenging environment for the restaurant industry generally, the Company determined that there were indicators of potential impairment of its goodwill and indefinite-lived intangible assets during the first quarter of 2020. As such, the Company performed an impairment assessment for both goodwill and indefinite lived intangible assets and concluded that the fair value of these assets exceeded their carrying values. The Company has not recorded any impairment to its goodwill or indefinite-lived intangible assets during the 13 and 39 weeks ended September 27, 2020. The ultimate severity and longevity of the COVID-19 pandemic is unknown, and therefore, it is possible that impairments could be identified in future periods, and such amounts could be material.                                                                      

 

 

(4) Loss Per Share

Basic and diluted income per common share attributable to common stockholders are calculated using the weighted average number of common shares outstanding for the period. Diluted income per common share attributable to common stockholders is computed by dividing the income allocated to common stockholders by the weighted average number of fully diluted common shares outstanding. In periods of a net loss, 0 potential common shares are included in diluted shares outstanding as the effect is anti-dilutive. For the 13 and 39 weeks ended September 27, 2020, and September 29, 2019, the Company had a loss per share, and therefore potentially dilutive shares were excluded from the calculation.

11


 

The following table summarizes the loss per share calculation:

 

 

 

For the 13 Weeks Ended

 

 

For the 39 Weeks Ended

 

 

 

September 27,

 

 

September 29,

 

 

September 27,

 

 

September 29,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Net loss attributable to Potbelly Corporation

 

$

(13,412

)

 

$

(2,355

)

 

$

(48,964

)

 

$

(22,660

)

Weighted average common shares outstanding-basic

 

 

23,957

 

 

 

23,740

 

 

 

23,792

 

 

 

23,927

 

Plus: Effect of potential stock options exercise

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding-diluted

 

 

23,957

 

 

 

23,740

 

 

 

23,792

 

 

 

23,927

 

Loss per share available to common stockholders-basic

 

$

(0.56

)

 

$

(0.10

)

 

$

(2.06

)

 

$

(0.95

)

Loss per share available to common stockholders-diluted

 

$

(0.56

)

 

$

(0.10

)

 

$

(2.06

)

 

$

(0.95

)

Potentially dilutive shares that are considered anti-dilutive:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common share options

 

 

3,015

 

 

 

2,333

 

 

 

2,769

 

 

 

2,366

 

 

(5) Income Taxes

 

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 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 AMT credits, loosen the business interest limitation under section 163(j), and fix the qualified improvement property regulations in the 2017 Tax Cuts and Jobs Act.   As a result of the CARES Act, the Company estimates that it will be able to obtain a tax refund of $6.7 million from the carryback of NOLs and a refund of prior AMT credits. The Company received $6.0 million of this refund as of September 27, 2020. The Company expects to receive the remaining $0.7 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 due to the anticipated impact of the CARES Act discussed above and an additional $3.0 million benefit during the third quarter of 2020 due to additional guidance on the CARES Act and the finalization of the Company’s 2019 federal tax return.  

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 September 27, 2020.  The Company did not provide for an income tax benefit on its pre-tax loss for the 13 and 39 weeks ended September 27, 2020 and September 29, 2019.  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 leases retail shops, warehouse and office space under operating leases. For leases with renewal periods at the Company’s option, the Company determines the expected lease period based on whether the renewal of any options are reasonably assured at the inception of the lease.

Operating lease assets and liabilities are recognized at the lease commencement date. Operating lease liabilities represent the present value of lease payments not yet paid. Operating lease assets represent our right to use an underlying asset and are based upon the operating lease liabilities adjusted for prepayments or accrued lease payments, initial direct costs, lease incentives, and impairment of operating lease assets. To determine the present value of lease payments not yet paid, we estimate incremental secured borrowing rates corresponding to the maturities of the leases. The Company estimates this rate based on prevailing financial market conditions, comparable company and credit analysis, and management judgment.

We recognize expense for these leases on a straight-line basis over the lease term. Additionally, tenant incentives used to fund leasehold improvements are recognized when earned and reduce our right-of-use asset related to the lease. These are amortized through the right-of-use asset as reductions of expense over the lease term.

12


 

As a result of COVID-19, the Company suspended the payment of rent on the majority of its leases in April 2020 and has been in discussions with landlords regarding the restructuring of those leases in light of various contractual and legal defenses. The Company entered into 169 and 276 amendments with our respective landlords during the 13 and 39 weeks ended September 27, 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 for 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 13 and 39 weeks ended September 27, 2020, we received concessions from certain landlords in the form of rent deferrals and abatements which were not substantial, and we have elected to not account for these rent concessions as lease modifications.  

During the 13 and 39 weeks ended September 27, 2020, the Company terminated the leases for 17 and 25 company-owned shops, respectively, which will be permanently closed.  The Company incurred $1.5 million and $2.2 million, respectively, in lease termination fees related to these leases for the 13 and 39 weeks ended September 27, 2020.  Upon termination of leases during the 13 weeks ended September 27, 2020, the Company derecognized ROU assets of $8.0 million and lease liabilities of $9.0 million that resulted in a net gain of $1.0 million that is recorded in impairment, loss on disposal of property and equipment and shop closures.  Upon termination of leases during the 39 weeks ended September 27, 2020, the Company derecognized ROU assets of $12.9 million and lease liabilities of $14.3 million that resulted in a net gain of $1.4 million that is recorded in impairment, loss on disposal of property and equipment and shop closures.  Upon termination of leases during the 13 weeks ended September 29, 2019, the Company derecognized ROU asset of $0.7 million and lease liabilities of $0.8 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. Upon termination of leases during the 39 weeks ended September 29, 2019, the Company derecognized ROU asset of $6.5 million and lease liabilities of $7.5 million that resulted in a net gain of $1.0 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:

 

 

 

September 27,

 

 

September 29,

 

 

 

2020

 

 

2019

 

Weighted average remaining lease term (years)

 

 

8.02

 

 

 

8.59

 

Weighted average discount rate

 

 

7.89

%

 

 

8.00

%

 

Certain of the Company’s operating lease agreements include variable payments that are passed through by the landlord, such as common area maintenance and real estate taxes, as well as variable payments based on percentage rent for certain of our shops.  Pass-through charges and payments based on percentage rent are included within variable lease cost.

The components of lease cost were as follows:

 

 

 

 

13 weeks ended

 

 

39 weeks ended

 

 

 

 

September 27,

 

September 29,

 

 

September 27,

 

September 29,

 

 

Classification

 

2020

 

2019

 

 

2020

 

2019

 

Operating lease cost

Occupancy and General and administrative expenses

 

 

11,112

 

 

11,187

 

 

 

34,699

 

 

33,793

 

Variable lease cost

Occupancy

 

 

2,879

 

 

3,277

 

 

 

9,119

 

 

10,430

 

Total lease cost

 

 

$

13,991

 

$

14,464

 

 

$

43,818

 

$

44,223

 

 

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

 

 

 

13 weeks ended

 

 

39 weeks ended

 

 

 

September 27,

 

September 29,

 

 

September 27,

 

September 29,

 

 

 

2020

 

2019

 

 

2020

 

2019

 

Operating cash flows rent paid for operating lease liabilities

 

 

10,693

 

 

11,762

 

 

 

24,200

 

 

35,488

 

Operating right-of-use assets obtained in exchange for new operating lease liabilities

 

 

5,264

 

 

4,745

 

 

 

18,800

 

 

8,402

 

Reduction in operating right-of-use assets due to lease terminations

 

 

(7,973

)

 

(659

)

 

 

(12,855

)

 

(6,506

)

 

As of September 27, 2020, the Company had 0 real estate leases entered into that had not yet commenced.

