pbpb-10q_20190331.htm

 

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 March 31, 2019

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, including Zip Code, of Principal Executive Offices)

Registrant’s telephone number, including area code: (312) 951-0600

 

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 the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

Common stock, $0.01 Par Value – 23,943,564 shares as of April 28, 2019

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)

 

 

 

 


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

 

6

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

7

 

 

 

 

Item 2.

 

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

 

16

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

21

 

 

 

 

Item 4.

 

Controls and Procedures

 

21

 

 

 

 

PART II.

 

OTHER INFORMATION

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

22

 

 

 

 

Item 1A.

 

Risk Factors

 

22

 

 

 

 

Item 2.

 

Unregistered Sale of Equity Securities and Use of Proceeds

 

22

 

 

 

 

Item 3.

 

Defaults Upon Senior Securities.....................................................................................................................................

 

22

 

 

 

 

Item 4.

  

Mine Safety Disclosures..................................................................................................................................................

 

22

 

 

 

 

Item 5.

  

Other Information............................................................................................................................................................

 

22

 

 

 

 

Item 6.

 

Exhibits

 

23

 

 

 

 

 

 

Signature

 

24

 

2


PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

Potbelly Corporation and Subsidiaries

Condensed Consolidated Balance Sheets

(amounts in thousands, except share and par value data, unaudited)

 

 

 

March 31,

 

 

December 30,

 

 

 

2019

 

 

2018

 

Assets

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

13,831

 

 

$

19,775

 

Accounts receivable, net of allowances of $65 and $113 as of March 31, 2019

   and December 30, 2018, respectively

 

 

5,548

 

 

 

4,737

 

Inventories

 

 

3,293

 

 

 

3,482

 

Prepaid expenses and other current assets

 

 

9,920

 

 

 

11,426

 

Total current assets

 

 

32,592

 

 

 

39,420

 

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

 

84,172

 

 

 

87,782

 

Right-of-use assets for operating leases

 

 

222,177

 

 

 

 

Indefinite-lived intangible assets

 

 

3,404

 

 

 

3,404

 

Goodwill

 

 

2,222

 

 

 

2,222

 

Deferred income taxes

 

 

 

 

 

13,385

 

Deferred expenses, net and other assets

 

 

6,963

 

 

 

7,002

 

Total assets

 

$

351,530

 

 

$

153,215

 

 

 

 

 

 

 

 

 

 

Liabilities and Equity

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

3,203

 

 

$

3,835

 

Accrued expenses

 

 

20,062

 

 

 

25,029

 

Short-term operating lease liabilities

 

 

28,768

 

 

 

 

Accrued income taxes

 

 

162

 

 

 

162

 

Total current liabilities

 

 

52,195

 

 

 

29,026

 

 

 

 

 

 

 

 

 

 

Deferred rent and landlord allowances

 

 

 

 

 

22,905

 

Long-term operating lease liabilities

 

 

217,008

 

 

 

 

Other long-term liabilities

 

 

6,239

 

 

 

5,751

 

Total liabilities

 

 

275,442

 

 

 

57,682

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 9)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

 

 

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

   24,038,211 and 24,142,586 shares as of March 31, 2019 and December 30,

   2018, respectively

 

 

330

 

 

 

330

 

Additional paid-in-capital

 

 

433,400

 

 

 

432,771

 

Treasury stock, held at cost, 8,939,202 and 8,801,154 shares as of

   March 31, 2019, and December 30, 2018, respectively

 

 

(109,541

)

 

 

(108,372

)

Accumulated deficit

 

 

(248,528

)

 

 

(229,558

)

Total stockholders’ equity

 

 

75,661

 

 

 

95,171

 

Non-controlling interest

 

 

427

 

 

 

362

 

Total stockholders' equity

 

 

76,088

 

 

 

95,533

 

 

 

 

 

 

 

 

 

 

Total liabilities and equity

 

$

351,530

 

 

$

153,215

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

3


Potbelly Corporation and Subsidiaries

Condensed Consolidated Statements of Operations

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

 

 

 

For the 13 Weeks Ended

 

 

 

March 31,

 

 

April 1,

 

 

 

2019

 

 

2018

 

Revenues

 

 

 

 

 

 

 

 

Sandwich shop sales, net

 

$

97,258

 

 

$

102,247

 

Franchise royalties and fees

 

 

