10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 30, 2014

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from                      to                     

Commission File Number: 001-36104

 

 

Potbelly Corporation

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   36-4466837

(State or Other Jurisdiction of

Incorporation)

 

(IRS Employer

Identification Number)

222 Merchandise Mart Plaza, 23rd Floor

Chicago, Illinois 60654

(Address, including Zip Code, of Principal Executive Offices)

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

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

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

Common stock, $0.01 Par Value – 29,255,472 shares as of April 30, 2014

 

 

 


Table of Contents

POTBELLY CORPORATION

QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS

 

         Page  

PART I.

  FINANCIAL INFORMATION   

Item 1.

  Financial Statements      3   
  Condensed Consolidated Balance Sheets      3   
  Condensed Consolidated Statements of Operations      4   
  Condensed Consolidated Statement of Redeemable Convertible Preferred Stock and Equity (Deficit)      5   
  Condensed Consolidated Statements of Cash Flows      6   
  Notes to Condensed Consolidated Financial Statements      7   

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      10   

Item 3.

  Quantitative and Qualitative Disclosures About Market Risk      14   

Item 4.

  Controls and Procedures      14   

PART II.

  OTHER INFORMATION   

Item 1.

  Legal Proceedings      14   

Item 1A.

  Risk Factors      14   

Item 6.

  Exhibits      14   
  Signature      15   

 

2


Table of Contents

PART I. FINANCIAL INFORMATION.

ITEM 1. FINANCIAL STATEMENTS.

POTBELLY CORPORATION AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

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

 

     March 30,
2014
    December 29,
2013
 

ASSETS

    

Current assets

    

Cash and cash equivalents

   $ 69,547      $ 69,579   

Accounts receivable, net of allowances of $11 and $6 as of March 30, 2014 and December 29, 2013, respectively

     3,862        2,991   

Inventories

     2,182        2,263   

Prepaid expenses and other current assets

     8,553        6,965   
  

 

 

   

 

 

 

Total current assets

     84,144        81,798   

Property and equipment, net

     79,007        78,983   

Intangible assets, net

     3,404        3,404   

Goodwill

     1,428        1,428   

Deferred income taxes

     17,661        17,297   

Deferred expenses, net and other assets

     3,141        3,170   
  

 

 

   

 

 

 

Total assets

   $ 188,785      $ 186,080   
  

 

 

   

 

 

 

LIABILITIES AND EQUITY

    

Current liabilities

    

Accounts payable

   $ 3,424      $ 2,078   

Accrued expenses

     17,382        16,337   

Accrued income taxes

     29        216   

Current portion of long-term debt

     74        74   
  

 

 

   

 

 

 

Total current liabilities

     20,909        18,705   

Long-term debt, net of current portion

     997        1,018   

Deferred rent and landlord allowances

     12,632        12,288   

Other long-term liabilities

     770        796   
  

 

 

   

 

 

 

Total liabilities

     35,308        32,807   
  

 

 

   

 

 

 

Equity

    

Common stock, $0.01 par value—authorized, 200,000,000 shares; issued and outstanding 29,151,428 and 29,148,029 shares as of March 30, 2014, and December 29, 2013, respectively

     291        291   

Warrants

     909        909   

Additional paid-in-capital

     383,573        383,077   

Accumulated deficit

     (231,533     (231,232
  

 

 

   

 

 

 

Total stockholders’ equity

     153,240        153,045   

Non-controlling interest

     237        228   
  

 

 

   

 

 

 

Total equity

     153,477        153,273   
  

 

 

   

 

 

 

Total liabilities and equity

   $ 188,785      $ 186,080   
  

 

 

   

 

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

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Table of Contents

POTBELLY CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

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

 

     13 Weeks Ended  
     March 30,
2014
    March 31,
2013
 

Revenues

    

Sandwich shop sales, net

   $ 73,523      $ 68,541   

Franchise royalties and fees

     358        203   
  

 

 

   

 

 

 

Total revenues

     73,881        68,744   
  

 

 

   

 

 

 

Expenses

    

Sandwich shop operating expenses

    

Cost of goods sold, excluding depreciation

     21,086        19,993   

Labor and related expenses

     21,460        19,791   

Occupancy expenses

     9,979        8,719   

Other operating expenses

     8,158        7,211   

General and administrative expenses

     7,822        8,182   

Depreciation expense

     4,717        4,380   

Pre-opening costs

     252        290   

Impairment and loss on disposal of property and equipment

     848        26   
  

 

 

   

 

 

 

Total expenses

     74,322        68,592   
  

 

 

   

 

 

 

(Loss) income from operations

     (441     152   

Interest expense

     42        112   

Other expense

     —         2   
  

 

