Potbelly(PBPB) - 2022 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Financial Statements Financial statements show significant revenue growth, a $9.1 million net income for the quarter due to PPP loan forgiveness, and improved equity Condensed Consolidated Balance Sheets (Unaudited) Total assets decreased to $241.6 million, while liabilities reduced, leading to a positive total equity of $0.9 million from a prior deficit Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | Sep 25, 2022 | Dec 26, 2021 | | :--- | :--- | :--- | | Cash and cash equivalents | $9,506 | $14,353 | | Total current assets | $25,708 | $28,054 | | Total assets | $241,555 | $253,237 | | Total current liabilities | $66,602 | $69,880 | | Long-term debt, net | $10,100 | $17,517 | | Total liabilities | $240,646 | $255,654 | | Total equity (deficit) | $909 | ($2,417) | Condensed Consolidated Statements of Operations (Unaudited) Q3 2022 revenues rose 15.7% to $117.6 million, with a $9.1 million net income driven by PPP loan forgiveness Q3 2022 vs Q3 2021 Performance (in thousands, except per share data) | Metric | Q3 2022 | Q3 2021 | | :--- | :--- | :--- | | Total revenues | $117,649 | $101,694 | | Loss from operations | ($705) | ($2,603) | | Gain on extinguishment of debt | $10,191 | $0 | | Net income (loss) | $9,136 | ($2,860) | | Diluted EPS | $0.31 | ($0.10) | YTD 2022 vs YTD 2021 Performance (in thousands, except per share data) | Metric | YTD Sep 25, 2022 | YTD Sep 26, 2021 | | :--- | :--- | :--- | | Total revenues | $331,823 | $277,248 | | Loss from operations | ($7,049) | ($20,239) | | Gain on extinguishment of debt | $10,191 | $0 | | Net income (loss) | $1,957 | ($21,182) | | Diluted EPS | $0.06 | ($0.78) | Condensed Consolidated Statements of Equity (Unaudited) Total equity improved from a $2.4 million deficit to a positive $0.9 million, primarily due to year-to-date net income - Total equity shifted from a deficit of ($2,417) thousand at the end of 2021 to a positive equity of $909 thousand at the end of Q3 2022[13] - The improvement was driven by a net income of $9,029 thousand in Q3 2022, offsetting earlier losses and reducing the accumulated deficit[13] Condensed Consolidated Statements of Cash Flows (Unaudited) Operating activities provided $1.0 million cash year-to-date, a significant improvement, despite an overall $4.8 million decrease in cash Year-to-Date Cash Flow Summary (in thousands) | Cash Flow Activity | YTD Sep 25, 2022 | YTD Sep 26, 2021 | | :--- | :--- | :--- | | Net cash from Operating | $1,018 | ($7,138) | | Net cash from Investing | ($4,914) | ($7,543) | | Net cash from Financing | ($951) | $13,391 | | Net decrease in cash | ($4,847) | ($1,290) | | Cash at end of period | $9,506 | $9,836 | - A non-cash gain on the extinguishment of a $10.2 million PPP loan significantly adjusted net income to operating cash flow[15] Notes to Condensed Consolidated Financial Statements (Unaudited) Notes detail operations, revenue recognition, debt, and contingencies, including PPP loan forgiveness and impairment charges - As of the report date, the company operates 388 shops, with franchisees operating an additional 46 shops in the United States[16] - On July 12, 2022, the SBA approved forgiveness of the $10.0 million PPP loan principal and $0.2 million accrued interest, resulting in a $10.2 million gain[65] - The company recorded impairment charges of $1.0 million for the quarter and $3.0 million year-to-date due to underperforming shops[42] - The revolving credit facility's maturity was extended to December 31, 2023, with $10.1 million outstanding as of September 25, 2022[61][62] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses 15.7% quarterly revenue growth, improved shop-level profit margin, and the 'Franchise Growth Acceleration Initiative' Business and Strategy The company's strategy centers on a 5-pillar plan and a 'Franchise Growth Acceleration Initiative' to refranchise 25% of units - The company's strategy centers on the "Traffic-Driven Profitability" 5-pillar plan for growth and customer engagement[85] - A major strategic push is the Franchise Growth Acceleration Initiative, aiming to refranchise approximately 25% of company units over three years[86] Shop Count Rollforward | Period | Company Operated | Franchise Operated | Total | | :--- | :--- | :--- | :--- | | Shops as of Dec 26, 2021 | 397 | 46 | 443 | | Shops opened