829

 

 

 

670

 

Total revenues

 

 

98,087

 

 

 

102,917

 

 

 

 

 

 

 

 

 

 

Expenses

 

 

 

 

 

 

 

 

Sandwich shop operating expenses

 

 

 

 

 

 

 

 

Cost of goods sold, excluding depreciation

 

 

25,978

 

 

 

26,636

 

Labor and related expenses

 

 

31,973

 

 

 

31,579

 

Occupancy expenses

 

 

14,377

 

 

 

14,726

 

Other operating expenses

 

 

12,145

 

 

 

12,500

 

General and administrative expenses

 

 

12,709

 

 

 

12,188

 

Depreciation expense

 

 

5,536

 

 

 

5,826

 

Pre-opening costs

 

 

10

 

 

 

68

 

Impairment and loss on disposal of property and equipment

 

 

82

 

 

 

2,024

 

Total expenses

 

 

102,810

 

 

 

105,547

 

Loss from operations

 

 

(4,723

)

 

 

(2,630

)

 

 

 

 

 

 

 

 

 

Interest expense

 

 

32

 

 

 

27

 

Loss before income taxes

 

 

(4,755

)

 

 

(2,657

)

Income tax expense (benefit)

 

 

13,619

 

 

 

(504

)

Net loss

 

 

(18,374

)

 

 

(2,153

)

Net income attributable to non-controlling interest

 

 

65

 

 

 

41

 

Net loss attributable to Potbelly Corporation

 

$

(18,439

)

 

$

(2,194

)

 

 

 

 

 

 

 

 

 

Net loss per common share attributable to common stockholders:

 

 

 

 

 

 

 

 

Basic

 

$

(0.76

)

 

$

(0.09

)

Diluted

 

$

(0.76

)

 

$

(0.09

)

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

Basic

 

 

24,133,038

 

 

 

25,144,855

 

Diluted

 

 

24,133,038

 

 

 

25,144,855

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

4


Potbelly Corporation and Subsidiaries

Condensed Consolidated Statements of Equity

(amounts in thousands, except share data, unaudited)

 

 

 

Common Stock

 

 

Treasury

 

 

Additional

Paid-In-

 

 

Accumulated

 

 

Non-

Controlling

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Stock

 

 

Capital

 

 

Deficit

 

 

Interest

 

 

Total Equity

 

Balance at December 31, 2017

 

 

24,999,688

 

 

 

318

 

 

 

(85,262

)

 

 

421,657

 

 

 

(219,990

)

 

 

515

 

 

$

117,238

 

Cumulative impact of Topic

   606 at 1/1/2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(690

)

 

 

 

 

 

(690

)

Net income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,194

)

 

 

41

 

 

 

(2,153

)

Stock-based compensation plans

 

 

300,312

 

 

 

3

 

 

 

 

 

 

2,252

 

 

 

 

 

 

 

 

 

2,255

 

Repurchases of common stock

 

 

(5,000

)

 

 

 

 

 

(63

)

 

 

 

 

 

 

 

 

 

 

 

(63

)

Treasury shares used for

    stock-based plans

 

 

(8,771

)

 

 

 

 

 

(116

)

 

 

 

 

 

 

 

 

 

 

 

(116

)

Amortization of

   stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

862

 

 

 

 

 

 

 

 

 

862

 

Balance at April 1, 2018

 

 

25,286,229

 

 

$

321

 

 

$

(85,441

)

 

$

424,771

 

 

$

(222,874

)

 

$

556

 

 

$

117,333

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 30, 2018

 

 

24,142,586

 

 

$

330

 

 

$

(108,372

)

 

$

432,771

 

 

$

(229,558

)

 

$

362

 

 

$

95,533

 

Cumulative impact of Topic

   842 at 12/31/2018, net of tax of $196

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(531

)

 

 

 

 

$

(531

)

Net income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(18,439

)

 

 

65

 

 

 

(18,374

)

Stock-based compensation plans

 

 

33,673

 

 

 

 

 

 

 

 

 

170

 

 

 

 

 

 

 

 

 

170

 

Repurchases of common stock

 

 

(135,000

)

 

 

 

 

 

(1,144

)

 

 

 

 

 

 

 

 

 

 

 

(1,144

)

Treasury shares used for

    stock-based plans

 

 

(3,048

)

 

 

 

 

 

(25

)

