pbpb-10q_20200329.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

 

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

 

For the Quarterly Period Ended March 29, 2020

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 of Principal Executive Offices)

 

(Zip Code)

 

Registrant’s Telephone Number, Including Area Code: (312) 951-0600

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

Common Stock, $0.01 par value

 

PBPB

 

The NASDAQ Stock Market LLC

 

 

 

 

(Nasdaq Global Select Market)

 

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

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

 

Large accelerated filer

 

 

  

Accelerated filer

 

Non-accelerated filer

 

  

  

Smaller reporting company

 

Emerging growth company

 

 

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.     Yes      No  

As of April 26, 2020, the registrant had 23,684,000 shares of common stock, $0.01 par value per share, outstanding.

 

 


 

Potbelly Corporation and Subsidiaries

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 Statements 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

 

16

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

23

 

 

 

 

Item 4.

 

Controls and Procedures

 

23

 

 

 

 

PART II.

 

OTHER INFORMATION

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

24

 

 

 

 

Item 1A.

 

Risk Factors

 

24

 

 

 

 

Item 2.

 

Unregistered Sale of Equity Securities and Use of Proceeds

 

24

 

 

 

 

Item 3.

 

Defaults Upon Senior Securities

 

24

 

 

 

 

Item 4.

  

Mine Safety Disclosures

 

24

 

 

 

 

Item 5.

  

Other Information

 

24

 

 

 

 

Item 6.

 

Exhibits

 

26

 

 

 

 

 

 

Signature

 

27

 

2


 

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

Potbelly Corporation and Subsidiaries

Condensed Consolidated Balance Sheets

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

 

 

 

March 29,

 

 

December 29,

 

 

 

2020

 

 

2019

 

Assets

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

45,816

 

 

$

18,806

 

Accounts receivable, net of allowances of $258 and $202 as of March 29, 2020

and December 29, 2019, respectively

 

 

2,651

 

 

 

4,257

 

Inventories

 

 

3,245

 

 

 

3,473

 

Prepaid expenses and other current assets

 

 

8,454

 

 

 

5,687

 

Total current assets

 

 

60,166

 

 

 

32,223

 

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

 

73,006

 

 

 

79,032

 

Right-of-use assets for operating leases

 

 

208,239

 

 

 

211,988

 

Indefinite-lived intangible assets

 

 

3,404

 

 

 

3,404

 

Goodwill

 

 

2,222

 

 

 

2,222

 

Deferred expenses, net and other assets

 

 

4,032

 

 

 

4,010

 

Total assets

 

$

351,069

 

 

$

332,879

 

 

 

 

 

 

 

 

 

 

Liabilities and Equity

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

3,375

 

 

$

3,886

 

Accrued expenses

 

 

15,656

 

 

 

20,398

 

Short-term operating lease liabilities

 

 

29,701

 

 

 

29,319

 

Accrued income taxes

 

 

171

 

 

 

171

 

Debt from revolving credit facility

 

 

39,786

 

 

 

-

 

Total current liabilities

 

 

88,689

 

 

 

53,774

 

 

 

 

 

 

 

 

 

 

Long-term operating lease liabilities

 

 

202,902

 

 

 

206,726

 

Other long-term liabilities

 

 

3,274

 

 

 

3,210

 

Total liabilities

 

 

294,865

 

 

 

263,710

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 10)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

 

 

 

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

23,684 and 23,638 shares as of March 29, 2020 and December 29,

2019, respectively

 

 

331

 

 

 

331

 

Additional paid-in-capital

 

 

435,768

 

 

 

435,278

 

Treasury stock, held at cost, 9,488 and 9,465 shares as of

March 29, 2020, and December 29, 2019, respectively

 

 

(112,751

)

 

 

(112,680

)

Accumulated deficit

 

 

(267,422

)

 

 

(254,081

)

Total stockholders’ equity

 

 

55,926

 

 

 

