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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 September 24, 2023
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
As of October 22, 2023, the registrant had 29,358,757 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)
September 24,
2023
December 25,
2022
Assets
Current assets
Cash and cash equivalents$30,938 $15,619 
Accounts receivable, net of allowances of $50 and $16 as of September 24, 2023 and December 25, 2022, respectively
7,897 6,420 
Inventories3,585 3,990 
Prepaid expenses and other current assets5,637 4,501 
Total current assets48,057 30,530 
Property and equipment, net45,148 44,477 
Right-of-use assets for operating leases148,336 160,891 
Indefinite-lived intangible assets3,404 3,404 
Goodwill2,122 2,222 
Restricted cash749  
Deferred expenses, net and other assets3,465 3,647 
Total assets$251,281 $245,171 
Liabilities and equity
Current liabilities
Accounts payable$8,955 $10,718 
Accrued expenses32,113 30,826 
Short-term operating lease liabilities27,536 27,395 
Current portion of long-term debt1,250  
Total current liabilities69,854 68,939 
Long-term debt, net of current portion20,918 8,550 
Long-term operating lease liabilities146,414 160,968 
Other long-term liabilities4,436 2,441 
Total liabilities241,622 240,898 
Commitments and contingencies (Note 11)
Equity
Common stock, $0.01 par value—authorized 200,000 shares; outstanding 29,350 and 28,819 shares as of September 24, 2023 and December 25, 2022, respectively
389 384 
Warrants2,219 2,566 
Additional paid-in-capital460,543 455,831 
Treasury stock, held at cost, 10,058 and 9,924 shares as of September 24, 2023, and December 25, 2022, respectively
(116,638)(115,388)
Accumulated deficit(336,532)(338,916)
Total stockholders’ equity9,981 4,477 
Non-controlling interest(322)(204)
Total equity9,659 4,273 
Total liabilities and equity$251,281 $245,171 
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
September 24,
2023
September 25,
2022
September 24,
2023
September 25,
2022
Revenues
Sandwich shop sales, net$118,340 $116,449 $359,995 $328,873 
Franchise royalties, fees and rent income2,428 1,200 5,665 2,950 
Total revenues120,768 117,649 365,660 331,823 
Expenses
Sandwich shop operating expenses, excluding depreciation
Food, beverage and packaging costs32,901 34,814 100,424 94,952 
Labor and related expenses34,188 36,031 108,556 105,405 
Occupancy expenses12,653 13,559 39,046 41,209 
Other operating expenses21,277 19,743 62,686 56,977 
Franchise support, rent and marketing expenses1,553 115 3,359 361 
General and administrative expenses11,894 9,554 33,558 26,899 
Depreciation expense3,044 2,922 8,902 9,089 
Pre-opening costs59  114  
Loss on Franchise Growth Acceleration Initiative activities
110  1,073  
Impairment, loss on disposal of property and equipment and shop closures458 1,616 2,161 3,980 
Total expenses118,137 118,354 359,879 338,872 
Income (loss) from operations2,631 (705)5,781 (7,049)
Interest expense, net853 354 2,531 1,037 
(Gain)/loss on extinguishment of debt
 (10,191)239 (10,191)
Income before income taxes1,778 9,132 3,011 2,105 
Income tax expense (benefit)129 (4)186 148 
Net income1,649 9,136 2,825 1,957 
Net income attributable to non-controlling interest154 107 442 267 
Net income attributable to Potbelly Corporation$1,495 $9,029 $2,383 $1,690 
Net income per common share attributable to common stockholders:
Basic$0.05 $0.31 $0.08 $0.06 
Diluted$0.05 $0.31 $0.08 $0.06 
Weighted average shares outstanding:
Basic29,324 28,726 29,143 28,563 
Diluted30,028 28,867 29,915 28,947 
        
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 26, 202128,380 $380 $(114,577)$2,566 $452,570 $(343,261)$(95)$(2,417)
Net income (loss)— — — — — (7,913)26 (7,887)
Shares issued under equity compensation plan81 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 
Shares issued under equity compensation plan235 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)
Net income— — — — — 9,029 107 9,136 
Shares issued under equity compensation plan95 1 (150)— (1)— — (150)
Distributions to non-controlling interest— — — — — — (147)(147)
Stock-based compensation expense— — — — 951 — — 951 
Balance at September 25, 202228,791 $384 $(115,331)$2,566 $455,012 $(341,571)$(151)$909 
Balance at December 25, 202228,819 $384 $(115,388)$2,566 $455,831 $(338,916)$(204)$4,273 
Net income (loss)— — — — — (1,327)123 (1,204)
Shares issued under equity compensation plan70 1 (337)— (1)— — (337)
Proceeds from exercise of warrants159 1 — (313)1,177 — — 865 
Distributions to non-controlling interest— — — — — — (152)(152)
Stock-based compensation expense— — — — 911 — — 911 
Balance at March 26, 202329,048 $386 $(115,725)$2,253 $457,918 $(340,243)$(233)$4,356 
Net income— — $— $— $— $2,216 $165 $2,381 
Shares issued under equity compensation plan243 3 (772)— (2)— — (771)
