pbpb-20220626
0001195734202212/25Q2FALSE611111P4Y0.330.250.2000011957342021-12-272022-06-2600011957342022-07-24xbrli:shares00011957342022-06-26iso4217:USD00011957342021-12-26iso4217:USDxbrli:shares0001195734us-gaap:ProductMember2022-03-282022-06-260001195734us-gaap:ProductMember2021-03-292021-06-270001195734us-gaap:ProductMember2021-12-272022-06-260001195734us-gaap:ProductMember2020-12-282021-06-270001195734pbpb:FranchiseRoyaltiesAndFeesMember2022-03-282022-06-260001195734pbpb:FranchiseRoyaltiesAndFeesMember2021-03-292021-06-270001195734pbpb:FranchiseRoyaltiesAndFeesMember2021-12-272022-06-260001195734pbpb:FranchiseRoyaltiesAndFeesMember2020-12-282021-06-2700011957342022-03-282022-06-2600011957342021-03-292021-06-2700011957342020-12-282021-06-270001195734us-gaap:CommonStockMember2020-12-270001195734us-gaap:TreasuryStockMember2020-12-270001195734us-gaap:WarrantMember2020-12-270001195734us-gaap:AdditionalPaidInCapitalMember2020-12-270001195734us-gaap:RetainedEarningsMember2020-12-270001195734us-gaap:NoncontrollingInterestMember2020-12-2700011957342020-12-270001195734us-gaap:RetainedEarningsMember2020-12-282021-03-280001195734us-gaap:NoncontrollingInterestMember2020-12-282021-03-2800011957342020-12-282021-03-280001195734us-gaap:CommonStockMember2020-12-282021-03-280001195734us-gaap:AdditionalPaidInCapitalMember2020-12-282021-03-280001195734us-gaap:WarrantMember2020-12-282021-03-280001195734us-gaap:CommonStockMember2021-03-280001195734us-gaap:TreasuryStockMember2021-03-280001195734us-gaap:WarrantMember2021-03-280001195734us-gaap:AdditionalPaidInCapitalMember2021-03-280001195734us-gaap:RetainedEarningsMember2021-03-280001195734us-gaap:NoncontrollingInterestMember2021-03-2800011957342021-03-280001195734us-gaap:RetainedEarningsMember2021-03-292021-06-270001195734us-gaap:NoncontrollingInterestMember2021-03-292021-06-270001195734us-gaap:CommonStockMember2021-03-292021-06-270001195734us-gaap:TreasuryStockMember2021-03-292021-06-270001195734us-gaap:AdditionalPaidInCapitalMember2021-03-292021-06-270001195734us-gaap:CommonStockMember2021-06-270001195734us-gaap:TreasuryStockMember2021-06-270001195734us-gaap:WarrantMember2021-06-270001195734us-gaap:AdditionalPaidInCapitalMember2021-06-270001195734us-gaap:RetainedEarningsMember2021-06-270001195734us-gaap:NoncontrollingInterestMember2021-06-2700011957342021-06-270001195734us-gaap:CommonStockMember2021-12-260001195734us-gaap:TreasuryStockMember2021-12-260001195734us-gaap:WarrantMember2021-12-260001195734us-gaap:AdditionalPaidInCapitalMember2021-12-260001195734us-gaap:RetainedEarningsMember2021-12-260001195734us-gaap:NoncontrollingInterestMember2021-12-260001195734us-gaap:RetainedEarningsMember2021-12-272022-03-270001195734us-gaap:NoncontrollingInterestMember2021-12-272022-03-2700011957342021-12-272022-03-270001195734us-gaap:CommonStockMember2021-12-272022-03-270001195734us-gaap:TreasuryStockMember2021-12-272022-03-270001195734us-gaap:AdditionalPaidInCapitalMember2021-12-272022-03-270001195734us-gaap:CommonStockMember2022-03-270001195734us-gaap:TreasuryStockMember2022-03-270001195734us-gaap:WarrantMember2022-03-270001195734us-gaap:AdditionalPaidInCapitalMember2022-03-270001195734us-gaap:RetainedEarningsMember2022-03-270001195734us-gaap:NoncontrollingInterestMember2022-03-2700011957342022-03-270001195734us-gaap:RetainedEarningsMember2022-03-282022-06-260001195734us-gaap:NoncontrollingInterestMember2022-03-282022-06-260001195734us-gaap:CommonStockMember2022-03-282022-06-260001195734us-gaap:TreasuryStockMember2022-03-282022-06-260001195734us-gaap:AdditionalPaidInCapitalMember2022-03-282022-06-260001195734us-gaap:CommonStockMember2022-06-260001195734us-gaap:TreasuryStockMember2022-06-260001195734us-gaap:WarrantMember2022-06-260001195734us-gaap:AdditionalPaidInCapitalMember2022-06-260001195734us-gaap:RetainedEarningsMember2022-06-260001195734us-gaap:NoncontrollingInterestMember2022-06-260001195734srt:MinimumMember2022-06-26pbpb:Shoppbpb:Subsidiarypbpb:JointVenture0001195734srt:MinimumMember2021-12-272022-06-26xbrli:pure0001195734srt:MaximumMember2021-12-272022-06-260001195734us-gaap:TransferredAtPointInTimeMember2021-12-272022-06-260001195734us-gaap:TransferredOverTimeMember2021-12-272022-06-260001195734us-gaap:TransferredAtPointInTimeMember2020-12-282021-06-270001195734us-gaap:TransferredOverTimeMember2020-12-282021-06-2700011957342022-01-012022-06-2600011957342023-01-012022-06-2600011957342024-01-012022-06-2600011957342025-01-012022-06-2600011957342026-01-012022-06-2600011957342027-01-012022-06-260001195734us-gaap:CalculatedUnderRevenueGuidanceInEffectBeforeTopic606Member2022-03-282022-06-260001195734us-gaap:CalculatedUnderRevenueGuidanceInEffectBeforeTopic606Member2021-12-272022-06-260001195734us-gaap:CalculatedUnderRevenueGuidanceInEffectBeforeTopic606Member2021-03-292021-06-270001195734us-gaap:CalculatedUnderRevenueGuidanceInEffectBeforeTopic606Member2020-12-282021-06-270001195734pbpb:CommonShareOptionsMember2021-12-272022-06-260001195734us-gaap:EmployeeStockOptionMember2022-03-282022-06-260001195734us-gaap:EmployeeStockOptionMember2021-03-292021-06-270001195734us-gaap:EmployeeStockOptionMember2021-12-272022-06-260001195734us-gaap:EmployeeStockOptionMember2020-12-282021-06-2700011957342019-03-31pbpb:amendmentpbpb:store0001195734pbpb:OccupancyAndGeneralAndAdministrativeExpensesMember2022-03-282022-06-260001195734pbpb:OccupancyAndGeneralAndAdministrativeExpensesMember2021-03-292021-06-270001195734pbpb:OccupancyAndGeneralAndAdministrativeExpensesMember2021-12-272022-06-260001195734pbpb:OccupancyAndGeneralAndAdministrativeExpensesMember2020-12-282021-06-270001195734us-gaap:OccupancyMember2022-03-282022-06-260001195734us-gaap:OccupancyMember2021-03-292021-06-270001195734us-gaap:OccupancyMember2021-12-272022-06-260001195734us-gaap:OccupancyMember2020-12-282021-06-270001195734us-gaap:RevolvingCreditFacilityMember2022-06-260001195734us-gaap:RevolvingCreditFacilityMember2021-12-260001195734pbpb:PaycheckProtectionProgramLoanMember2022-06-260001195734pbpb:PaycheckProtectionProgramLoanMember2021-12-260001195734us-gaap:RevolvingCreditFacilityMemberpbpb:JPMorganChaseBankNAMember2019-08-070001195734srt:MinimumMemberpbpb:SixthCreditAgreementAmendmentMemberpbpb:CARESActOf2020Member2022-01-282022-01-280001195734pbpb:SixthCreditAgreementAmendmentMemberpbpb:CARESActOf2020Membersrt:MaximumMember2022-01-282022-01-280001195734pbpb:SixthCreditAgreementAmendmentMemberpbpb:CBFRLoanMember2022-01-282022-01-280001195734pbpb:SixthCreditAgreementAmendmentMemberpbpb:TermBenchmarkLoanMember2022-01-280001195734pbpb:SixthCreditAgreementAmendmentMemberpbpb:CARESActOf2020Memberpbpb:PaycheckProtectionProgramLoanMemberpbpb:HarvestSmallBusinessFinanceLLCMember2021-12-272022-06-260001195734pbpb:SixthCreditAgreementAmendmentMemberpbpb:CARESActOf2020Memberpbpb:PaycheckProtectionProgramLoanMemberpbpb:HarvestSmallBusinessFinanceLLCMember2020-12-282021-12-260001195734pbpb:PotbellySandwichWorksLLCMemberus-gaap:CommercialLoanMemberpbpb:PaycheckProtectionProgramLoanMemberpbpb:HarvestSmallBusinessFinanceLLCMember2020-08-100001195734pbpb:PotbellySandwichWorksLLCMemberpbpb:CARESActOf2020Memberpbpb:PaycheckProtectionProgramLoanMember2020-08-102020-08-100001195734us-gaap:SubsequentEventMemberus-gaap:CommercialLoanMemberpbpb:PaycheckProtectionProgramLoanMemberpbpb:HarvestSmallBusinessFinanceLLCMember2022-07-122022-07-1200011957342020-09-282020-12-27pbpb:Employee00011957342018-05-080001195734pbpb:SecuritiesPurchaseAgreementMember2021-02-092021-02-090001195734pbpb:SecuritiesPurchaseAgreementMember2021-02-090001195734pbpb:SecuritiesPurchaseAgreementMemberus-gaap:WarrantMember2021-02-092021-02-090001195734pbpb:SecuritiesPurchaseAgreementMemberus-gaap:WarrantMember2021-02-090001195734us-gaap:WarrantMember2021-02-092021-02-090001195734pbpb:WilliamBlairMember2021-11-032021-11-030001195734srt:MaximumMemberus-gaap:StockOptionMember2021-12-272022-06-260001195734pbpb:TwoThousandAndNineteenLongTermIncentivePlanMember2021-12-272022-06-260001195734srt:MinimumMemberpbpb:TwoThousandAndNineteenLongTermIncentivePlanMember2021-12-272022-06-260001195734srt:MaximumMemberpbpb:TwoThousandAndNineteenLongTermIncentivePlanMember2021-12-272022-06-2600011957342020-12-282021-12-260001195734us-gaap:EmployeeStockOptionMembersrt:MaximumMember2022-03-282022-06-260001195734us-gaap:EmployeeStockOptionMembersrt:MaximumMember2021-12-272022-06-260001195734us-gaap:EmployeeStockOptionMembersrt:MaximumMember2022-06-260001195734pbpb:NonEmployeeBoardOfDirectorsMemberus-gaap:ShareBasedCompensationAwardTrancheOneMemberus-gaap:RestrictedStockUnitsRSUMember2019-12-302020-12-270001195734pbpb:NonEmployeeBoardOfDirectorsMemberus-gaap:ShareBasedCompensationAwardTrancheTwoMemberus-gaap:RestrictedStockUnitsRSUMember2021-12-272022-06-260001195734pbpb:NonEmployeeBoardOfDirectorsMemberus-gaap:RestrictedStockUnitsRSUMember2021-12-272022-06-260001195734us-gaap:RestrictedStockUnitsRSUMember2021-12-260001195734us-gaap:RestrictedStockUnitsRSUMember2021-12-272022-06-260001195734us-gaap:RestrictedStockUnitsRSUMember2022-06-260001195734pbpb:NonEmployeeBoardOfDirectorsMemberus-gaap:RestrictedStockUnitsRSUMember2022-03-282022-06-260001195734pbpb:NonEmployeeBoardOfDirectorsMemberus-gaap:RestrictedStockUnitsRSUMember2021-03-292021-06-270001195734pbpb:NonEmployeeBoardOfDirectorsMemberus-gaap:RestrictedStockUnitsRSUMember2020-12-282021-06-270001195734pbpb:NonEmployeeBoardOfDirectorsMemberus-gaap:RestrictedStockUnitsRSUMember2022-06-260001195734pbpb:MarketVestingConditionsMemberus-gaap:PerformanceSharesMember2022-03-282022-06-260001195734pbpb:MarketVestingConditionsMemberus-gaap:PerformanceSharesMember2021-12-272022-06-260001195734us-gaap:PerformanceSharesMember2021-12-260001195734us-gaap:PerformanceSharesMember2021-12-272022-06-260001195734us-gaap:PerformanceSharesMember2022-06-26
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________________________________________
FORM 10-Q
______________________________________________
xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 26, 2022
OR
oTRANSITION 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)
______________________________________________
Delaware36-4466837
(State or Other Jurisdiction of
Incorporation)
(IRS Employer
Identification Number)
111 N. Canal Street, Suite 325
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 classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $0.01 par valuePBPBThe 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 x No o
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 x No o
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 fileroAccelerated filerx
Non-accelerated fileroSmaller reporting companyo
Emerging growth companyo
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. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No x
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 o
As of July 24, 2022, the registrant had 28,701,112 shares of common stock, $0.01 par value per share, outstanding.


