
Report Overview This section provides an overview of the quarterly report, including filing details and key company information Filing Information This document is a Quarterly Report on Form 10-Q for Potbelly Corporation, filed for the quarterly period ended March 26, 2023, with 29,150,046 shares outstanding - Potbelly Corporation filed a Form 10-Q for the quarter ended March 26, 20231 - The registrant is an accelerated filer3 Common Stock Outstanding | Date | Shares Outstanding | Par Value per Share | | :--- | :--- | :--- | | April 23, 2023 | 29,150,046 | $0.01 | Table of Contents This section provides an overview of the report's structure, detailing the financial information and other disclosures included in the Form 10-Q, with corresponding page numbers for each item PART I. FINANCIAL INFORMATION Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements for Potbelly Corporation, including balance sheets, statements of operations, equity, and cash flows, along with detailed notes Condensed Consolidated Balance Sheets (Unaudited) The balance sheet shows an increase in total assets and liabilities from December 25, 2022, to March 26, 2023, primarily driven by an increase in cash and cash equivalents and long-term debt Condensed Consolidated Balance Sheets (Amounts in thousands) | Item | March 26, 2023 | December 25, 2022 | Change | | :--- | :--- | :--- | :--- | | Cash and cash equivalents | $25,596 | $15,619 | +$9,977 | | Total current assets | $41,966 | $30,530 | +$11,436 | | Total assets | $250,889 | $245,171 | +$5,718 | | Total current liabilities | $65,806 | $68,939 | -$3,133 | | Long-term debt, net of current portion | $21,297 | $8,550 | +$12,747 | | Total liabilities | $246,533 | $240,898 | +$5,635 | | Total stockholders' equity | $4,589 | $4,477 | +$112 | | Total equity | $4,356 | $4,273 | +$83 | Condensed Consolidated Statements of Operations (Unaudited) Potbelly Corporation significantly reduced its net loss for the quarter ended March 26, 2023, compared to the prior year, driven by a substantial increase in total revenues and improved operating leverage Condensed Consolidated Statements of Operations (Amounts in thousands, except per share data) | Item | Q1 2023 (March 26) | Q1 2022 (March 27) | Change (YoY) | Percent Change (YoY) | | :--- | :--- | :--- | :--- | :--- | | Sandwich shop sales, net | $116,947 | $97,431 | +$19,516 | +20.0% | | Franchise royalties, fees and rent income | $1,323 | $790 | +$533 | +67.5% | | Total revenues | $118,270 | $98,221 | +$20,049 | +20.4% | | Loss from operations | $(193) | $(7,383) | +$7,190 | NM | | Net loss attributable to Potbelly Corporation | $(1,327) | $(7,913) | +$6,586 | NM | | Basic Net loss per common share | $(0.05) | $(0.28) | +$0.23 | NM | | Diluted Net loss per common share | $(0.05) | $(0.28) | +$0.23 | NM | - Total revenues increased by 20.4% year-over-year, primarily due to sustained recovery in central business districts and airport locations, improved catering, successful marketing, and increased menu prices93 - Loss from operations significantly improved from $(7,383) thousand in Q1 2022 to $(193) thousand in Q1 202310 Condensed Consolidated Statements of Equity (Unaudited) The statements of equity show a slight increase in total equity from December 25, 2022, to March 26, 2023, despite a net loss, primarily due to stock-based compensation expense and proceeds from warrant exercises Condensed Consolidated Statements of Equity (Amounts in thousands) | Item | Balance at December 25, 2022 | Balance at March 26, 2023 | Change | | :--- | :--- | :--- | :--- | | Common Stock (Amount) | $384 | $386 | +$2 | | Warrants | $2,566 | $2,253 | -$313 | | Additional Paid-In Capital | $455,831 | $457,918 | +$2,087 | | Treasury Stock | $(115,388) | $(115,725) | -$337 | | Accumulated Deficit | $(338,916) | $(340,243) | -$1,327 | | Total Equity | $4,273 | $4,356 | +$83 | - Proceeds from the exercise of warrants contributed $865 thousand to equity during the quarter12 - Stock-based compensation expense added $911 thousand to additional paid-in capital12 Condensed Consolidated Statements of Cash Flows (Unaudited) The company experienced a net increase in cash and cash equivalents, primarily driven by significant cash provided by