Proceeds from exercise of warrants18 — — (34)130 — — 96 
Distributions to non-controlling interest— — — — — — (166)(166)
Stock-based compensation expense— — — — 1,305 — — 1,305 
Balance at June 25, 202329,309 $389 $(116,497)$2,219 $459,351 $(338,027)$(234)$7,201 
Net income— — $— $— $— $1,495 $154 $1,649 
Shares issued under equity compensation plan41  (141)—  — — (141)
Proceeds from exercise of warrants — —   — —  
Distributions to non-controlling interest— — — — — — (242)(242)
Stock-based compensation expense— — — — 1,192 — — 1,192 
Balance at September 24, 202329,350 $389 $(116,638)$2,219 $460,543 $(336,532)$(322)$9,659 
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
September 24,
2023
September 25,
2022
Cash flows from operating activities:
Net income
$2,825 $1,957 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense8,902 9,089 
Noncash lease expense18,890 19,511 
Deferred income tax(82)14 
Stock-based compensation expense3,408 2,446 
Asset impairment, loss on disposal of property and equipment and shop closures824 3,980 
Loss on Franchise Growth Acceleration Initiative activities
1,030  
(Gain)/loss on extinguishment of debt
224 (10,191)
Other operating activities331 205 
Changes in operating assets and liabilities:
Accounts receivable, net(1,499)(2,286)
Inventories227 (169)
Prepaid expenses and other assets(934)(491)
Accounts payable(2,019)1,352 
Operating lease liabilities(20,473)(21,163)
Accrued expenses and other liabilities2,847 (3,236)
Net cash provided by operating activities:14,501 1,018 
Cash flows from investing activities:
Purchases of property and equipment(12,252)(4,914)
Proceeds from sale of refranchised shops1,362  
Net cash used in investing activities:(10,890)(4,914)
 
Cash flows from financing activities:
Borrowings under Term Loan25,000  
Principal payments made for Term Loan(938) 
Borrowings under revolving credit facility14,600 30,550 
Repayments under revolving credit facility(23,150)(30,300)
Payment of debt issuance costs(2,204)(176)
Proceeds from exercise of warrants961  
Employee taxes on certain stock-based payment arrangements(1,251)(702)
Distributions to non-controlling interest(560)(323)
Net cash provided by financing activities:12,458 (951)
Net increase (decrease) in cash and cash equivalents and restricted cash16,069 (4,847)
Cash and cash equivalents and restricted cash at beginning of period15,619 14,353 
Cash and cash equivalents and restricted cash at end of period$31,688 $9,506 
Supplemental cash flow information:
Income taxes paid$428 $139 
Interest paid$2,349 $662 
Supplemental non-cash investing and financing activities:
Gain (loss) on extinguishment of debt and accrued interest
$(224)$10,191 
Unpaid liability for purchases of property and equipment$859 $573 
Unpaid liability for employee taxes on certain stock-based payment arrangements$38 $52 
See accompanying notes to the unaudited condensed consolidated financial statements
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Potbelly Corporation and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (unaudited)
(Dollars and shares in thousands, except per share amounts or where noted)
(1) Organization and Other Matters
Business
Potbelly Corporation, a Delaware corporation, together with its subsidiaries (collectively referred to as the "Company," "Potbelly," "we," "us" or "our"), owns and operates 361 company-operated shops in the United States as of September 24, 2023. Additionally, Potbelly franchisees operate 69 shops domestically.
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 and its subsidiaries and the notes thereto included in our Annual Report on Form 10-K for the year ended December 25, 2022. 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, the accompanying condensed consolidated financial statements contain all adjustments necessary to present fairly the financial position, results of operations and cash flows for the interim periods reported within. . 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.
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.
Principles of Consolidation
The unaudited condensed consolidated financial statements include the accounts of Potbelly; 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 our six consolidated joint ventures, "non-controlling interest" represents the non-controlling partner’s share of the assets, liabilities and operations related to the joint venture investments. Potbelly has ownership interests ranging from 51-80% in these consolidated joint ventures.
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 2023 consists of 53 weeks and fiscal year 2022 consisted of 52 weeks. The fiscal quarters ended September 24, 2023 and September 25, 2022 each consisted of 13 weeks. The year to date periods ended September 24, 2023 and September 25, 2022 each consisted of 39 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.