13


 

Maturities of lease liabilities were as follows as of September 27, 2020:

 

  

 

Operating Leases

 

Remainder of 2020

 

 

15,588

 

2021

 

 

47,643

 

2022

 

 

40,459

 

2023

 

 

35,972

 

2024

 

 

33,338

 

2025

 

 

31,232

 

Thereafter

 

 

112,177

 

Total lease payments

 

 

316,409

 

Less: imputed interest

 

 

(85,294

)

Present value of lease liabilities

 

$

231,115

 

 

(7) Debt and Credit Facilities

 

The components of long-term debt were as follows:

 

 

 

September 27,

 

 

December 29,

 

 

 

2020

 

 

2019

 

Revolving credit facility

 

$

12,386

 

 

$

-

 

Paycheck Protection Program loan

 

 

10,000

 

 

 

-

 

Total long-term debt

 

$

22,386

 

 

$

-

 

 

Revolving credit facility

On August 7, 2019, the Company entered into a second amended and restated revolving credit facility agreement (the "Credit Agreement") with JPMorgan Chase Bank, N.A. (“JPMorgan”) that expires in July 2022. The Credit Agreement amends and restates that certain amended and restated revolving credit facility agreement, dated as of December 9, 2015, and amended on May 3, 2019 (collectively, the "Prior Credit Agreement") with JPMorgan. The Credit Agreement provides, among other things, for a revolving credit facility in a maximum principal amount $40 million, with possible future increases of up to $20 million under an expansion feature. Borrowings under the credit facility generally bear interest at the Company’s option at either (i) a eurocurrency rate determined by reference to the applicable LIBOR rate plus a margin ranging from 1.25% to 1.75% or (ii) a prime rate as announced by JP Morgan plus a margin ranging from 0.00% to 0.50%. The applicable margin is determined based upon the Company’s consolidated total leverage ratio. On the last day of each calendar quarter, the Company is required to pay a commitment fee of 0.20% per annum in respect of any unused commitments under the credit facility. So long as certain total leverage ratios, EBITDA thresholds and minimum liquidity requirements are met and no default or event of default has occurred or would result, there is no limit on the “restricted payments” (primarily distributions and equity repurchases) that the Company may make, provided that proceeds of the loans under the Credit Agreement may not be used for purposes of making restricted payments.

On March 17, 2020, the Company fully borrowed the available capacity of $39.8 million under the Credit Agreement as a precautionary measure in order to increase its cash position and preserve financial flexibility in light of current uncertainty in the global markets resulting from the COVID-19 pandemic. In accordance with the terms of the Credit Agreement, the proceeds from these borrowings may in the future be used for working capital, general corporate or other permitted purposes.

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.

14


 

On July 17, 2020, the Company entered into Amendment No. 2 (the “Second Amendment”) to the Credit Agreement to, among other things: (i) revise its financial covenants; (ii) decrease the aggregate amount of loan commitment available 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.

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.

On August 19, 2020, the Company entered into Amendment No. 3 (the “Third Amendment”) to the Credit Agreement to permit the Company to incur indebtedness in the form of a loan agreement with Harvest Small Business Finance, LLC in the aggregate amount of $10.0 million pursuant to the PPP under the CARES Act and (ii) revise financial covenants for the impact of the PPP proceeds.  As of September 27, 2020, the Company had $12.4 million outstanding under the Credit Agreement.  There were 0 borrowings outstanding as of September 29, 2019.  The Company is currently in compliance with all debt covenants as of September 27, 2020.    

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 the ongoing operations of the Company 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.  The Company intends to use all of the PPP proceeds toward qualifying expenses and pursue forgiveness of the Loan amount, but it is not able to determine the likelihood or the amount of forgiveness that will be obtained.  

The Company has recorded the amount of the Loan as long-term debt in its condensed consolidated balance sheet as of September 27, 2020 and related interest has been recorded to interest expense on its condensed consolidated statement of operations for the 13 weeks ended September 27, 2020.

(8) Capital Stock

On May 8, 2018, the Company announced that its Board of Directors authorized a stock repurchase program for up to $65.0 million of its outstanding common stock. The program permits the Company, from time to time, to purchase shares in the open market (including in pre-arranged stock trading plans in accordance with the guidelines specified in Rule 10b5-1 under the Securities and Exchange Act of 1934, as amended) or in privately negotiated transactions.  The number of common shares actually repurchased, and the timing and price of repurchases, will depend upon market conditions, SEC requirements and other factors. Purchases may be started or stopped at any time without prior notice depending on market conditions and other factors.  For the 13 and 39 weeks ended September 27, 2020, the Company did 0t repurchase any shares of its common stock. In light of the COVID-19 pandemic, the Company does not have plans to repurchase any common stock under its stock repurchase program at this time.  For the 13 and 39 weeks ended September 29, 2019, the Company repurchased 162,162 shares and 647,821 shares of its common stock for approximately $0.7 million and $4.2 million, respectively, under the stock repurchase program, including cost and commission, in open market transactions.  Repurchased shares are included as treasury stock in the condensed consolidated balance sheets and the condensed consolidated statements of equity.

15


 

(9) Stock-Based Compensation

Stock options

The Company has awarded stock options to certain of its employees and certain non-employee members of its 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 39 weeks ended September 27, 2020.

 

A summary of stock option activity for the 39 weeks ended September 27, 2020 is as follows:

 

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

 

 

(165

)

 

 

(12.35

)

 

 

 

 

 

 

 

 

Outstanding—September 27, 2020

 

 

1,609

 

 

 

11.23

 

 

$

 

 

 

3.31

 

Exercisable—September 27, 2020

 

 

1,556

 

 

$

11.18

 

 

$

 

 

 

3.18

 

 

Stock-based compensation related to stock options is measured at the grant date based on the calculated fair value of the award, and is recognized as expense over the requisite employee service period, which is generally the vesting period of the grant with a corresponding increase to additional paid-in capital. For the 13 weeks ended September 27, 2020, the Company recognized stock-based compensation credit of $0.1 million due to forfeiture credits. For the 39 weeks ended September 27, 2020, the Company recognized stock-based compensation expense related to stock options of $0.2 million. For the 13 and 39 weeks ended September 29, 2019, the Company recognized stock-based compensation expense related to stock options of $0.1 million and $0.7 million, respectively. As of September 27, 2020, unrecognized stock-based compensation expense for stock options was $0.2 million, which will be recognized through fiscal year 2022. The Company records stock-based compensation expense within general and administrative expenses in the condensed consolidated statements of operations.

