pbpb-10q_20160626.htm

 

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 26, 2016

OR

o

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  o

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  o

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

 

o

 

  

Accelerated filer

 

x

 

 

 

 

 

Non-accelerated filer

 

o

  (Do not check if a smaller reporting company)

  

Smaller reporting company

 

o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    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 – 25,192,902 shares as of July 29, 2016

 

 

 

 

 


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

 

17

 

 

 

 

Item 4.

 

Controls and Procedures

 

17

 

 

 

 

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

 

 

2


POTBELLY CORPORATION AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

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

 

 

 

June 26,

 

 

December 27,

 

 

 

2016

 

 

2015

 

ASSETS

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

29,921

 

 

$

32,006

 

Accounts receivable, net of allowances of $126 and $14 as of June 26, 2016 and

     December 27, 2015, respectively

 

 

4,554

 

 

 

4,461

 

Inventories

 

 

3,039

 

 

 

3,159

 

Prepaid expenses and other current assets

 

 

5,191

 

 

 

10,155

 

Total current assets

 

 

42,705

 

 

 

49,781

 

Property and equipment, net

 

 

95,812

 

 

 

97,434

 

Indefinite-lived intangible assets

 

 

3,404

 

 

 

3,404

 

Goodwill

 

 

2,222

 

 

 

1,428

 

Deferred income taxes, non-current

 

 

18,162

 

 

 

18,439

 

Deferred expenses, net and other assets

 

 

3,989

 

 

 

4,021

 

Total assets

 

$

166,294

 

 

$

174,507

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

3,913

 

 

$

5,762

 

Accrued expenses

 

 

18,090

 

 

 

19,277

 

Accrued income taxes

 

 

1,281

 

 

 

143

 

Total current liabilities

 

 

23,284

 

 

 

25,182

 

Deferred rent and landlord allowances

 

 

18,398

 

 

 

17,820

 

Other long-term liabilities

 

 

1,490

 

 

 

1,292

 

Total liabilities

 

 

43,172

 

 

 

44,294

 

Equity

 

 

 

 

 

 

 

 

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

     25,357,542 and 26,304,261 shares as of June 26, 2016 and

     December 27, 2015, respectively

 

 

306

 

 

 

303

 

Warrants

 

 

909

 

 

 

909

 

Additional paid-in-capital

 

 

404,585

 

 

 

399,458

 

Treasury stock, held at cost, 5,302,754 and 4,033,910 shares as of June 26, 2016,

     and December 27, 2015, respectively

 

 

(66,622

)

 

 

(50,000

)

Accumulated deficit

 

 

(216,785

)

 

 

(221,246

)

Total stockholders’ equity

 

 

122,393

 

 

 

129,424

 

Non-controlling interest

 

 

729

 

 

 

789

 

Total equity

 

 

123,122

 

 

 

130,213

 

Total liabilities and equity

 

$

166,294

 

 

$

174,507

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

3


POTBELLY CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

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

 

 

 

For the 13 Weeks Ended

 

 

For the 26 Weeks Ended

 

 

 

June 26,

 

 

June 28,

 

 

June 26,

 

 

June 28,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sandwich shop sales, net

 

$

104,466

 

 

$

95,566

 

 

$

199,892

 

 

$

180,963

 

Franchise royalties and fees

 

 

570

 

 

 

383

 

 

 

1,099

 

 

 

754

 

Total revenues

 

 

105,036

 

 

 

95,949

 

 

 

200,991

 

 

 

181,717

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sandwich shop operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of goods sold, excluding depreciation

 

 

28,500

 

 

 

27,253

 

 

 

54,746

 

 

 

51,598

 

Labor and related expenses

 

 

29,935

 

 

 

27,152

 

 

 

58,097

 

 

 

51,752

 

Occupancy expenses

 

 

13,174

 

 

 

11,539

 

 

 

25,931

 

 

 

22,886

 

Other operating expenses

 

 

10,687

 

 

 

9,970

 

 

 

21,232

 

 

 

19,627

 