68,848

 

Non-controlling interest

 

 

278

 

 

 

321

 

Total equity

 

 

56,204

 

 

 

69,169

 

 

 

 

 

 

 

 

 

 

Total liabilities and equity

 

$

351,069

 

 

$

332,879

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

3


 

Potbelly Corporation and Subsidiaries

Condensed Consolidated Statements of Operations

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

 

 

 

For the 13 Weeks Ended

 

 

 

March 29,

 

 

March 31,

 

 

 

2020

 

 

2019

 

Revenues

 

 

 

 

 

 

 

 

Sandwich shop sales, net

 

$

86,961

 

 

$

97,258

 

Franchise royalties and fees

 

 

629

 

 

 

829

 

Total revenues

 

 

87,590

 

 

 

98,087

 

 

 

 

 

 

 

 

 

 

Expenses

 

 

 

 

 

 

 

 

Sandwich shop operating expenses

 

 

 

 

 

 

 

 

Cost of goods sold, excluding depreciation

 

 

24,174

 

 

 

25,978

 

Labor and related expenses

 

 

30,397

 

 

 

31,973

 

Occupancy expenses

 

 

15,028

 

 

 

14,377

 

Other operating expenses

 

 

12,765

 

 

 

12,145

 

General and administrative expenses

 

 

10,734

 

 

 

12,709

 

Depreciation expense

 

 

5,456

 

 

 

5,536

 

Pre-opening costs

 

 

64

 

 

 

10

 

Impairment and loss on disposal of property and equipment

 

 

5,957

 

 

 

82

 

Total expenses

 

 

104,575

 

 

 

102,810

 

Loss from operations

 

 

(16,985

)

 

 

(4,723

)

 

 

 

 

 

 

 

 

 

Interest expense

 

 

74

 

 

 

32

 

Loss before income taxes

 

 

(17,059

)

 

 

(4,755

)

Income tax expense (benefit)

 

 

(3,709

)

 

 

13,619

 

Net loss

 

 

(13,350

)

 

 

(18,374

)

Net income (loss) attributable to non-controlling interest

 

 

(14

)

 

 

65

 

Net loss attributable to Potbelly Corporation

 

$

(13,336

)

 

$

(18,439

)

 

 

 

 

 

 

 

 

 

Net loss per common share attributable to common

   stockholders:

 

 

 

 

 

 

 

 

Basic

 

$

(0.56

)

 

$

(0.76

)

Diluted

 

$

(0.56

)

 

$

(0.76

)

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

Basic

 

 

23,646

 

 

 

24,133

 

Diluted

 

 

23,646

 

 

 

24,133

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

4


 

Potbelly Corporation and Subsidiaries

Condensed Consolidated Statements of Equity

(amounts and shares in thousands, unaudited)

 

For the 13 weeks ended:

 

Common Stock

 

 

Treasury

 

 

Additional

Paid-In-

 

 

Accumulated

 

 

Non-

Controlling

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Stock

 

 

Capital

 

 

Deficit

 

 

Interest

 

 

Total Equity

 

Balance at December 30, 2018

 

 

24,143

 

 

 

330

 

 

 

(108,372

)

 

 

432,771

 

 

 

(229,558

)

 

 

362

 

 

$

95,533

 

Cumulative impact of Topic

842, net of tax of $196

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(531

)

 

 

 

 

 

(531

)

Net income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(18,439

)

 

 

65

 

 

 

(18,374

)

Stock-based compensation plans

 

 

33

 

 

 

 

 

 

 

 

 

170

 

 

 

 

 

 

 

 

 

170

 

Repurchases of common stock

 

 

(135

)

 

 

 

 

 

(1,144

)

 

 

 

 

 

 

 

 

 

 

 

(1,144

)

Treasury shares used for

    stock-based plans

 

 

(3

)

 

 

 

 

 

(25

)

 

 

 

 

 

 

 

 

 