Franchise Growth Acceleration Initiative
On March 2, 2022, we announced our Franchise Growth Acceleration Initiative, which included a plan to grow our franchise units domestically through multi-unit shop development area agreements, which may include refranchising certain company-operated shops. Deals for refranchised shops typically include cash consideration for the sale of the current shops as well as development agreement fees for commitments to develop new shops to fully penetrate existing markets. On an ongoing basis, we collect additional cash consideration for royalties and lease payments.

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All gains and losses recognized on sales of shops and other expenses incurred to execute a refranchising transaction are included in Loss on Franchising Growth Acceleration Initiative activities in the condensed consolidated statement of operations. Development agreement fees received are recorded in the consolidated balance sheets as accrued expenses or other long-term liabilities, and amortized over the term of the franchise agreement once the shops are opened. For the year to date ended September 24, 2023, we completed refranchising transactions under the Franchise Growth Acceleration Initiative that resulted in the sale of 20 company-operated shops and commitments to develop 28 additional shops. Further details on the impact of these transactions on our financial statements are described in Notes 8 and 12.
Restricted Cash
As of September 24, 2023, we had restricted cash related to funds held in a money market account as collateral for letters of credit to certain lease agreements.
The reconciliation of cash and cash equivalents and restricted cash presented in the condensed consolidated balance sheets to the total amount shown in our condensed consolidated statements of cash flows is as follows:
September 24,
2023
December 25,
2022
Reconciliation of cash, cash equivalents and restricted cash:
Cash and cash equivalents$30,938 $15,619 
Restricted cash, noncurrent749  
Total cash, cash equivalents and restricted cash shown on statement of cash flows$31,688 $15,619 
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.
We manage these advertising and marketing expenses through the Brand Fund using the funds contributed by our shops. These funds are managed 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 shops.
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 recorded to company-operated and franchised shops based on a percentage of sales. Company-operated Brand Fund expense is included within other operating expenses in our condensed consolidated statements of operations. Franchisee Brand Fund expense is presented within franchise support, rent and marketing expenses in our condensed consolidated statements of operations.

(2) Revenue
We primarily earn revenue at a point in time for sandwich shop sales, which can occur in person at a shop, through 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 where revenue is generally recognized over time, as outlined below.
For the year to date ended September 24, 2023, revenue recognized from all revenue sources on point in time sales was $363.4 million, and revenue recognized from sales over time was $2.2 million. For the year to date ended September 25, 2022, revenue recognized from all revenue sources on point in time sales was $330.6 million and revenue recognized from sales over time was $1.2 million.
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Franchise Revenue, including Rent Income
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 term of the franchise agreement once the shops are opened. 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.
We also earn rent income from properties leased by Potbelly and subleased to franchisees. Rent income is recognized on a straight-line basis over the operating lease terms. See Note 6 for further detail.
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 sandwich shop sales, net in the condensed consolidated statements of operations.
We recognized gift card breakage income of $0.6 million and $0.4 million for the year to date ended September 24, 2023 and September 25, 2022, respectively.
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. Once a customer earns a free entrée, that entrée reward will expire after 30 days. 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 deferred revenue liability is established in accrued expenses. The deferral is based on the estimated value of the unredeemed points and free entrées. The estimated value and the estimated redemption rates are based on a historical data analysis of loyalty reward redemptions. Estimated breakage 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.
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 25, 2022
$7,008 $1,677 
Ending balance as of September 24, 2023
6,279 3,502 
Increase (decrease) in contract liability
$(729)$1,825 
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The aggregate value of remaining performance obligations on outstanding contracts was $9.8 million as of September 24, 2023. 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
2023$2,931 
20242,772 
2025318 
2026289 
2027256 
Thereafter3,272 
Total revenue recognized$9,838 
For the quarter and year to date ended September 24, 2023, the amount of revenue recognized related to the December 25, 2022 liability ending balance was $0.4 million and $2.5 million, respectively. For the quarter and year to date ended September 25, 2022, the amount of revenue recognized related to the December 26, 2021 liability ending balance was $0.4 million and $2.2 million. This revenue is related to the recognition of gift card redemptions and upfront franchise fees. For the quarters ended September 24, 2023 and September 25, 2022, 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 and short-term debt under the Credit Agreement, which is further discussed in Note 7, is considered to approximate its fair value as of September 24, 2023, 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 condensed 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 September 24, 2023, it was determined that indicators of impairment were present for certain shops as a result of continued underperformance. We performed an impairment analysis related to these shops and recorded an impairment charge of $0.2 million and $0.9 million for the quarter and year to date ended September 24, 2023.
(4) Earnings 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.