General and administrative expenses

 

 

10,305

 

 

 

9,643

 

 

 

20,828

 

 

 

18,474

 

Depreciation expense

 

 

5,676

 

 

 

5,288

 

 

 

11,340

 

 

 

10,439

 

Pre-opening costs

 

 

239

 

 

 

536

 

 

 

391

 

 

 

1,077

 

Impairment and loss on disposal of property and equipment

 

 

1,008

 

 

 

484

 

 

 

1,025

 

 

 

832

 

Total expenses

 

 

99,524

 

 

 

91,865

 

 

 

193,590

 

 

 

176,685

 

Income from operations

 

 

5,512

 

 

 

4,084

 

 

 

7,401

 

 

 

5,032

 

Interest expense

 

 

41

 

 

 

63

 

 

 

69

 

 

 

124

 

Income before income taxes

 

 

5,471

 

 

 

4,021

 

 

 

7,332

 

 

 

4,908

 

Income tax expense

 

 

2,039

 

 

 

1,563

 

 

 

2,772

 

 

 

1,914

 

Net income

 

 

3,432

 

 

 

2,458

 

 

 

4,560

 

 

 

2,994

 

Net income (loss) attributable to non-controlling interest

 

 

59

 

 

 

(3

)

 

 

99

 

 

 

2

 

Net income attributable to Potbelly Corporation

 

$

3,373

 

 

$

2,461

 

 

$

4,461

 

 

$

2,992

 

Net income per common share attributable to common

   stockholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.13

 

 

$

0.09

 

 

$

0.17

 

 

$

0.10

 

Diluted

 

$

0.13

 

 

$

0.08

 

 

$

0.17

 

 

$

0.10

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

25,818,571

 

 

 

28,594,712

 

 

 

26,039,082

 

 

 

28,749,898

 

Diluted

 

 

26,459,087

 

 

 

29,364,689

 

 

 

26,597,012

 

 

 

29,520,163

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

 

4


POTBELLY CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statement of Equity

(amounts in thousands, except share data, unaudited)

 

 

 

Common Stock

 

 

Treasury

 

 

 

 

 

 

Additional Paid-In-

 

 

Accumulated

 

 

Non-Controlling

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Stock

 

 

Warrants

 

 

Capital

 

 

Deficit

 

 

Interest

 

 

Total Equity

 

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

 

Balance at December 27, 2015

 

 

26,304,261

 

 

$

303

 

 

$

(50,000

)

 

$

909

 

 

$

399,458

 

 

$

(221,246

)

 

$

789

 

 

$

130,213

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,461

 

 

 

99

 

 

 

4,560

 

Exercise of stock options

 

 

322,125

 

 

 

3

 

 

 

 

 

 

 

 

 

3,645

 

 

 

 

 

 

 

 

 

3,648

 

Excess tax benefits

   associated with exercise

   of stock options

 

 

 

 

 

 

 

 

 

 

 

 

 

 

16

 

 

 

 

 

 

 

 

 

16

 

Repurchases of common

   stock

 

 

(1,268,844

)

 

 

 

 

 

(16,622

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(16,622

)

Capital distribution to non-

   controlling interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(159

)

 

 

(159

)

Amortization of

   stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,466

 

 

 

 

 

 

 

 

 

1,466

 

Balance at June 26, 2016

 

 

25,357,542

 

 

$

306

 

 

$

(66,622

)

 

$

909

 

 

$

404,585

 

 

$

(216,785

)

 

$

729

 

 

$

123,122

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

 

5


POTBELLY CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(amounts in thousands, unaudited)

 

 

 

For the 26 Weeks Ended

 

 

 

June 26,

 

 

June 28,

 

 

 

2016

 

 

2015

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net income

 

$

4,560

 

 

$

2,994

 

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

 

 

 

 

 

 

 

 

Depreciation

 

 

11,340

 

 

 

10,439

 

Deferred income tax

 

 

293

 

 

 

190

 

Deferred rent and landlord allowances

 

 

579

 

 

 

1,769

 

