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 June 28, 2015

OR

 

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

For the Transition Period from                      to                     

Commission File Number: 001-36104

 

 

Potbelly Corporation

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   36-4466837

(State or Other Jurisdiction of

Incorporation)

 

(IRS Employer

Identification Number)

111 N. Canal Street, Suite 850

Chicago, Illinois 60606

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

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

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  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   x
Non-accelerated filer   ¨  (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 – 30,213,562 shares as of July 31, 2015

 

 

 


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 Equity

     5   
 

Condensed Consolidated Statements of Cash Flows

     6   
 

Notes to Condensed Consolidated Financial Statements

     7   

Item 2.

 

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

     11   

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

     18   

Item 4.

 

Controls and Procedures

     18   

PART II.

 

OTHER INFORMATION

  

Item 1.

 

Legal Proceedings

     19   

Item 1A.

 

Risk Factors

     19   

Item 2.

 

Unregistered Sale of Equity Securities and Use of Proceeds

     19   

Item 6.

 

Exhibits

     19   
 

Signature

     20   

 

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Table of Contents

POTBELLY CORPORATION AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

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

 

                                                 
     June 28,
2015
    December 28,
2014
 

ASSETS

    

Current assets

    

Cash and cash equivalents

   $ 54,105         $ 63,005   

Accounts receivable, net of allowances of $43 and $19 as of June 28, 2015 and December 28, 2014, respectively

     5,034        4,016   

Inventories

     2,820        2,768   

Deferred income taxes, current

     541        507   

Prepaid expenses and other current assets

     8,529        9,922   
  

 

 

   

 

 

 

Total current assets

     71,029        80,218   

Property and equipment, net

     92,615        85,704   

Indefinite-lived intangible assets

     3,404        3,404   

Goodwill

     1,428        1,428   

Deferred income taxes, non-current

     17,860        17,860   

Deferred expenses, net and other assets

     3,673        3,333   
  

 

 

   

 

 

 

Total assets

   $ 190,009      $ 191,947   
  

 

 

   

 

 

 

LIABILITIES AND EQUITY

    

Current liabilities

    

Accounts payable

   $ 2,228      $ 3,301   

Accrued expenses

     19,694        16,349   

Accrued income taxes

     100        226   

Current portion of long-term debt

     —         1,008   
  

 

 

   

 

 

 

Total current liabilities

     22,022        20,884   

Deferred rent and landlord allowances

     15,781        14,012   

Other long-term liabilities

     699        726   
  

 

 

   

 

 

 

Total liabilities

     38,502        35,622   
  

 

 

   

 

 

 

Equity

    

Common stock, $0.01 par value—authorized, 200,000,000 shares; outstanding 28,371,178 and 28,934,700 shares as of June 28, 2015, and December 28, 2014, respectively

     301        298   

Warrants

     909        909   

Additional paid-in-capital

     396,385        391,972   

Treasury stock, held at cost, 1,749,406 and 827,090 shares as of June 28, 2015, and December 28, 2014, respectively

     (22,792     (10,246

Accumulated deficit

     (223,882     (226,874
  

 

 

   

 

 

 

Total stockholders’ equity

     150,921        156,059   

Non-controlling interest

     586        266   
  

 

 

   

 

 

 

Total equity

     151,507        156,325   
  

 

 

   

 

 

 

Total liabilities and equity

   $ 190,009      $ 191,947   
  

 

 

   

 

 

 

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)

 

     For the 13 Weeks Ended     For the 26 Weeks Ended  
     June 28,
2015
    June 29,
2014
    June 28,
2015
     June 29,
2014
 

Revenues

         

Sandwich shop sales, net

   $ 95,566      $ 83,268      $ 180,963       $ 156,791   

Franchise royalties and fees

     383        352        754         710   
  

 

 

   

 

 

   

 

 

    

 

 

 

Total revenues

     95,949        83,620        181,717         157,501   
  

 

 

   

 

 

   

 

 

    

 

 

 

Expenses

         

Sandwich shop operating expenses

         

Cost of goods sold, excluding depreciation

     27,253        23,936        51,598         45,022   

Labor and related expenses

     27,152        23,405        51,752         44,865   

Occupancy expenses

     11,539        10,183        22,886         20,162   

Other operating expenses

     9,970        8,691        19,627         16,849   

General and administrative expenses

     9,643        8,865        18,474         16,687   

Depreciation expense

     5,288        4,784        10,439         9,501   

Pre-opening costs

     536        273        1,077         525   

Impairment and loss on disposal of property and equipment

     484        29        832         877   
  

 

 

   

 

 

   

 

 

    

 

 

 

Total expenses

     91,865        80,166        176,685         154,488   
  

 

 

   

 

 

   

 

 

    

 

 

 

Income from operations

     4,084        3,454        5,032         3,013   

Interest expense

     63        40        124         82   
  

 

 

   

 

 

   

 

 

    

 

 

 

Income before income taxes

     4,021        3,414        4,908         2,931   

Income tax expense

     1,563        1,407        1,914         1,216   
  

 

 

   

 

 

   

 

 

    

 

 

 

Net income

     2,458        2,007        2,994         1,715   

Net (loss) income attributable to non-controlling interest

     (3     (3 )     2         6   
  

 

 

   

 

 

   

 

 

    

 

 

 

Net income attributable to Potbelly Corporation

     2,461        2,010        2,992         1,709   
  

 

 

   

 

 

   

 

 

    

 

 

 

Net income per common share attributable to common stockholders:

         

Basic

   $ 0.09      $ 0.07      $ 0.10       $ 0.06   

Diluted

   $ 0.08      $ 0.07      $ 0.10       $ 0.06   

Weighted average shares outstanding:

         

Basic

     28,594,712        29,342,528        28,749,898         29,246,676   

Diluted

     29,364,689        30,509,553        29,520,163         30,642,892   

See accompanying notes to the unaudited condensed consolidated financial statements.