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The following table summarizes the earnings per share calculation:
For the Quarter EndedFor the Year to Date Ended
September 24,
2023
September 25,
2022
September 24,
2023
September 25,
2022
Net income attributable to Potbelly Corporation
$1,495 $9,029 $2,383 $1,690 
Weighted average common stock outstanding-basic29,324 28,726 29,143 28,563 
Plus: Effect of potentially dilutive stock-based compensation awards295 141 392 329 
Plus: Effect of potential warrant exercise409  380 55 
Weighted average common shares outstanding-diluted30,028 28,867 29,915 28,947 
Income per share available to common stockholders-basic
$0.05 $0.31 $0.08 $0.06 
Income per share available to common stockholders-diluted
$0.05 $0.31 $0.08 $0.06 
Potentially dilutive shares that are considered anti-dilutive:
Shares437 2,620 367 647 
(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 September 24, 2023. We did not provide for an income tax expense on our pre-tax income for the quarter and year to date ended September 24, 2023 and September 25, 2022. 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 and 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. In addition, we lease certain properties from third parties that we sublease to franchisees. We remain primarily liable to the landlord for the performance of all obligations in the event that the sublessee does not perform its obligations under the lease. All of our subleases are classified as operating leases with fixed and variable income.
Lessee Disclosures
We did not terminate any leases during the quarter and year to date ended September 24, 2023.
The weighted average operating lease term and discount rate were as follows:
September 24,
2023
September 25,
2022
Weighted average remaining lease term (years)6.276.77
Weighted average discount rate8.74 %8.17 %
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.
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The components of lease cost were as follows (in thousands), which are included in occupancy, general and administrative and franchise support, rent and marketing expense:
For the Quarter Ended
For the Year to Date Ended
September 24,
2023
September 25,
2022
September 24,
2023
September 25,
2022
Operating lease cost$10,231 10,451 $30,406 31,041 
Variable lease cost3,825 2,797 11,188 9,649 
Short-term lease cost77 46 234 259 
Total lease cost$14,133 13,294 $41,828 40,949 
Supplemental disclosures of cash flow information related to leases were as follows (in thousands):
For the Quarter Ended
For the Year to Date Ended
September 24,
2023
September 25,
2022
September 24,
2023
September 25,
2022
Operating cash flows rent paid for operating lease liabilities$10,479 10,254 $31,685 31,179 
Operating right-of-use assets obtained in exchange for new operating lease liabilities4,745 7,361 8,997 17,537 
Reduction in operating right-of-use assets due to lease terminations and modifications$1,392 84 $2,251 1,347 
Maturities of lease liabilities were as follows (in thousands) as of September 24, 2023:
Operating Leases
Remainder of 2023
$10,448 
202441,928 
202539,356 
202635,562 
202729,730 
202823,062 
Thereafter49,296 
Total lease payments229,382 
Less: imputed interest(55,433)
Present value of lease liabilities$173,949 
As of September 24, 2023, we had no significant real estate leases entered into that had not yet commenced.
Lessor Disclosures
We recognized $0.8 million and $1.5 million in franchise rent income during the quarter and year to date ended September 24, 2023 respectively, which is included in franchise royalties, fees and rent income in the condensed consolidated statement of operations. During the quarter and year to date ended September 24, 2023, we incurred $0.9 million and $1.6 million in expenses associated with these leases, which are included in franchise support, rent and
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marketing expenses in the condensed consolidated statement of operations from the inception of the related sublease agreements. The components of lease income were as follows:
For the Quarter Ended
For the Year to Date Ended
September 24,
2023
September 25,
2022
September 24,
2023
September 25,
2022
Number of subleases20  20  
Operating lease income$559 $ $1,159 $ 
Variable lease income266  304  
Franchise rent income$825 $ $1,463 $ 
(7) Debt and Credit Facilities
The components of long-term debt were as follows (in thousands):
September 24,
2023
December 25,
2022
Revolving credit facility$ $8,550 
Term loan credit facility24,062  
Unamortized debt issuance costs(1,894) 
Less: current portion of long-term debt(1,250) 
Total long-term debt$20,918 $8,550 
Term Loan Credit Facility
On February 7, 2023 (the “Closing Date”), we entered into a credit and guaranty agreement (the “Credit Agreement”) with Sagard Holdings Manager LP as administrative agent (the “Administrative Agent”). The Credit Agreement provides for a term loan facility with an aggregate commitment of $25 million (the “Term Loan”). Concurrent with entry into the Credit Agreement, we repaid in full and terminated the obligations and commitments under our existing senior secured credit facility (the “Former Credit Facility”). Upon termination of the Former Credit Facility, we recognized a loss on extinguishment of debt of $0.2 million. The remaining proceeds from the Term Loan were used to pay related transaction fees and expenses, and for general corporate purposes.
The Credit Agreement is scheduled to mature on February 7, 2028. We are required to make principal payments equal to 1.25% of the initial principal of the Term Loan on the last business day of each fiscal quarter. If not previously paid, any remaining principal balance must be repaid on the maturity date.