 

 

(25

)

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

459

 

 

 

 

 

 

 

 

 

459

 

Balance at March 31, 2019

 

 

24,038

 

 

$

330

 

 

$

(109,541

)

 

$

433,400

 

 

$

(248,528

)

 

$

427

 

 

$

76,088

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 29, 2019

 

 

23,638

 

 

$

331

 

 

$

(112,680

)

 

$

435,278

 

 

$

(254,081

)

 

$

321

 

 

$

69,169

 

Cumulative impact of Topic 326, net of tax of $2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(5

)

 

 

 

 

 

(5

)

Net income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(13,336

)

 

 

(14

)

 

 

(13,350

)

Stock-based compensation plans

 

 

68

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Treasury shares used for

    stock-based plans

 

 

(22

)

 

 

 

 

 

(71

)

 

 

 

 

 

 

 

 

 

 

 

(71

)

Distributions to non-controlling

   interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(172

)

 

 

(172

)

Contributions from non-controlling

   interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

143

 

 

 

143

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

490

 

 

 

 

 

 

 

 

 

490

 

Balance at March 29, 2020

 

 

23,684

 

 

$

331

 

 

$

(112,751

)

 

$

435,768

 

 

$

(267,422

)

 

$

278

 

 

$

56,204

 

 

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 13 Weeks Ended

 

 

 

March 29,

 

 

March 31,

 

 

 

2020

 

 

2019

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(13,350

)

 

$

(18,374

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Depreciation expense

 

 

5,456

 

 

 

5,536

 

Noncash lease expense

 

 

7,295

 

 

 

7,829

 

Deferred income tax

 

 

5

 

 

 

13,580

 

Stock-based compensation expense

 

 

490

 

 

 

459

 

Asset impairment, store closure and disposal of property and equipment

 

 

6,236

 

 

 

87

 

Other operating activities

 

 

20

 

 

 

9

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable, net

 

 

1,620

 

 

 

(811

)

Inventories

 

 

228

 

 

 

189

 

Prepaid expenses and other assets

 

 

(3,252

)

 

 

1,455

 

Accounts payable

 

 

(767

)

 

 

(130

)

Operating lease liabilities

 

 

(7,653

)

 

 

(7,860

)

Accrued expenses and other liabilities

 

 

(4,144

)

 

 

(4,342

)

Net cash used in operating activities:

 

 

(7,816

)

 

 

(2,373

)

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

$

(4,860

)

 

$

(2,572

)

Net cash used in investing activities:

 

 

(4,860

)

 

 

(2,572

)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Borrowings under credit facility

 

$

39,786

 

 

$

 

Proceeds from exercise of stock options

 

 

 

 

 

170

 

Employee taxes on certain stock-based payment arrangements

 

 

(71

)

 

 

(25

)

Treasury stock repurchases

 

 

 

 

 

(1,144

)

Distributions to non-controlling interest

 

 

(172

)

 

 

 

Contributions from non-controlling interest

 

 

143

 

 

 

 

Net cash provided by (used in) financing activities:

 

 

39,686

 

 

 

(999

)

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

 

27,010

 

 

 

(5,944

)

Cash and cash equivalents at beginning of period

 

 

18,806

 

 

 

19,775

 

Cash and cash equivalents at end of period

 

$

45,816

 

 

$

13,831

 

 

 

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

 

 

 

Income taxes paid

 

$

9

 

 

$

4

 

Interest paid

 

 

25

 

 

 

24

 

Supplemental non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Unpaid liability for purchases of property and equipment

 

$

1,091

 

 

$

161

 

 

See accompanying notes to the unaudited condensed consolidated financial statements

 

 

6


 

Potbelly Corporation and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements (unaudited)

 

(1) Organization and Other Matters

Business

Potbelly Corporation (the “Company” or “Potbelly”), through its wholly owned subsidiaries, owns or operates more than 400 company-owned shops in the United States. Additionally, Potbelly franchisees operate over 40 shops in the United States.