 

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POTBELLY CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statement of Equity

(amounts in thousands, except share data, unaudited)

 

    Common Stock     Treasury           Additional     Accumulated     Non-Controlling        
    Shares     Amount     Stock     Warrants     Paid-In-Capital     Deficit     Interest     Total Equity  

Balance at December 29, 2013

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

Net income

    —         —          —          —          —          1,709        6        1,715   

Issuance of unrestricted common stock

    25,663        —          —          —          400        —          —          400   

Exercise of stock options

    297,002        4        —          —          2,624        —          —          2,628   

Distribution to non-controlling interest

    —          —          —          —          —          —          (26     (26

Amortization of stock-based compensation

    —          —          —          —          1,041        —          —          1,041   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 29, 2014

    29,470,694      $ 295      $ —        $ 909      $ 387,142      $ (229,523   $ 208      $ 159,031   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 28, 2014

    28,934,700      $ 298      $ (10,246   $ 909      $ 391,972      $ (226,874   $ 266      $ 156,325   

Net income

    —          —          —          —          —          2,992        2        2,994   

Exercise of stock options

    358,794        3        —          —          3,062        —          —          3,065   

Excess tax benefits associated with exercise of stock options

    —          —          —          —          224        —          —          224   

Repurchases of common stock

    (922,316     —          (12,546     —          —          —          —          (12,546

Capital distribution to non-controlling interest

    —          —          —          —          —          —          (8     (8

Contributions from non-controlling interest

    —          —          —          —          —          —          326        326   

Amortization of stock-based compensation

    —          —          —          —          1,127        —          —          1,127   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 28, 2015

    28,371,178      $ 301      $ (22,792   $ 909      $ 396,385      $ (223,882   $ 586      $ 151,507   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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)

 

                                                 
     For the 26 Weeks Ended  
         June 28,    
2015
        June 29,    
2014
 

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net income

   $ 2,994      $ 1,715   

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

    

Depreciation

     10,439        9,501   

Deferred income tax

     190        121   

Deferred rent and landlord allowances

     1,769        723   

Amortization of stock compensation expense

     1,127        1,441   

Excess tax benefit from stock-based compensation

     (224     —     

Asset impairment, store closure and disposal of property and equipment

     887        877   

Amortization of debt issuance costs

     35        35   

Changes in operating assets and liabilities:

    

Accounts receivable, net

     (1,018     (958

Inventories

     (52 )     (90

Prepaid expenses and other assets

     904        (2,035

Accounts payable

     (730 )     1,351   

Accrued and other liabilities

     2,641        (910 )
  

 

 

   

 

 

 

Net cash provided by operating activities

     18,962        11,771   
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Purchases of property and equipment

     (17,901     (13,386
  

 

 

   

 

 

 

Net cash (used in) investing activities

     (17,901     (13,386
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Payments on note payable

     (1,022     (42

Proceeds from exercise of stock options

     3,743        3,337   

Payment of payroll taxes related to stock-based compensation awards

     (678     (709

Treasury stock repurchase

     (12,546     —     

Excess tax benefit from stock-based compensation

     224        —     

Contributions from non-controlling interest

     326        —     

Distribution to non-controlling interest

     (8     (26
  

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     (9,961 )     2,560   
  

 

 

   

 

 

 

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS

     (8,900     945   

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

     63,005        69,579   
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

   $ 54,105      $ 70,524   
  

 

 

   

 

 

 

Supplemental cash flow information:

    

Income taxes paid

   $ 230      $ 700   

Interest paid

     114        84   

Supplemental non-cash investing and financing activities:

    

Unpaid liability for purchases of property and equipment

   $ 2,931      $ 2,424   

See accompanying notes to the unaudited condensed consolidated financial statements

 

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Table of Contents

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 subsidiaries, operates Potbelly Sandwich Works sandwich shops in 27 states and the District of Columbia. As of June 28, 2015 and June 29, 2014, the Company had 349 and 312 company-operated shops, respectively. During the 26 weeks ended June 28, 2015, the Company opened 17 new company-operated shops and closed 2 shops. During the 26 weeks ended June 29, 2014, the Company opened 16 new company-operated shops and closed no shops.

The Company also sells and administers franchises of Potbelly Sandwich Works sandwich shops. The first domestic and international franchise locations administered by the Company opened during February 2011. As of June 28, 2015, 17 franchised shops were in operation domestically and 12 franchised shops were in operation internationally. During the 26 weeks ended June 28, 2015, the Company opened one franchised shop and closed one franchised shop. During the 26 weeks ended June 29, 2014, the Company opened three franchised shops and closed no franchised shops.