 

 

 

 

 

 

 

 

 

 

 

(25

)

Amortization of

   stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

459

 

 

 

 

 

 

 

 

 

459

 

Balance at March 31, 2019

 

 

24,038,211

 

 

$

330

 

 

$

(109,541

)

 

$

433,400

 

 

$

(248,528

)

 

$

427

 

 

$

76,088

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

5


Potbelly Corporation and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(amounts in thousands, unaudited)

 

 

 

For the 13 Weeks Ended

 

 

 

March 31,

 

 

April 1,

 

 

 

2019

 

 

2018

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(18,374

)

 

$

(2,153

)

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

 

 

 

 

 

 

 

 

Depreciation

 

 

5,536

 

 

 

5,826

 

Noncash lease expense

 

 

7,829

 

 

 

 

Deferred income tax

 

 

13,580

 

 

 

 

Deferred rent and landlord allowances

 

 

 

 

 

(23

)

Amortization of stock compensation expense

 

 

459

 

 

 

862

 

Excess tax deficiency from stock-based compensation

 

 

 

 

 

122

 

Asset impairment, store closure and disposal of property and equipment

 

 

87

 

 

 

2,381

 

Amortization of debt issuance costs

 

 

9

 

 

 

9

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable, net

 

 

(811

)

 

 

(41

)

Inventories

 

 

189

 

 

 

68

 

Prepaid expenses and other assets

 

 

1,455

 

 

 

207

 

Accounts payable

 

 

(130

)

 

 

(241

)

Operating lease liabilities

 

 

(7,860

)

 

 

 

Accrued and other liabilities

 

 

(4,342

)

 

 

(352

)

Net cash provided by operating activities:

 

 

(2,373

)

 

 

6,665

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

$

(2,572

)

 

$

(4,939

)

Net cash used in investing activities:

 

 

(2,572

)

 

 

(4,939

)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from exercise of stock options

 

$

170

 

 

$

2,255

 

Employee taxes on certain stock-based payment arrangements

 

 

(25

)

 

 

(512

)

Treasury stock repurchases

 

 

(1,144

)

 

 

(63

)

Net cash used in financing activities:

 

 

(999

)

 

 

1,680

 

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

 

(5,944

)

 

 

3,406

 

Cash and cash equivalents at beginning of period

 

 

19,775

 

 

 

25,530

 

Cash and cash equivalents at end of period

 

$

13,831

 

 

$

28,936

 

 

 

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

 

 

 

Income taxes paid

 

$

4

 

 

$

 

Interest paid

 

 

24

 

 

 

19

 

Supplemental non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Unpaid liability for purchases of property and equipment

 

$

161

 

 

$

1,234

 

 

See accompanying notes to the unaudited condensed consolidated financial statements

 

 

6


 

Potbelly Corporation and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements (unaudited)

 

(1) Organization and Other Matters

Business

Potbelly Corporation (the “Company” or “Potbelly”), through its wholly owned subsidiaries, owns or operates more than 400 company-owned shops in the United States. Additionally, Potbelly franchisees operate approximately 50 shops domestically and in the Middle East.

Basis of Presentation

The unaudited condensed consolidated financial statements and notes herein should be read in conjunction with the audited consolidated financial statements of Potbelly Corporation and its subsidiaries and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 30, 2018. The unaudited condensed consolidated financial statements included herein have been prepared by the Company without audit, pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”) regarding interim financial reporting. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) have been condensed or omitted pursuant to the SEC rules and regulations. In the opinion of management, all adjustments, which are of a normal and recurring nature (except as otherwise noted), that are necessary to present fairly the Company’s financial position as of March 31, 2019 and December 30, 2018, its statement of operations for the 13 weeks ended March 31, 2019 and April 1, 2018 and its statement of cash flows for the 13 weeks ended March 31, 2019 and April 1, 2018 have been included. The consolidated statements of operations for the interim periods presented herein are not necessarily indicative of the results to be expected for the full year.

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

Principles of Consolidation

The unaudited condensed consolidated financial statements include the accounts of Potbelly Corporation; its wholly owned subsidiary, Potbelly Illinois, Inc. (“PII”); PII’s wholly owned subsidiaries, Potbelly Franchising, LLC and Potbelly Sandwich Works, LLC (“LLC”); seven of LLC’s wholly owned subsidiaries and LLC’s seven joint ventures, collectively, the “Company.” All intercompany balances and transactions have been eliminated in consolidation. For consolidated joint ventures, non-controlling interest represents a non-controlling partner’s share of the assets, liabilities and operations related to the seven joint venture investments. The Company has ownership interests ranging from 51-80% in these consolidated joint ventures.