financing activities, including new term loan borrowings, which offset cash used in operating and investing activities Condensed Consolidated Statements of Cash Flows (Amounts in thousands) | Cash Flow Activity | Q1 2023 (March 26) | Q1 2022 (March 27) | Change (YoY) | | :--- | :--- | :--- | :--- | | Net cash used in operating activities | $(657) | $(7,739) | +$7,082 | | Net cash used in investing activities | $(3,216) | $(1,378) | -$1,838 | | Net cash provided by financing activities | $14,599 | $4,257 | +$10,342 | | Net increase (decrease) in cash and cash equivalents and restricted cash | $10,726 | $(4,860) | +$15,586 | | Cash and cash equivalents and restricted cash at end of period | $26,345 | $9,493 | +$16,852 | - Operating cash flow improved significantly, with net cash used decreasing from $7.7 million in Q1 2022 to $0.7 million in Q1 2023116 - Financing activities provided $14.6 million in cash, primarily from $25 million in new Term Loan borrowings, partially offset by repayments and debt issuance costs15118 Notes to Condensed Consolidated Financial Statements (Unaudited) These notes provide detailed explanations and disclosures for the condensed consolidated financial statements, covering the company's organization, accounting policies, revenue recognition, fair value measurements, debt, leases, equity, stock-based compensation, and commitments and contingencies (1) Organization and Other Matters Potbelly Corporation operates 373 company-owned and 53 franchised shops as of March 26, 2023, with a Franchise Growth Acceleration Initiative aiming to grow franchise units and refranchise company-operated shops - As of March 26, 2023, Potbelly operates 373 company-owned shops and 53 franchised shops domestically16 - The Franchise Growth Acceleration Initiative, announced March 2, 2022, includes plans to grow franchise units and refranchise company-operated shops22 - The first refranchising transaction under this initiative was executed in the first quarter of 202323 Reconciliation of Cash, Cash Equivalents and Restricted Cash (Amounts in thousands) | Item | March 26, 2023 | December 26, 2022 | | :--- | :--- | :--- | | Cash and cash equivalents | $25,596 | $15,619 | | Restricted cash, noncurrent | $749 | $— | | Total cash, cash equivalents and restricted cash | $26,345 | $15,619 | (2) Revenue Potbelly primarily earns revenue from sandwich shop sales, which increased to $117.9 million in Q1 2023, and also recognizes franchise revenue, gift card breakage, and loyalty program income Revenue Recognized by Source (Amounts in millions) | Revenue Source | Q1 2023 (March 26) | Q1 2022 (March 27) | | :--- | :--- | :--- | | Point in time sales | $117.9 | $97.9 | | Sales over time | $0.4 | $0.3 | - Gift card breakage income was $0.2 million for both Q1 2023 and Q1 2022, recognized within net sandwich shop sales35 Contract Liabilities (Amounts in thousands) | Item | Beginning Balance (Dec 25, 2022) | Ending Balance (Mar 26, 2023) | Increase (Decrease) | | :--- | :--- | :--- | :--- | | Current Contract Liability | $7,008 | $6,553 | $(455) | | Noncurrent Contract Liability | $1,677 | $2,229 | $552 | Expected Revenue Recognition from Contract Liabilities (Amounts in thousands) | Years Ending | Amount | | :--- | :--- | | 2023 | $5,786 | | 2024 | $479 | | 2025 | $378 | | 2026 | $202 | | 2027 | $142 | | Thereafter | $1,795 | | Total revenue recognized | $8,782 | (3) Fair Value Measurement The company's current assets and liabilities, as well as debt, approximate fair value, with an impairment charge of $0.7 million recorded in Q1 2023 for underperforming shops - An impairment charge of $0.7 million was recognized for certain underperforming shops during the quarter ended March 26, 202341 (4) Earnings (Loss) Per Share Basic and diluted net loss per common share were both $(0.05) for Q1 2023, a significant improvement from $(0.28) in the prior year, with potentially dilutive shares excluded due to the net loss Loss Per Share Calculation (Amounts in thousands, except per share data) | Item | Q1 2023 (March 26) | Q1 2022 (March 27) | | :--- | :--- | :--- | | Net loss attributable to Potbelly Corporation | $(1,327) | $(7,913) | | Weighted average common stock outstanding-basic | 28,907 | 28,396 | | Weighted average common shares outstanding-diluted | 28,907 | 28,396 | | Loss per share available to common stockholders-basic | $(0.05) | $(0.28) | | Loss per share available to common stockholders-diluted | $(0.05) | $(0.28) | | Potentially dilutive shares (anti-dilutive) | 2,831 | 1,735 | (5) Income Taxes The company maintains a full valuation allowance against all its deferred tax assets and did not provide for an income tax benefit on its pre-tax loss for the quarter - Potbelly Corporation maintains a full valuation allowance against all its deferred tax assets44 - Income tax expense was $105 thousand for Q1 2023, down from $177 thousand in Q1 2022107 (6) Leases Potbelly leases retail shops and office space under operating leases, with a weighted average remaining lease term of 6.54 years and a total lease cost of $13.4 million for Q1 2023 Operating Lease Terms and Discount Rate | Item | March 26, 2023 | March 27, 2022 | | :--- | :--- | :--- | | Weighted average remaining lease term (years) | 6.54 | 7.06 | | Weighted average discount rate | 8.37% | 8.06% | Components of Lease Cost (Amounts in thousands) | Item | Q1 2023 (March 26) | Q1 2022 (March 27) | | :--- | :--- | :--- | | Operating lease cost | $9,842 | $10,305 | | Variable lease cost | $3,541 | $3,462 | | Total lease cost | $13,383 | $13,767 | Maturities of Lease Liabilities (Amounts in thousands) | Period | Operating Leases | | :--- | :--- | | Remainder of 2023 | $31,133 | | 2024 | $40,930 | | 2025 | $38,145 | | 2026 | $34,247 | | 2027 | $28,662 | | 2028 | $22,128 | | Thereafter | $46,447 | | Total lease payments | $241,692 | | Less: imputed interest | $(57,985) | | Present value of lease liabilities | $183,707 | - Franchise rent income was $0.1 million for Q1 2023, with 8 subleases in effect51 (7) Debt and Credit Facilities On February 7, 2023, Potbelly entered into a new $25 million Term Loan Credit Facility, maturing in February 2028, replacing its former facility and incurring a $0.2 million loss on extinguishment of debt Components of Long-Term Debt (Amounts in thousands) | Item | March 26, 2023 | December 25, 2022 | | :--- | :--- | :--- | | Revolving credit facility | $— | $8,550 | | Term loan credit facility | $24,688 | $— | | Unamortized debt issuance costs | $(2,141) | $— | | Less: current portion of long-term debt | $(1,250) | $— | | Total long-term debt | $21,297 | $8,550 | - A new $25 million Term Loan Credit Facility was entered into on February 7, 2023, replacing the former credit facility53 - The company recognized a loss on extinguishment of debt of $0.2 million upon termination of the Former Credit Facility53 - As of March 26, 2023, the effective interest rate on the Term Loan was 15.07%, and $24.7 million was outstanding5561 (8) Franchise Growth Acceleration Initiative The Franchise Growth Acceleration Initiative aims to expand franchise units and refranchise company-operated shops, with 8 shops refranchised in Q1 2023 resulting in a $0.9 million loss on activities - The initiative includes refranchising approximately 25% of company-operated shops over the next three years and executing area development agreements62 - In Q1 2023, 8 shops were refranchised in New York City, with a development commitment for 13 new shops64 Franchise Growth Acceleration Initiative Activities (Amounts in thousands) | Item | Q1 2023 (March 26) | Q1 2022 (March 27) | | :--- | :--- | :--- | | Number of shops sold to franchisees | 8 | — | | Loss on sale of company-operated shops, net | $(433) | — | | Adjustment to recognize held-for-sale assets at fair value | $(503) | — | | Loss on Franchise Growth Acceleration Initiative activities | $(949) | $— | (9) Capital Stock Potbelly did not repurchase common stock under its $65.0 million stock repurchase program in Q1 2023, but 158,767 warrants were exercised, reducing outstanding warrants to 1,141,094 - No shares were repurchased under the $65.0 million stock repurchase program in Q1 2023, and there are no current plans for repurchases6667 - 158,767 warrants were exercised at $5.45 per warrant during Q1 2023, leaving 1,141,094 warrants outstanding68 - The company has an 'at the market' equity offering program for up to $40.0 million, but no shares have been sold under it as