Basis of Presentation

The unaudited condensed consolidated financial statements and notes herein should be read in conjunction with the audited consolidated financial statements of Potbelly Corporation and its subsidiaries and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 29, 2019. The unaudited condensed consolidated financial statements included herein have been prepared by the Company without audit, pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”) regarding interim financial reporting. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) have been condensed or omitted pursuant to the SEC rules and regulations. In the opinion of management, all adjustments, which are of a normal and recurring nature (except as otherwise noted), that are necessary to present fairly the Company’s balance sheet as of March 29, 2020 and December 29, 2019, its statement of operations for the 13 weeks ended March 29, 2020 and March 31, 2019, the statement of equity for the 13 weeks ended March 29, 2020 and March 31, 2019, and its statement of cash flows for the 13 weeks ended March 29, 2020 and March 31, 2019 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 condensed consolidated financial statements.

COVID-19

On January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus ("COVID-19") and the risks to the international community as the virus spreads globally. On March 11, 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally.  In response to the pandemic, many states and jurisdictions in which we operate have issued stay-at-home orders and other measures aimed at slowing the spread of the coronavirus.  While most of our company-owned shops remain open in accordance with guidance from local authorities, these measures resulted in us closing the vast majority our dining rooms and shifting to off-premise operations only, and we experienced a sudden and drastic decrease in revenues.

The disruption in operations and reduction in revenues have led the Company to consider the impact of the COVID-19 pandemic on the recoverability of its assets, including property and equipment, right-of-use assets for operating leases, goodwill and intangible assets, and others.

Due to the impact of the COVID-19 pandemic, the Company performed impairment analyses of its goodwill, intangible assets, and long-lived assets, which includes property and equipment and right-of-use assets for operating leases, as of March 29, 2020.  The impairment assessments for both goodwill and indefinite lived intangible assets resulted in the conclusion that the fair value of these assets exceeded their carrying values. Accordingly, the Company did not record any impairment to its goodwill or indefinite-lived intangible assets during the thirteen weeks ended March 29, 2020. The Company recorded an impairment charge for its long-lived assets of $5.9 million for the 13 weeks ended March 29, 2020, primarily driven by the expected impact of the COVID-19 pandemic on future cash flows. The ultimate severity and longevity of the COVID-19 pandemic is unknown, and therefore, it is possible that impairments could be identified in future periods, and such amounts could be material.  See Note 3 for further details.

The Company recognized an income tax benefit of $3.7 million for the thirteen weeks ended March 29, 2020 primarily due to the impact of the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”).  The Company estimates that it will be able to obtain a tax refund of $3.7 million from the carryback of NOLs and a refund of prior AMT credits. See Note 5 for further details.  

To preserve financial flexibility, the Company drew the $40.0 million of available capacity under its revolving credit facility.  Due to the pandemic’s impact on revenues, the Company is in discussions with its lender regarding modifications to financial covenants related to the revolving credit facility.  See Note 7 for further details.

7


 

The full impact of the COVID-19 outbreak continues to evolve as of the date of this report. Due to the rapid development and fluidity of this situation, the Company cannot determine the ultimate impact that the COVID-19 pandemic will have on its consolidated financial condition, liquidity, and future results of operations, and therefore any prediction as to the ultimate material adverse impact on the Company’s consolidated financial condition, liquidity, and future results of operations is uncertain.