 

   

 

 

 

(Loss) income before income taxes

     (483     38   

Income tax (benefit) expense

     (191     16   
  

 

 

   

 

 

 

Net (loss) income

     (292     22   

Net income attributable to non-controlling interest

     9       4   
  

 

 

   

 

 

 

Net (loss) income attributable to Potbelly Corporation

     (301     18   

Accretion of redeemable convertible preferred stock to maximum redemption value

     —         (7,396
  

 

 

   

 

 

 

Net (loss) attributable to common stockholders

   $ (301   $ (7,378
  

 

 

   

 

 

 

Net (loss) per common share attributable to common stockholders:

    

Basic

   $ (0.01   $ (1.74

Diluted

   $ (0.01   $ (1.74

Weighted average shares outstanding:

    

Basic

     29,150,824        4,238,624   

Diluted

     29,150,824        4,238,624   

See accompanying notes to the unaudited condensed consolidated financial statements.

 

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Table of Contents

POTBELLY CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Redeemable Convertible Preferred Stock and Equity (Deficit)

(amounts in thousands, except share data, unaudited)

 

    Redeemable Convertible Preferred Stock     Equity (Deficit)     Total
Equity
 
    Series A     Series B     Series C     Series D     Series E     Series F     Total     Common
Stock
          Additional
Paid-In-
    Accumu-
lated
    Non-
Cont-
rolling
   
    Shares     Amount     Shares     Amount     Shares     Amount     Shares     Amount     Shares     Amount     Shares     Amount     Shares     Amount     Shares     Amount     Warrants     Capital     Deficit     Interest     (Deficit)  

Balance at December 30, 2012

    3,697,377      $ 52,796        3,290,294      $ 46,983        1,646,595      $ 23,715        1,250,000      $ 18,319        4,194,366      $ 79,861        2,007,743      $ 28,669        16,086,375      $ 250,343        4,233,977      $ 42      $ 1,552      $ —        $ (170,518   $ 196      $ (168,728

Net income

    —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          18       4       22   

Beneficial Conversion Charge

    —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          50        (50     —          —     

Exercise of stock warrants

    —          —          —          —          —          —          —          —          —          —          —          —          —          —          8       —          (45     45       —          —          —     

Amortization of stock-based compensation

    —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          708        —          —          708  

Changes in redemption value of preferred stock

    —          1,197        —          1,065       —          537       —          424       —          3,523       —          650       —          7,396       —          —          —          (803     (6,593     —          (7,396
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2013

    3,697,377      $ 53,993        3,290,294      $ 48,048        1,646,595      $ 24,252        1,250,000      $ 18,743        4,194,366      $ 83,384        2,007,743      $ 29,319        16,086,375      $ 257,739        4,233,985      $ 42      $ 1,507      $ —        $ (177,143   $ 200      $ (175,394
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 29, 2013

    —          —          —          —          —          —          —          —          —          —          —          —          —          —          29,148,029      $ 291      $ 909      $ 383,077      $ (231,232   $ 228      $ 153,273   

Net loss

    —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          (301 )     9       (292 )

Exercise of stock options

    —          —          —          —          —          —          —          —          —          —          —          —          —          —          3,399       —          —          8       —          —          8  

Amortization of stock-based compensation

    —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          —          488        —          —          488  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 30, 2014

    —          —          —          —          —          —          —          —          —          —          —          —          —          —          29,151,428      $ 291      $ 909      $ 383,573      $ (231,533   $ 237      $ 153,477   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

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POTBELLY CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(amounts in thousands, unaudited)

 

     13 Weeks Ended  
     March 30,
2014
    March 31,
2013
 

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net (loss) income

   $ (292   $ 22   

Adjustments to reconcile net (loss) income to net cash provided by operating activities:

    

Depreciation

     4,717        4,380   

Deferred income tax

     (364     10   

Deferred rent and landlord allowances

     344        (32

Amortization of stock compensation expense

     488        708   

Asset impairment and disposal of property and equipment

     848        26   

Amortization of debt issuance costs

     18        11   

Changes in operating assets and liabilities:

    

Accounts receivable, net

     (871     (126

Inventories

     81        (78

Prepaid expenses and other assets

     (1,641     (269

Accounts payable

     1,324        397   

Accrued and other liabilities

     1,864        2,866   
  

 

 

   

 

 

 

Net cash provided by operating activities

     6,516        7,915   
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Purchases of property and equipment

     (6,536     (6,834
  

 

 

   

 

 

 

Net cash (used in) investing activities

     (6,536     (6,834
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

    