YTD | 0 | 1 | 1 | | Shops closed YTD | (9) | (1) | (10) | | Shops as of Sep 27, 2022 | 388 | 46 | 434 | Results of Operations Q3 2022 revenues increased 15.7% to $117.6 million, driven by comparable store sales and price increases, with PPP loan forgiveness aiding profitability Q3 2022 vs Q3 2021 Results (in thousands) | Metric | Q3 2022 | Q3 2021 | % Change | | :--- | :--- | :--- | :--- | | Total Revenues | $117,649 | $101,694 | 15.7% | | Sandwich shop sales, net | $116,449 | $100,996 | 15.3% | | Loss from operations | ($705) | ($2,603) | 72.9% | | Net income (loss) | $9,029 | ($2,948) | NM | - Quarterly revenue growth was driven by recovery in central business districts, improved catering, marketing, and price increases[98] YTD 2022 vs YTD 2021 Results (in thousands) | Metric | YTD 2022 | YTD 2021 | % Change | | :--- | :--- | :--- | :--- | | Total Revenues | $331,823 | $277,248 | 19.7% | | Sandwich shop sales, net | $328,873 | $275,274 | 19.5% | | Loss from operations | ($7,049) | ($20,239) | 65.2% | | Net income (loss) | $1,690 | ($21,301) | NM | Non-GAAP Financial Measures Non-GAAP metrics show improved Q3 2022 shop-level profit margin at 10.6% and Adjusted EBITDA at $4.7 million Non-GAAP Performance Metrics | Metric | Q3 2022 | Q3 2021 | YTD 2022 | YTD 2021 | | :--- | :--- | :--- | :--- | :--- | | Shop-level profit margin | 10.6% | 8.7% | 9.2% | 6.5% | | Adjusted EBITDA (in thousands) | $4,677 | $2,677 | $8,199 | ($2,036) | Liquidity and Capital Resources The company maintains $23.7 million in total liquidity, with operating activities providing $1.0 million cash year-to-date, bolstered by PPP loan forgiveness - At the end of Q3 2022, the company had a cash balance of $9.5 million and total liquidity of $23.7 million[135] - The company's $10.0 million PPP loan, with accrued interest, was fully forgiven in July 2022, resulting in a $10.2 million gain[147] - The company has an 'at the market' equity offering program for up to $40.0 million, with no shares sold as of September 25, 2022[150] Quantitative and Qualitative Disclosures About Market Risk The company reports no material changes to its market risk exposures since December 26, 2021 - There have been no material changes in the company's market risk exposures since December 26, 2021[153] Controls and Procedures Management concluded that disclosure controls and procedures were effective as of September 25, 2022, with no material changes to internal controls - The CEO and CFO concluded that disclosure controls and procedures were effective as of September 25, 2022[154] - No changes occurred during the quarter that materially affected internal control over financial reporting[155] PART II. OTHER INFORMATION Legal Proceedings The company is involved in various legal proceedings, but management expects no material adverse financial impact - Information regarding legal proceedings is provided in Note 11 to the Condensed Consolidated Financial Statements[156] - Management does not expect current legal proceedings to materially impact the company's financials[81] Risk Factors No material changes to risk factors have occurred since the fiscal year ended December 26, 2021 - No material changes to the company's Risk Factors have occurred since the Annual Report on Form 10-K for the fiscal year ended December 26, 2021[157] Unregistered Sale of Equity Securities and Use of Proceeds The company did not repurchase shares under its program year-to-date, acquiring 128,000 shares solely for tax withholding obligations - The company did not repurchase any shares under its stock repurchase program during the quarter[69][148] - A total of 128,000 shares were acquired year-to-date, solely for employee tax withholding on vested equity awards[158][161] - Approximately $38.0 million remains available for future purchases under the authorized stock repurchase program[158] Defaults Upon Senior Securities Not applicable - Not applicable[159] Mine Safety Disclosures Not applicable - Not applicable[160] Other Information Not applicable - Not applicable[161] Exhibits The report includes key exhibits such as the credit agreement amendment and Sarbanes-Oxley Act certifications - Exhibit 10.1 is Amendment No. 8 to the Second Amended and Restated Credit Agreement, dated September 23, 2022[163] - Exhibits 31.1, 31.2, and 32.1 contain required CEO and CFO certifications under the Sarbanes-Oxley Act[163]