Loans under the Credit Agreement will initially bear interest, at the Company’s option, at either the term SOFR plus 9.25% per annum or base rate plus 8.25% per annum.
As of September 24, 2023, the effective interest rate was 14.94%.
We may prepay the Term Loan in agreed-upon minimum principal amounts, subject to prepayment fees equal to (a) if the prepayment occurs on or prior to the one (1) year anniversary of the Closing Date, a customary make-whole amount plus 3.00% of the outstanding principal balance of the Term Loan, (b) if the prepayment occurs after such one (1) year anniversary and prior to the two (2) year anniversary of the Closing Date, 3.00% of the outstanding principal balance of the Term Loan, (c) if the prepayment occurs after such second anniversary of the Closing Date and prior to the three (3) year anniversary of the Closing Date 1.00% of the outstanding principal balance of the Term Loan and (d) thereafter, no prepayment fee.
Subject to certain customary exceptions, obligations under the Credit Agreement are guaranteed by the Company and all of the Company’s current and future wholly-owned material domestic subsidiaries and are secured by a first-priority security interest in substantially all of the assets of the Company and its subsidiary guarantors.
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The Credit Agreement contains customary representations and affirmative and negative covenants. Among other things, these covenants restrict the Company’s and certain of its subsidiaries’ ability to incur indebtedness, make certain investments, pay dividends or repurchase stock, and make dispositions and acquisitions. In addition, the Credit Agreement requires that the Company and its wholly-owned subsidiaries maintain certain total net leverage ratios as set forth in the Credit Agreement, an average liquidity amount that shall not be less than $10 million, maximum capital expenditures per year as set forth in the Credit Agreement and fixed charge coverage ratios as set forth in the Credit Agreement.
The Credit Agreement also contains customary events of default. If an event of default occurs, the Administrative Agent and lenders are entitled to take various actions, including the acceleration of amounts due under the Credit Agreement, termination of commitments thereunder and all other actions permitted to be taken by a secured creditor.
In connection with entering into the Credit Agreement, we paid $2.2 million in debt issuance costs, all of which were capitalized. During the quarter and year to date ended September 24, 2023, we amortized $0.1 million and $0.3 million of debt issuance costs, respectively, using the effective interest method, which is included in interest expense in the condensed consolidated statement of operations. As of September 24, 2023, we had $24.1 million outstanding under the Credit Agreement. We are currently in compliance with all financial debt covenants.
(8) Franchise Growth Acceleration Initiative

The following is a summary of the refranchising activities recorded as a result of the Franchise Growth Acceleration Initiative during the quarter and year ended September 24, 2023 and September 25, 2022:

For the Quarter Ended
For the Year to Date Ended
September 24,
2023
September 25,
2022
September 24,
2023
September 25,
2022
Number of shops sold to franchisees12  20  
Proceeds from sale of company-operated shops$1,269 $ $1,369 $ 
Net assets sold(1,283) (1,796) 
Goodwill related to the company-operated shops sold to franchisee(79) (100) 
Loss on sale of company-operated shops, net(93) (527) 
Adjustment to recognize held-for-sale assets at fair value  (503) 
Other expenses (a)
(17) (43) 
Loss on Franchise Growth Acceleration Initiative activities
$110 $ $1,073 $ 
______________________________
(a)These costs primarily include professional service fees and travel expenses incurred to execute the refranchise transaction.
(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 ended September 24, 2023, 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
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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 currently exercisable until 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. During the quarter ended September 24, 2023, no warrants were exercised. For the year to date ended September 24, 2023, 176,272 warrants were exercised at the exercise price of $5.45 per warrant. As of September 24, 2023, we had 1,123,589 warrants outstanding that are exercisable through August 12, 2026.
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 September 24, 2023, 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 our senior leadership team. The number of options and exercise price of each option is determined by an independent 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 September 24, 2023 is $10.59 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 for the year to date ended September 24, 2023 is as follows:
Options
Shares
(Thousands)
Weighted
Average
Exercise
Price
Aggregate
Intrinsic
Value
(Thousands)
Weighted
Average
Remaining
Term
(Years)
Outstanding—December 25, 2022
473 $12.22 $ 1.46
Granted  
Exercised  
Canceled(345)11.64 
Outstanding—September 24, 2023
128 $13.78 $ 1.62
Exercisable—September 24, 2023
128 13.78 $ 1.62
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 or year to date ended September 24, 2023 or the quarter ended September 25, 2022. For the year to date ended September 25, 2022, we recognized stock-based compensation expense related to stock options of less than $0.1 million. As of September 24, 2023, we did 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. Grants of RSUs to our Board of Directors 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 generally vest in one-third increments over a three-year period.