Proceeds from exercise of stock options

     8        —    

Payment of costs associated with initial public offering

     —         (369 )

Payments on note payable

     (20     (19
  

 

 

   

 

 

 

Net cash (used in) financing activities

     (12     (388
  

 

 

   

 

 

 

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS

     (32     693   

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

     69,579        22,595   
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

   $ 69,547      $ 23,288   
  

 

 

   

 

 

 

Supplemental cash flow information:

    

Income taxes paid

   $ 356      $ 103   

Interest paid

     42        92   

Supplemental non-cash investing and financing activities:

    

Unpaid liability for purchases of property and equipment

   $ 1,626      $ 2,118   

Accretion of redeemable convertible preferred stock to maximum redemption value

     —          7,396   

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

(1) Organization and Other Matters

Business

Potbelly Corporation (the “Company” or “Potbelly”), through its wholly owned subsidiary, Potbelly Sandwich Works LLC, operates Potbelly Sandwich Works sandwich shops in 21 states and the District of Columbia. As of March 30, 2014, the Company had 305 company-operated shops. During the 13 weeks ended March 30, 2014, the Company opened nine new company-operated shops and closed no shops.

The Company also sells and administers franchises of new Potbelly Sandwich Works sandwich shops. The first domestic and international franchise locations administered by the Company opened during February 2011. As of March 30, 2014, twelve franchised shops were in operation in domestic locations and thirteen franchised shops were in operation internationally.

Basis of Presentation

The unaudited condensed consolidated financial statements and notes herein should be read in conjunction with the audited consolidated financial statements of Potbelly Corporation and its subsidiaries and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 29, 2013. The unaudited condensed consolidated financial statements included herein have been prepared by the Company without audit, pursuant to the rules and regulations of the SEC regarding interim financial reporting. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to the SEC’s rules and regulations. In the opinion of management, all adjustments, which are of a normal and recurring nature (except as otherwise noted), that are necessary to present fairly the Company’s financial position as of December 29, 2013 and March 30, 2014, its statement of operations for the 13 weeks ended March 31, 2013 and March 30, 2014 and its statement of cash flows for the 13 weeks ended March 31, 2013 and March 30, 2014 have been included. The consolidated statements of operations for the interim periods presented herein are not necessarily indicative of the results to be expected for the full year.

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

Principles of Consolidation

The unaudited condensed consolidated financial statements include the accounts of Potbelly Corporation; its wholly owned subsidiary, Potbelly Illinois, Inc. (“PII”); PII’s wholly owned subsidiaries, Potbelly Franchising, LLC, Potbelly Sandwich Works, LLC (“LLC”) and 17 of LLC’s wholly owned subsidiaries, collectively, the “Company.” All significant intercompany balances and transactions have been eliminated in consolidation. For the Company’s consolidated joint venture, non-controlling interest represents the non-controlling partner’s share of the assets, liabilities and operations related to the joint venture investment in Potbelly Airport II Boston, LLC, related to one shop located in the Boston Logan International Airport. The Company owns a seventy-five percent interest in this consolidated joint venture.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions, primarily related to long-lived assets, income taxes, stock-based compensation and common stock equity valuations, that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Fiscal Year

The Company uses a 52/53-week fiscal year that ends on the last Sunday of the calendar year. Approximately every five or six years a 53rd week is added. Fiscal 2013 and 2014 each consist of 52 weeks. The fiscal quarters ended March 31, 2013 and March 30, 2014 each consisted of 13 weeks.

 

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Table of Contents

POTBELLY CORPORATION AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

 

(2) Fair Value Measurements

The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and all other current liabilities approximate fair values due to the short maturities of these balances.

The Company assesses potential impairments to its long-lived assets, which includes property and equipment, whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. Shop-level assets are grouped at the individual shop-level for the purpose of the impairment assessment. Recoverability of an asset is measured by a comparison of the carrying amount of an asset to its estimated undiscounted future cash flows expected to be generated by the asset. 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 exceeds the fair value of the asset. The fair value of the shop assets was 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. 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, it was determined that indicators of impairment were present for certain shops as a result of continued underperformance of shop profitability. We performed an impairment analysis related to these shops and recorded an impairment charge of $0.8 million related to the excess of the carrying amounts recorded on our balance sheet over the identified shops’ estimated fair values as of March 30, 2014.