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 28, 2014. 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 June 28, 2015 and December 28, 2014, its statement of operations for the 13 and 26 weeks ended June 28, 2015 and June 29, 2014 and its statement of cash flows for the 26 weeks ended June 28, 2015 and June 29, 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 and Potbelly Sandwich Works LLC (“LLC”) and 17 of LLC’s wholly owned subsidiaries and the LLC’s 4 joint ventures, collectively, the “Company.” All significant intercompany balances and transactions have been eliminated in consolidation. For consolidated joint ventures, non-controlling interest represents a non-controlling partner’s share of the assets, liabilities and operations related to the 4 joint venture investments. The Company has ownership interests ranging from 65-80% in these consolidated joint ventures.

Fiscal Year

The Company uses a 52/53-week fiscal year that ends on the last Sunday of the calendar period. Approximately every five or six years a 53rd week is added. Fiscal years 2015 and 2014 each consist of 52 weeks. The fiscal quarters ended June 28, 2015 and June 29, 2014 each consisted of 13 weeks.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions, primarily related to the long-lived assets and income taxes, 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.

 

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Table of Contents

POTBELLY CORPORATION AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

 

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 have chosen 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.

In April 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.” The pronouncement changes the criteria for reporting discontinued operations while enhancing disclosures in this area. Pursuant to ASU 2014-08, only disposals representing a strategic shift, such as a major line of business, a major geographical area or a major equity investment, which were not expected to have continuing cash flows should be presented as a discontinued operation. If the disposal does qualify as a discontinued operation under ASU 2014-08, the entity will be required to provide expanded disclosures. ASU 2014-08 is effective for fiscal and interim periods beginning on or after December 15, 2014. Early adoption is permitted. The adoption of ASU 2014-08 is not expected to have a significant impact on our consolidated financial statements or disclosures.

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers.” The pronouncement was issued to clarify the principles for recognizing revenue and to develop a common revenue standard and disclosure requirements for U.S. GAAP and IFRS. The FASB has approved a one-year deferral of the effective date of ASU 2014-09, such that it will become effective for the annual period ending after December 15, 2017. We are evaluating the expected adoption method of ASU 2014-09 and the adoption is not expected to have a significant impact on our consolidated balance sheet or consolidated statement of operations.

In August 2014, the FASB issued ASU No. 2014-15, “Presentation of Financial Statements – Going Concern (Subtopic 205-40) – Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.” The pronouncement requires our management to evaluate whether there is substantial doubt about our ability to continue as a going concern. The pronouncement is effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early adoption is permitted. The adoption of ASU 2014-15 is not expected to have a material effect on our consolidated balance sheet or consolidated statement of operations.

(2) Fair Value Measurement

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

The Company assesses potential impairments to its long-lived assets, which includes property and equipment, 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. After performing a periodic review of our shops during the first and second fiscal quarter of 2015, 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 impairment charges of $0.3 million and $0.6 million for the 13 weeks and 26 weeks ended June 28, 2015, respectively, related to the excess of the carrying amounts recorded on our balance sheet over the identified shops’ estimated fair values. 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.

In fiscal 2014, the Company established a non-qualified deferred compensation plan, “Potbelly Non-Qualified Deferred Compensation Plan,” which allows highly compensated employees to defer a portion of their base salary and variable compensation each plan year. The Company maintains a rabbi trust to fund obligations under the deferred compensation plan. Amounts in the rabbi trust are invested in mutual funds. The investments in the rabbi trust are designated as trading securities and carried at fair value. Fair market value of investments in the rabbi trust is measured using Level 1 inputs (quoted prices for identical assets in active markets). As of June 28, 2015, the fair value of the investments in the rabbi trust was $71 thousand, which is included in other assets in the

 

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POTBELLY CORPORATION AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

 

condensed consolidated balance sheet. The associated liability is recorded within other long-term liabilities in the condensed consolidated balance sheet. The Company records trading gains and losses in general and administrative expenses in the condensed consolidated statement of operations, along with the offsetting amount related to the increase or decrease in deferred compensation to reflect its exposure to liabilities for payment under the deferred plan. For the three months ended June 28, 2015, the Company recorded an immaterial amount of unrealized losses on investments held in the rabbi trust.