Restricted stock units

The Company awards restricted stock units (“RSUs”) to certain of its employees and certain non-employee members of its Board of Directors. The Board of Director grants have a vesting schedule of 50% on the first anniversary of the grant date and 50% on the second anniversary of the grant date. The employee grants vest in one-third increments over a three-year period. For the 13 and 39 weeks ended September 27, 2020, the Company recognized stock-based compensation expense related to RSUs of $1.0 million and $1.6 million, respectively. For the 13 and 39 weeks ended September 29, 2019, the Company recognized stock-based compensation expense related to RSUs of $0.3 million and $1.2 million, respectively. As of September 27, 2020, unrecognized stock-based compensation expense for RSUs was $3.1 million, which will be recognized though fiscal year 2023.

A summary of RSU activity for the 39 weeks ended September 27, 2020 is as follows:

 

RSUs

 

Number of RSUs

(Thousands)

 

 

Weighted Average

Fair Value per Share

 

Non-vested as of December 29, 2019

 

 

463

 

 

$

7.59

 

Granted

 

 

1,574

 

 

 

3.13

 

Vested

 

 

(201

)

 

 

2.87

 

Canceled

 

 

(430

)

 

 

3.87

 

Non-vested as of September 27, 2020

 

 

1,406

 

 

$

3.68

 

 

Performance stock units

The Company awards performance share units (“PSUs”) to certain of its employees.  The PSUs have certain vesting conditions based upon the Company’s financial performance or the Company’s stock price.  

16


 

The Company has granted PSUs that are subject to service and market vesting conditions.  The fair market value was established using a Monte Carlo simulation model.   Participants are entitled to receive a specified number of shares of the Company’s common stock contingent on the Company's achievement of a stock return on the Company's common stock.  The PSUs may vest during a performance period of five years.  Compensation expense for these awards is being amortized over an average expected service period or earlier based on when vesting conditions are met.  For the 13 and 39 weeks ended September 27, 2020, the Company recognized stock-based compensation expense for PSUs with market vesting conditions of $0.7 million.

A summary of activity for PSUs with market vesting conditions for the 39 weeks ended September 27, 2020 is as follows:

 

PSUs

 

Number

of PSUs

(Thousands)

 

 

Weighted

Average

Fair Value

per Share

 

Non-vested as of December 29, 2019

 

 

 

 

$

 

Granted

 

 

1,475

 

 

 

1.43

 

Vested

 

 

(391

)

 

 

4.20

 

Canceled

 

 

(332

)

 

 

1.50

 

Non-vested as of September 27, 2020

 

 

752

 

 

$

1.42

 

The Company also previously granted PSUs that are subject to service and performance vesting conditions.  The PSUs will vest based on the Company’s achievement of certain targets related to adjusted EBITDA and same store sales goals. 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.  As of September 27, 2020, there were 45 thousand PSUs with performance vesting conditions outstanding with a grant date fair value of $8.46 per share.  For the 13 and 39 weeks ended September 27, 2020 and September 29, 2019, 0 expense was recognized related to PSUs with performance vesting conditions.

 

(10) Commitments and Contingencies

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

(11) Related Party Transactions

On May 10, 2020, the Company entered into a Settlement Agreement (the “Settlement Agreement”) with 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 each 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 by the Vann Group on August 17, 2020, the Vann Group beneficially owns 2.69% of the common stock of the Company.

 

 

17


 

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. This discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the Private Securities Litigation Reform Act of 1995, and involves numerous risks and uncertainties. Forward-looking statements may include, among others, statements relating to: our future financial position and results of operations, estimated costs associated with our closure of underperforming shops, and the implementation and results of strategic initiatives. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts and generally contain words such as “believes,” “expects,” “may,” “will,” “should,” “seeks,” “intends,” “plans,” “strives,” “goal,” “estimates,” “forecasts,” “projects” or “anticipates” and the negative of these terms or similar expressions. Our forward-looking statements are subject to risks and uncertainties, which may cause actual results to differ materially from those projected or implied by the forward-looking statement, due to reasons including, but not limited to, the COVID-19 outbreak; compliance with covenants in our credit facility; competition; general economic conditions; our ability to successfully implement our business strategy; the success of our initiatives to increase sales and traffic; changes in commodity, energy and other costs; our ability to attract and retain management and employees; consumer reaction to industry-related public health issues and perceptions of food safety; our ability to manage our growth; reputational and brand issues; price and availability of commodities; consumer confidence and spending patterns; and weather conditions. Forward-looking statements are based on current expectations and assumptions and currently available data and are neither predictions nor guarantees of future events or performance. You should not place undue reliance on forward-looking statements, which speak only as of the date hereof. See “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements” included in our Annual Report on Form 10-K for the fiscal year ended December 29, 2019, our Quarterly Report on Form 10-Q for the quarter ended March 29, 2020 and our Current Reports on Form 8-K filed on March 20, 2020 and May 8, 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 escape for more than 40 years. Potbelly owns and operates Potbelly Sandwich Shop concepts in the United States. The Company also has domestic franchise operations of Potbelly Sandwich Shop concepts. Potbelly’s chief operating decision maker is our Chief Executive Officer. Based on how our Chief Executive Officer reviews financial performance and allocates resources on a recurring basis, the Company has one operating segment and one reportable segment.

Our 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 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

 

 

 

Operated

 

 

Domestic

 

 

International

 

 

Total

 

 

Company

 

Shops as of December 30, 2018

 

 

437

 

 

 

41

 

 

 

8

 

 

 

49

 

 

 

486

 

Shops opened

 

 

1

 

 

 

6

 

 

 

 

 

 

6

 

 

 

7

 

Shops closed

 

 

(11

)

 

 

(2

)

 

 

(8

)

 

 

(10

)

 

 

(21

)

Shops as of September 29, 2019

 

 

427

 

 

 

45

 

 

 

 

 

 

45

 

 

 

472

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shops as of December 29, 2019

 

 

428

 

 

 

46

 

 

 

 

 

 

46

 

 

 

474

 

Shops opened

 

 

4

 

 

 

2

 

 

 

 

 

 

2

 

 

 

6

 

Shops closed

 

 

(26

)

 

 

(2

)

 

 

 

 

 

(2

)

 

 

(28

)

Shops as of September 27, 2020

 

 

406

 

 

 

46

 

 

 

 

 

 

46

 

 

 

452

 

 

18


 

Impact of COVID-19 on Our Business

On January 30, 2020, the WHO announced a global health emergency because of COVID-19 and the risks to the international community as the virus spreads globally. On March 11, 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally.  The COVID-19 pandemic has significantly impacted economic conditions in the United States where all our shops are located. In response to the pandemic, many states and jurisdictions in which we operate have issued stay-at-home orders and other measures aimed at slowing the spread of the coronavirus.  While most of our company-owned shops remain open in accordance with guidance from local authorities, these measures resulted in us closing the vast majority our dining rooms and shifting to off-premise operations only, and we experienced a sudden and drastic decrease in revenues.  Nearly all of our shops have reopened their dining rooms with restrictions, such as social distancing and limited capacities, to ensure the health and safety of our guests and employees. We continue to follow 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.