Table of Contents
Potbelly Corporation and Subsidiaries
Table of Contents
Page
2

Table of Contents
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Potbelly Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
(amounts in thousands, except par value data, unaudited)
June 26,
2022
December 26,
2021
Assets
Current assets
Cash and cash equivalents$14,657 $14,353 
Accounts receivable, net of allowances of $30 and $27 as of June 26, 2022 and December 26, 2021, respectively
7,410 6,032 
Inventories3,612 3,491 
Prepaid expenses and other current assets3,885 4,178 
Total current assets29,564 28,054 
Property and equipment, net45,545 49,805 
Right-of-use assets for operating leases161,563 166,084 
Indefinite-lived intangible assets3,404 3,404 
Goodwill2,222 2,222 
Deferred expenses, net and other assets3,470 3,668 
Total assets$245,768 $253,237 
Liabilities and equity (deficit)
Current liabilities
Accounts payable$8,865 $8,140 
Accrued expenses31,918 30,859 
Short-term operating lease liabilities27,704 28,548 
Current portion of long-term debt3,333 2,333 
Total current liabilities71,820 69,880 
Long-term debt, net of current portion18,717 17,517 
Long-term operating lease liabilities162,197 166,291 
Other long-term liabilities1,915 1,966 
Total liabilities254,649 255,654 
Commitments and contingencies (Note 11)
Equity (deficit)
Common stock, $0.01 par value—authorized 200,000 shares; outstanding 28,696 and 28,380 shares as of June 26, 2022 and December 26, 2021, respectively
383 380 
Warrants2,566 2,566 
Additional paid-in-capital454,062 452,570 
Treasury stock, held at cost, 9,885 and 9,785 shares as of June 26, 2022, and December 26, 2021, respectively
(115,181)(114,577)
Accumulated deficit(350,600)(343,261)
Total stockholders’ equity (deficit)(8,770)(2,322)
Non-controlling interest(111)(95)
Total equity (deficit)(8,881)(2,417)
Total liabilities and equity (deficit)$245,768 $253,237 
See accompanying notes to the unaudited condensed consolidated financial statements.
3

Table of Contents
Potbelly Corporation and Subsidiaries
Condensed Consolidated Statements of Operations
(amounts in thousands, except per share data, unaudited)
For the Quarter Ended
For the Year to Date Ended
June 26,
2022
June 27,
2021
June 26,
2022
June 27,
2021
Revenues
Sandwich shop sales, net$114,992 $96,777 $212,423 $174,279 
Franchise royalties and fees960 714 1,750 1,277 
Total revenues115,952 97,491 214,173 175,556 
Expenses
Sandwich shop operating expenses, excluding depreciation
Food, beverage and packaging costs32,830 26,341 60,138 47,810 
Labor and related expenses36,121 31,961 69,374 60,575 
Occupancy expenses13,805 13,562 27,650 27,160 
Other operating expenses19,128 15,570 37,233 29,574 
Franchise marketing expenses126 76 246 120 
General and administrative expenses8,827 8,674 17,345 15,847 
Depreciation expense3,030 4,553 6,167 8,727 
Impairment, loss on disposal of property and equipment and shop closures1,044 257 2,363 3,379 
Total expenses114,911 100,994 220,516 193,192 
Income (loss) from operations1,041 (3,503)(6,343)(17,636)
Interest expense, net357 185 683 472 
Income (loss) before income taxes684 (3,688)(7,026)(18,108)
Income tax expense (benefit)(24)160 153 214 
Net income (loss)708 (3,848)(7,179)(18,322)
Net income attributable to non-controlling interest134 33 160 31 
Net income (loss) attributable to Potbelly Corporation$574 $(3,881)$(7,339)$(18,353)
Net income (loss) per common share attributable to common stockholders:
Basic$0.02 $(0.14)$(0.26)$(0.68)
Diluted$0.02 $(0.14)$(0.26)$(0.68)
Weighted average shares outstanding:
Basic28,565 27,978 28,481 26,961 
Diluted29,117 27,978 28,481 26,961 
        