(3) Earnings per share

Basic and diluted income (loss) per share are calculated using the weighted average number of shares outstanding for the period as follows:

 

     For the 13 Weeks Ended      For the 26 Weeks Ended  
     June 28,
2015
     June 29,
2014
     June 28,
2015
     June 29,
2014
 

Net income attributable to Potbelly Corporation

   $ 2,461       $ 2,010       $ 2,992       $ 1,709   

Weighted average common shares outstanding-basic

     28,594,712         29,342,528         28,749,898         29,246,676   

Plus: Effect of potential stock options exercise

     708,271         1,046,198         709,276         1,258,203   

Plus: Effect of potential warrant exercise

     61,706         120,827         60,989         138,013   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average common shares outstanding-diluted

     29,364,689         30,509,553         29,520,163         30,642,892   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income per share available to common stockholders-basic

   $ 0.09       $ 0.07       $ 0.10       $ 0.06   

Income per share available to common stockholders-diluted

   $ 0.08       $ 0.07       $ 0.10       $ 0.06   

Potentially dilutive shares that are considered anti-dilutive:

     

Common share options

     491,494         242,636         609,084         242,636   

Warrants

     —          —          —          —    

(4) Income Taxes

The Company recognized income tax expense of $1.9 million on pre-tax income of $4.9 million, or an effective tax rate of 39.0%, for the 26 weeks ended June 28, 2015, compared to income tax expense of $1.2 million on pre-tax income of $2.9 million, or an effective tax rate of 41.5%, for the 26 weeks ended June 29, 2014. The difference between the statutory rate and the effective tax rate is primarily attributable to state income taxes offset by certain federal and state tax credits.

(5) Capital Stock

On August 1, 2014, the Company’s Board of Directors authorized a share repurchase program of up to $35.0 million of the Company’s common stock. Under this program, the Company may, from time to time, 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 Exchange Act of 1934, as amended) or in privately negotiated transactions. During the 26 weeks ended June 28, 2015, the Company repurchased 922,316 shares of its common stock for approximately $12.5 million in open market transactions. As of June 28, 2015, the remaining dollar value of authorization under the share repurchase program was $12.2 million. Repurchased shares are included as treasury stock in the condensed consolidated balance sheets and the condensed consolidated statement of equity.

(6) Stock-Based Compensation

Throughout the 26 weeks ending June 28, 2015, the Company issued 498,479 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 weighted average fair value of options granted during the 26 weeks ended June 28, 2015 was $6.65 per share, as estimated using the following weighted average assumptions: expected life of options – seven years; volatility- 45.47%; risk-free interest rate – 1.90%; 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.

 

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POTBELLY CORPORATION AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

 

A summary of activity for the 26 weeks ended June 28, 2015 is as follows:

 

Options

   Shares
(Thousands)
     Weighted
Average
Exercise
Price
     Aggregate
Intrinsic
Value
(Thousands)
     Weighted
Average
Remaining
Term
(Years)
 

Outstanding—December 28, 2014

     4,613       $ 10.10       $ 12,731         5.62   
        

 

 

    

Granted

     498         13.59         

Exercised

     (359      8.54         

Canceled

     (141      14.18         
  

 

 

          

Outstanding—June 28, 2015

     4,611         10.47       $ 12,653         5.61   
  

 

 

       

 

 

    

Exercisable—June 28, 2015

     3,337         6.79       $ 11,549         3.19   
  

 

 

       

 

 

    

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, which is generally the vesting period of the grant, with a corresponding increase to additional paid-in-capital. For the 13 and 26 weeks ended June 28, 2015, the Company recognized $0.6 million and $1.1 million, respectively. For the 13 and 26 weeks ended June 29, 2014, the Company recognized $1.0 million and $1.4 million, respectively, which includes $0.4 million related to the May 2014 unrestricted common stock grants. As of June 28, 2015, the unrecognized stock-based compensation expense was $7.2 million, which will be recognized through fiscal year 2019. The Company records stock-based compensation expense within general and administrative expenses in the consolidated statements of operations.

In May 2015, the Company issued 30,856 shares of restricted stock units (“RSUs”) to certain non-employee members of its Board of Directors. The RSUs had a grant-date share price of $14.26 upon issuance and have a vesting schedule of 50% on the first anniversary of the grant date and 50% on the second anniversary of the grant date. The Company recorded an immaterial amount of stock-based compensation expense related to the issuance of the RSUs.

 

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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 28, 2014. This discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (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 28, 2014, 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.

 

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13 Weeks Ended June 28, 2015 Compared to 13 Weeks Ended June 29, 2014

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

 

     For the 13 Weeks Ended               
     June 28,
2015
    % of
Revenues
    June 29,
2014
    % of
Revenues
    Increase
(Decrease)
     Percent
Change
 

Revenues

             

Sandwich shop sales, net

   $ 95,566        99.6   $ 83,268        99.6 %   $ 12,298         14.8

Franchise royalties and fees

     383        0.4        352        0.4        31         8.8   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total revenues

     95,949        100.0        83,620        100.0        12,329         14.7   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Expenses

             

Sandwich shop operating expenses

             

Cost of goods sold, excluding depreciation

     27,253        28.4        23,936        28.6        3,317         13.9   

Labor and related expenses

     27,152        28.3        23,405        28.0        3,747         16.0   

Occupancy expenses

     11,539        12.0        10,183        12.2        1,356         13.3   

Other operating expenses

     9,970        10.4        8,691        10.4        1,279         14.7   

General and administrative expenses

     9,643        10.1        8,865        10.6        778         8.8   

Depreciation expense

     5,288        5.5        4,784        5.7        504         10.5   

Pre-opening costs

     536        0.6        273        0.3        263         96.3   

Impairment and loss on disposal of property and equipment

     484        0.5        29        *        455         1569.0   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total expenses

     91,865        95.7        80,166        95.9        11,699         14.6   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Income from operations