of March 26, 202369 (10) Stock-Based Compensation Potbelly grants stock options, RSUs, and PSUs, with RSU expense at $0.6 million for Q1 2023 and $4.4 million in unrecognized RSU expense remaining Stock Option Activity (Amounts in thousands) | Item | Shares (Thousands) | Weighted Average Exercise Price | | :--- | :--- | :--- | | Outstanding—December 25, 2022 | 473 | $12.22 | | Canceled | (49) | $9.52 | | Outstanding—March 26, 2023 | 424 | $12.53 | | Exercisable—March 26, 2023 | 424 | $12.53 | - No stock-based compensation expense was recognized for stock options in Q1 202371 Restricted Stock Unit (RSU) Activity (Amounts in thousands) | Item | Number of RSUs (Thousands) | Weighted Average Fair Value per Share | | :--- | :--- | :--- | | Non-vested as of December 25, 2022 | 908 | $4.25 | | Granted | 185 | $5.49 | | Vested | (111) | $8.18 | | Canceled | (43) | $6.31 | | Non-vested as of March 26, 2023 | 939 | $4.38 | - RSU compensation expense was $0.6 million for both Q1 2023 and Q1 2022, with $4.4 million unrecognized as of March 26, 202373 - PSU compensation expense with market vesting conditions was $0.3 million for Q1 202375 (11) Commitments and Contingencies The company is subject to various legal proceedings and manages commodity price risk for food products through forward and formula pricing protocols - Management believes the ultimate liability from legal proceedings will not materially impact financial position or results77 - The company manages commodity price risk through forward and formula pricing protocols, typically for periods of 12 months or less78 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on Potbelly Corporation's financial condition and results of operations for the quarter ended March 26, 2023, highlighting key business strategies, performance indicators, and a detailed comparison of financial results against the prior year Forward-Looking Statements This section contains cautionary statements regarding forward-looking information, emphasizing that actual results may differ materially due to various risks and uncertainties, including the impact of COVID-19, economic conditions, competition, and operational costs - Forward-looking statements are subject to risks including COVID-19 impact, economic conditions, competition, and changes in commodity, energy, and labor costs79 Business Potbelly Corporation operates as a neighborhood sandwich concept with 373 company-owned and 53 franchised shops, guided by its 'Traffic-Driven Profitability' Five-Pillar strategic plan for profitable growth and franchise development - Potbelly operates 373 company-owned and 53 franchised shops as of March 26, 202383 - The 'Traffic-Driven Profitability' Five-Pillar strategic plan aims for profitable growth through: Craveable Quality Food, People Creating Good Vibes, Customer Experiences, Digitally Driven Awareness, and Franchise Focused Development81 - The Franchise Growth Acceleration Initiative targets refranchising ~25% of company-operated shops over three years and developing new franchise units82 Shop Rollforward | Item | Company Operated (Dec 25, 2022) | Franchise Operated (Dec 25, 2022) | Total (Dec 25, 2022) | Company Operated (Mar 26, 2023) | Franchise Operated (Mar 26, 2023) | Total (Mar 26, 2023) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Shops as of period start | 384 | 45 | 429 | 384 | 45 | 429 | | Shops opened | — | — | — | — | — | — | | Shops closed | (3) | — | (3) | (3) | — | (3) | | Shops refranchised | — | — | — | (8) | 8 | — | | Shops as of period end | 384 | 45 | 429 | 373 | 53 | 426 | Impact of COVID-19 and Other Impacts on Our Business The impact of the COVID-19 pandemic on Potbelly's financial results and operations significantly decreased throughout 2022, despite an increase in cases during Q1 2022 - The impact of COVID-19 on financial results and operations significantly decreased throughout 202284 Key Performance Indicators Potbelly assesses performance using key indicators: comparable store sales, number of company-operated shop openings, shop-level profit margins, and Adjusted EBITDA - Key performance indicators include comparable store sales, number of company-operated shop openings, shop-level profit margins, and Adjusted EBITDA85 - Comparable store sales include shops open for 15 months or longer, with 376 shops in Q1 202386 - Shop-level profit (loss) margin is a non-GAAP measure evaluating shop-level productivity and efficiency89 - Adjusted EBITDA is a non-GAAP measure providing a picture of operating results by eliminating expenses not reflective of underlying business performance90 Quarter Ended March 26, 2023 Compared to Quarter Ended March 27, 2022 Potbelly Corporation demonstrated significant financial improvement in Q1 2023 compared to Q1 2022, with total revenues increasing by 20.4% to $118.3 million, driven by strong comparable store sales growth of 22.2% Key Financial Performance Indicators (Amounts in thousands, except percentages) | Item | Q1 2023 (March 26) | Q1 2022 (March 27) | Percent Change | | :--- | :--- | :--- | :--- | | Total revenues | $118,270 | $98,221 | +20.4% | | Loss from operations | $(193) | $(7,383) | NM | | Net loss attributable to Potbelly Corporation | $(1,327) | $(7,913) | NM | | Comparable store sales | 22.2% | 24.4% | -2.2% pts | | Shop-level profit margin | 12.0% | 5.0% | +6.9% pts | | Adjusted EBITDA | $5,560 | $(2,279) | NM | - Total revenues increased by $20.0 million (20.4%) to $118.3 million, primarily due to sustained recovery in central business districts and airports, improved catering, and increased prices93 - Company-operated comparable store sales increased by 22.2%, contributing $21.3 million to revenue93 - Food, beverage, and packaging costs increased by 19.5% but decreased as a percentage of sandwich shop sales (27.9% from 28.0%) due to increased menu prices94 - Labor and related expenses increased by 9.8% but decreased as a percentage of sandwich shop sales (31.2% from 34.1%) due to sales leverage95 - Occupancy expenses decreased by 3.9% and as a percentage of sandwich shop sales (11.4% from 14.2%) due to lease concessions and sales leverage96 - Interest expense, net, more than doubled to $667 thousand due to higher interest rates and increased average borrowings from the Term Loan106 - Loss on Franchise Growth Acceleration Initiative activities was $0.9 million in Q1 2023, with no comparable expense in Q1 2022102 Non-GAAP Financial Measures This section provides reconciliations for non-GAAP financial measures, including Shop-Level Profit (Loss) Margin and Adjusted EBITDA, both showing significant improvement in Q1 2023 Shop-Level Profit (Loss) Margin Reconciliation (Amounts in thousands) | Item | Q1 2023 (March 26) | Q1 2022 (March 27) | | :--- | :--- | :--- | | Shop-level profit (loss) | $14,031 | $4,920 | | Sandwich shop sales, net | $116,947 | $97,431 | | Shop-level profit (loss) margin | 12.0% | 5.0% | Adjusted EBITDA Reconciliation (Amounts in thousands) | Item | Q1 2023 (March 26) | Q1 2022 (March 27) | | :--- | :--- | :--- | | Net loss attributable to Potbelly Corporation | $(1,327) | $(7,913) | | Depreciation expense | 2,971 | 3,136 | | Interest expense | 667 | 327 | | Income tax expense | 105 | 177 | | EBITDA | $2,416 | $(4,273) | | Impairment, loss on disposal of property and equipment, and shop closures | 1,045 | 1,319 | | Stock-based compensation | 911 | 675 | | Loss on extinguishment of debt | 239 | — | | Loss on Franchise Growth Acceleration Initiative activities | 949 | — | | Adjusted EBITDA | $5,560 | $(2,279) | Liquidity and Capital Resources Potbelly's liquidity is primarily supported by cash from operations, existing cash, and its new $25 million Term Loan, with total liquidity at $24.8 million as of March 26, 2023 - Primary liquidity sources are cash from operations, existing cash, and the Term Loan113 Liquidity Overview (Amounts in millions) | Item | March 26, 2023 | December 25, 2022 | | :--- | :--- | :--- | | Cash balance | $25.6 | $15.6 | | Total liquidity | $24.8 | $31.4 | - Net cash used in operating activities decreased to $0.7 million in Q1 2023 from $7.7 million in Q1 2022116 - Net cash provided by financing activities increased to $14.6 million in Q1 2023 from $4.3 million in Q1 2022, primarily due to the Term Loan118 - Net cash used in investing activities increased to $3.2 million due to higher capital expenditures117 - The Term Loan, entered on February 7, 2023, provides $25 million, matures in February 2028, and has