(3) Earnings per share

Basic income (loss) per common share attributable to common stockholders is calculated using the weighted average number of common shares outstanding for the period. For the 13 weeks ended March 31, 2013, diluted income (loss) per common share attributable to common stockholders was computed by dividing the income (loss) allocated to common stockholders utilizing the two-class method by the weighted average number of fully diluted common shares outstanding. The Company’s redeemable convertible preferred stock were all considered participating securities requiring the two-class method to calculate basic and diluted earnings per share. In periods of a net loss attributable to common stockholders, the redeemable convertible preferred stock were excluded from the computation of basic earnings per share due to the fact that they are not required to fund losses and the redemption amount is not reduced as a result of losses. For the 13 weeks ended March 31, 2013, the dilutive securities did not include stock options awarded to employees that had a performance condition requiring the completion of an initial public offering of common stock, as that performance condition was not satisfied at the reporting date and the holders of these options had no rights in our undistributed earnings until that time. For the 13 weeks ended March 30, 2014, diluted income (loss) per common share attributable to common stockholders was calculated using income available to common shareholders divided by diluted weighted-average shares of common stock outstanding during the period.

 

     13 Weeks Ended  
     March 30,
2014
    March 31,
2013
 

Calculation of undistributed (loss) for basic and diluted shares:

    

Net (loss) income attributable to Potbelly Corporation

   $ (301   $ 18   

Less: Accretion of redeemable convertible preferred stock to maximum redemption value

     —         (7,396
  

 

 

   

 

 

 

Undistributed (loss) for basic and diluted shares

     (301   $ (7,378
  

 

 

   

 

 

 

Allocation of undistributed (loss) to participating securities:

    

Common shares

   $ (301   $ (7,378

Redeemable convertible preferred shares

     —          —     
  

 

 

   

 

 

 

Undistributed (loss)

   $ (301   $ (7,378
  

 

 

   

 

 

 

Weighted average common shares outstanding-basic

     29,150,824        4,238,624   

Plus: Effect of potential stock options exercise

     —          —     

Plus: Effect of potential warrant exercise

     —          —     
  

 

 

   

 

 

 

Weighted average common shares outstanding-diluted

     29,150,824        4,238,624   
  

 

 

   

 

 

 

(Loss) per share available to common stockholders-basic

   $ (0.01   $ (1.74

(Loss) per share available to common stockholders-diluted

   $ (0.01   $ (1.74

Potentially dilutive shares that are considered anti-dilutive:

    

Common share options

     5,238,508        4,418,825   

Warrants

     241,704        241,704   

For the 13 weeks ended March 31, 2013 and March 30, 2014, the Company’s potential common stock instruments such as common share options and warrants were not included in the computation of diluted (loss) per common share as the effect of including these shares in the calculation would have been anti-dilutive.

 

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POTBELLY CORPORATION AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

 

(4) Income Taxes

The Company recognized an income tax benefit of $0.2 million on pre-tax loss of $0.5 million, or an effective tax rate of 39.5%, for the 13 weeks ended March 30, 2014, compared to income tax expense of $16 thousand on pre-tax income of $38 thousand, or an effective tax rate of 42.1%, for the 13 weeks ended March 31, 2013. The difference between the statutory rate and the effective tax rate is primarily attributable to state income taxes and certain federal and state tax credits. The decrease in the effective tax rate primarily relates to the Company recognizing certain federal tax credits, which were not recognized in the comparable prior period.

(5) Capital Stock

On October 9, 2013, the Company completed an initial public offering. Effective upon the closing of such offering, all shares of preferred stock and non-voting common stock converted into common stock. The terms of the non-voting common stock provided that all shares of non-voting common stock would convert into voting common stock on a 1:1 basis immediately prior to the closing of an underwritten IPO or sale of the Company. The redeemable convertible preferred stock included down-round provisions which would adjust the conversion price for any additional stock issued without consideration or for a consideration per share less than the respective conversion price for one or more of the series of preferred stock in effect immediately prior to the issuance of such additional stock. Each share of common stock has the same relative rights and was identical in all respects to each other share of common stock. Each holder of shares of common stock is entitled to one vote for each share held by such holder at all meetings of stockholders.

(6) Stock Options

On March 6, 2014, the Company issued 247,767 stock options under the 2013 Long-Term Incentive Plan to eligible employees and key executives. The fair value of the options was determined using the Black-Scholes option pricing model. The Company used the following assumptions for purposes of valuing these option grants: common stock fair value of $20.53 per share; expected life of options – seven years; volatility- 49.61%; risk-free interest rate – 1.13%; and dividend yield – 0.00%. The Company used the simplified method for determining the expected life of the options. Due to the lack of historical data as a newly public company, the Company calculated the specific stock price volatility using a blended volatility rate based on comparable publicly traded companies.