     4,084        4.3        3,454        4.1        630         18.2   

Interest expense, net

     63        0.1        40        *        23         57.5   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Income before income taxes

     4,021        4.2        3,414        4.1        607         17.8   

Income tax expense

     1,563        1.6        1,407        1.7        156         11.1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net income

     2,458        2.6        2,007        2.4        451         22.5   

Net loss attributable to non-controlling interests

     (3 )     *        (3 )     *        —          0.0   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net income attributable to Potbelly Corporation

   $ 2,461        2.6   $ 2,010        2.4 %   $ 451         22.4
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

* Amount is less than 0.1%

Revenues

Total revenues increased by $12.3 million, or 14.7%, to $95.9 million during the 13 weeks ended June 28, 2015, from $83.6 million during the 13 weeks ended June 29, 2014. The increase in revenues primarily consisted of an increase of $8.3 million in sales from shops not yet in our company-operated comparable store sales base and a $4.0 million, or 4.9%, increase in company-operated comparable store sales. The increase in company-operated comparable store sales resulted from increases in average check from certain menu price increases and menu mix, as well as traffic.

Cost of Goods Sold

Cost of goods sold increased by $3.3 million, or 13.9%, to $27.2 million during the 13 weeks ended June 28, 2015, compared to $23.9 million during the 13 weeks ended June 29, 2014, primarily due to the increase in revenues. As a percentage of revenues, cost of goods sold decreased to 28.4% during the 13 weeks ended June 28, 2015, from 28.6% during the 13 weeks ended June 29, 2014, primarily driven by certain menu price increases, partially offset by inflation on dairy and certain proteins.

Labor and Related Expenses

Labor and related expenses increased by $3.7 million, or 16.0%, to $27.1 million during the 13 weeks ended June 28, 2015, from $23.4 million during the 13 weeks ended June 29, 2014, primarily due to new shop openings. As a percentage of revenues, labor and related expenses increased to 28.3% during the 13 weeks ended June 28, 2015, from 28.0% during the 13 weeks ended June 29, 2014, primarily driven by higher labor costs, performance-based manager bonuses and an additional incentive program to reward employees for tenure and development.

 

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Table of Contents

Occupancy Expenses

Occupancy expenses increased by $1.4 million, or 13.3%, to $11.6 million during the 13 weeks ended June 28, 2015, from $10.2 million during the 13 weeks ended June 29, 2014, primarily due to new shop openings. As a percentage of revenues, occupancy expenses decreased to 12.0% during the 13 weeks ended June 28, 2015, from 12.2% during the 13 weeks ended June 29, 2014, primarily due to sales leverage (i.e., the ability to spread certain expenses over a higher revenue base).

Other Operating Expenses

Other operating expenses increased by $1.3 million, or 14.7%, to $10.0 million during the 13 weeks ended June 28, 2015, from $8.7 million during the 13 weeks ended June 29, 2014. The increase is attributable to new shop openings, as well as increased fees associated with credit card usage in our shops, and other operating expense increases in line with revenue growth. As a percentage of revenues, other operating expenses remained consistent at 10.4% during the 13 weeks ended June 28, 2015 and June 29, 2014.

General and Administrative Expenses

General and administrative expenses increased by $0.7 million, or 8.8%, to $9.6 million during the 13 weeks ended June 28, 2015, from $8.9 million during the 13 weeks ended June 29, 2014. The net increase is driven primarily by increased spending on advertising, partially offset by lower stock-based compensation expense. As a percentage of revenues, general and administrative expenses decreased to 10.1% during the 13 weeks ended June 28, 2015, from 10.6% during the 13 weeks ended June 29, 2014, driven by lower stock-based compensation expense, coupled with sales leverage (i.e., the ability to spread certain costs over a higher revenue base).

Depreciation Expense

Depreciation expense increased by $0.5 million, or 10.5%, to $5.3 million during the 13 weeks ended June 28, 2015, from $4.8 million during the 13 weeks ended June 29, 2014, primarily due to a higher depreciable base related to new shops and existing shop capital investments. As a percentage of revenues, depreciation decreased to 5.5% during the 13 weeks ended June 28, 2015, from 5.7% during the 13 weeks ended June 29, 2014, driven by lower depreciation associated with new shops with lower build-out costs and longer expected useful lives for leasehold improvements, as well as leasehold improvements at legacy shops with higher build-out costs and shorter expected useful lives being fully depreciated.

Pre-Opening Costs

Pre-opening costs increased by $0.2 million, or 96.3%, to $0.5 million during the 13 weeks ended June 28, 2015, from $0.3 million during the 13 weeks ended June 29, 2014, primarily due to timing of new shop openings during the 13 weeks ended June 28, 2015 compared to the 13 weeks ended June 29, 2014.

Impairment and Loss on Disposal of Property and Equipment

Impairment and loss on disposal of property and equipment increased to $0.5 million during the 13 weeks ended June 28, 2015, from $29 thousand during the 13 weeks ended June 29, 2014. After performing a periodic review of our shops during the second quarter of 2015, it was determined that indicators of impairment were present for a certain shop as a result of continued underperformance of shop profitability. We performed an impairment analysis related to this shop and recorded an impairment charge of $0.3 million related to the excess of the carrying amounts recorded on our balance sheet over the identified shop’s estimated fair values.