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 COVID-19 pandemic, and the Company is closely monitoring the impact of the pandemic on all aspects of its business, including how it will impact its customers, employees, suppliers, vendors, business partners, and distribution channels.  The Company is unable to predict the impact that COVID-19 will have on its financial position and operating results due to numerous uncertainties, however, the Company is continually assessing the evolving impact of the COVID-19 pandemic and intends to make adjustments to its responses accordingly.  

As the COVID-19 pandemic emerged, the Company’s first priority was and continues to be ensuring the health and safety of our employees as we serve our customers and communities.  We have provided masks, gloves, and other 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 Centers 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 November 5, 2020, 20 of the Company’s 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 weeks of 2020, we saw comparable same-store-sales increase 2.5% and the Company was on pace to record the first positive quarterly comparable same-store-sales since 2016.  Due to the negative impact of the COVID-19 pandemic, 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 and third quarters.  The Company reported a decrease in same-store sales of 41.5% for the second quarter and a decrease of 21.0% for the third quarter. As our shops were subject to restrictions on dine-in capacity, our 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 authorities in determining the appropriate restrictions to put in place for each shop. The majority of our shops have reopened their dining rooms with restrictions, such as social distancing and limited capacities, to ensure the health and safety of our guests and employees. Customers can place off-premise orders through Potbelly.com and the Potbelly app, or through DoorDash, Grubhub, Postmates and Uber Eats marketplaces nationwide. We continue to offer the Potbelly Pantry program, which allows 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.

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 continually adjust shop-level labor and purchases of inventory to align with current levels of demand.  At the onset of the pandemic, we reduced advertising and marketing expenditures, enacted a hiring freeze, and restricted business travel.  As of the beginning of the second quarter of 2020, we temporarily reduced salaries for all corporate employees, suspended merit increases, promotions, bonuses, and certain benefits, furloughed approximately one-third of our corporate employees, and the Board of Directors elected to temporarily defer its compensation. During the third quarter of 2020, the Company eliminated the temporary salary reduction of salaries for corporate employees and the deferral of Board of Director compensation for the Board of Directors. We continue to be thoughtful and judicious regarding our operating expenses during the uncertainty of the pandemic.  Additionally, the Company announced a corporate restructuring plan being executed during the fourth quarter of 2020 that will reduce annual general and administrative expenses by $3.5 million to $4.0 million. The Plan will consist of corporate expense optimization, consolidation of shop support services, and other expense and staff reductions.

Additionally, we have suspended the payment of rent on the majority of our leases and are in discussions with our landlords regarding the restructuring of those leases in light of various contractual and legal defenses.  As of November 5, 2020, we have

19


 

amended approximately 300 of the lease agreements for 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 27 of our shops.

Shop Development – The Company has halted capital investment in new company-owned shops, except for shops that are substantially complete, as well as all non-essential capital expenditures.  The Company does not have plans to begin construction on any company-owned shops until the impact of the pandemic is behind us.

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

 

 

13 Weeks Ended September 27, 2020 Compared to 13 Weeks Ended September 29, 2019

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

 

 

 

For the 13 Weeks Ended

 

 

 

 

 

 

 

 

 

 

 

September 27, 2020

 

 

% of

Revenues

 

 

September 29, 2019

 

 

% of

Revenues

 

 

Increase

(Decrease)

 

 

Percent

Change

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sandwich shop sales, net

 

$

72,189

 

 

 

99.3

%

 

$

103,560

 

 

 

99.3

%

 

$

(31,371

)

 

 

(30.3

)%

Franchise royalties and fees

 

 

474

 

 

 

0.7

 

 

 

678

 

 

 

0.7

 

 

 

(204

)

 

 

(30.1

)

Total revenues

 

 

72,663

 

 

 

100.0

 

 

 

104,238

 

 

 

100.0

 

 

 

(31,575

)

 

 

(30.3

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Percentages stated as a percent of

   sandwich shop sales, net)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sandwich shop operating

   expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of goods sold, excluding

   depreciation

 

 

20,721

 

 

 

28.7

 

 

 

27,540

 

 

 

26.6

 

 

 

(6,819

)

 

 

(24.8

)

Labor and related expenses

 

 

25,809

 

 

 

35.8

 

 

 

32,430

 

 

 

31.3

 

 

 

(6,621

)

 

 

(20.4

)

Occupancy expenses

 

 

13,904

 

 

 

19.3

 

 

 

14,850

 

 

 

14.3

 

 

 

(946

)

 

 

(6.4

)

Other operating expenses

 

 

12,126

 

 

 

16.8

 

 

 

13,274

 

 

 

12.8

 

 

 

(1,148

)

 

 

(8.6

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Percentages stated as a percent of

   total revenues)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General and administrative

   expenses

 

 

9,821

 

 

 

13.5

 

 

 

11,192

 

 

 

10.7

 

 

 

(1,371

)

 

 

(12.2

)

Depreciation expense

 

 

4,699

 

 

 

6.5

 

 

 

5,365

 

 

 

5.1

 

 

 

(666

)

 

 

(12.4

)

Pre-opening costs

 

 

 

 

*

 

 

 

16

 

 

*

 

 

 

(16

)

 

 

0.0

 

Impairment, loss on disposal of

   property and equipment and

   shop closures

 

 

1,721

 

 

 

2.4

 

 

 

1,714

 

 

 

1.6

 

 

 

7

 

 

 

0.4

 

Total expenses

 

 

88,801

 

 

>100

 

 

 

106,381

 

 

>100

 

 

 

(17,580

)

 

 

(16.5

)

Loss from operations

 

 

(16,138

)

 

 

(22.2

)

 

 

(2,143

)

 

 

(2.1

)

 

 

(13,995

)

 

>100

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

268

 

 

 

0.4

 

 

 

28

 

 

*

 

 

 

240

 

 

>100

 

Loss before income taxes

 

 

(16,406

)

 

 

(22.6

)

 

 

(2,171

)

 

 

(2.1

)

 

 

(14,235

)

 

>100

 

Income tax expense (benefit)

 

 

(2,917

)

 

 

(4.0

)

 

 

66

 

 

*

 

 

 

(2,983

)

 

>(100)

 

Net loss

 

 

(13,489

)

 

 

(18.6

)

 

 

(2,237

)

 

 

(2.1

)

 

 

(11,252

)

 

>100

 

Net income (loss) attributable to

   non-controlling interest

 

 

(77

)

 

 

(0.1

)

 

 

118

 

 

 

0.1

 

 

 

(195

)

 

>(100)

 

Net loss attributable to Potbelly

   Corporation

 

$

(13,412

)

 

 

(18.5

)%

 

$

(2,355

)

 

 

(2.3

)%

 

$

(11,057

)

 

>100%

 

 

*

Amount is less than 0.1%

20


 

Revenues

Total revenues decreased by $31.6 million, or 30.3%, to $72.7 million during the 13 weeks ended September 27, 2020, from $104.2 million during the 13 weeks ended September 29, 2019. The revenue decrease for the quarter was driven by a $19.0 million, or 21.0%, decrease in company-operated comparable store sales and a decrease in sales of $10.8 million from shops that have either permanently or temporarily closed.