Fiscal Year

The Company uses a 52/53-week fiscal year that ends on the last Sunday of the calendar period. Approximately every five or six years a 53rd week is added. Fiscal year 2019 and 2018 both consist of 52 weeks. The fiscal quarters ended March 31, 2019 and April 1, 2018 each consisted of 13 weeks.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses and the disclosure of contingent assets and liabilities. Significant estimates include amounts for long-lived assets and income taxes. Actual results could differ from those estimates.

7


 

 

Recent Accounting Pronouncements

On December 31, 2018, we adopted ASU 2016-02, “Leases (Topic 842),” along with related clarifications and improvements. This pronouncement requires lessees to recognize a liability for lease obligations, which represents the discounted obligation to make future lease payments, and a corresponding right-of-use asset on the balance sheet. The guidance requires disclosure of key information about leasing arrangements that is intended to give financial statement users the ability to assess the amount, timing, and potential uncertainty of cash flows related to leases. We elected the optional transition method to apply the standard as of the effective date and therefore, prior period amounts have not been adjusted and continue to be reported in accordance with our historical accounting under previous lease guidance, ASC Topic 840: Leases (Topic 840). The adoption of Topic 842 had a material impact on the consolidated balance sheets and an immaterial impact on the consolidated statements of operations, consolidated statements of equity and consolidated statements of cash flows.

Our practical expedients were as follows:

 

 

Implications as of December 31, 2018

Practical expedient package

We have not reassessed whether any expired or existing contracts are, or contain, leases.

 

We have not reassessed the lease classification for any expired or existing leases.

 

We have not reassessed initial direct costs for any expired or existing leases.

Hindsight practical expedient

We have not elected the hindsight practical expedient, which permits the use of hindsight when determining lease term and impairment of operating lease assets.

8


 

The impact on the consolidated balance sheet is as follows:

 

 

 

 

 

 

Adjustments Due

 

 

 

 

 

 

December 30,

 

 

to the Adoption of

 

 

December 31,

 

 

2018

 

 

Topic 842

 

 

2018

 

Assets

 

 

 

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

19,775

 

 

$

 

 

$

19,775

 

Accounts receivable, net of allowances of $113 as of December 30, 2018

 

4,737

 

 

 

 

 

 

4,737

 

Inventories

 

3,482

 

 

 

 

 

 

3,482

 

Prepaid expenses and other current assets

 

11,426

 

 

 

 

 

 

11,426

 

Total current assets

 

39,420

 

 

 

 

 

 

39,420

 

 

 

 

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

87,782

 

 

 

 

 

 

87,782

 

Right-of-use assets for operating leases

 

 

 

 

232,477

 

 

 

232,477

 

Indefinite-lived intangible assets

 

3,404

 

 

 

 

 

 

3,404

 

Goodwill

 

2,222

 

 

 

 

 

 

2,222

 

Deferred income taxes, noncurrent

 

13,385

 

 

 

195

 

 

 

13,580

 

Deferred expenses, net and other assets

 

7,002

 

 

 

 

 

 

7,002

 

Total assets

$

153,215

 

 

$

232,672

 

 

$

385,887

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Equity

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

$

3,835

 

 

$

 

 

$

3,835

 

Accrued expenses(1)

 

25,029

 

 

 

(1,124

)

 

 

23,905

 

Short-term operating lease liabilities

 

 

 

 

28,826

 

 

 

28,826

 

Accrued income taxes

 

162

 

 

 

 

 

 

162

 

Total current liabilities

 

29,026

 

 

 

27,702

 

 

 

56,728

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred rent and landlord allowances(1)

 

22,905

 

 

 

(22,905

)

 

 

 

Long-term operating lease liabilities

 

 

 

 

228,406

 

 

 

228,406

 

Other long-term liabilities

 

5,751

 

 

 

 

 

 

5,751

 

Total liabilities

 

57,682

 

 

 

233,203

 

 

 

290,885

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

 

 

 

 

 

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

   outstanding 24,142,586 shares as of December 30, 2018

 