See accompanying notes to the unaudited condensed consolidated financial statements.
4

Table of Contents
Potbelly Corporation and Subsidiaries
Condensed Consolidated Statements of Equity (Deficit)
(amounts and shares in thousands, unaudited)
Common StockTreasury
Stock
Warrants
Additional
Paid-In-
Capital
Accumulated
Deficit
Non-
Controlling
Interest
Total Equity
(Deficit)
SharesAmount
Balance at December 27, 202024,323 339 (113,266) 438,174 (319,477)(275)$5,495 
Net loss— — — — — (14,472)(2)(14,474)
Stock-based compensation plans63 1 — — (1)— —  
Issuance of common shares and warrants, net of fees3,250 32 — 2,566 12,342 — — 14,940 
Contributions from non-controlling interest— — — — — — 136 136 
Stock-based compensation expense— — — — 193 — — 193 
Balance at March 28, 202127,636 372 (113,266)2,566 450,708 (333,949)(141)$6,290 
Net income (loss)— — — — — (3,881)33 (3,848)
Stock-based compensation plans535 6 (685)— (6)— — (685)
Proceeds from exercise of stock options
— — — — 219 — — 219 
Issuance of common shares and warrants, net of fees— — — — (101)— — (101)
Stock-based compensation expense— — — — 655 — — 655 
Balance at June 27, 202128,171 $378 $(113,951)$2,566 $451,475 $(337,830)$(108)$2,530 
Balance at December 26, 202128,380 $380 $(114,577)$2,566 $452,570 $(343,261)$(95)$(2,417)
Net income (loss)— — — — — (7,913)26 (7,887)
Stock-based compensation plans81 1 (279)— — — — (278)
Distributions to non-controlling interest— — — — — — (120)(120)
Stock-based compensation expense— — — 675 — — 675 
Balance at March 27, 202228,461 381 (114,856)2,566 453,245 (351,174)(189)(10,027)
Net income— — — — — 574 134 708 
Stock-based compensation plans235 2 (325)— (3)— — (326)
Distributions to non-controlling interest— — — — — — (56)(56)
Stock-based compensation expense— — — — 820 — — 820 
Balance at June 26, 202228,696 $383 $(115,181)$2,566 $454,062 $(350,600)$(111)$(8,881)
See accompanying notes to the unaudited condensed consolidated financial statements.
5

Table of Contents
Potbelly Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(amounts in thousands, unaudited)
For the Year to Date Ended
June 26,
2022
June 27,
2021
Cash flows from operating activities:
Net loss$(7,179)$(18,322)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation expense6,167 8,727 
Noncash lease expense13,020 12,662 
Deferred income tax9 9 
Stock-based compensation expense1,495 848 
Asset impairment, loss on disposal of property and equipment and shop closures2,363 2,826 
Other operating activities139 158 
Changes in operating assets and liabilities:
Accounts receivable, net(1,379)(2,202)
Inventories(121)19 
Prepaid expenses and other assets12 191 
Accounts payable455 2,602 
Operating lease liabilities(14,183)(17,154)
Accrued expenses and other liabilities1,180 4,182 
Net cash provided by (used in) operating activities:1,978 (5,454)
Cash flows from investing activities:
Purchases of property and equipment$(3,115)$(3,333)
Net cash used in investing activities:(3,115)(3,333)
 
Cash flows from financing activities:
Borrowings under revolving credit facility$15,000 $15,500 
Repayments under revolving credit facility(12,800)(21,000)
Payment of debt issuance costs(76)(195)
Proceeds from issuance of common shares and warrants, net of fees 14,839 
Proceeds from exercise of stock options 219 
Employee taxes on certain stock-based payment arrangements(507) 
Contributions from non-controlling interest 136 
Distributions to non-controlling interest(176) 
Net cash provided by financing activities:1,441 9,499 
Net increase in cash and cash equivalents304 712 
Cash and cash equivalents at beginning of period14,353 11,126 
Cash and cash equivalents at end of period$14,657 $11,838 
Supplemental cash flow information:
Income taxes paid$132 $35 
Interest paid236 398 
Supplemental non-cash investing and financing activities:
Unpaid liability for purchases of property and equipment591 811 
Unpaid liability for employee taxes on certain stock-based payment arrangements97 685 
See accompanying notes to the unaudited condensed consolidated financial statements
6

Table of Contents
Potbelly Corporation and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (unaudited)
(1) Organization and Other Matters
Business
Potbelly Corporation (the "Company", "Potbelly", "we", "us" or "our"), through its wholly owned subsidiaries, owns and operates 393 company-owned shops in the United States. Additionally, Potbelly franchisees operate 47 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 our Annual Report on Form 10-K for the year ended December 26, 2021. The unaudited condensed consolidated financial statements included herein have been prepared by us 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 our balance sheet as of June 26, 2022 and December 26, 2021, our statement of operations for the quarter and year to date ended June 26, 2022 and June 27, 2021, the statement of equity for the quarter and year to date ended June 26, 2022 and June 27, 2021, and our statement of cash flows for the year to date ended June 26, 2022 and June 27, 2021 have been included. The condensed consolidated statements of operations for the interim periods presented herein are not necessarily indicative of the results to be expected for the full year.
Beginning in the first quarter of 2022, we reclassified certain advertising and marketing expenses within the condensed consolidated statement of operations. Refer to discussion of the Potbelly Brand Fund in the paragraphs below. These reclassifications had no impact on our results of operations, financial position, or cash flows.
We do not have any components of other comprehensive income recorded within our consolidated financial statements and therefore, do not separately present a statement of comprehensive income in our condensed consolidated financial statements.
COVID-19
On January 30, 2020, the World Health Organization (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 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 issued stay-at-home orders and other measures aimed at slowing the spread of the coronavirus, resulting in significant changes to our operations and a sudden and drastic decrease in revenues. While the pandemic continues to have an impact on our business, the distribution of COVID-19 vaccines and lifting of local restrictions has resulted in a gradual improvement to our sales during 2021 and 2022. Nearly all of our shops, including those in central business districts, have reopened their dining rooms and are no longer subject to operating restrictions and capacity limits related to COVID-19. We will continue to follow guidance from local authorities in determining the appropriate restrictions to put in place for each shop, including mask mandates, hours of operation, and the suspension or reduction of in-shop dining if required due to changes in the pandemic response in each jurisdiction and restaurant operating protocols, which could result in lower in-shop dining revenue or higher operating costs.
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”); seven of PSW’s wholly owned subsidiaries and PSW’s six 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 six joint venture investments. Potbelly has ownership interests ranging from 51-80% in these consolidated joint ventures.
7