Cost of Goods Sold

Cost of goods sold decreased by $6.8 million, or 24.8%, to $20.7 million during the 13 weeks ended September 27, 2020, from $27.5 million during the 13 weeks ended September 29, 2019. This decrease was primarily driven by a decrease in shop revenue. As a percentage of sandwich shop sales, cost of goods sold increased to 28.7% during the 13 weeks ended September 27, 2020, from 26.6% during the 13 weeks ended September 29, 2019, primarily driven by a shift in product mix due to increase in off-premise sales and by cost inflation in certain products, partially offset by menu price increases.

 

Labor and Related Expenses

Labor and related expenses decreased by $6.6 million, or 20.4%, to $25.8 million during the 13 weeks ended September 27, 2020, from $32.4 for the 13 weeks ended September 30, 2019, primarily due to labor management amid a decrease in shop revenue and a decrease in expense from closed shops, partially offset by wage inflation. As a percentage of sandwich shop sales, labor and related expenses increased to 35.8% during the 13 weeks ended September 27, 2020, from 31.3% for the 13 weeks ended September 29, 2019, primarily driven by sales deleverage in certain labor related costs not directly variable with sales.

Occupancy Expenses

Occupancy expenses decreased by $0.9 million, or 6.4%, to $13.9 million during the 13 weeks ended September 27, 2020, from $14.9 million during the 13 weeks ended September 29, 2019 primarily due to a decrease in expenses related to closed shops. As a percentage of sandwich shop sales, occupancy expenses increased to 19.3% for the 13 weeks ended September 27, 2020, from 14.3% for the 13 weeks ended September 29, 2019, primarily due to sales deleverage and inflation in certain occupancy related costs, including lease renewals, real estate taxes and common area maintenance.

Other Operating Expenses

Other operating expenses decreased by $1.1 million, or 8.6%, to $12.1 million during the 13 weeks ended September 27, 2020, from $13.3 million during the 13 weeks ended September 29, 2019. The decrease was primarily attributable to a decrease in certain items variable with sales, partially offset by higher expenses related to third-party delivery partnerships driven by increased sales in that channel. As a percentage of sandwich shop sales, other operating expenses increased to 16.8% for the 13 weeks ended September 27, 2020, from 12.8% for the 13 weeks ended September 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.  

 

General and Administrative Expenses

General and administrative expenses decreased by $1.4 million, or 12.2%, to $9.8 million during the 13 weeks ended September 27, 2020, from $11.2 million during the 13 weeks ended September 29, 2019. The decrease was driven primarily by a decrease in nonrecurring professional services fees, as well as a decrease in payroll costs as a result of furloughs of approximately one-third of corporate employees. As a percentage of revenues, general and administrative expenses increased to 13.5% for the 13 weeks ended September 27, 2020, from 10.7% for the 13 weeks ended September 29, 2019, primarily driven by a decrease in shop revenue, partially offset by reductions in nonrecurring professional services fees and payroll costs noted above.

Depreciation Expense

Depreciation expense decreased by $0.7 million, or 12.4%, to $4.7 million during the 13 weeks ended September 27, 2020, from $5.4 million during the 13 weeks ended September 29, 2019. 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 in technology such as the mobile application, which increased the depreciable base. As a percentage of revenues, depreciation was 6.5% during the 13 weeks ended September 27, 2020 and was 5.1 % for the 13 weeks ended September 29, 2019.

21


 

Pre-Opening Costs

There were no pre-opening costs during the 13 weeks ended September 27, 2020. Pre-opening costs were $16 thousand during the 13 weeks ended September 29, 2019.

Impairment, Loss on Disposal of Property and Equipment and Shop Closures

Impairment, loss on disposal of property and equipment and shop closures was $1.7 million during the 13 weeks ended September 27, 2020 and September 29, 2019.

After performing periodic reviews of Company shops during the third quarter of 2020, it was determined that indicators of impairment were present for certain shops.  The Company performed impairment analyses related to these shops and recorded an impairment charge of $1.2 million for the excess of the carrying amount recorded on the balance sheet over the shops’ estimated fair value. The Company performs impairment analyses whenever events or changes in circumstances indicate that the carrying amount may not be recoverable 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, it is possible that non-cash impairments could be identified in tangible assets in the future. However, the likelihood or the amount of an additional impairment charge cannot be reasonably estimated at this time.

The Company terminated the leases for 17 company-owned shops during the 13 weeks ended September 27, 2020, for which the shops will be permanently closed.  These terminations resulted in $1.5 million of lease termination payments which were offset by a net gain of $1.0 million from derecognizing the associated right-of-use assets and lease liabilities, for net lease exit expenses of $0.5 million.

Interest Expense, Net

Net interest expense was $268 thousand during the 13 weeks ended September 27, 2020 and $28 thousand during the 13 weeks ended September 29, 2019, primarily driven by an increase in outstanding borrowings on our revolving credit facility partially offset by interest income on tax refunds received during the third quarter.

Income Tax Expense

The Company recognized an income tax benefit of $2.9 million for the 13 weeks ended September 27, 2020 primarily due to a discrete tax benefit recorded for the carryback of NOLs and a refund of prior AMT credits allowed under the CARES Act. The Company has recorded a tax receivable for the $0.7 million for the amount of the remaining refund it expects to receive before the end of the year. Income tax expense was $66 thousand for the 13 weeks ended September 29, 2019.

 

 

22


 

39 Weeks Ended September 27, 2020 Compared to 39 Weeks Ended September 29, 2019

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

 

 

 

For the 39 Weeks Ended

 

 

 

 

 

 

 

 

 

 

 

September 27, 2020

 

 

% of

Revenues

 

 

September 29, 2019

 

 

% of

Revenues

 

 

Increase

(Decrease)

 

 

Percent

Change

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sandwich shop sales, net

 

$

215,013

 

 

 

99.4

%

 

$

305,619

 

 

 

99.2

%

 

$

(90,606

)

 

 

(29.6

)%

Franchise royalties and fees

 

 

1,402

 

 

 

0.6

 

 

 

2,336

 

 

 

0.8

 

 

 

(934

)

 

 

(40.0

)

Total revenues

 

 

216,415

 

 

 

100.0

 

 

 

307,955

 

 

 

100.0

 

 

 

(91,540

)

 

 

(29.7

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Percentages stated as a percent of

   sandwich shop sales, net)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sandwich shop operating

   expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of goods sold, excluding

   depreciation

 

 

61,003

 

 

 

28.4

 

 

 

81,782

 

 

 

26.8

 

 

 

(20,779

)

 

 

(25.4

)

Labor and related expenses

 

 

78,090

 

 

 

36.3

 

 

 

96,517

 

 

 

31.6

 

 

 

(18,427

)

 

 

(19.1

)

Occupancy expenses

 

 

43,581

 

 

 

20.3

 

 

 