A summary of activity for the thirteen weeks ended March 30, 2014 is as follows:

 

Options

   Shares
(Thousands)
    Weighted
Average
Exercise

Price
     Aggregate
Intrinsic
Value

(Thousands)
     Weighted
Average

Remaining
Term
(Years)
 

Outstanding—December 29, 2013

     5,030      $ 9.41       $ 78,575         6.31   
       

 

 

    

Granted

     248        20.53         

Exercised

     (3     8.38         

Canceled

     (36     12.67         
  

 

 

         

Outstanding—March 30, 2014

     5,239        9.91       $ 41,564         6.23   
  

 

 

      

 

 

    

Exercisable—March 30, 2014

     3,921        13.24       $ 38,203         8.32   
  

 

 

      

 

 

    

In accordance with ASC Topic 718, Compensation—Stock Compensation, stock-based compensation is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the requisite employee service period (generally the vesting period of the grant). The Company recognized $0.5 million and $0.7 million for the 13 weeks ended March 30, 2014 and March 31, 2013, respectively, with a corresponding increase to additional paid-in-capital. As of March 30, 2014 and March 31, 2013, the unrecognized stock compensation expense was $7.1 million and $0.9 million, respectively, which will be recognized through fiscal year 2018. The Company records stock based compensation expense within general and administrative expenses in the consolidated statements of operations.

(7) Subsequent Events

The Company has evaluated subsequent events and found there to be no events requiring recognition or disclosure through the date of issuance of this report.

 

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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 29, 2013. This discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and involves numerous risks and uncertainties. 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” 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. 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 29, 2013, for a discussion of factors that could cause our actual results to differ from those expressed or implied by forward-looking statements.

Overview

Potbelly is a fast-growing neighborhood sandwich concept offering toasty warm sandwiches, signature salads and other fresh menu items served by engaging people in an environment that reflects the Potbelly brand. Our combination of product, people and place is how we deliver on our passion to be “The Best Place for Lunch.” Our sandwiches, salads and hand-dipped milkshakes are all made fresh to order and our cookies are baked fresh each day. Our employees are trained to engage with our customers in a genuine way to provide a personalized experience. Our shops feature vintage design elements and locally-themed décor inspired by the neighborhood that we believe create a lively atmosphere. Through this combination, we believe we are creating a devoted base of Potbelly fans that return again and again and that we are expanding one sandwich shop at a time.

We believe that a key to our past and future success is our culture. It is embodied in The Potbelly Advantage, which is an expression of our Vision, Mission, Passion and Values, and the foundation of everything we do. Our Vision is for our customers to feel that we are their “Neighborhood Sandwich Shop” and to tell others about their great experience. Our Mission is to make people really happy, to make more money and to improve every day. Our Passion is to be “The Best Place for Lunch.” Our Values embody both how we lead and how we behave, and form the cornerstone of our culture. We use simple language that resonates from the frontline associate to the most senior levels of the organization, creating shared expectations and accountabilities in how we approach our day-to-day activities. We strive to be a fun, friendly and hardworking group of people who enjoy taking care of our customers, while at the same time taking care of each other.

13 Weeks Ended March 30, 2014 Compared to 13 Weeks Ended March 31, 2013

The following table presents information comparing the components of net income for the periods indicated (dollars in thousands):

 

     13 Weeks Ended              
     March 30,
2014
     % of
Revenues
    March 31,
2013
     % of
Revenues
    Increase
(Decrease)
    Percent
Change
 

Revenues

              

Sandwich shop sales, net

   $ 73,523         99.5   $ 68,541         99.7   $ 4,982        7.3

Franchise royalties and fees

     358         0.5        203         0.3        155        76.4   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total revenues

     73,881         100.0        68,744         100.0        5,137        7.5   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Expenses

              

Sandwich shop operating expenses

              

Cost of goods sold, excluding depreciation

     21,086         28.5        19,993         29.1        1,093        5.5   

Labor and related expenses

     21,460         29.0        19,791         28.8        1,669        8.4   

Occupancy expenses

     9,979         13.5        8,719         12.7        1,260        14.5   

Other operating expenses

     8,158         11.0        7,211         10.5        947        13.1   

General and administrative expenses

     7,822         10.6        8,182         11.9        (360     (4.4

Depreciation expense

     4,717         6.4        4,380         6.4        337        7.7   

Pre-opening costs

     252         0.3        290         0.4        (38     (13.1

Impairment and loss on disposal of property and equipment

     848         1.1        26         *        822        3,161.5   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

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Total expenses

     74,322        100.6        68,592        99.8        5,730        8.4   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from operations

     (441     (0.6     152        0.2        (593     (390.1

Interest expense

     42        0.1        112        0.2        (70     (62.2

Other expense

     —          *        2        *        (2     *   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before income taxes