Interest Expense, net

Interest expense increased by $23 thousand, or 57.5%, to $63 thousand during the 13 weeks ended June 28, 2015, from $40 thousand during the 13 weeks ended June 29, 2014, primarily due to the accretion of certain occupancy-related interest costs. Interest expense for the 13 weeks ended June 28, 2015 is attributable to interest on the note payable, unused commitment fees, occupancy-related interest costs and deferred financing fees, partially offset by interest income related to money market funds.

Income Tax Expense

Income tax expense increased by $0.2 million to $1.6 million for the 13 weeks ended June 28, 2015, from $1.4 million for the 13 weeks ended June 29, 2014. For the 13 weeks ended June 28, 2015, our effective tax rate was 38.9%, compared to 41.2% for the 13 weeks ended June 29, 2014. 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.

 

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26 Weeks Ended June 28, 2015 Compared to 26 Weeks Ended June 29, 2014

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

 

     For the 26 Weeks Ended        
     June 28,
2015
     % of
Revenues
    June 29,
2014
     % of
Revenues
    Increase
(Decrease)
    Percent
Change
 

Revenues

       

Sandwich shop sales, net

   $ 180,963         99.6   $ 156,791         99.5 %   $ 24,172        15.4

Franchise royalties and fees

     754         0.4        710         0.5        44        6.2   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total revenues

     181,717         100.0        157,501         100.0        24,216        15.4   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Expenses

              

Sandwich shop operating expenses

              

Cost of goods sold, excluding depreciation

     51,598         28.4        45,022         28.6        6,576        14.6   

Labor and related expenses

     51,752         28.5        44,865         28.5        6,887        15.4   

Occupancy expenses

     22,886         12.6        20,162         12.8        2,724        13.5   

Other operating expenses

     19,627         10.8        16,849         10.7        2,778        16.5   

General and administrative expenses

     18,474         10.2        16,687         10.6        1,787        10.7   

Depreciation expense

     10,439         5.7        9,501         6.0        938        9.9   

Pre-opening costs

     1,077         0.6        525         0.3        552        105.1   

Impairment and loss on disposal of property and equipment

     832         0.5        877         0.6        (45 )     (5.1
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total expenses

     176,685         97.2        154,488         98.1        22,197        14.4   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Income from operations

     5,032         2.8        3,013         1.9        2,019        67.0   

Interest expense, net

     124         0.1        82         0.1        42        51.2   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Income before income taxes

     4,908         2.7        2,931         1.9        1,977        67.5   

Income tax expense

     1,914         1.1        1,216         0.8        698        57.4   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net income

     2,994         1.6        1,715         1.1        1,279        74.6   

Net income attributable to non-controlling interests

     2         *        6         *        (4 )     (66.7
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net income attributable to Potbelly Corporation

   $ 2,992         1.6   $ 1,709         1.1 %   $ 1,283        75.1
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

* Amount is less than 0.1%

Revenues

Total revenues increased by $24.2 million, or 15.4%, to $181.7 million during the 26 weeks ended June 28, 2015, from $157.5 million during the 26 weeks ended June 29, 2014. The increase in revenues primarily consisted of an increase of $16.3 million in sales from shops not yet in our company-operated comparable store sales base and a $7.8 million, or 5.1%, increase in company-operated comparable store sales. The increase in company-operated comparable store sales resulted from increases in average check from certain menu price increases and menu mix, as well as traffic.

Cost of Goods Sold

Cost of goods sold increased by $6.6 million, or 14.6%, to $51.6 million during the 26 weeks ended June 28, 2015, compared to $45.0 million during the 26 weeks ended June 29, 2014, primarily due to the increase in revenues. As a percentage of revenues, cost of goods sold decreased to 28.4% during the 26 weeks ended June 28, 2015, from 28.6% during the 26 weeks ended June 29, 2014, primarily driven by certain menu price increases.

Labor and Related Expenses

Labor and related expenses increased by $6.9 million, or 15.4%, to $51.8 million during the 26 weeks ended June 28, 2015, from $44.9 million during the 26 weeks ended June 29, 2014, primarily due to new shop openings. As a percentage of revenues, labor and related expenses remained consistent at 28.5% during the 26 weeks ended June 28, 2015 and June 29, 2014.

 

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Table of Contents

Occupancy Expenses

Occupancy expenses increased by $2.7 million, or 13.5%, to $22.9 million during the 26 weeks ended June 28, 2015, from $20.2 million during the 26 weeks ended June 29, 2014, primarily due to new shop openings. As a percentage of revenues, occupancy expenses decreased to 12.6% during the 26 weeks ended June 28, 2015, from 12.8% during the 26 weeks ended June 29, 2014, primarily due to sales leverage (i.e., the ability to spread certain expenses over a higher revenue base).

Other Operating Expenses

Other operating expenses increased by $2.8 million, or 16.5%, to $19.6 million during the 26 weeks ended June 28, 2015, from $16.8 million during the 26 weeks ended June 29, 2014. The increase is attributable to new shop openings, increased marketing spend as well as increased fees associated with credit card usage in our shops. As a percentage of revenues, other operating expenses increased to 10.8% during the 26 weeks ended June 28, 2015, from 10.7% during the 26 weeks ended June 29, 2014, primarily due to increased marketing spend.