Table of Contents
Fiscal Year
We use a 52/53-week fiscal year that ends on the last Sunday of the calendar period. Approximately every five or six years a 53rd week is added. Fiscal year 2022 and 2021 both consist of 52 weeks. The fiscal quarters ended June 26, 2022 and June 27, 2021 each consisted of 13 weeks. The year to date periods ended June 26, 2022 and June 27, 2021 each consisted of 26 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.
Potbelly Brand Fund
We maintain the Potbelly Brand Fund (the "Brand Fund") for the purpose of collecting and administering funds to be used for advertising, customer research, marketing technology, agencies, and other activities that promote the Potbelly brand in order to deliver sales at our shops. Company-operated and franchised shops both contribute to the Brand Fund based on a percentage of sales.
Beginning in the first quarter of fiscal year 2022, we manage these advertising and marketing expenses through the Brand Fund using the funds contributed by our shops. We manage these funds separately from our general operating expenses, but we are not obligated to maintain the funds in separate accounts or entities. We may spend more or less in any fiscal period than the amounts contributed to the Brand Fund, and we may choose to roll over any unused contributions to the following fiscal period or return them to our shops. Cash held related to the Brand Fund is not considered to be restricted cash as there are no restrictions on the use of the funds.
Brand Fund contributions made by company-operated shops are eliminated from the consolidated financial statements. Franchisee contributions are included within franchise royalties and fees in the condensed consolidated statements of operations.
Expenses incurred by the Brand Fund are allocated to company-operated and franchised shops based on their relative contributions. The allocation of company-operated Brand Fund expense is included within other operating expenses in our condensed consolidated statements of operations. The allocation of franchisee Brand Fund expense is presented as franchise marketing expenses in our condensed consolidated statements of operations. Prior periods have been reclassified to conform to the current presentation of these expenses.
Recent Accounting Pronouncements
We reviewed all recently issued accounting pronouncements and concluded that they were either not applicable or not expected to have a significant impact to the condensed consolidated financial statements.
(2) Revenue
We primarily earn revenue at a point in time for sandwich shop sales, which can occur in person at the shop, over our online or app platform, or through a third-party platform. Sales taxes collected from customers are excluded from revenues and the obligation is included in accrued liabilities until the taxes are remitted to the appropriate taxing authorities. We have other revenue generating activities outlined below.
Franchise Revenue
We earn an initial franchise fee, a franchise development agreement fee and ongoing fees for royalties and Brand Fund contributions under our franchise agreements. Initial franchise fees are considered highly dependent upon and interrelated with the franchise right granted in the franchise agreement. As such, these franchise fees are recognized over the contractual term of the franchise agreement. We record a contract liability for the unearned portion of the initial franchise fees. Franchise development agreement fees represent the exclusivity rights for a geographical area paid by a third party to develop Potbelly shops for a certain period of time. Franchise development agreement fee payments received by us are recorded in the consolidated balance sheets as accrued expenses or other long-term liabilities, and amortized over the life of the franchise development agreement. Royalties and Brand Fund contributions are based on a percentage of sales and are recorded as revenue as they are earned and become receivable from the franchisee.
8

Table of Contents
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 ("breakage"), which is recognized as revenue as a percentage of customers gift card redemptions. The expected breakage amount recognized is determined by a historical data analysis on gift card redemption patterns. We recognize gift card breakage income within net sandwich shop sales in the consolidated statements of operations.
We recognized gift card breakage income of $0.3 million and $0.1 million for the year to date ended June 26, 2022 and June 27, 2021, respectively, which is recorded within net sandwich shop sales in our condensed consolidated statements of operations.
Loyalty Program
We offer a 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. We defer 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 after the customer's account has been inactive for a year. The breakage amount recognized is estimated based on a historical data analysis of loyalty reward redemptions and is recognized in net shop sandwich sales in the consolidated statement of operations. When points are redeemed, we recognize revenue for the redeemed product and reduce accrued expenses.
For the year to date ended June 26, 2022 revenue recognized from all revenue sources on point in time sales was $213.5 million, and revenue recognized from sales over time was $0.7 million. For the year to date ended June 27, 2021, revenue recognized from all revenue sources on point in time sales was $175.3 million and revenue recognized from sales over time was $0.3 million.
Contract Liabilities
We record current and noncurrent contract liabilities in accrued expenses and other long-term liabilities, respectively, for initial franchise fees, gift cards, and loyalty programs. We have no other contract liabilities or contract assets recorded.
The opening and closing balances of our 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 26, 2021
$6,533 $1,428 
Ending balance as of June 26, 2022
6,217 1,354 
Increase (decrease) in contract liability$(316)$(74)
9

Table of Contents
The aggregate value of remaining performance obligations on outstanding contracts was $7.6 million as of June 26, 2022. We expect to recognize revenue related to contract liabilities as follows (in thousands), which may vary based upon franchise activity as well as gift card redemption patterns:
Years EndingAmount
2022$5,231 
2023477 
2024351 
2025349 
2026154 
Thereafter1,009 
Total revenue recognized$7,571 
For the quarter and year to date ended June 26, 2022, the amount of revenue recognized related to the December 26, 2021 liability ending balance was $0.7 million and $1.8 million, respectively. For quarter and year to date ended June 27, 2021, the amount of revenue recognized related to the December 27, 2020 liability ending balance was $0.3 million and $0.9 million, respectively. This revenue is related to the recognition of gift card redemptions and upfront franchise fees. For the year to date ended June 26, 2022 and June 27, 2021, we did not recognize any revenue from obligations satisfied (or partially satisfied) in prior periods.
(3) Fair Value Measurement
The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and all other current liabilities approximate fair values due to the short maturities of these balances.
The book value of the long-term debt under the Credit Agreement, subsequently amended most recently as of May 31, 2022 and further discussed in Note 7, is considered to approximate its fair value as of June 26, 2022 as the interest rates are considered in line with current market rates.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Assets recognized or disclosed at fair value on the consolidated financial statements on a nonrecurring basis include items such as leasehold improvements, property and equipment, operating lease assets, goodwill, and other intangible assets. These assets are measured at fair value if determined to be impaired.
We assess potential impairments to our 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 our shops during the quarter and year to date ended June 26, 2022, it was determined that indicators of impairment were present for certain shops as a result of continued underperformance, primarily related to the impacts of COVID-19. We performed an impairment analysis related to these shops and recorded an impairment charge of $0.9 million and $2.0 million for the quarter and year to date ended June 26, 2022. 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) Earnings (Loss) Per Share
Basic and diluted income (loss) per common share attributable to common stockholders are calculated using the weighted average number of common shares outstanding for the period. Diluted income (loss) per common share attributable to common stockholders is computed by dividing the loss allocated to common stockholders by the weighted
10

Table of Contents
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 year to date ended June 26, 2022 and the quarter and year to date ended June 27, 2021, we had a loss per share, and therefore potentially dilutive shares were excluded from the calculation.
The following table summarizes the loss per share calculation:
For the Quarter EndedFor the Year to Date Ended
June 26,
2022
June 27,
2021
June 26,
2022
June 27,
2021
Net income (loss) attributable to Potbelly Corporation$574 $(3,881)$(7,339)$(18,353)
Weighted average common shares outstanding-basic28,565 27,978 28,481 26,961 
Plus: Effect of potentially dilutive stock-based compensation awards451    
Plus: Effect of potential warrant exercise101    
Weighted average common shares outstanding-diluted29,117 27,978 28,481 26,961 
Income (loss) per share available to common stockholders-basic$0.02 $(0.14)$(0.26)$(0.68)
Income (loss) per share available to common stockholders-diluted$0.02 $(0.14)$(0.26)$(0.68)
Potentially dilutive shares that are considered anti-dilutive:
Shares637 2,002 1,906 2,048 
(5) Income Taxes
The interim tax provision is determined using an estimated annual effective tax rate and is adjusted for discrete taxable events that occur during the quarter. We regularly assess the need for a valuation allowance related to our deferred tax assets, which includes consideration of both positive and negative evidence related to the likelihood of realization of such deferred tax assets to determine, based on the weight of the available evidence, whether it is more-likely-than-not that some or all of our deferred tax assets will not be realized. In our assessment, we consider recent financial operating results, projected future taxable income, the reversal of existing taxable differences, and tax planning strategies. We recorded a full valuation allowance against our net deferred tax assets during the first quarter of 2019, resulting in a non-cash charge to income tax expense of $13.6 million. We continue to maintain a valuation allowance against all of our deferred tax assets as of June 26, 2022. We did not provide for an income tax benefit on our pre-tax income income (loss) for the quarter and year to date ended June 26, 2022 and June 27, 2021. We assess the likelihood of the realization of our deferred tax assets each quarter and the valuation allowance is adjusted accordingly.
(6) Leases
We determine if an arrangement is a lease at inception of the arrangement. We lease retail shops, warehouse, and office space under operating leases. Our leases generally have terms of ten years and most include options to extend the leases for additional five-year periods. For leases with renewal periods at our option, we determine the expected lease period based on whether the renewal of any options are reasonably assured at the inception of the lease.
Operating leases result in the recording a right-of-use asset and lease liability on the consolidated balance sheet. Right-of-use assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease assets and liabilities are recognized at the lease commencement date, which is the date we take possession of the property. Operating lease liabilities represent the present value of lease payments not yet paid. Operating right-of-use assets represent the operating lease liability adjusted for prepayments or accrued lease payments, initial direct costs, lease incentives, and impairment of operating lease assets. In determining the present value of lease payments not yet paid, we estimate our incremental secured borrowing rates corresponding to the maturities of our leases. We estimate this rate based on prevailing financial market conditions, comparable company and credit analysis, and management judgment.
11