330

 

 

 

 

 

 

330

 

Additional paid-in-capital

 

432,771

 

 

 

 

 

 

432,771

 

Treasury stock, held at cost,  8,801,154 shares as of December 30, 2018

 

(108,372

)

 

 

 

 

 

(108,372

)

Accumulated deficit(2)

 

(229,558

)

 

 

(531

)

 

 

(230,089

)

Total stockholders’ equity

 

95,171

 

 

 

(531

)

 

 

94,640

 

Non-controlling interest

 

362

 

 

 

 

 

 

362

 

Total stockholders' equity

 

95,533

 

 

 

(531

)

 

 

95,002

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities and equity

$

153,215

 

 

$

232,672

 

 

$

385,887

 

 

(1)

Adjustment to reclassify deferred rent and tenant improvement allowance to right-of-use assets for operating leases upon the adoption of Topic 842.

(2)

The Company recorded a net reduction of $0.5 million to opening accumulated deficit as of December 31, 2018, due to the cumulative impact of adopting Topic 842.

 

9


 

(2) Revenue

Potbelly primarily earns revenue at a point in time through sales at our sandwich shop locations and records such revenue 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 weeks ended March 31, 2019, revenue recognized from all revenue sources on point in time sales was $97.8 million, and revenue recognized from sales over time was $0.3 million. For the 13 weeks ended April 1, 2018, revenue recognized from all revenue sources on point in time sales was $102.7 million, and revenue recognized from sales over time was $0.2 million.

Franchise Revenue

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

Gift Card Redemptions / Breakage Revenue

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

Contract Liabilities

As described above, the Company records current and noncurrent contract liabilities for upfront franchise fees as well as gift cards. There are no other contract liabilities or contract assets recorded by the Company. The opening and closing balances of the Company’s current and noncurrent contract liabilities from contracts with customers were as follows:

 

 

 

Current Contract

Liability

 

 

Noncurrent Contract

Liability

 

 

 

(Thousands)

 

 

(Thousands)

 

Beginning balance as of December 31, 2018

 

$

(2,184

)

 

$

(1,631

)

Ending balance as of March 31, 2019

 

 

(1,495

)

 

 

(2,076

)

Increase (Decrease) in contract liability

 

$

(689

)

 

$

445

 

 

The aggregate value of remaining performance obligations on outstanding contracts was $3.6 million as of March 31, 2019. 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

 

2019

 

$

1,124

 

2020

 

 

525

 

2021

 

 

185

 

2022

 

 

176

 

2023

 

 

169

 

Thereafter

 

 

1,392

 

Total revenue recognized

 

$

3,571

 

 

For the 13 weeks ended March 31, 2019, the amount of revenue recognized related to the December 31, 2018 liability ending balance was $0.8 million. For the 13 weeks ended April 1, 2018, the amount of revenue recognized related to the January 1, 2018 liability ending balance was $0.9 million. This revenue related to the recognition of gift card redemptions and upfront franchise fees. For the 13 weeks ended March 31, 2019 and the 13 weeks ended April 1, 2018, the Company did not 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. At transition of adoption to ASC 842, the Company impaired $0.7 million of pre-tax right-of-use assets related to previously impaired shops. This amount is recorded, net of tax, as an opening reduction to retained earnings. After performing a periodic review of the Company’s shops during the 13 weeks ended March 31, 2019, it was determined that there were no indicators of impairment for the quarter ended March 31, 2019 and accordingly, the Company recorded no impairment charge for the 13 weeks ended March 31, 2019. The Company recorded an impairment charge of $2.0 million for the 13 weeks ended April 1, 2018.

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.

 

(4) Loss Per Share

Basic and diluted income per common share attributable to common stockholders are calculated using the weighted average number of common shares outstanding for the period. Diluted income per common share attributable to common stockholders is computed by dividing the income allocated to common stockholders by the weighted average number of fully diluted common shares outstanding. In periods of a net loss, no potential common shares are included in diluted shares outstanding as the effect is anti-dilutive. For the 13 weeks ended March 31, 2019, and April 1, 2018, the Company had a loss per share, and therefore potentially diluted shares were excluded from the calculation.