General and Administrative Expenses

General and administrative expenses increased by $1.8 million, or 10.7%, to $18.5 million during the 26 weeks ended June 28, 2015, from $16.7 million during the 26 weeks ended June 29, 2014. The net increase is driven primarily by an increase in our performance-based incentives, as well as increased spending on advertising, partially offset by lower stock-based compensation expense. As a percentage of revenues, general and administrative expenses decreased to 10.2% during the 26 weeks ended June 28, 2015, from 10.6% during the 26 weeks ended June 29, 2014, driven by lower stock-based compensation expense, coupled with sales leverage (i.e., the ability to spread certain costs over a higher revenue base).

Depreciation Expense

Depreciation expense increased by $0.9 million, or 9.9%, to $10.4 million during the 26 weeks ended June 28, 2015, from $9.5 million during the 26 weeks ended June 29, 2014, primarily due to a higher depreciable base related to new shops and existing shop capital investments. As a percentage of revenues, depreciation decreased to 5.7% during the 26 weeks ended June 28, 2015, from 6.0% during the 26 weeks ended June 29, 2014, driven by lower depreciation associated with new shops with lower build-out costs and longer expected useful lives for leasehold improvements, as well as leasehold improvements at legacy shops with higher build-out costs and shorter expected useful lives being fully depreciated.

Pre-Opening Costs

Pre-opening costs increased by $0.6 million, or 105.1%, to $1.1 million during the 26 weeks ended June 28, 2015, from $0.5 million during the 26 weeks ended June 29, 2014, primarily due to timing of new shop openings during the 26 weeks ended June 28, 2015 compared to the 26 weeks ended June 29, 2014.

Impairment and Loss on Disposal of Property and Equipment

Impairment and loss on disposal of property and equipment decreased to $0.8 million during the 26 weeks ended June 28, 2015, from $0.9 million during the 26 weeks ended June 29, 2014. After performing a periodic review of our shops during the first and second quarters of 2015, 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 $0.6 million related to the excess of the carrying amounts recorded on our balance sheet over the identified shops’ estimated fair values.

Interest Expense, net

Interest expense increased by $42 thousand, or 51.2%, to $124 thousand during the 26 weeks ended June 28, 2015, from $82 thousand during the 26 weeks ended June 29, 2014, primarily due to the accretion of certain occupancy-related interest costs. Interest expense for the 26 weeks ended June 28, 2015 is attributable to interest on the note payable, unused commitment fees, occupancy-related interest costs and deferred financing fees, partially offset by interest income related to money market funds.

Income Tax Expense

Income tax expense increased by $0.7 million to $1.9 million for the 26 weeks ended June 28, 2015, from $1.2 million for the 26 weeks ended June 29, 2014. For the 26 weeks ended June 28, 2015, our effective tax rate was 39.0%, compared to 41.5% for the 26 weeks ended June 29, 2014. 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.

 

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Table of Contents

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, repurchases of our common stock 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 certain 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):

 

     For the 26 Weeks Ended  
     June 28,
2015
     June 29,
2014
 

Net cash provided by (used in):

     

Operating activities

   $ 18,962       $ 11,771   

Investing activities

     (17,901 )      (13,386 )

Financing activities

     (9,961 )      2,560   
  

 

 

    

 

 

 

Net (decrease) increase in cash

   $ (8,900 )    $ 945   
  

 

 

    

 

 

 

Operating Activities

Net cash provided by operating activities increased to $19.0 million for the 26 weeks ended June 28, 2015, from $11.8 million for the 26 weeks ended June 29, 2014. The $7.2 million increase is primarily attributable to an increase of $5.2 million in net shop-level profits, increases in non-cash items such as depreciation and deferred rent and landlord allowances as well as timing of the payment of working capital accounts.

Investing Activities

Net cash used in investing activities increased to $17.9 million for the 26 weeks ended June 28, 2015, from $13.4 million for the 26 weeks ended June 29, 2014. The increase was primarily due to capital expenditures for future shop openings, maintaining our existing shops and certain other projects, including costs associated with the move of our Company headquarters during the 26 weeks ended June 28, 2015 as compared to the same period in 2014.

Financing Activities

Net cash used in financing activities was $10.0 million for the 26 weeks ended June 28, 2015, compared to net cash provided by financing activities of $2.6 million for the 26 weeks ended June 29, 2014. The increase in net cash used was driven by the $12.5 million of treasury stock repurchased during the 26 weeks ended June 28, 2015, with no comparable transactions during the 26 weeks ended June 29, 2014, offset by $3.1 million in cash proceeds received by us related to the exercise of stock options, net of payroll taxes paid, during the 26 weeks ended June 28, 2015, compared to $2.6 million in cash proceeds received during the 26 weeks ended June 29, 2014.