Table of Contents
Our leases typically contain rent escalations over the lease term and lease expense is recognized on a straight-line basis over the lease term. Tenant incentives used to fund leasehold improvements are recognized when earned and reduce right-of-use assets related to the lease. The tenant incentives are amortized through the right-of-use asset as reductions of rent expense over the lease term.
We elected a short-term lease exception policy, permitting us to not apply the recognition requirements of ASC 842, Leases, to short-term leases (i.e. leases with terms of 12 months or less) and an accounting policy to account for lease and non-lease components as a single component for certain classes of assets.
In fiscal year 2020, as a result of COVID-19, we held discussions with landlords regarding restructuring of our leases in light of various contractual and legal defenses, and we subsequently entered into a total of 350 amendments with our respective landlords through December 26, 2021. The vast majority of these lease amendments were completed during fiscal year 2020, and we fully completed the COVID-19-related lease amendments as of December 26, 2021.
We did not terminate any leases during the quarter ended June 26, 2022. During the year to date ended, we terminated 1 lease. The terminated lease had a month-to-month term and, as a result, we did not incur lease termination fees and we did not record a gain or loss for the year to date ended June 26, 2022. We also did not derecognize any ROU assets or lease liabilities related to this lease termination.
Operating lease term and discount rate were as follows:
June 26,
2022
June 27,
2021
Weighted average remaining lease term (years)6.897.50
Weighted average discount rate8.11 %7.90 %
Certain of our 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:
For the Quarter EndedFor the Year to Date Ended
ClassificationJune 26,
2022
June 27,
2021
June 26,
2022
June 27,
2021
Operating lease costOccupancy and General and administrative expenses10,092 10,296 20,397 20,707 
Variable lease costOccupancy3,796 3,236 7,258 6,475 
Total lease cost 13,888 13,532 27,655 27,182 
Supplemental disclosures of cash flow information related to leases were as follows:
For the Quarter EndedFor the Year to Date Ended
June 26,
2022
June 27,
2021
June 26,
2022
June 27,
2021
Operating cash flows rent paid for operating lease liabilities10,804 12,137 21,398 25,051 
Operating right-of-use assets obtained in exchange for new operating lease liabilities6,794 2,938 10,176 4,656 
Reduction in operating right-of-use assets due to lease terminations and modifications1,264 846 1,264 4,140 
As of June 26, 2022, we had no real estate leases entered into that had not yet commenced.
12

Table of Contents
Maturities of lease liabilities were as follows as of June 26, 2022:
Operating Leases
Remainder of 2022
21,112 
202340,095 
202437,905 
202535,095 
202631,422 
202725,884 
Thereafter60,110 
Total lease payments251,623 
Less: imputed interest(61,722)
Present value of lease liabilities189,901 
(7) Debt and Credit Facilities
The components of long-term debt were as follows:
June 26,
2022
December 26,
2021
Revolving credit facility$12,050 $9,850 
Paycheck Protection Program loan10,000 10,000 
Less: current portion of long-term debt(3,333)(2,333)
Total long-term debt$18,717 $17,517 
Revolving credit facility
On August 7, 2019, we entered into a second amended and restated revolving credit facility agreement (the "Credit Agreement") with JPMorgan Chase Bank, N.A. ("JPMorgan"). The Credit Agreement amends and restates the revolving credit facility agreement, dated as of December 9, 2015, and amended on May 3, 2019 (collectively, the "Prior Credit Agreement") with JPMorgan. As disclosed in our Annual Report on Form 10-K for the fiscal year ended December 26, 2021, we subsequently amended the Credit Agreement during fiscal years 2020 and 2021. The Credit Agreement provides for a revolving credit facility in a maximum principal amount of $25 million.
On January 28, 2022, we entered into Amendment No. 6 (the "Sixth Amendment") to the Credit Agreement. The Sixth Amendment, among other things, (i) extended the maturity date under the Credit Agreement from January 31, 2023 to May 31, 2023, (ii) changed the benchmark interest rates under the Credit Agreement for borrowings from the London Interbank Offered Rate (LIBOR) to the Secured Overnight Financing Rate (SOFR) subject to certain adjustments in the Sixth Amendment, (iii) increased the interest rate margin by 75 basis points with respect to any CBFR Loan (as defined in the Credit Agreement), (iv) sets the interest rate margin at 600 basis points with respect to any Term Benchmark Loan (as defined in the Credit Agreement), (v) amended certain financial covenant testing levels, and (vi) amended the definition of subsidiary to exclude the Potbelly Employee Relief Fund NFP, an Illinois not-for-profit corporation.
On May 31, 2022, we entered into Amendment No. 7 (the "Seventh Amendment") to the Credit Agreement. The Seventh Amendment, among other things (i) extended the maturity date under the Credit Agreement from May 31, 2023 to August 31, 2023 and (ii) amended certain financial covenant testing levels.
As of June 26, 2022, we had $12.1 million outstanding under the Credit Agreement. As of December 26, 2021, we had $9.9 million outstanding under the Credit Agreement. We are currently in compliance with all financial debt covenants.
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.
13

Table of Contents
The Loan was necessary to support our ongoing operations due to the economic uncertainty resulting from the COVID-19 pandemic and lack of access to alternative sources of liquidity.
The Loan is scheduled to mature five years from the date on which PSW applies for loan forgiveness under the CARES Act, bears interest at a rate of 1% per annum and is subject to the terms and conditions applicable to loans administered by the U.S. Small Business Administration ("SBA") under the CARES Act. The PPP provides that the use of the Loan amount shall be limited to certain qualifying expenses and may be partially or wholly forgiven in accordance with the requirements set forth in the CARES Act. We used all of the PPP proceeds toward qualifying expenses and pursued forgiveness of the full Loan amount.
We have recorded the amount of the Loan as long-term debt (current and non-current) in our condensed consolidated balance sheet and the related interest has been recorded to interest expense in our condensed consolidated statement of operations.
On July 12, 2022, we received notification from Harvest Small Business Finance, LLC that the SBA approved our loan forgiveness application for the entire outstanding principal and accrued interest under the Loan equaling $10.2 million, which will be recognized as a gain on extinguishment of debt during the third fiscal quarter.
(8) Restructuring
On November 3, 2020, as part of our COVID-related cost reduction efforts and to better align our general and administrative expenses with future strategy, we made the determination to reorganize and restructure our corporate team. The restructuring plan implemented resulted in general and administrative expense savings in 2021 and 2022. This was accomplished through corporate expense optimization, consolidating our shop support services, and through other expense and staff reductions. As a result, we reduced corporate employment levels by approximately 35 employees in the fourth quarter of 2020. We substantially completed our planned restructuring actions during 2020, but we will continue to evaluate our cost structure and seek opportunities for further efficiencies and cost savings as part of our ongoing strategy.
During the first quarter of 2022, we fully paid our remaining obligations as a result of the restructuring plan implemented in the fourth quarter of 2020.
Total
(Thousands)
Balance as of December 26, 2021
$122 
Charges incurred 
Payments made(122)
Balance at June 26, 2022
$ 
(9) Capital Stock
On May 8, 2018, we announced that our Board of Directors authorized a stock repurchase program for up to $65.0 million of our outstanding common stock. The program permits us, from time to time, to purchase shares in the open market (including in pre-arranged stock trading plans in accordance with the guidelines specified in Rule 10b5-1 under the Securities and Exchange Act of 1934, as amended) or in privately negotiated transactions. The number of common shares actually repurchased, and the timing and price of repurchases, will depend upon market conditions, SEC requirements and other factors. Purchases may be started or stopped at any time without prior notice depending on market conditions and other factors. For the quarter and year to date ended June 26, 2022, we did not repurchase any shares of our common stock under the stock repurchase program. We do not have plans to repurchase any common stock under our stock repurchase program at this time.
On February 9, 2021, we closed on a Securities Purchase Agreement (the "SPA") for the sale by us of 3,249,668 shares of our common stock at a par value of $0.01 per share and the issuance of warrants to purchase 1,299,861 shares of common stock at an exercise price of $5.45 per warrant for gross proceeds of $16.0 million, before deducting placement agent fees and offering expenses of approximately $1.0 million. The warrants are initially exercisable commencing August 13, 2021 through their expiration date of August 12, 2026. The proceeds received from the SPA were allocated between shares and warrants based on their relative fair values at closing. The warrants were valued utilizing the Black-Scholes method.
14