44,457

 

 

 

14.5

 

 

 

(876

)

 

 

(2.0

)

Other operating expenses

 

 

35,881

 

 

 

16.7

 

 

 

37,235

 

 

 

12.2

 

 

 

(1,354

)

 

 

(3.6

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Percentages stated as a percent of

   total revenues)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General and administrative

   expenses

 

 

28,094

 

 

 

13.0

 

 

 

34,709

 

 

 

11.3

 

 

 

(6,615

)

 

 

(19.1

)

Depreciation expense

 

 

15,110

 

 

 

7.0

 

 

 

16,486

 

 

 

5.4

 

 

 

(1,376

)

 

 

(8.3

)

Pre-opening costs

 

 

64

 

 

*

 

 

 

26

 

 

*

 

 

 

38

 

 

>100

 

Impairment, loss on disposal of

   property and equipment and

   shop closures

 

 

9,602

 

 

 

4.4

 

 

 

5,077

 

 

 

1.6

 

 

 

4,525

 

 

 

89.1

 

Total expenses

 

 

271,425

 

 

>100

 

 

 

316,289

 

 

>100

 

 

 

(44,864

)

 

 

(14.2

)

Loss from operations

 

 

(55,010

)

 

 

(25.4

)

 

 

(8,334

)

 

 

(2.7

)

 

 

(46,676

)

 

>100

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

730

 

 

 

0.3

 

 

 

95

 

 

*

 

 

 

635

 

 

>100

 

Loss before income taxes

 

 

(55,740

)

 

 

(25.8

)

 

 

(8,429

)

 

 

(2.7

)

 

 

(47,311

)

 

>100

 

Income tax expense (benefit)

 

 

(6,585

)

 

 

(3.0

)

 

 

13,931

 

 

 

4.5

 

 

 

(20,516

)

 

>(100)

 

Net loss

 

 

(49,155

)

 

 

(22.7

)

 

 

(22,360

)

 

 

(7.3

)

 

 

(26,795

)

 

>100

 

Net income attributable to non-

   controlling interests

 

 

(191

)

 

*

 

 

 

300

 

 

 

0.1

 

 

 

(491

)

 

>(100)

 

Net loss attributable to Potbelly

   Corporation

 

$

(48,964

)

 

 

(22.6

)%

 

$

(22,660

)

 

 

(7.4

)%

 

$

(26,304

)

 

>100

 

 

*

Amount is less than 0.1%

 

Revenues

Total revenues decreased by $91.5 million, or 29.7%, to $216.4 million during the 39 weeks ended September 27, 2020, from $308.0 million during the 39 weeks ended September 29, 2019. The revenue decrease was driven by a $68.3 million, or 24.2%, decrease in company-operated comparable store sales and a decrease in sales of $23.4 million from shops that have either permanently or temporarily closed.

 

23


 

Cost of Goods Sold

Cost of goods sold decreased by $20.8 million, or 25.4%, to $61.0 million during the 39 weeks ended September 27, 2020, from $81.8 million during the 39 weeks ended September 29, 2019. This decrease was primarily driven by a decrease in shop revenue. As a percentage of sandwich shop sales, cost of goods sold increased to 28.4% for the 39 weeks ended September 27, 2020, from 26.8% during the 39 weeks ended September 29, 2019, primarily driven by a shift in product mix due to increase in off-premise sales and inflation in certain products, partially offset by menu price increases.

 

Labor and Related Expenses

Labor and related expenses decreased by $18.4 million, or 19.1%, to $79.1 million during the 39 weeks ended September 27, 2020, from $96.5 for the 39 weeks ended September 29, 2019, primarily due to labor management amid a decrease in shop revenue and a decrease in expense from closed shops, partially offset by wage inflation. As a percentage of sandwich shop sales, labor and related expenses increased to 36.3% during the 39 weeks ended September 27, 2020, from 31.6% during the 39 weeks ended September 29, 2019, primarily driven by sales deleverage in certain labor related costs not directly variable with sales.

Occupancy Expenses

Occupancy expenses decreased by $0.9 million, or 2.0%, to $43.6 million during the 39 weeks ended September 27, 2020, from $44.5 million during the 39 weeks ended September 29, 2019 primarily due to a decrease in expenses related to closed shops. As a percentage of sandwich shop sales, occupancy expenses increased to 20.3% during the 39 weeks ended September 27, 2020, from 14.5% during the 39 weeks ended September 29, 2019, primarily due to sales deleverage and inflation in certain occupancy related costs, including lease renewals, real estate taxes and common area maintenance.

Other Operating Expenses

Other operating expenses decreased by $1.4 million, or 3.6%, to $35.9 million during the 39 weeks ended September 27, 2020, from $37.2 million during the 39 weeks ended September 29, 2019. The decrease was primarily attributable to a decrease in certain items variable with sales, partially offset by higher expenses related to third-party delivery partnerships driven by increased sales in that channel. As a percentage of sandwich shop sales, other operating expenses increased to 16.7% during the 39 weeks ended September 27, 2020, from 12.2% during the 39 weeks ended September 29, 2019, primarily driven by sales deleverage in operating expense items such as utilities and other expenses not directly variable with sales.  

 

General and Administrative Expenses

General and administrative expenses decreased by $6.6 million, or 19.1%, to $28.1 million during the 39 weeks ended September 27, 2020, from $34.7 million during the 39 weeks ended September 29, 2019. The decrease was driven primarily by a decrease in nonrecurring professional services fees, as well as a decrease in payroll costs as a result of furloughs of approximately one-third of corporate employees. As a percentage of revenues, general and administrative expenses increased to 13.0% for the 39 weeks ended September 27, 2020, from 11.3% for the 39 weeks ended September 29, 2019, primarily driven by a decrease in shop revenue, partially offset by reductions in nonrecurring professional services fees and payroll costs noted above.  

Depreciation Expense

Depreciation expense decreased by $1.4 million, or 8.3%, to $15.1 million during the 39 weeks ended September 27, 2020, from $16.5 million during the 39 weeks ended September 29, 2019. 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 in technology such as the mobile application, which increased the depreciable base. As a percentage of revenues, depreciation was 7.0% during the 39 weeks ended September 27, 2020 and was 5.4 % for the 39 weeks ended September 29, 2019.

Pre-Opening Costs

Pre-opening costs were $64 thousand during the 39 weeks ended September 27, 2020, and $26 thousand during the 39 weeks ended September 29, 2019.

24


 

Impairment, Loss on Disposal of Property and Equipment and Shop Closures

Impairment, loss on disposal of property and equipment and shop closures increased to $9.6 million during the 39 weeks ended September 27, 2020, from $5.1 million during the 39 weeks ended September 27, 2019 primarily due impairment charges resulting from the expected impact of COVID-19 on future cash flows.

After performing periodic reviews of Company shops during the third quarter of 2020, it was determined that indicators of impairment were present for certain shops. The Company performed impairment analyses related to these shops and recorded an impairment charge of $8.0 million for the excess 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 the carrying amount may not be recoverable 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, it is possible that non-cash impairments could be identified in tangible assets in the future. However, the likelihood or the amount of an additional impairment charge cannot be reasonably estimated at this time.