The following table summarizes the loss per share calculation:

 

 

 

For the 13 Weeks Ended

 

 

 

March 31,

 

 

April 1,

 

 

 

2019

 

 

2018

 

Net loss attributable to Potbelly Corporation

 

$

(18,439

)

 

$

(2,194

)

Weighted average common shares outstanding-basic

 

 

24,133,038

 

 

 

25,144,855

 

Plus: Effect of potential stock options exercise

 

 

 

 

 

 

Weighted average common shares outstanding-diluted

 

 

24,133,038

 

 

 

25,144,855

 

Loss per share available to common stockholders-basic

 

$

(0.76

)

 

$

(0.09

)

Loss per share available to common stockholders-diluted

 

$

(0.76

)

 

$

(0.09

)

Potentially dilutive shares that are considered anti-dilutive:

 

 

 

 

 

 

 

 

Common share options

 

 

2,386,820

 

 

 

3,101,447

 

 

11


 

(5) Income Taxes

Our interim tax provision is determined using an estimated annual effective tax rate and adjusted for discrete taxable events that occur during the quarter. The difference between the effective tax rate in Q1 2019 and Q1 2018 is the recording of the valuation allowance in Q1 2019.

The Company regularly assesses the need for a valuation allowance related to its deferred tax assets, which includes consideration of both positive and negative evidence related to the likelihood of realization of such deferred tax assets to determine, based on the weight of the available evidence, whether it is more-likely-than-not that some or all of its deferred tax assets will not be realized.  In its assessment, the Company considered recent financial operating results, the change in projected future taxable income for fiscal year 2019, the reversal of existing taxable temporary differences, and tax planning strategies.  As a result of the recent changes in the projected taxable income for 2019, the Company now estimates it will be in a cumulative loss position as of December 29, 2019.  Therefore, the Company determined that the negative evidence outweighed the positive evidence and, therefore, recorded a full valuation allowance against its net deferred tax assets. The Company recorded a non-cash charge to income tax expense of $13.6 million related to the recognition of the valuation allowance and did not provide for an income tax benefit on the pre-tax loss recorded for the three months ended March 31, 2019. This accounting treatment has no effect on the Company’s ability to utilize deferred tax assets to reduce future cash tax payments. The Company will continue to assess the likelihood of the realization of its deferred tax assets at the end of each reporting period and the valuation allowance will be adjusted accordingly.

 

(6) Leases

We determine if a contract contains a lease at inception. The Company leases retail shops, warehouse and office space under operating leases. For leases with renewal periods at the Company’s option, the Company determines the expected lease period based on whether the renewal of any options are reasonably assured at the inception of the lease.

Operating lease assets and liabilities are recognized at the lease commencement date. Operating lease liabilities represent the present value of lease payments not yet paid. Operating lease assets represent our right to use an underlying asset and are based upon the operating lease liabilities adjusted for prepayments or accrued lease payments, initial direct costs, lease incentives, and impairment of operating lease assets. To determine the present value of lease payments not yet paid, we estimate incremental secured borrowing rates corresponding to the maturities of the leases. As we have no outstanding debt nor committed credit facilities, secured or otherwise, we estimate this rate based on prevailing financial market conditions, comparable company and credit analysis, and management judgment.

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

Related to the adoption of Topic 842, our policy elections were as follows:

 

Separation of lease and non-lease components

 

We elected this expedient to account for lease and non-lease components as a single component for our entire population of operating lease assets.

Short-term policy

 

We have elected the short-term lease recognition exemption for all applicable classes of underlying assets. Short-term disclosures include only those leases with a term greater than one month and 12 months or less, and expense is recognized on a straight-line basis over the lease term. Leases with an initial term of 12 months or less, that do not include an option to purchase the underlying asset that we are reasonably certain to exercise, are not recorded on the balance sheet.

 

Supplemental balance sheet information related to leases was as follows:

 

 

 

 

 

March 31,

 

Operating Leases

 

Classification

 

2019

 

Right-of-use assets

 

Right-of-use assets for operating leases

 

$

222,177

 

Short-term lease liabilities

 

Short-term operating lease liabilities

 

 

28,768

 

Long-term lease liabilities

 

Long-term operating lease liabilities

 

 

217,008

 

Total lease liabilities

 

 

 

 

245,776

 

 

12


 

Operating lease term and discount rate were as follows:

 

 

 

March 31,

 

 

 

2019

 

Weighted average remaining lease term (years)

 

8.90

 

Weighted average discount rate

 

 

8.01

%

 

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