Amortization of stock compensation expense

 

 

1,466

 

 

 

1,127

 

Excess tax benefit from stock-based compensation

 

 

(16

)

 

 

(224

)

Asset impairment, store closure and disposal of property and equipment

 

 

1,028

 

 

 

887

 

Amortization of debt issuance costs

 

 

16

 

 

 

35

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable, net

 

 

(93

)

 

 

(1,018

)

Inventories

 

 

138

 

 

 

(52

)

Prepaid expenses and other assets

 

 

4,616

 

 

 

904

 

Accounts payable

 

 

(1,511

)

 

 

(730

)

Accrued and other liabilities

 

 

1,902

 

 

 

2,641

 

Net cash provided by operating activities

 

 

24,318

 

 

 

18,962

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Acquisition of franchise shop

 

 

(1,108

)

 

 

 

Purchases of property and equipment

 

 

(12,178

)

 

 

(17,901

)

Net cash used in investing activities

 

 

(13,286

)

 

 

(17,901

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Payments on note payable

 

 

 

 

 

(1,022

)

Proceeds from exercise of stock options

 

 

3,813

 

 

 

3,743

 

Payment of payroll taxes related to stock-based compensation awards

 

 

(165

)

 

 

(678

)

Treasury stock repurchase

 

 

(16,622

)

 

 

(12,546

)

Excess tax benefit from stock-based compensation

 

 

16

 

 

 

224

 

Contributions from non-controlling interest

 

 

 

 

 

326

 

Distribution to non-controlling interest

 

 

(159

)

 

 

(8

)

Net cash used in financing activities

 

 

(13,117

)

 

 

(9,961

)

NET DECREASE IN CASH AND CASH EQUIVALENTS

 

 

(2,085

)

 

 

(8,900

)

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

 

 

32,006

 

 

 

63,005

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

 

$

29,921

 

 

$

54,105

 

Supplemental cash flow information:

 

 

 

 

 

 

 

 

Income taxes paid

 

$

714

 

 

$

230

 

Interest paid

 

 

57

 

 

 

114

 

Supplemental non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Unpaid liability for purchases of property and equipment

 

$

1,580

 

 

$

2,931

 

 

See accompanying notes to the unaudited condensed consolidated financial statements

 

 

 

6


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 or franchises Potbelly Sandwich Works sandwich shops in 29 states and the District of Columbia. 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. In July 2015, the Company opened its first franchise shop in the United Kingdom. Additionally, during April 2016, the Company transitioned a franchise shop to a company-operated shop for a purchases price of $1.1 million. The Company recorded $0.8 million of goodwill related to the transaction. The Company believes this acquisition is immaterial.

The table below sets forth a rollforward of company-operated and franchise-operated activities:

 

 

 

Company-

 

 

Franchise-Operated

 

 

Total

 

 

 

Operated

 

 

Domestic

 

 

International

 

 

Total

 

 

Company

 

Shops as of December 28, 2014

 

 

334

 

 

 

17

 

 

 

12

 

 

 

29

 

 

 

363

 

Shops opened

 

 

17

 

 

 

 

 

 

1

 

 

 

1

 

 

 

18

 

Shops closed

 

 

(2

)

 

 

 

 

 

(1

)

 

 

(1

)

 

 

(3

)

Shops as of June 28, 2015

 

 

349

 

 

 

17

 

 

 

12

 

 

 

29

 

 

 

378

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shops as of December 27, 2015

 

 

372

 

 

 

24

 

 

 

12

 

 

 

36

 

 

 

408

 

Shops opened

 

 

9

 

 

 

4

 

 

 

1

 

 

 

5

 

 

 

14

 

Shop purchased from franchisee

 

 

1

 

 

 

(1

)

 

 

 

 

 

(1

)

 

 

 

Shop closed

 

 

 

 

 

 

 

 

(1

)

 

 

(1

)

 

 

(1

)

Shops as of June 26, 2016

 

 

382

 

 

 

27

 

 

 

12

 

 

 

39

 

 

 

421

 

 

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 27, 2015. 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 26, 2016 and December 27, 2015, its statement of operations for the 13 and 26 weeks ended June 26, 2016 and June 28, 2015 and its statement of cash flows for the 26 weeks ended June 26, 2016 and June 28, 2015 have been included. The consolidated statements of operations for the interim periods presented herein are not necessarily indicative of the results to be expected for the full year.