Going Concern

Under ASC 205, Presentation of Financial Statements, the Company is required to consider and has evaluated whether there is substantial doubt that it has the ability to meet its obligations within one year from the financial statement issuance date. This assessment also includes the Company’s consideration of any management plans to alleviate such doubts. The conditions described above related to the COVID-19 pandemic have had a material adverse impact on the Company’s revenues, profitability, and cash flows.  Because of these conditions, the Company has concluded that it is probable that it will not be in compliance with certain financial covenants of the Credit Agreement Amendment, which are further described in Note 7, for a period of one year from the financial statement issuance date.  The probable inability of the Company to meet its current covenant requirements raises substantial doubt on the Company’s ability to meet its obligations within one year from the financial statement issuance date and to continue as a going concern.  If the Company is unable to maintain compliance with the covenants contained in the current Credit Agreement, it may be unable to make additional borrowings on any undrawn amounts and may be required to repay its then outstanding borrowings.  The Company is in continued negotiations with its current lender and expects further amendments to the Credit Agreement as needed to maintain compliance with future financial covenants, but we cannot make any assurances regarding the likelihood, certainty or exact timing of further amendments to the Credit Agreement. The Company is also evaluating various alternatives to improve its liquidity, including but not limited to, lease concessions and deferrals, further reductions of operating and capital expenditures, and raising additional capital.

The condensed consolidated financial statements included in this interim report on Form 10-Q do not include any adjustments that might result from the outcome of this uncertainty.

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”); seven of LLC’s wholly owned subsidiaries and LLC’s seven joint ventures, collectively, the “Company.” All intercompany balances and transactions have been eliminated in consolidation. For consolidated joint ventures, non-controlling interest represents a non-controlling partner’s share of the assets, liabilities and operations related to the seven joint venture investments. The Company has ownership interests ranging from 51-80% 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 year 2020 and 2019 both consist of 52 weeks. The fiscal quarters ended March 29, 2020 and March 31, 2019 each consisted of 13 weeks.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses and the disclosure of contingent assets and liabilities. Significant estimates include amounts for long-lived assets and income taxes. Actual results could differ from those estimates.

 

Recent Accounting Pronouncements

On December 30, 2019, the Company adopted Accounting Standard Update No. 2016-13, Financial Instruments—Credit Losses (Topic 326). This pronouncement requires the measurement and recognition of expected credit losses on financial instruments. ASU 2016-13 replaces the existing incurred loss model with a forward-looking expected credit loss model that requires consideration of a broader range of information to estimate credit losses. The Company recorded a net reduction of $5 thousand to opening accumulated deficit as of December 30, 2019, due to the cumulative impact of adopting Topic 326.

8


 

(2) Revenue

The Company primarily earns revenue at a point in time for sandwich shop sales which can occur in person at the shop, over our web or app platform, or through a third-party platform.  Revenue is recorded net of sales-related taxes collected from customers. The payment on these sales is due at the time of the customer’s purchase. The Company also receives royalties from franchisees on their respective sales, which are recognized at the point in time the sale is made and invoiced weekly. Potbelly also records revenue from sales over time related to upfront franchise fees, gift card redemptions and breakage. For the 13 weeks ended March 29, 2020, revenue recognized from all revenue sources on point in time sales was $87.5 million, and revenue recognized from sales over time was $0.1 million. For the 13 weeks ended March 31, 2019, revenue recognized from all revenue sources on point in time sales was $97.8 million, and revenue recognized from sales over time was $0.3 million.

Franchise Revenue

Potbelly licenses intellectual property and trademarks to franchisees through franchise agreements. As part of these franchise agreements, Potbelly receives an upfront payment from the franchisee, which the Company recognizes over the term of the franchise agreement. The Company records a contract liability for the unearned portion of the upfront franchise payments.

Gift Card Redemptions / Breakage Revenue

Potbelly sells gift cards to customers, records the sale as a contract liability and recognizes the associated revenue as the gift card is redeemed. A portion of these gift cards are not redeemed by the customer, which is recognized by the Company as revenue as a percentage of customers gift card redemptions. The expected breakage amount recognized is determined by a historical data analysis on gift card redemption patterns.