The Company terminated the leases for 25 company-owned shops during the 39 weeks ended September 27, 2020, for which the shops will be permanently closed.  These terminations resulted in $2.2 million of lease termination payments which were offset by a net gain of $1.4 million from derecognizing the associated right-of-use assets and lease liabilities, for net lease exit expenses of $0.8 million.

Interest Expense, Net

Net interest expense was $730 thousand during the 39 weeks ended September 27, 2020 and $95 thousand during the 39 weeks ended September 29, 2019, primarily driven by an increase in outstanding borrowings on our revolving credit facility partially offset by interest income on tax refunds received during the third quarter.

Income Tax Expense

The Company recognized an income tax benefit of $6.7 million for the 39 weeks ended September 27, 2020 primarily due to a discrete tax benefit recorded for the carryback of NOLs and a refund of prior AMT credits allowed under the CARES Act, which resulted in a tax refund of $6.0 million. The Company expects to receive the remaining $0.7 million tax refund before the end of the year. The Company recognized a non-cash charge to income tax expense of $13.9 million for the 39 weeks ended September 29, 2019 to record a full valuation allowance against its net deferred tax assets.

Liquidity and Capital Resources

General

Historically, Potbelly’s ongoing primary sources of liquidity and capital resources are cash provided from operating activities, existing cash and cash equivalents, and the Company’s credit facility. Potbelly’s primary requirements for liquidity and capital are new shop openings, existing shop capital investments, maintenance, repurchases of Company common stock, lease obligations, working capital and general corporate needs. Potbelly’s requirement for working capital is not significant since the Company’s customers pay for their food and beverage purchases in cash or payment cards (credit or debit) at the time of sale. Thus, Potbelly is able to sell certain inventory items before the Company needs to pay its suppliers for such items. Company shops do not require significant inventories or receivables.

The COVID-19 pandemic’s impact on our operations and revenues has significantly affected our ability to generate cash from operations.  To preserve financial flexibility, the Company borrowed $39.8 million under its revolving credit facility in March 2020.  The Company ended the third quarter with a cash balance of $23.4 million compared to a balance of $18.8 million at December 29, 2019.   The increase in the cash balance is primarily due to net borrowings under its revolving credit facility and proceeds from the Paycheck Protection Program (“PPP”), offset by cash used.  Total liquidity (cash plus amounts available on the revolving credit facility) was $50.8 million as of September 27, 2020 compared to $45.8 million as of June 28, 2020 and March 29, 2020 and $58.8 million as of December 29, 2019.

25


 

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 November 5, 2020, we have amended approximately 300 of the lease agreements for 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 27 of our shops. Future lease amendments resulting from these discussions may have a material impact on our liquidity.  

The Company received $6.0 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 and expects to receive an additional $0.7 million before the end of the current year. We have elected to defer the employer-paid portion of social security taxes which is expected to defer approximately $3.0 to $4.0 million of cash payments from 2020 in to 2021 and 2022.  During the second and third quarters of 2020, $2.9 million of payroll tax expenses were deferred and are accrued within other long-term liabilities.

Cash Flows

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

 

 

 

For the 39 Weeks Ended

 

 

 

September 27,

 

 

September 29,

 

 

 

2020

 

 

2019

 

Net cash provided by (used in):

 

 

 

 

 

 

 

 

Operating activities

 

$

(7,744

)

 

$

9,863

 

Investing activities

 

 

(8,702

)

 

 

(9,533

)

Financing activities

 

 

21,047

 

 

 

(4,347

)

Net increase (decrease) in cash

 

$

4,601

 

 

$

(4,017

)

 

Operating Activities

Net cash used in operating activities increased to $7.7 million for the 39 weeks ended September 27, 2020, from cash provided by operating activities of $9.9 million for the 39 weeks ended September 27, 2019. The $17.6 million change in operating cash was primarily driven by an increase in loss from operations, offset by income tax refunds and the timing of payment for certain liabilities, including the deferral of rent for many of our shops.

Investing Activities

Net cash used in investing activities decreased to $8.7 million for the 39 weeks ended September 27, 2020, from $9.5 million for the 39 weeks ended September 29, 2019. The decrease was primarily due to a reduction of capital expenditures related to new shop construction.  Due to the COVID-19 pandemic, capital expenditures have been limited to essential maintenance and safety.

Financing Activities

Net cash provided by financing activities increased to $21.0 million for the 39 weeks ended September 27, 2020, from net cash used in financing activities of $4.3 million for the 39 weeks ended September 29, 2019. The $25.3 million change in financing cash was primarily driven by net borrowings under the Credit Facility of $12.4 million and net borrowings under the PPP of $10.0 million.

Revolving Credit Facility

On August 7, 2019, the Company entered into a second amended and restated revolving credit facility agreement (the "Credit Agreement") with JPMorgan Chase Bank, N.A. (“JPMorgan”) that expires in July 2022. The Credit Agreement amends and restates that certain amended and restated revolving credit facility agreement, dated as of December 9, 2015, and amended on May 3, 2019 (collectively, the "Prior Credit Agreement") with JPMorgan. The Credit Agreement provides, among other things, for a revolving credit facility in a maximum principal amount of $40 million, with possible future increases of up to $20 million under an expansion feature. Borrowings under the credit facility generally bear interest at the Company’s option at either (i) a eurocurrency rate determined by reference to the applicable LIBOR rate plus a margin ranging from 1.25% to 1.75% or (ii) a prime rate as announced by JPMorgan plus a margin ranging from 0.00% to 0.50%. The applicable margin is determined based upon the Company’s consolidated total leverage ratio. On the last day of each calendar quarter, the Company is required to pay a commitment fee of 0.20% per annum in respect of any unused commitments under the credit facility. So long as certain total leverage ratios, EBITDA thresholds and minimum liquidity requirements are met and no default or event of default has occurred or would result, there is no limit on the “restricted payments” (primarily distributions and equity repurchases) that the Company may make, provided that proceeds of the loans under the Credit Agreement may not be used for purposes of making restricted payments.

26


 

On March 17, 2020, the Company fully drew the available capacity of $39.8 million under its Revolving Credit Facility as a precautionary measure in order to increase its cash position and preserve financial flexibility in light of current uncertainty in the global markets resulting from the COVID-19 pandemic. In accordance with the terms of its Revolving Credit Facility, the proceeds from these borrowings may in the future be used for working capital, general corporate or other permitted purposes.

The Credit Agreement was subsequently amended as of May 15, 2020 (the “Credit Agreement Amendment”) to, among other things (i) change the maturity date from July 31, 2022 to March 31, 2022; (ii) eliminate the $20.0 million expansion feature; (iii) amend the interest rate to the Company’s option at either (a) a eurocurrency rate determined by reference to the applicable LIBOR rate with a 1.00% floor plus a margin of 5.00% or (b) a prime rate as announced by JP Morgan plus 4.00%; (iv) amend the commitment fee to 1.00% per annum in respect of any unused commitments under the credit facility; (v) implement additional restrictions on restricted payments, acquisitions and other indebtedness; and (vi) implement additional financial covenants. Per the terms of the Credit Agreement Amendment, the Company repaid $15.0 million of its outstanding borrowing at the signing of the Credit Agreement Amendment, and may re-borrow this $15.0 million when its cash balances held by JP Morgan declines below $28.0 million.  Lastly, the Company is required to pay an upfront fee of 1% of the outstanding loan balance within fifteen business days of the signing of the Credit Agreement Amendment.