The Company does not have any components of other comprehensive income recorded within its consolidated financial statements, and, therefore, does not separately present a statement of comprehensive income in its 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”); 17 of LLC’s wholly owned subsidiaries and LLC’s five 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 five joint venture investments. The Company has ownership interests ranging from 51-80% in these consolidated joint ventures.

7


POTBELLY CORPORATION AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

 

 

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 2016 and 2015 each consist of 52 weeks. The fiscal quarters ended June 26, 2016 and June 28, 2015 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 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.

New and Revised Financial Accounting Standards

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 beginning after December 15, 2017. In addition, the FASB issued ASU 2016-08, ASU 2016-10, and ASU 2016-12 in March 2016, April 2016, and May 2016, respectively, to help provide interpretive clarifications on the new guidance in ASC Topic 606. The Company is evaluating the effect this guidance will have on the Company’s consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its financial statements and disclosures.

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 the Company’s management to evaluate whether there is substantial doubt about the Company’s 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 the Company’s financial statements and disclosures.

In February 2016, the FASB issued ASU No. 2016-02, “Leases”, which will replace the existing guidance in ASC 840, “Leases”. The pronouncement requires a dual approach for lessee accounting under which a lessee would account for leases as finance leases or operating leases. Both finance leases and operating leases will result in the lessee recognizing a right-of-use asset and a corresponding lease liability. For finance leases, the lessee would recognize interest expense and amortization of the right-of-use asset, and for operating leases, the lessee would recognize a straight-line total lease expense. The pronouncement is effective for fiscal years beginning after December 15, 2018, including annual and interim periods thereafter. In addition, the pronouncement requires the use of the modified retrospective method, which will require adjustment to all comparative periods presented in the consolidated financial statements. The Company is evaluating the impact this standard will have on its financial statements and disclosures.

In March 2016, the FASB issued ASU No. 2016-04, “Recognition of Breakage for Certain Prepaid Stored-Value Products”. This pronouncement clarifies when it is acceptable to recognize the unredeemed portion of prepaid gift cards into income. This pronouncement is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company is evaluating the impact this standard will have on its financial statements and disclosures.

In March 2016, the FASB issued ASU No. 2016-09, “Compensation – Stock Compensation (Topic 718)”. The pronouncement simplifies the accounting for the taxes related to stock-based compensation, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification within the statement of cash flows. The pronouncement is effective for annual periods beginning after December 15, 2016, including annual and interim periods thereafter. The Company is evaluating the impact this standard will have on its financial statements and disclosures.

 

 

(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.

8


POTBELLY CORPORATION AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

 

 

The Company assesses potential impairments to its long-lived assets, which includes property and equipment, on a quarterly basis or 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 is determined using the discounted future cash flow method of anticipated cash flows through the shop’s lease-end date using fair value measurement inputs classified as Level 3. 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 the Company’s shops during each quarter of 2016, it was determined that indicators of impairment were present for certain shops during the 13 weeks ended June 26, 2016 as a result of continued underperformance. The Company performed an impairment analysis related to these shops and recorded an impairment charge of $1.0 million for the 13 and 26 weeks ended June 26, 2016 related to the excess of the carrying amounts recorded on the balance sheet over the shops estimated fair value. The Company recorded impairment charges of $0.3 million and $0.6 million for the 13 and 26 weeks ended June 28, 2015, respectively.