Contract Liabilities

As described above, the Company records current and noncurrent contract liabilities for upfront franchise fees and gift cards.  There are no other contract liabilities or contract assets recorded by the Company. The opening and closing balances of the Company’s current and noncurrent contract liabilities from contracts with customers were as follows:

 

 

 

Current Contract

Liability

 

 

Noncurrent Contract

Liability

 

 

 

(Thousands)

 

 

(Thousands)

 

Beginning balance as of December 30, 2019

 

$

(1,594

)

 

$

(2,054

)

Ending balance as of March 29, 2020

 

 

(1,264

)

 

 

(1,984

)

Decrease in contract liability

 

$

(330

)

 

$

(70

)

 

The aggregate value of remaining performance obligations on outstanding contracts was $3.2 million as of March 29, 2020. The Company expects to recognize revenue related to contract liabilities as follows (in thousands), which may vary based upon franchise activity as well as gift card redemption patterns:

 

Years Ending

 

Amount

 

2020

 

$

942

 

2021

 

 

302

 

2022

 

 

240

 

2023

 

 

206

 

2024

 

 

174

 

Thereafter

 

 

1,384

 

Total revenue recognized

 

$

3,248

 

 

For the 13 weeks ended March 29, 2020, the amount of revenue recognized related to the December 30, 2019 liability ending balance was $0.5 million. For the 13 weeks ended March 31, 2019, the amount of revenue recognized related to the December 30, 2018 liability ending balance was $0.8 million. This revenue related to the recognition of gift card redemptions and upfront franchise fees. For the 13 weeks ended March 29, 2020 and March 31, 2019, the Company did not recognize any revenue from obligations satisfied (or partially satisfied) in prior periods.

(3) Fair Value Measurement

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

9


 

The Company assesses potential impairments to its long-lived assets, which includes property and equipment and lease right-of-use assets, on a quarterly basis or whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. Shop-level assets and right-of-use assets are grouped at the individual shop-level for the purpose of the impairment assessment. Recoverability of an asset group is measured by a comparison of the carrying amount of an asset group to its estimated undiscounted future cash flows expected to be generated by the asset group. If the carrying amount of the asset group exceeds its estimated undiscounted future cash flows, an impairment charge is recognized as the amount by which the carrying amount of the asset group exceeds the fair value of the asset group. The fair value of the shop assets is determined using the discounted future cash flow method of anticipated cash flows through the shop’s lease-end date using fair value measurement inputs classified as Level 3. The fair value of right-of-use assets is estimated using market comparative information for similar properties. Level 3 inputs are derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable. After performing a periodic review of the Company’s shops during the 13 weeks ended March 29, 2020, it was determined that indicators of impairment were present for certain shops as a result of continued underperformance. The Company performed an impairment analysis related to these shops and recorded an impairment charge of $5.9 million for the 13 weeks ended March 29, 2020, primarily driven by the expected impact of the COVID-19 pandemic on future cash flows. The ultimate severity and longevity of the COVID-19 pandemic is unknown, and therefore, it is possible that impairments could be identified in future periods, and such amounts could be material. After performing a periodic review of the Company’s shops during the 13 weeks ended March 31, 2019, it was determined that there were no indicators of impairment for the quarter ended March 31, 2019 and accordingly, the Company recorded no impairment charge for the 13 weeks ended March 31, 2019.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

Assets recognized or disclosed at fair value on the consolidated financial statements on a nonrecurring basis include items such as leasehold improvements, property and equipment, operating lease assets, goodwill, and other intangible assets. These assets are measured at fair value if determined to be impaired.