Table of Contents
On November 3, 2021, we entered into a certain Equity Sales Agreement (the "Sales Agreement") with William Blair & Company, L.L.C., as agent ("William Blair") pursuant to which we may sell shares of our common stock having an aggregate offering price of up to $40.0 million (the "Shares"), from time to time, in our sole discretion, through an "at the market" equity offering program under which William Blair will act as sales agent. As of June 26, 2022, we have not sold any shares under the Sales Agreement.
(10) Stock-Based Compensation
Stock options
We have awarded stock options to certain employees including the senior leadership team. The number of options and exercise price of each option is determined by a committee designated by our Board of Directors. The options granted are generally exercisable over a 10-year period from the date of the grant. Outstanding options expire on various dates through the year 2028. The range of exercise prices for the outstanding options as of June 26, 2022 is $9.47 and $20.53 per option, and the options generally vest in one-fourth and one-fifth increments over four and five-year periods, respectively.
A summary of stock option activity is as follows:
Options
Shares
(Thousands)
Weighted
Average
Exercise
Price
Aggregate
Intrinsic
Value
(Thousands)
Weighted
Average
Remaining
Term
(Years)
Outstanding—December 26, 2021
538 $12.03 $ 2.35
Granted  
Exercised  
Canceled(11)8.16 
Outstanding—June 26, 2022
527 12.11 $ 2.05
Exercisable—June 26, 2022
527 $12.11 $ 2.05
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. We did not recognize stock-based compensation expense related to stock options for the quarter ended June 26, 2022. For the year to date ended June 26, 2022, we recognized stock-based compensation expense related to stock options of less than $0.1 million. For the quarter and year to date ended June 27, 2021, we recognized stock-based compensation expense related to stock options of $0.1 million. As of June 26, 2022, we do not have unrecognized stock-based compensation expense related to stock options. We record stock-based compensation expense within general and administrative expenses in the condensed consolidated statements of operations.
Restricted stock units
We award restricted stock units ("RSUs") to certain employees and certain non-employee members of our Board of Directors. Prior to 2021, the Board of Director grants had a vesting schedule of 50% on the first anniversary of the grant date and 50% on the second anniversary of the grant date. Beginning with the annual grant made in the second quarter of 2021, the Board of Director grants fully vest on the first anniversary of the grant date, or upon termination from the Board of Directors for any reason other than for cause, a pro rata portion of the shares vest on the termination date. The employee grants vest in one-third increments over a three-year period.
A summary of RSU activity is as follows:
15

Table of Contents
RSUs
Number of RSUs
(Thousands)
Weighted Average
Fair Value per Share
Non-vested as of December 26, 2021
1,151 $4.87 
Granted506 6.11 
Vested(487)5.87 
Canceled  
Non-vested as of June 26, 2022
1,170 $4.34 
For the quarter and year to date ended June 26, 2022, we recognized stock-based compensation expense related to RSUs of $0.7 million and $1.3 million, respectively. For the quarter and year to date ended June 27, 2021, we recognized stock-based compensation expense related to RSUs of $0.3 million and $0.4 million, respectively. As of June 26, 2022, unrecognized stock-based compensation expense for RSUs was $5.9 million, which will be recognized through fiscal year 2024.
Performance stock units
We award performance share units ("PSUs") to certain of our employees. The PSUs have certain vesting conditions based upon our stock price and relative stock performance.
Because these PSUs are subject to service and market vesting conditions, we determine the fair market value of each grant using a Monte Carlo simulation model. Participants are entitled to receive a specified number of shares of our common stock contingent on achievement of a stock return on our common stock. For the quarter and year to date ended June 26, 2022, we recognized stock-based compensation expense for PSUs with market vesting conditions of $0.1 million and $0.2 million, respectively.
A summary of activity for PSUs with market vesting conditions for the year to date ended June 26, 2022 is as follows:
PSUs
Number
of PSUs
(Thousands)
Weighted
Average
Fair Value
per Share
Non-vested as of December 26, 2021
130 8.43 
Granted145 10.15 
Vested  
Canceled  
Non-vested as of June 26, 2022
275 9.34 
(11) Commitments and Contingencies
We are subject to legal proceedings, claims and liabilities, such as employment-related claims and slip and fall cases, which arise in the ordinary course of business and are generally covered by insurance. We accrue for such liabilities when it is probable that future costs will be incurred and such costs can be reasonably estimated. Such accruals are based on developments to date, our estimates of the outcomes of these matters and its experience in contesting, litigating and settling other similar matters. In the opinion of management, the amount of ultimate liability with respect to those actions should not have a material adverse impact on our financial position or results of operations and cash flows.
Many of the food products we purchase are subject to changes in the price and availability of food commodities, including, among other things, beef, poultry, grains, dairy and produce. We work with our suppliers and use a mix of forward pricing protocols for certain items including agreements with our supplier on fixed prices for deliveries at a time in the future and agreements on a fixed price with our suppliers for the duration of those protocols. We also utilize formula pricing protocols under which the prices we pay are based on a specified formula related to the prices of the goods, such as spot prices. Our use of any forward pricing arrangements varies substantially from time to time and these arrangements tend to cover relatively short periods (i.e., typically twelve months or less). Such contracts are used in the normal purchases of our food products and not for speculative purposes, and as such are not required to be evaluated as derivative instruments.
16

Table of Contents
(12) Subsequent Events
On July 12, 2022, we received notification from Harvest Small Business Finance, LLC that the SBA approved our loan forgiveness application for the entire outstanding principal and accrued interest under the Loan. See Note 7 for further information.
17

Table of Contents
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 26, 2021. 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, our ability to grow our brand in new and existing markets, and the implementation and results of strategic initiatives, including our "Traffic-Driven Profitability" 5-pillar strategic plan. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts and generally contain words such as "believes," "expects," "may," "will," "should," "seeks," "intends," "plans," "strives," "goal," "estimates," "forecasts," "projects" or "anticipates" and the negative of these terms or similar expressions. Our forward-looking statements are subject to risks and uncertainties, which may cause actual results to differ materially from those projected or implied by the forward-looking statement, due to reasons including, but not limited to, the potential future impact of COVID-19 on our business and results of operations; compliance with covenants in our credit facility; competition; general economic conditions; our ability to successfully implement our business strategy; the success of our initiatives to increase sales and traffic; changes in commodity, energy and other costs; our ability to attract and retain management and employees; consumer reaction to industry-related public health issues and perceptions of food safety; our ability to manage our growth; reputational and brand issues; price and availability of commodities; consumer confidence and spending patterns; and weather conditions. Forward-looking statements are based on current expectations and assumptions and currently available data and are neither predictions nor guarantees of future events or performance. You should not place undue reliance on forward-looking statements, which speak only as of the date hereof. See "Risk Factors" and "Cautionary Note Regarding Forward-Looking Statements" included in our Annual Report on Form 10-K for the fiscal year ended December 26, 2021, 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 feeding customers’ smiles with warm, toasty sandwiches, signature salads, hand-dipped shakes and other fresh menu items, customized just the way customers want them, for more than 40 years. Potbelly owns and operates Potbelly Sandwich Shop concepts in the United States. We also have 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, we have one operating segment and one reportable segment.
We strive to be proactive and deliberate in our efforts to drive profitable growth in our existing business. Our "Traffic-Driven Profitability" 5-pillar strategic plan includes a prioritized set of low-cost strategic investments that we believe will deliver strong returns. The 5 pillars are:
Craveable Quality Food at a Great Value
People Creating Good Vibes
Customer Experiences that Drive Traffic Growth
Digitally Driven Awareness, Connection and Traffic
Franchise Focused Development
Our shop model is designed to generate, and has generated, strong cash flow, attractive shop-level financial results and high returns on investment. We operate our shops successfully in a wide range of geographic markets, population densities and real estate settings. We aim to generate average shop-level profit margins, a non-GAAP measure, that range from the mid to high teens. 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.
18