On July 17, 2020, we entered into Amendment No. 2 (the “Second Amendment”) to the Credit Agreement to, among other things: (i) revise its financial covenants; (ii) decrease the aggregate amount of loan commitment available 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.

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.  

On August 19, 2020, the Company entered into Amendment No. 3 (the “Third Amendment”) to the Credit Agreement to permit the Company to incur indebtedness in the form of a loan agreement with Harvest Small Business Finance, LLC in the aggregate amount of $10.0 million pursuant to the PPP under the CARES Act and (ii) revise financial covenants for the impact of the PPP proceeds.  As of September 27, 2020, the Company had $12.4 million outstanding under the Credit Agreement.  There were no borrowings outstanding as of September 29, 2019.   The Company is currently in compliance with all debt covenants as of September 27, 2020.

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 the ongoing operations of the Company due to the economic uncertainty resulting from the COVID-19 pandemic and lack of alternative sources of liquidity.  

The Loan is scheduled to mature five years from the date on which the 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.  The Company intends to use all of the PPP proceeds towards qualifying expenses and pursue forgiveness of the Loan amount, but it is not able to determine the likelihood or the amount of forgiveness that will be obtained.  

Stock Repurchase Program

On May 8, 2018, the Company announced that its Board of Directors authorized a stock repurchase program for up to $65.0 million of its outstanding common stock. The program permits the Company, from time to time, to purchase shares in the open market (including in pre-arranged stock trading plans in accordance with the guidelines specified in Rule 10b5-1 under the Exchange Act) or in privately negotiated transactions. The number of shares of common stock repurchased in the future, and the timing and price of repurchases, will depend upon market conditions, liquidity needs and other factors. Purchases may 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.

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For the 13 and 39 weeks ended September 27, 2020, the Company did not repurchase any shares of its common stock.  In light of the COVID-19 pandemic, the Company does not have plans to repurchase any common stock under its 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 bases estimates on historical experience and other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Judgments and uncertainties affecting the application of those policies may result in materially different amounts being reported under different conditions or using different assumptions. Potbelly had no significant changes in our critical accounting estimates since the last annual report. The Company’s critical accounting estimates are identified and described in our annual consolidated financial statements and related notes.

Off-Balance Sheet Arrangements

As of September 27, 2020, the Company does not have any off-balance sheet arrangements, synthetic leases, investments in special purpose entities or undisclosed borrowings or debt that would be required to be disclosed pursuant to Item 303 of Regulation S-K under the Exchange Act.

New and Revised Financial Accounting Standards

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

For 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, 2020. Our exposures to market risk have not changed materially since March 29, 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 September 27, 2020. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of September 27, 2020, our disclosure controls and procedures were effective in ensuring that information required to be disclosed in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and is accumulated and communicated to our management, including our Chief Executive Officer and 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 third quarter ended September 27, 2020 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

 

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PART II. OTHER INFORMATION

Information pertaining to legal proceedings is provided in Note 10 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 Current Reports on Form 8-K on March 20, 2020 and May 8, 2020 for the purpose of supplementing the risk factors disclosed in Item 1A of its Annual Report on Form 10-K for the fiscal year ended December 29, 2019. 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table contains information regarding purchases of our common stock made by or on behalf of Potbelly Corporation during the 13 weeks ended September 27, 2020:

 

Period

 

Total Number of

Shares

Purchased

 

 

Average Price Paid

per Share (1)

 

 

Total Number of Shares

Purchased as Part of

Publicly Announced

Program (2)

 

 

Maximum Value of

Shares that May Yet

be Purchased Under

the Program (2)

 

June 29, 2020 - July 26, 2020

 

 

 

 

$

 

 

 

 

 

$

37.9

 

July 27, 2020 - August 23, 2020

 

 

 

 

 

 

 

 

 

 

$

37.9

 

August 24, 2020 - September 27, 2020

 

 

(122

)

 

$

4.17

 

 

 

 

 

$

37.9

 

Total:

 

 

(122

)

 

 

 

 

 

 

 

 

 

 

 

 

(1)

Average price paid per share excludes commissions.

(2)

On May 8, 2018, the Company announced that its Board of Directors authorized a stock repurchase program for up to $65.0 million of its outstanding common stock. The program permits the Company, from time to time, to purchase shares in the open market (including in pre-arranged stock trading plans in accordance with the guidelines specified in Rule 10b5-1 under the Exchange Act or in privately negotiated transactions). No time limit has been set for the completion of the repurchase program and the program may be suspended or discontinued at any time. Due to the COVID-19 pandemic, the Company does not have plans to repurchase any common stock under its stock repurchase program at this time. See Note 8 for further information regarding the Company’s stock repurchase program.  

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

Not applicable.

 

 

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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

 

 

 

  10.1

 

Promissory Note, effective as of August 7, 2020, between Potbelly Sandwich Works, LLC and Harvest Small Business Finance, LLC (filed as Exhibit 10.1 to Form 8-K filed on August 14, 2020 and incorporated by reference).

 

 

 

  10.2

  

Amendment No. 3, dated August 19, 2020, to Second Amended and Restated Credit Agreement, dated as of August 7, 2019, among Potbelly Sandwich Works, LLC, the other Loan Parties party thereto, the Lenders party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent, and J.P. Morgan Chase Bank, N.A., as Sole Bookrunner and Sole Lead Arranger (filed as Exhibit 10.1 to Form 8-K filed on August 21, 2020 and incorporated by reference).

 

 

 

  10.3

  

Executive Employment Agreement dated July 20, 2020, between Potbelly Corporation and Robert D. Wright (filed as Exhibit 10.1 to Form 8-K filed on July 20, 2020 and incorporated by reference).

 

 

 

  10.4

  

Executive Employment Agreement dated August 5, 2020, between Potbelly Corporation and Adam Noyes (filed as Exhibit 10.1 to Form 8-K filed on September 1, 2020 and incorporated by reference).

 

 

 

  10.5†

 

Restricted Stock Unit Inducement Award Agreement effective as of August 5, 2020, between Potbelly Corporation and Robert D. Wright.

 

 

 

  10.6†

 

Restricted Stock Unit Inducement Award Agreement effective as of August 28, 2020, between Potbelly Corporation and Adam Noyes.

 

 

 

  31.1

  

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

 

 

  31.2

  

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

 

 

 

  32.1

 

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

 

 

 

101.INS

  

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

 

30


 

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: November 5, 2020

 

By:

/s/ Steven Cirulis

 

 

 

Steven Cirulis

 

 

 

Chief Financial Officer

 

 

 

(Principal Financial Officer)

 

31