A summary of RSU activity for the year to date ended September 24, 2023 is as follows:
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RSUs
Number of RSUs
(Thousands)
Weighted Average
Fair Value per Share
Non-vested as of December 25, 2022
908 $4.25 
Granted599 7.42 
Vested(610)5.06 
Canceled(69)6.45 
Non-vested as of September 24, 2023
828 $7.12 
For the quarter and year to date ended September 24, 2023, we recognized stock-based compensation expense related to RSUs of $0.8 million and $2.4 million, respectively. For the quarter and year to date ended September 25, 2022, we recognized stock-based compensation expense related to RSUs of $0.8 million and $2.1 million, respectively. As of September 24, 2023, unrecognized stock-based compensation expense for RSUs was $5.6 million, which will be recognized through fiscal year 2024.
Performance stock units
We award performance share units ("PSUs") to certain of our employees. We have PSUs that have certain vesting conditions based upon our stock price and relative stock performance. We also have PSUs that are based solely on stock price.
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 September 24, 2023, we recognized stock-based compensation expense for PSUs with market vesting conditions of $0.4 million and $1.0 million, respectively. For the quarter and year to date ended September 25, 2022, we recognized stock-based compensation expense for PSUs with market vesting conditions of $0.2 million and $0.4 million, respectively.
A summary of activity for PSUs with market vesting conditions for the year to date ended September 24, 2023 is as follows:
PSUs
Number
of PSUs
(Thousands)
Weighted
Average
Fair Value
per Share
Non-vested as of December 25, 2022
275 9.34 
Granted297 9.79 
Vested(18)4.30 
Canceled(40)6.24 
Non-vested as of September 24, 2023
514 $9.59
(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 our 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 normal purchases of our food products and not for speculative purposes, and as such are not required to be evaluated as derivative instruments.
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(12) Subsequent Events
On October 30, 2023, we completed a multi-unit development agreement which included the refranchising of four shops in the greater Columbus, Ohio region. We received $3.3 million in cash proceeds for the sale of these shop assets, and we expect to recognize a gain on the sale the fourth quarter of 2023 of between $2.0 and $3.0 million.
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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 25, 2022. 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" Five-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, compliance with covenants in our credit facility; competition; general economic conditions including any impact from inflation; our ability to successfully implement our business strategy; the success of our initiatives to increase sales and traffic, including the success of our franchising initiatives; changes in commodity, energy, labor and other costs; our ability to attract and retain management and employees and adequately staff our restaurants; 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 25, 2022, 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 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" Five-Pillar strategic plan includes a prioritized set of low-cost strategic investments that we believe will deliver strong returns. The five 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
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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.
We are actively executing against our Franchise Growth Acceleration Initiative which includes the goal of refranchising approximately 25% of our company-operated shops 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 26, 2021397 46 443 
Shops opened— 
Shops closed(9)(1)(10)
Shops refranchised— — — 
Shops as of September 25, 2022388 46 434 
Shops as of December 25, 2022384 45 429 
Shops opened
Shops closed(4)— (4)
Shops refranchised(20)20 — 
Shops as of September 24, 2023361 69 430 
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, number of company-operated shop openings, 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 company-operated store base to include those shops open for 15 months or longer. As of the quarters ended September 24, 2023 and September 25, 2022, there were 360 and 382 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 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. With our focus on franchise shop development, we expect company shop development to be limited for the foreseeable future.
Shop-Level Profit Margin
Shop-level profit 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
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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 margin is not required by, or presented in accordance with U.S. GAAP. We believe shop-level profit margin is important in evaluating shop-level productivity, efficiency and performance.
Adjusted EBITDA
We define Adjusted EBITDA as net income attributable to Potbelly before depreciation and amortization, interest expense and the 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, gain or loss on disposal of property and equipment, and gain or loss on Franchise Growth Acceleration Initiative activities, as well as other one-time, non-recurring charges. Adjusted EBITDA is not required by or presented in accordance with U.S. GAAP. We believe 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.