Table of Contents
We are actively executing against our Franchise Growth Acceleration Initiative which includes the goal of refranchising approximately 25% of our company units over the next three years and executing area development agreements with franchisees to develop additional Potbelly shops in specific markets.
The table below sets forth a rollforward of company-operated and franchise operated activities:
Company-
Operated
Franchise-
Operated
Total
Company
Shops as of December 27, 2020400 46 446 
Shops opened— 
Shops closed(2)(2)(4)
Shops as of June 27, 2021398 45 443 
Shops as of December 26, 2021397 46 443 
Shops opened— 
Shops closed(4)— (4)
Shops as of June 26, 2022393 47 440 
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 significantly impacted economic conditions in the United States where all our shops are located during portions of 2020 and 2021. In response to the pandemic, many states and jurisdictions in which we operate issued stay-at-home orders and other measures aimed at slowing the spread of the coronavirus, resulting in significant changes to our operations and a sudden and drastic decrease in revenues. While the pandemic continues to have an impact on our business, the distribution of COVID-19 vaccines and lifting of local restrictions has resulted in a gradual improvement to our sales during 2021 and through the first half of 2022. Nearly all of our shops have reopened their dining rooms and are no longer subject to operating restrictions and capacity limits related to COVID-19. We will continue to follow guidance from local authorities in determining the appropriate restrictions to put in place for each shop, including mask mandates, hours of operation, and the suspension or reduction of in-shop dining if required due to changes in the pandemic response in each jurisdiction and restaurant operating protocols, which could result in lower in-shop dining revenue or higher operating costs.
Specifically, COVID-19 has affected our financial results and performance as follows:
Revenue – Many of our shops, specifically those in suburban and urban residential locations are now operating near or above pre-COVID-19 levels. Other shops, especially those in central business districts, are still operating materially below those levels but are continuing to recover. While the majority of our shops have reopened their dining rooms and are operating without mandated restrictions, the pandemic has affected consumer behavior including more significant focus on digital sales. As such, we continue to offer convenient off-premise options for customers. Customers can place off-premise orders through Potbelly.com and the Potbelly app, or through DoorDash, Grubhub, Postmates, Uber Eats and other marketplaces nationwide. We also continue to evaluate our product offerings and service methods to ensure we are aligned with the preferences of our customers as the pandemic evolves.
Operating Costs – We 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 inventory to align with current levels of demand. At the onset of the pandemic, we implemented a strategy to reduce costs and preserve cash, and we continue to be thoughtful and judicious regarding our operating expenses during the uncertainty of the pandemic. We negotiated rent abatements, rent deferrals, and other modified lease terms with the majority of our shop landlords in order to preserve
19

Table of Contents
liquidity and reduce ongoing occupancy costs. Additionally, we announced and executed a corporate restructuring plan during the fourth quarter of 2020 which reduced annual general and administrative expenses in 2021 and 2022. The restructuring plan consisted of corporate expense optimization, consolidation of shop support services, and other expense and staff reductions.
As a result of COVID-19, during the quarter ended June 26, 2022, some of our food and paper suppliers have experienced shortages in labor and transportation resources, which in some cases, has resulted in increased costs of our food and paper, which we expect will continue to a certain extent through the remainder of the year. We have worked closely with our suppliers to ensure availability of products and, to date, there has been minimal disruption to the availability of our products, though it is possible that more significant disruptions could occur if the COVID-19 pandemic and labor and supply chain availability challenges continue to worsen.
In addition, during the quarter ended June 26, 2022, we experienced labor availability challenges in certain shops. We are managing the labor availability impact on these restaurants by selectively raising wages and limiting our hours of operation or closing dining rooms, when necessary. We have also expanded the ability for customers to pay tips on their orders to further increase compensation for our shop employees.
Although we have been able to manage costs relating to compliance with our stringent food safety and quality assurance programs and implementation and maintenance of strict sanitation protocols for our shops, to the extent new requirements or actions are mandated or we deem them advisable, we may incur additional costs to comply with such requirements to take such actions.
We have increased, and plan to continue to increase, menu prices as necessary in order to offset additional costs as a result of a higher inflationary economic environment in the U.S. These price increases may not be sufficient to mitigate additional unexpected higher costs and further increases may negatively impact consumer behavior and purchases.
Shop Development – We halted capital investment in new company-owned shops, except for shops that were substantially complete, as well as all non-essential capital expenditures. We currently do not have plans to begin construction on any company-owned shops, and we are pursuing shop growth through our franchising initiatives.
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.
Key Performance Indicators
In assessing the performance of our business, we consider a variety of performance and financial measures. The key measures for determining how the business is performing are comparable store sales, shop-level profit margins, and adjusted EBITDA.
Company-Operated Comparable Store Sales
Comparable store sales reflect the change in year-over-year sales for the comparable company-operated store base. We define the comparable store base to include those shops open for 15 months or longer. As of the quarters ended June 26, 2022 and June 27, 2021, there were 379 and 360 shops, respectively, in our comparable company-operated store base. Comparable store sales growth can be generated by an increase in number of transactions and/or by increases in the average check amount resulting from a shift in menu mix and/or increase in price. This measure highlights performance of existing shops as the impact of new shop openings is excluded. For purposes of the comparable store sales calculation, a transaction is defined as an entrée, which includes sandwiches, salads and bowls of soup or mac and cheese.
Number of Company-Operated Shop Openings
The number of company-operated shop openings reflects the number of shops opened during a particular reporting period. Before we open new shops, we incur pre-opening costs. Often, new shops open with an initial start-up period of
20

Table of Contents
higher than normal sales volumes, which subsequently decrease to stabilized levels. While sales volumes are generally higher during the initial opening period, new shops typically experience normal inefficiencies in the form of higher cost of sales, labor and other direct operating expenses and as a result, shop-level profit margins are generally lower during the start-up period of operation. The average start-up period is 10 to 13 weeks. The number and timing of shop openings has had, and is expected to continue to have, an impact on our results of operations.
Shop-Level Profit (Loss) Margin
Shop-level profit (loss) margin is defined as net company-operated sandwich shop sales less company-operated sandwich shop operating expenses, excluding depreciation, which consists of food, beverage and packaging costs, labor and related expenses, occupancy expenses, and other operating expenses, as a percentage of net company-operated sandwich shop sales. Other operating expenses include all other shop-level operating costs, excluding depreciation, the major components of which are credit card fees, fees to third-party marketplace partners, marketing and advertising, shop technology and software, supply chain costs, operating supplies, utilities, and repair and maintenance costs. Shop-level profit (loss) margin is not required by, or presented in accordance with U.S. GAAP. Potbelly believes shop-level profit (loss) margin is important in evaluating shop-level productivity, efficiency and performance.
Adjusted EBITDA
Potbelly defines adjusted EBITDA as net income before depreciation and amortization, interest expense and provision for income taxes, adjusted for the impact of the following items that we do not consider representative of ongoing operating performance: stock-based compensation expense, impairment and shop closure expenses, and gain or loss on disposal of property and equipment as well as other one-time, non-recurring charges, such as CEO transition costs. Potbelly believes that adjusted EBITDA is a useful measure of operating performance, as it provides a picture of operating results by eliminating expenses that management does not believe are reflective of underlying business performance.
21