The Company reviews indefinite-lived intangible assets, which includes goodwill and tradenames, annually at fiscal year-end for impairment or more frequently if events or circumstances indicate that the carrying value may not be recoverable. Due to the recent impact of the COVID-19 pandemic to the global economy, including but not limited to, the volatility of the Company's stock price as well as that of its competitors, declining sales at the Company's restaurants and the challenging environment for the restaurant industry generally, the Company determined that there were indicators of potential impairment of its goodwill and indefinite-lived intangible assets during the thirteen weeks ended March 29, 2020. As such, the Company performed an impairment assessment for both goodwill and indefinite lived intangible assets and concluded that the fair value of these assets exceeded their carrying values. Accordingly, the Company did not record any impairment to its goodwill or indefinite-lived intangible assets during the thirteen weeks ended March 29, 2020. The ultimate severity and longevity of the COVID-19 pandemic is unknown, and therefore, it is possible that impairments could be identified in future periods, and such amounts could be material.

 

 

(4) Loss Per Share

Basic and diluted income per common share attributable to common stockholders are calculated using the weighted average number of common shares outstanding for the period. Diluted income per common share attributable to common stockholders is computed by dividing the income allocated to common stockholders by the weighted average number of fully diluted common shares outstanding. In periods of a net loss, no potential common shares are included in diluted shares outstanding as the effect is anti-dilutive. For the 13 weeks ended March 29, 2020, and March 31, 2019, the Company had a loss per share, and therefore potentially dilutive shares were excluded from the calculation.

The following table summarizes the loss per share calculation:

 

 

 

For the 13 Weeks Ended

 

 

 

March 29,

 

 

March 31,

 

 

 

2020

 

 

2019

 

Net loss attributable to Potbelly Corporation

 

$

(13,336

)

 

$

(18,439

)

Weighted average common shares outstanding-basic

 

 

23,646

 

 

 

24,133

 

Plus: Effect of potential stock options exercise

 

 

 

 

 

 

Weighted average common shares outstanding-diluted

 

 

23,646

 

 

 

24,133

 

Loss per share available to common stockholders-basic

 

$

(0.56

)

 

$

(0.76

)

Loss per share available to common stockholders-diluted

 

$

(0.56

)

 

$

(0.76

)

Potentially dilutive shares that are considered anti-dilutive:

 

 

 

 

 

 

 

 

Common share options

 

 

2,294

 

 

 

2,387

 

10


 

 

(5) Income Taxes

 

On March 27, 2020, the CARES Act was enacted into law.  The CARES Act is a tax and spending package intended to provide economic relief to address the impact of the COVID-19 pandemic.  The CARES Act includes several significant business tax provisions that, among other things, would eliminate the taxable income limit for certain net operating losses (“NOLs”) and allow businesses to carry back NOLs arising in 2018, 2019, and 2020 to the five prior tax years, accelerate refunds of previously generated corporate alternative minimum tax (“AMT”) credits, loosen the business interest limitation under section 163(j), and fix the qualified improvement property regulations in the 2017 Tax Cuts and Jobs Act.   As a result of the CARES Act, the Company estimates that it will be able to obtain a tax refund of $3.7 million from the carryback of NOLs and a refund of prior AMT credits.

 

The interim tax provision is determined using an estimated annual effective tax rate and is adjusted for discrete taxable events that occur during the quarter.  The Company recognized an income tax benefit of $3.7 million for the thirteen weeks ended March 29, 2020 primarily due to the impact of the Cares Act discussed above.  The Company recorded a tax expense of $13.6 million for the thirteen weeks ended March 31, 2019 due to the Company recording a non-cash charge to income tax expense for the recognition of a full valuation allowance against its net deferred tax assets.  The Company continues to record a valuation allowance against all of its deferred tax assets as March 29, 2020.  The Company did not provide for an income tax benefit on its pre-tax loss for the 13 weeks ended March 29, 2020 and March 31, 2019.