an effective interest rate of 15.07% as of March 26, 2023119121122 - The company is in compliance with all financial debt covenants126 - No shares were repurchased under the stock repurchase program in Q1 2023, and no shares have been sold under the equity offering program127128 Critical Accounting Estimates This section reiterates that the preparation of financial statements requires management to make estimates and assumptions, particularly for long-lived assets and income taxes, with no significant changes since the last annual report - Significant estimates include amounts for long-lived assets and income taxes21 - No significant changes in critical accounting estimates since the last annual report129 New and Revised Financial Accounting Standards The company reviewed recently issued accounting pronouncements and concluded that they were either not applicable or not expected to have a significant impact on the condensed consolidated financial statements - Recently issued accounting pronouncements are not expected to have a significant impact on the financial statements29130 Item 3. Quantitative and Qualitative Disclosures About Market Risk This section refers to the Annual Report on Form 10-K for detailed disclosures on market risk, stating that there have been no material changes to the company's market risk exposures since December 25, 2022 - No material changes to market risk exposures since December 25, 2022131 Item 4. Controls and Procedures Management concluded that Potbelly's disclosure controls and procedures were effective as of March 26, 2023, with no material changes in internal control over financial reporting during the quarter - Disclosure controls and procedures were effective as of March 26, 2023132 - No material changes in internal control over financial reporting occurred during the quarter133 PART II. OTHER INFORMATION Item 1. Legal Proceedings Information regarding legal proceedings is incorporated by reference from Note 11 to the Condensed Consolidated Financial Statements - Legal proceedings information is provided in Note 11 of the financial statements135 Item 1A. Risk Factors This section refers to the Annual Report on Form 10-K for a description of business risk factors, noting that no material changes have occurred since December 25, 2022 - No material changes to risk factors since December 25, 2022136 Item 2. Unregistered Sale of Equity Securities and Use of Proceeds During Q1 2023, Potbelly Corporation purchased 41 thousand shares of common stock from employees to satisfy withholding obligations related to equity awards, with no shares repurchased under the publicly announced stock repurchase program Issuer Purchases of Equity Securities (Amounts in thousands, except per share data) | Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Program | Maximum Value of Shares that May Yet be Purchased Under the Program | | :--- | :--- | :--- | :--- | :--- | | Dec 26, 2022 - Jan 22, 2023 | 3 | $7.47 | — | $37,982 | | Jan 23, 2023 - Feb 19, 2023 | 1 | $7.99 | — | $37,982 | | Feb 20, 2023 - Mar 26, 2023 | 37 | $8.19 | — | $37,982 | | Total | 41 | | — | | - 41 thousand shares were purchased from employees to satisfy withholding obligations, not under the stock repurchase program137140 - The stock repurchase program, authorized for up to $65.0 million, still has $37.982 million available137140 Item 3. Defaults Upon Senior Securities This item is not applicable to the current report Item 4. Mine Safety Disclosures This item is not applicable to the current report Item 5. Other Information This item is not applicable to the current report Item 6. Exhibits This section lists the exhibits filed with the Quarterly Report on Form 10-Q, including certifications from the Principal Executive Officer and Principal Financial Officer, and Inline XBRL documents - Exhibits include certifications (31.1, 31.2, 32.1) and Inline XBRL documents (101.INS, 101.SCH, 101.CAL, 101.DEF, 101.LAB, 101.PRE, 104)142 Signature The report is signed by Steven Cirulis, Chief Financial Officer of Potbelly Corporation, on May 4, 2023, certifying its submission pursuant to the Securities Exchange Act of 1934 - The report was signed by Steven Cirulis, Chief Financial Officer, on May 4, 2023145