 

(3) Earnings per share

Basic and diluted income 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 26,

 

 

June 28,

 

 

June 26,

 

 

June 28,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Net income attributable to Potbelly Corporation

 

$

3,373

 

 

$

2,461

 

 

$

4,461

 

 

$

2,992

 

Weighted average common shares outstanding-basic

 

 

25,818,571

 

 

 

28,594,712

 

 

 

26,039,082

 

 

 

28,749,898

 

Plus: Effect of potential stock options exercise

 

 

581,971

 

 

 

708,271

 

 

 

504,761

 

 

 

709,276

 

Plus: Effect of potential warrant exercise

 

 

58,545

 

 

 

61,706

 

 

 

53,169

 

 

 

60,989

 

Weighted average common shares outstanding-diluted

 

 

26,459,087

 

 

 

29,364,689

 

 

 

26,597,012

 

 

 

29,520,163

 

Income per share available to common stockholders-basic

 

$

0.13

 

 

$

0.09

 

 

$

0.17

 

 

$

0.10

 

Income per share available to common stockholders-diluted

 

$

0.13

 

 

$

0.08

 

 

$

0.17

 

 

$

0.10

 

Potentially dilutive shares that are considered anti-dilutive:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common share options

 

 

1,003,718

 

 

 

491,494

 

 

 

1,238,252

 

 

 

609,084

 

Warrants

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4) Income Taxes

The Company recognized income tax expense of $2.0 million on pre-tax income of $5.5 million, or an effective tax rate of 37.3%, for the 13 weeks ended June 26, 2016, compared to income tax expense of $1.6 million on pre-tax income of $4.0 million, or an effective tax rate of 38.9%, for the 13 weeks ended June 28, 2015. The Company recognized income tax expense of $2.8 million on pre-tax income of $7.3 million, or an effective tax rate of 37.8%, for the 26 weeks ended June 26, 2016, compared to 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. The difference between the federal statutory rate and the effective tax rate for both the 13 and 26 weeks ended June 26, 2016 is primarily attributable to state income taxes offset by certain federal and state tax credits.

 

 

(5) Capital Stock

On September 8, 2015, the Company’s Board of Directors authorized a share repurchase program of up to $35.0 million of the Company’s common stock.  This program permits the Company, from time to time, to purchase shares in the open market (including in pre-arranged stock trading plans in accordance with the guidelines specified in Rule 10b5-1 under the Securities Exchange Act of 1934, as amended) or in privately negotiated transactions. During the 26 weeks ended June 26, 2016, the Company repurchased 1,268,844 shares of its common stock for approximately $16.6 million, including cost and commission, in open market transactions. As of June 26, 2016, the remaining dollar value of authorization under the share repurchase program was $3.4 million, which does not include commission. Repurchased shares are included as treasury stock in the condensed consolidated balance sheets and the condensed consolidated statement of equity.

 

 

9


POTBELLY CORPORATION AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

 

 

(6) Stock-Based Compensation

Throughout the 26 weeks ended June 26, 2016, the Company issued 367,789 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 26, 2016 was $7.05 per share, as estimated using the following weighted average assumptions: expected life of options – seven years; volatility – 49.41%; risk-free interest rate – 1.67%; and dividend yield – 0.0%. The Company used the simplified method for determining the expected life of the options. Beginning October 2015, expected volatility of the options was calculated using the Company’s historical data since its initial public offering. Prior to October 2015, the Company calculated expected volatility of the options based on historical data from selected peer public company restaurants.

A summary of activity for the 26 weeks ended June 26, 2016 is as follows:

Options

 

Shares

(Thousands)

 

 

Weighted

Average

Exercise

Price

 

 

Aggregate

Intrinsic

Value

(Thousands)

 

 

Weighted

Average

Remaining

Term

(Years)

 

Outstanding—December 27, 2015

 

 

4,368

 

 

$

10.53

 

 

$

9,742

 

 

 

5.10

 

Granted

 

 

368

 

 

 

13.65

 

 

 

 

 

 

 

 

 

Exercised

 

 

(307

)

 

 

11.85

 

 

 

 

 

 

 

 

 

Canceled

 

 

(103

)

 

 

14.42

 

 

 

 

 

 

 

 

 

Outstanding—June 26, 2016

 

 

4,326

 

 

 

10.61