     (483     (0.7     38        0.1        (521     (1,338.5

Income tax (benefit) expense

     (191     (0.3     16        *        (207     (1,223.5
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

     (292     (0.4     22        *        (314     (1,427.3

Net income attributable to non-controlling interests

     9        *        4        *        5        125.0   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income attributable to Potbelly Corporation

     (301     (0.4     18        *        (319     (1,772.2

Accretion of redeemable convertible preferred stock to maximum redemption value

     —         *        (7,396     (10.8     7,396        (100.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to common stockholders

   $ (301     (0.4 )%    $ (7,378     (10.7 )%    $     7,077        (95.9
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

* Amount is less than 0.1%

Revenues

Total revenues increased by $5.1 million, or 7.5%, to $73.9 million during the 13 weeks ended March 30, 2014, from $68.7 million during the 13 weeks ended March 31, 2013. The increase in revenues primarily consisted of an increase of approximately $6.5 million in sales from shops not yet in our company-operated comparable store sales base, $0.2 million increase in franchise revenues, partially offset by a 2.2%, or $1.5 million decrease in company-operated comparable store sales. The decrease in company-operated comparable store sales resulted from a reduction in entrée counts due to significantly adverse weather in the first quarter, partially offset by certain menu price increases and mix.

Cost of Goods Sold

Cost of goods sold increased by $1.1 million, or 5.5%, to $21.1 million during the 13 weeks ended March 30, 2014, compared to $20.0 million during the 13 weeks ended March 31, 2013, primarily due to the increase in revenues. As a percentage of revenues, cost of goods sold decreased to 28.5% during the 13 weeks ended March 30, 2014, from 29.1% during the 13 weeks ended March 31, 2013, primarily driven by lower commodity costs.

Labor and Related Expenses

Labor and related expenses increased by $1.7 million, or 8.4%, to $21.5 million during the 13 weeks ended March 30, 2014, from $19.8 million during the 13 weeks ended March 31, 2013, primarily due to new shop openings. As a percentage of revenues, labor and related expenses increased to 29.0% during the 13 weeks ended March 30, 2014, from 28.8% during the 13 weeks ended March 31, 2013, primarily driven by more new company-operated shops opened during the 13 weeks ended March 30, 2014 compared to the 13 weeks ended March 31, 2013, as well as deleveraging of the fixed component of these expenses as a result of lower company-operated comparable store sales.

Occupancy Expenses

Occupancy expenses increased by $1.3 million, or 14.5%, to $10.0 million during the 13 weeks ended March 30, 2014, from $8.7 million during the 13 weeks ended March 31, 2013, primarily due to new shop openings. As a percentage of revenues, occupancy expenses increased to 13.5% during the 13 weeks ended March 31, 2014, from 12.7% during the 13 weeks ended March 31, 2013, due to deleveraging of the fixed component of these expenses as a result of lower company-operated comparable store sales.

Other Operating Expenses

Other operating expenses increased by $1.0 million, or 13.1%, to $8.2 million during the 13 weeks ended March 30, 2014, from $7.2 million during the 13 weeks ended March 31, 2013, primarily due to new shop openings, increased fees associated with higher credit card usage in our shops and increased utility expenses due to inclement weather. As a percentage of revenues, other operating expenses increased to 11.0% during the 13 weeks ended March 30, 2014, from 10.5% during the 13 weeks ended March 31, 2013, primarily due to the increased utility expenses and deleveraging of the fixed component of these expenses as a result of lower company-operated comparable store sales.

 

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Table of Contents

General and Administrative Expenses

General and administrative expenses decreased by $0.4 million, or 4.4%, to $7.8 million during the 13 weeks ended March 30, 2014, from $8.2 million during the 13 weeks ended March 31, 2013. As a percentage of revenues, general and administrative expenses decreased to 10.6% during the 13 weeks ended March 30, 2014, from 11.9% during the 13 weeks ended March 31, 2013, primarily due to lower stock-based compensation expense during the 13 weeks ended March 30, 2014 as compared to the 13 weeks ended March 31, 2013.

Depreciation Expense

Depreciation expense increased by $0.3 million, or 7.7%, to $4.7 million during the 13 weeks ended March 30, 2014, from $4.4 million during the 13 weeks ended March 31, 2013, primarily due to a higher depreciable base related to new shops. As a percentage of revenues, depreciation remained consistent at 6.4% during the 13 weeks ended March 30, 2014 and March 31, 2013.

Pre-Opening Costs

Pre-opening costs remained consistent at $0.3 million during the 13 weeks ended March 30, 2014 and the 13 weeks ended March 31, 2013, primarily due to fewer new shops opened in new markets that, on average, have higher pre-opening costs during the 13 weeks ended March 30, 2014 compared to the 13 weeks ended March 31, 2013.