Stock Repurchase Program

On August 1, 2014, our Board of Directors authorized a share repurchase program of up to $35.0 million of the Company’s common stock. Under this program, we may, from time to time, 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 Exchange Act) or in privately negotiated transactions. During the 26 weeks ended June 28, 2015, we repurchased 922,316 shares of common stock for approximately $12.5 million in open market transactions. At June 28, 2015, the remaining dollar value of authorization under the share repurchase program was $12.2 million.

 

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Credit Facility

On September 21, 2012, we entered into a 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 June 28, 2015. 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 June 28, 2015, 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 June 28, 2015, 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.

New and Revised Financial Accounting Standards

For a description of recently issued Financial Accounting Standards, see Note 1 “Organization and Other Matters” of the Notes to Unaudited Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q.

 

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Table of Contents

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 28, 2014. Our exposures to market risk have not changed materially since December 28, 2014.

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 Securities Exchange Act of 1934, as amended (“Exchange Act”)) as of June 28, 2015. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of June 28, 2015, 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 Securities and Exchange Commission (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 (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during our fiscal quarter ended June 28, 2015 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.

 

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Table of Contents

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 28, 2014. There have been no material changes to our Risk Factors as previously reported.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table contains information regarding purchases of our common stock made by or on behalf of Potbelly Corporation during the 13 weeks ended June 28, 2015:

 

Period

   Total Number of
Shares
Purchased
     Average Price Paid
per Share (1)
     Total Number of Shares
Purchased as Part of
Publicly Announced
Program (2)
     Maximum Value of
Shares that May Yet
be Purchased Under
the Program (2)
 

March 30, 2015 – April 26, 2015

     200,940       $ 13.89         200,940       $ 17,586,629   

April 27, 2015 – May 24, 2015

     79,604       $ 13.93         79,604       $ 16,475,799   

May 25, 2015 – June 28, 2015

     307,086       $ 13.83         307,086       $ 12,242,638   
  

 

 

       

 

 

    

Total:

     587,630            587,630      
  

 

 

       

 

 

    

 

(1) Average price paid per share excludes commissions.
(2) On August 5, 2014, we announced that our Board of Directors approved a new share repurchase program, authorizing us to repurchase up to $35.0 million of our common stock. Such repurchases may take place from time to time in the open market (including in pre-arranged stock trading plans in accordance with the guidelines specified in Rule 10b5-1 under the Exchange Act) or in privately negotiated transactions.

 

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

  10.22    Director Compensation Plan, adopted May 14, 2015 †
  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

 

Management contract or compensatory plan

 

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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: August 5, 2015     By:  

/s/ Michael Coyne

      Michael Coyne
      Chief Financial Officer
      (Principal Financial Officer)

 

20

EX-10.22

Exhibit 10.22

Director Compensation Plan

In accordance with the Potbelly Corporation 2013 Long-Term Incentive Plan (the “Plan”), each non-employee Director of Potbelly Corporation (the “Company”) and Potbelly Illinois, Inc. is eligible to receive compensation for services rendered. Each non-employee/non-investor Director who is a member of the Board of Directors as of the end of the Annual Meeting of the Stockholders (the “Annual Meeting”) is eligible to receive $80,000 in annual compensation, and each non-employee/investor Director who is a member of the Board of Directors as of the Annual Meeting is eligible to receive $40,000 in annual compensation.

Each non-employee/non-investor Director may elect between the following forms of payment for his or her annual compensation:

 

  1. The non-employee/non-investor Director receives Restricted Stock Units (as defined in the Plan) (the “RSUs”) having a grant date Fair Market Value of $80,000 (with a grant date on or before the end of the second fiscal quarter); or

 

  2. The non-employee/non-investor Director receives:

 

  a. $40,000 in cash (half of which will be paid on before the end of the second fiscal quarter and half of which will be paid on or before the end of the fiscal year); plus

 

  b. RSUs having a grant date Fair Market Value of $40,000 (with a grant date on or before the end of the second fiscal quarter).

If any non-employee/non-investor Director fails to make an election prior to the end of the first fiscal quarter, such Director will be deemed to have elected to receive $40,000 in cash plus RSUs having a grant date Fair Market Value of $40,000.

If any non-employee/non-investor Director joins the Board of Directors of the Company and/or Potbelly Illinois, Inc. after the Annual Meeting of the Stockholders (the “Annual Meeting”), such Director’s compensation shall be pro-rated accordingly and paid prior to the next Annual Meeting.

Each non-employee/investor Director is eligible to receive his or her annual compensation as RSUs having a grant date Fair Market Value of $40,000 (with a grant date on or before the end of the second fiscal quarter).

Subject to the terms and conditions of the Restricted Stock Unit Award Agreement, RSUs shall vest as follows: fifty percent (50%) on the first anniversary of the grant date, and fifty percent (50%) on the second anniversary of the grant date.

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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  c. 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;

 

  d. 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: August 5, 2015     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, Michael Coyne, 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  c. 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;

 

  d. 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: August 5, 2015     By:  

/s/ Michael Coyne

      Michael Coyne
      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 Michael Coyne, 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 June 28, 2015, 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: August 5, 2015     By:  

/s/ Aylwin Lewis

      Aylwin Lewis
      Chief Executive Officer and President
Date: August 5, 2015     By:  

/s/ Michael Coyne

      Michael Coyne
      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.