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Quarter Ended September 24, 2023 Compared to Quarter Ended September 25, 2022
The following table presents information comparing the components of net income for the periods indicated (dollars in thousands):
 For the Quarter EndedIncrease
(Decrease)
Percent
Change
 September 24,
2023
% of
Revenues
September 25,
2022
% of
Revenues
Revenues
Sandwich shop sales, net$118,340 98.0 $116,449 99.0 $1,891 1.6 
Franchise royalties, fees and rent income2,428 2.0 1,200 1.0 1,228 102.3 
Total revenues120,768 100.0 117,649 100.0 3,119 2.7 
Expenses
(Percentages stated as a percent of sandwich shop sales, net)
Sandwich shop operating expenses, excluding depreciation
Food, beverage and packaging costs32,901 27.8 34,814 29.9 (1,913)(5.5)
Labor and related expenses34,188 28.9 36,031 30.9 (1,843)(5.1)
Occupancy expenses12,653 10.7 13,559 11.6 (906)(6.7)
Other operating expenses21,277 18.0 19,743 17.0 1,534 7.8 
(Percentages stated as a percent of total revenues)
Franchise support, rent and marketing expenses1,553 1.3 115 NM1,438 NM
General and administrative expenses11,894 9.8 9,554 8.1 2,340 24.5 
Depreciation expense3,044 2.5 2,922 2.5 122 4.2 
Pre-opening costs59 NM— NM59 NM
Loss on Franchise Growth Acceleration Initiative activities
110 NM— NM110 NM
Impairment, loss on disposal of property and equipment and shop closures458 0.4 1,616 1.4 (1,158)(71.7)
Total expenses118,137 97.8 118,354 100.6 (217)(0.2)
Income (loss) from operations2,631 2.2 (705)(0.6)3,336 NM
Interest expense, net853 0.7 354 0.3 499 141.0 
(Gain)/loss on extinguishment of debt
— NM(10,191)(8.7)10,191 NM
Income before income taxes1,778 1.5 9,132 7.8 (7,354)(80.5)
Income tax expense (benefit)129 0.1 (4)NM133 NM
Net income1,649 1.4 9,136 7.8 (7,487)(82.0)
Net income attributable to non-controlling interest154 0.1 107 NM47 43.9 
Net income attributable to Potbelly Corporation$1,495 1.2 $9,029 7.7 $(7,534)(83.4)
For the Quarter Ended
Other Key Performance IndicatorsSeptember 24,
2023
September 25,
2022
Increase
(Decrease)
Comparable store sales8.0 %15.0 %(7.0)%
Shop-level profit margin(1)
14.6 %10.6 %4.1 %
Adjusted EBITDA(1)
$7,281 $4,677 $2,604 
_____________________________________
(1) - Reconciliation below for Non-GAAP measures
"NM" - Amount is not meaningful


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Revenues
Total revenues increased by $3.1 million, or 2.7%, to $120.8 million during the quarter ended September 24, 2023, from $117.6 million during the quarter ended September 25, 2022, primarily driven by company-operated comparable store sales increasing $8.8 million, or 8.0%. This increase was partially offset by a decrease in sales of $7.4 million from shops that have either permanently closed or were refranchised over the last 12 months. Additionally, revenue from franchise royalties, fees and rent income increased by $1.2 million, or 102.3% primarily driven by our increased refranchising efforts.
Food, Beverage, and Packaging Costs
Food, beverage, and packaging costs decreased by $1.9 million, or 5.5%, to $32.9 million during the quarter ended September 24, 2023, from $34.8 million during the quarter ended September 25, 2022. This decrease was primarily driven by lower costs of protein and lower costs from stores that either permanently closed or were refranchised over the last 12 months. As a percentage of sandwich shop sales, food, beverage, and packaging costs decreased to 27.8% during the quarter ended September 24, 2023, from 29.9% during the quarter ended September 25, 2022, primarily driven by a decrease in costs and lower inflation and, to a lesser extent, increased menu prices.
Labor and Related Expenses
Labor and related expenses decreased by $1.8 million, or 5.1%, to $34.2 million during the quarter ended September 24, 2023, from $36.0 million for the quarter ended September 25, 2022, primarily driven by shops that were either permanently closed or were refranchised over the last 12 months and the continued optimization of our hours-based labor guide and other labor-saving initiatives. As a percentage of sandwich shop sales, labor and related expenses decreased to 28.9% during the quarter ended September 24, 2023, from 30.9% for the quarter ended September 25, 2022, primarily driven by the previously noted items.
Occupancy Expenses
Occupancy expenses decreased by $0.9 million, or 6.7%, to $12.7 million during the quarter ended September 24, 2023, from $13.6 million during the quarter ended September 25, 2022, primarily due to a decrease in fixed lease expenses as a result of our refranchising efforts, partially offset by an increase in variable lease expenses. As a percentage of sandwich shop sales, occupancy expenses decreased to 10.7% for the quarter ended September 24, 2023, from 11.6% for the quarter ended September 25, 2022, primarily due to increased sales leverage in certain fixed occupancy related costs.
Other Operating Expenses
Other operating expenses increased by $1.5 million, or 7.8%, to $21.3 million during the quarter ended September 24, 2023, from $19.7 million during the quarter ended September 25, 2022. The increase was primarily related to an increase in marketing and advertising spend and certain items variable with sales, including fees to third-party delivery partners and credit card fees. As a percentage of sandwich shop sales, other operating expenses increased to 18.0% for the quarter ended September 24, 2023, from 17.0% for the quarter ended September 25, 2022, primarily driven by the increase in marketing and advertising spend.