Table of Contents
Quarter Ended June 26, 2022 Compared to Quarter Ended June 27, 2021
The following table presents information comparing the components of net loss for the periods indicated (dollars in thousands):
 For the Quarter EndedIncrease
(Decrease)
Percent
Change
 June 26,
2022
% of
Revenues
June 27,
2021
% of
Revenues
Revenues
Sandwich shop sales, net$114,992 99.2 %$96,777 99.3 %$18,215 18.8 %
Franchise royalties and fees960 0.8 714 0.7 246 34.5 
Total revenues115,952 100.0 97,491 100.0 18,461 18.9 
Expenses
(Percentages stated as a percent of sandwich shop sales, net)
Sandwich shop operating expenses, excluding depreciation
Food, beverage and packaging costs32,830 28.5 26,341 27.2 6,489 24.6 
Labor and related expenses36,121 31.4 31,961 33.0 4,160 13.0 
Occupancy expenses13,805 12.0 13,562 14.0 243 1.8 
Other operating expenses19,128 16.6 15,570 16.1 3,558 22.9 
(Percentages stated as a percent of total revenues)
Franchise marketing expenses126 0.1 76 NM50 65.8 
General and administrative expenses8,827 7.6 8,674 8.9 153 1.8 
Depreciation expense3,030 2.6 4,553 4.7 (1,523)(33.5)
Impairment, loss on disposal of property and equipment and shop closures1,044 0.9 257 0.3 787 306.2 
Total expenses114,911 99.1 100,994 103.6 13,917 13.8 
Income (loss) from operations1,041 0.9 (3,503)(3.6)4,544 (129.7)
Interest expense, net357 0.3 185 0.2 172 93.0 
Income (loss) before income taxes684 0.6 (3,688)(3.8)4,372 (118.5)
Income tax expense (benefit)(24)NM160 0.2 (184)(115.0)
Net income (loss)708 0.6 (3,848)(3.9)4,556 (118.4)
Net income attributable to non-controlling interest134 0.1 33 NM101 NM
Net income (loss) attributable to Potbelly Corporation$574 0.5 %$(3,881)(4.0)%$4,455 (114.8)%
For the Quarter Ended
Other Key Performance IndicatorsJune 26,
2022
June 27,
2021
Increase
(Decrease)
Comparable store sales17.2 %70.0 %(52.8)%
Shop-level profit margin11.4 %9.7 %1.7 %
Adjusted EBITDA$5,801 $1,929 $3,872 
_____________________________________
"NM" - Amount is not meaningful
22

Table of Contents
Revenues
Total revenues increased by $18.5 million, or 18.9%, to $116.0 million during the quarter ended June 26, 2022, from $97.5 million during the quarter ended June 27, 2021. This increase was primarily driven by the sustained recovery of our shops in central business district and airport locations, improved performance of our catering channel, successful marketing programs, and increased prices to offset cost inflation. Company-operated comparable store sales resulted in an increase in revenue of $16.5 million, or 17.2%. The increases in sales during the first quarter of 2022 also included sales of $2.3 million of shops that were temporarily closed in 2021 that have since re-opened. These increases were partially offset by a decrease in sales of $0.5 million due to shops that have permanently closed during the last year. Additionally, revenue from franchise royalties and fees increased by $0.2 million, or 34.5%.
Food, beverage, and packaging costs
Food, beverage, and packaging costs increased by $6.5 million, or 24.6%, to $32.8 million during the quarter ended June 26, 2022, from $26.3 million during the quarter ended June 27, 2021. This increase was primarily driven by an increase in shop sales volume and increased costs of our food and paper as a result of some of our suppliers experiencing shortages in labor and transportation resources. As a percentage of sandwich shop sales, food, beverage, and packaging costs increased to 28.5% during the quarter ended June 26, 2022, from 27.2% during the quarter ended June 27, 2021, primarily driven by commodity inflation partially offset by increased menu prices.
Labor and Related Expenses
Labor and related expenses increased by $4.2 million, or 13.0%, to $36.1 million during the quarter ended June 26, 2022, from $32.0 million for the quarter ended June 27, 2021, primarily driven by an increase in shop sales volumes and higher shop labor wage rates as a result of labor availability challenges in certain restaurants. As a percentage of sandwich shop sales, labor and related expenses decreased to 31.4% during the quarter ended June 26, 2022, from 33.0% for the quarter ended June 27, 2021, primarily driven by sales leverage in certain labor related costs not directly variable with sales.
Occupancy Expenses
Occupancy expenses increased by $0.2 million, or 1.8%, to $13.8 million during the quarter ended June 26, 2022, from $13.6 million during the quarter ended June 27, 2021, primarily due to an increase in variable lease expenses. As a percentage of sandwich shop sales, occupancy expenses decreased to 12.0% for the quarter ended June 26, 2022, from 14.0% for the quarter ended June 27, 2021, primarily due to increased sales leverage in certain occupancy related costs which are not variable with sales, as well as the impact of lease concessions and restructurings over the last year.
Other Operating Expenses
Other operating expenses increased by $3.6 million, or 22.9%, to $19.1 million during the quarter ended June 26, 2022, from $15.6 million during the quarter ended June 27, 2021. The increase was primarily related to an increase in certain items variable with sales, including fees to third-party delivery partners, and increased marketing and advertising spend. Marketing and advertising expenses included in other operating expenses were $1.8 million and $0.9 million as of the quarter ended June 26, 2022 and the quarter ended June 27, 2021, respectively. As a percentage of sandwich shop sales, other operating expenses increased to 16.6% for the quarter ended June 26, 2022, from 16.1% for the quarter ended June 27, 2021, primarily driven by increased marketing and advertising expenses as noted above, partially offset by sales leverage in operating expense items that are not directly variable with sales.
Franchise marketing expenses
Franchise marketing expenses increased by $50 thousand to $126 thousand during the quarter ended June 26, 2022 compared to $76 thousand during the quarter ended June 27, 2021, driven by increased marketing and advertising expenses allocated from the Brand Fund to franchised shops.
General and Administrative Expenses
General and administrative expenses increased by $0.2 million, or 1.8%, to $8.8 million during the quarter ended June 26, 2022, from $8.7 million during the quarter ended June 27, 2021. This increase was primarily driven by an increase in payroll costs and stock-based compensation expense. As a percentage of revenues, general and administrative expenses decreased to 7.6% for the quarter ended June 26, 2022, from 8.9% for the quarter ended June 27, 2021, primarily driven by increased sales leverage.
23

Table of Contents
Depreciation Expense
Depreciation expense decreased by $1.5 million, or 33.5%, to $3.0 million during quarter ended June 26, 2022, from $4.6 million during the quarter ended June 27, 2021. 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. As a percentage of revenues, depreciation was 2.6% during the quarter ended June 26, 2022 and was 4.7% for the quarter ended June 27, 2021.
Impairment, Loss on Disposal of Property and Equipment and Shop Closures
Impairment, loss on disposal of property and equipment and shop closures decreased by $0.8 million, or 306.2%, to $1.0 million during the quarter ended June 26, 2022, from $0.3 million during the quarter ended June 27, 2021.
After performing a periodic review of our shops during the quarter ended June 26, 2022, it was determined that indicators of impairment were present for certain shops as a result of continued underperformance, primarily related to the impacts of COVID-19. We performed an impairment analysis related to these shops and recorded an impairment charge of $0.9 million for the quarter ended June 26, 2022. 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.
During the quarter ended June 26, 2022, we did not incur any lease termination fees.
Interest Expense, Net
Net interest expense was $357 thousand during the quarter ended June 26, 2022 compared to $185 thousand during the quarter ended June 27, 2021, as a result of higher debt balances on our revolving credit facility agreement.
Income Tax Expense
We recognized an income tax benefit of $24 thousand for the quarter ended June 26, 2022. We recognized income tax expense of $0.2 million for the quarter ended June 27, 2021.
24

Table of Contents
Year to Date Ended June 26, 2022 Compared to Year to Date Ended June 27, 2021
The following table presents information comparing the components of net loss for the periods indicated (dollars in thousands):
 For the Year to Date EndedIncrease
(Decrease)
Percent
Change
 June 26,
2022
% of
Revenues
June 27,
2021
% of
Revenues
Revenues
Sandwich shop sales, net$212,423 99.2 %%$174,279 99.3 %$38,144 21.9 %
Franchise royalties and fees$1,750 0.8 $1,277 0.7