Impairment and Loss on Disposal of Property and Equipment

Impairment and loss on disposal of property and equipment increased to $0.8 million during the 13 weeks ended March 30, 2014, from $26 thousand during the 13 weeks ended March 31, 2013. After performing a periodic review of our shops, it was determined that indicators of impairment were present for certain shops as a result of continued underperformance of shop profitability. We performed an impairment analysis related to these shops and recorded an impairment charge of $0.8 million related to the excess of the carrying amounts recorded on our balance sheet over the identified shops’ estimated fair values as of March 30, 2014.

Interest Expense

Interest expense decreased by $70 thousand, or 62.2%, to $42 thousand during the 13 weeks ended March 30, 2014, from $0.1 million during the 13 weeks ended March 31, 2013, primarily due to repaying the $14.0 million outstanding under the senior credit facility on October 24, 2013.

Income Tax (Benefit) Expense

Income tax (benefit) expense decreased by $0.2 million from an expense of $16 thousand during the 13 weeks ended March 31, 2013, to a benefit of $0.2 million for the 13 weeks ended March 30, 2014. For the 13 weeks ended March 30, 2014, our effective tax rate was 39.5%, compared to 42.1% for the 13 weeks ended March 31, 2013. The decrease in the effective tax rate primarily relates to the Company recognizing certain federal tax credits, which were not recognized in the comparable prior period.

Liquidity and Capital Resources

General

Our primary sources of liquidity and capital resources are cash provided from operating activities, existing cash and cash equivalents and our credit facility. Our primary requirements for liquidity and capital are new shop openings, existing shop capital investments (maintenance and improvements), principal and interest payments on our debt, lease obligations, and working capital and general corporate needs. Our requirement for working capital is not significant since our customers pay for their food and beverage purchases in cash or payment cards (credit or debit) at the time of sale. Thus, we are able to sell many of our inventory items before we have to pay our suppliers for such items. Our shops do not require significant inventories or receivables. We believe that these sources of liquidity and capital will be sufficient to finance our continued operations and expansion plans for at least the next twelve months.

The following table presents summary cash flow information for the periods indicated (in thousands):

 

     13 Weeks Ended  
     March 30,
2014
    March 31,
2013
 

Net cash provided by (used in):

  

Operating activities

   $ 6,516      $ 7,915   

Investing activities

     (6,536 )     (6,834 )
  

 

 

   

 

 

 

Financing activities

     (12     (388 )
  

 

 

   

 

 

 

Net (decrease) increase in cash

   $ (32   $ 693  
  

 

 

   

 

 

 
    

 

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Table of Contents

Operating Activities

Net cash provided by operating activities decreased to $6.5 million for the 13 weeks ended March 30, 2014, from $7.9 million for the 13 weeks ended March 31, 2013, primarily due to a cash outflow for prepaid expenses related to change in terms with certain vendors during the 13 weeks ended March 30, 2014 as compared to the same period in 2013.

Investing Activities

Net cash used in investing activities decreased to $6.5 million for the 13 weeks ended March 30, 2014, from $6.8 million for the 13 weeks ended March 31, 2013. The decrease was primarily due to lower construction costs for new company-operated shops opened during the 13 weeks ended March 31, 2014, as well as lower capital expenditures for future shop openings, maintaining our existing shops and certain other projects, as compared to the same period in 2013.

Financing Activities

Net cash used in financing activities was $12 thousand for the 13 weeks ended March 30, 2014, compared to $0.4 million for the 13 weeks ended March 31, 2013. The decrease in net cash used is driven by lower cash outflows related to costs associated with our initial public offering in the 13 weeks ended March 30, 2014, compared to the 13 weeks ended March 31, 2013.

Credit Facility

On September 21, 2012, we entered into a new five-year revolving credit facility agreement with JPMorgan Chase Bank, N.A. that expires in September 2017 and provides for borrowings up to $35.0 million to fund capital expenditures for new shops, renovations and maintenance of existing shops, and to provide ongoing working capital for other general and corporate purposes. We will be entitled to incur additional incremental increases in the revolving credit facility of up to $25.0 million that will be included in the credit facility if no event of default exists and certain other requirements are met. The credit facility contains customary representations, warranties, negative and affirmative covenants, including a requirement to maintain a maximum leverage ratio, as defined, of 2.25:1 and a minimum debt service coverage ratio, as defined, of 1.5:1. The credit facility also limits the restricted payments (primarily distributions and equity repurchases) that we may make, unless we obtain certain waivers or amendments from our lender. We were in compliance with these restrictions and conditions as of March 30, 2014. The credit facility is secured by substantially all assets of the Company. Borrowings under the credit facility bear interest at our option at either (i) a eurocurrency rate determined by reference to the applicable LIBOR rate plus an applicable margin or (ii) a prime rate as announced by JPMorgan Chase plus an applicable margin. As of March 30, 2014, we had no amounts outstanding under the credit facility.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of our consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Critical accounting policies are those that management believes are both most important to the portrayal of our financial condition and operating results, and require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. We base our estimates on historical experience and other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Judgments and uncertainties affecting the application of those policies may result in materially different amounts being reported under different conditions or using different assumptions. We had no significant changes in our critical accounting estimates since our last annual report. Our critical accounting estimates are identified and described in our annual consolidated financial statements and related notes.