Franchise Support, Rent and Marketing Expenses
Franchise support, rent and marketing expenses increased by $1.4 million to $1.6 million during the quarter ended September 24, 2023 compared to $0.1 million during the quarter ended September 25, 2022, driven by an increase in franchise rent expense as a result of the refranchising transactions executed throughout fiscal year 2023 as well as increased marketing and advertising expenses.
General and Administrative Expenses
General and administrative expenses increased by $2.3 million, or 24.5%, to $11.9 million during the quarter ended September 24, 2023, from $9.6 million during the quarter ended September 25, 2022. 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 increased to 9.8% for the quarter ended September 24, 2023, from 8.1% for the quarter ended September 25, 2022, primarily driven by an increase in corporate headcount to support our growth and development initiatives.
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Depreciation Expense
Depreciation expense increased by $0.1 million, or 4.2%, to $3.0 million during the quarter ended September 24, 2023, from $2.9 million during the quarter ended September 25, 2022. As a percentage of revenues, depreciation was 2.5% during the quarter ended September 24, 2023, which is consistent with the quarter ended September 25, 2022.
Impairment, Loss on Disposal of Property and Equipment and Shop Closures
Impairment, loss on disposal of property and equipment and shop closures decreased by $1.2 million, or 71.7%, to $0.4 million during the quarter ended September 24, 2023, from $1.6 million during the quarter ended September 25, 2022. The decrease in impairment was driven primarily by an increase in the performance of company-operated shops.
After performing a periodic review of our shops during the quarter ended September 24, 2023, it was determined that indicators of impairment were present for certain shops as a result of continued underperformance. We performed an impairment analysis related to these shops and recorded an impairment charge of $0.4 million for the quarter ended September 24, 2023.
During the quarters ended September 24, 2023 and September 25, 2022, we did not incur any lease termination fees.
Interest Expense, Net
Net interest expense was $0.9 million during the quarter ended September 24, 2023 compared to $0.4 million during the quarter ended September 25, 2022, the increase was due to higher interest rates and average borrowings outstanding as a result of the Term Loan entered into in February 2023. The increase was partially offset by interest income generated through investments in money market funds of $0.2 million during the quarter ended September 24, 2023.
Income Tax Expense
We recognized income tax expense of $129 thousand for the quarter ended September 24, 2023. We recognized an income tax benefit of $4 thousand for the quarter ended September 25, 2022.

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Year to Date Ended September 24, 2023 Compared to Year to Date Ended September 25, 2022
The following table presents information comparing the components of net income for the periods indicated (dollars in thousands):
 For the Year to Date EndedIncrease
(Decrease)
Percent
Change
 September 24,
2023
% of
Revenues
September 25,
2022
% of
Revenues
Revenues
Sandwich shop sales, net$359,995 98.5 %$328,873 99.1 %$31,122 9.5 
Franchise royalties, fees and rent income$5,665 1.5 $2,950 0.9 2,715 92.0 
Total revenues365,660 100.0 $331,823 100.0 33,837 10.2 
Expenses
(Percentages stated as a percent of sandwich shop sales, net)
Sandwich shop operating expenses, excluding depreciation
Food, beverage and packaging costs100,424 27.9 94,952 28.9 5,472 5.8 
Labor and related expenses108,556 30.2 105,405 32.1 3,151 3.0 
Occupancy expenses39,046 10.8 41,209 12.5 (2,163)(5.2)
Other operating expenses62,686 17.4 56,977 17.3 5,709 10.0 
(Percentages stated as a percent of total revenues)
Franchise support, rent and marketing expenses3,359 0.9 361 0.1 2,998 NM
General and administrative expenses33,558 9.2 26,899 8.1 6,659 24.8 
Depreciation expense8,902 2.4 9,089 2.7 (187)(2.1)
Pre-opening costs114 NM— NM114 NM
Loss on Franchise Growth Acceleration Initiative activities1,073 0.3 — NM1,073 NM
Impairment, loss on disposal of property and equipment and shop closures2,161 0.6 3,980 1.2 (1,819)(45.7)
Total expenses359,879 98.4 338,872 102.1 21,007 6.2 
Income (loss) from operations5,781 1.6 (7,049)(2.1)12,830 NM
Interest expense, net2,531 0.7 1,037 0.3 1,494 144.1 
Gain on extinguishment of debt239 0.1 (10,191)NM10,430 (102.3)
Income (loss) before income taxes3,011 0.8 2,105 0.6 906 43.0 
Income tax expense (benefit)186 NM148 NM38 25.7 
Net income (loss)2,825 0.8 1,957 0.6 868 44.4 
Net income attributable to non-controlling interest442 0.1 267 NM175 65.5