Off-Balance Sheet Arrangements

As of March 30, 2014, we do not have any off-balance sheet arrangements, synthetic leases, investments in special purpose entities or undisclosed borrowings or debt that would be required to be disclosed pursuant to Item 303 of Regulation S-K under the Exchange Act.

 

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Table of Contents

New and Revised Financial Accounting Standards

We qualify as an “emerging growth company” pursuant to the provisions of the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, enacted on April 5, 2012. Section 102 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. However, we are choosing to “opt out” of such extended transition period, and as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Our decision to opt out of the extended transition period is irrevocable.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

For quantitative and qualitative disclosures about market risk, see Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” of our Annual Report on Form 10-K for the fiscal year ended December 29, 2013. Our exposures to market risk have not changed materially since December 29, 2013.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of March 30, 2014. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of March 30, 2014, our disclosure controls and procedures were effective in ensuring that information required to be disclosed in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting that occurred during our fiscal quarter ended March 30, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

The certifications required by Section 302 of the Sarbanes-Oxley Act of 2002 are filed as exhibits 31.1 and 31.2 to this Quarterly Report on Form 10-Q.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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. 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.

ITEM 1A. RISK FACTORS

A description of the risk factors associated with our business is contained in Item 1A, “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 29, 2013.  There have been no material changes to our Risk Factors as previously reported.

ITEM 6. EXHIBITS

The following exhibits are either provided with this Quarterly Report on Form 10-Q or are incorporated herein by reference.

 

Exhibit No.

  

Description

  31.1        Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  31.2        Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  32.1        Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS    XBRL Instance Document
101.SCH    XBRL Taxonomy Extension Schema Document
101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB    XBRL Taxonomy Extension Label Linkbase Document
101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF    XBRL Taxonomy Extension Definition Linkbase Document

 

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Table of Contents

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

    POTBELLY CORPORATION
Date:   May 7, 2014   By:  

/s/ Charles Talbot

      Charles Talbot
      Chief Financial Officer
      (Principal Financial Officer)

 

15

EX-31.1

EXHIBIT 31.1

Certification of Chief Executive Officer

pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Aylwin Lewis, certify that:

 

  1. I have reviewed this Quarterly Report on Form 10-Q of Potbelly Corporation;

 

  2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

  3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

  4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

 

  a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  b. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  c. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

  5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: May 7, 2014     By:  

/s/ Aylwin Lewis

      Aylwin Lewis
      Chief Executive Officer and President
      (Principal Executive Officer)
EX-31.2

EXHIBIT 31.2

Certification of Chief Financial Officer

pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Charles Talbot, certify that:

 

  1. I have reviewed this Quarterly Report on Form 10-Q of Potbelly Corporation;

 

  2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

  3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

  4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

 

  a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  b. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  c. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

  5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: May 7, 2014     By:  

/s/ Charles Talbot

      Charles Talbot
      Chief Financial Officer
      (Principal Financial Officer)
EX-32.1

EXHIBIT 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906

OF THE SARBANES-OXLEY ACT OF 2002

In accordance with 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, Aylwin Lewis, Chief Executive Officer and President of Potbelly Corporation (the “Registrant”), and Charles Talbot, Chief Financial Officer of the Registrant, each hereby certifies that, to the best of his knowledge on the date hereof:

 

  1. the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended March 30, 2014, to which this Certification is attached as Exhibit 32.1 (the “Quarterly Report”), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

  2. information contained in the Quarterly Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.

 

Date: May 7, 2014     By:  

/s/ Aylwin Lewis

      Aylwin Lewis
      Chief Executive Officer and President

 

Date: May 7, 2014       By:   

/s/ Charles Talbot

         Charles Talbot
         Chief Financial Officer

This certification accompanies the Quarterly Report on Form 10-Q pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed by the Registrant for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the Registrant specifically incorporates it by reference.