The Company regularly assesses the need for a valuation allowance related to its deferred tax assets, which includes consideration of both positive and negative evidence related to the likelihood of realization of such deferred tax assets to determine, based on the weight of the available evidence, whether it is more-likely-than-not that some or all of its deferred tax assets will not be realized.  In its assessment, the Company considers recent financial operating results, projected future taxable income, the reversal of existing taxable differences, and tax planning strategies.  The Company recorded a full valuation allowance against its net deferred tax assets during the 13 weeks ended March 31, 2019.  The Company recorded a non-cash charge to income tax expense of $13.6 million related to the recognition of the valuation allowance during the first quarter of 2019 and continue to record a valuation allowance against all of our deferred tax assets as of March 29, 2020.  The Company will continue to assess the likelihood of the realization of its deferred tax assets and the valuation allowance will be adjusted accordingly

(6) Leases

We determine if a contract contains a lease at inception. The Company leases retail shops, warehouse and office space under operating leases. For leases with renewal periods at the Company’s option, the Company determines the expected lease period based on whether the renewal of any options are reasonably assured at the inception of the lease.

Operating lease assets and liabilities are recognized at the lease commencement date. Operating lease liabilities represent the present value of lease payments not yet paid. Operating lease assets represent our right to use an underlying asset and are based upon the operating lease liabilities adjusted for prepayments or accrued lease payments, initial direct costs, lease incentives, and impairment of operating lease assets. To determine the present value of lease payments not yet paid, we estimate incremental secured borrowing rates corresponding to the maturities of the leases. The Company estimates this rate based on prevailing financial market conditions, comparable company and credit analysis, and management judgment.

We recognize expense for these leases on a straight-line basis over the lease term. Additionally, tenant incentives used to fund leasehold improvements are recognized when earned and reduce our right-of-use asset related to the lease. These are amortized through the right-of-use asset as reductions of expense over the lease term.

 

Operating lease term and discount rate were as follows:

 

 

 

March 29,

 

 

March 31,

 

 

 

2020

 

 

2019

 

Weighted average remaining lease term (years)

 

8.33

 

 

8.90

 

Weighted average discount rate

 

 

7.90

%

 

 

8.01

%

 

Certain of the Company’s operating lease agreements include variable payments that are passed through by the landlord, such as common area maintenance and real estate taxes, as well as variable payments based on percentage rent for certain of our shops.  Pass-through charges and payments based on percentage rent are included within variable lease cost.

11


 

The components of lease cost were as follows:

 

 

 

 

13 weeks ending

 

 

13 weeks ending

 

 

 

 

March 29,

 

 

March 31,

 

 

Classification

 

2020

 

 

2019

 

Operating lease cost

Occupancy and General and administrative expenses

 

 

11,770

 

 

 

10,995

 

Variable lease cost

Occupancy

 

 

3,322

 

 

 

3,504

 

Total lease cost

 

 

$

15,092

 

 

$

14,499

 

 

Supplemental disclosures of cash flow information related to leases were as follows:

 

 

 

13 weeks ending

 

 

13 weeks ending

 

 

 

March 29,

 

 

March 31,

 

 

 

2020

 

 

2019

 

Operating cash flows rent paid for operating lease liabilities

 

 

11,979

 

 

 

11,938

 

Operating right-of-use assets obtained in exchange for new operating lease liabilities

 

 

5,534

 

 

 

922

 

Reduction in operating right-of-use assets due to lease terminations

 

 

1,439

 

 

 

 

 

As of March 29, 2020, the Company had no real estate leases entered into that had not yet commenced.

 

 

Maturities of lease liabilities were as follows as of March 29, 2020:

 

  

 

Operating Leases

 

Remainder of 2020

 

 

34,954

 

2021

 

 

44,610

 

2022

 

 

39,071

 

2023

 

 

34,321

 

2024

 

 

31,180

 

2025

 

 

28,836

 

Thereafter

 

 

112,902

 

Total lease payments

 

 

325,874

 

Less: imputed interest

 

 

(93,271

)

Present value of lease liabilities

 

$

232,603

 

 

 

(7) Debt and Credit Facilities

On August 7, 2019, the Company entered into a second amended and restated revolving credit facility agreement (the "Credit Agreement") with JPMorgan Chase Bank, N.A. (“JPMorgan”) that expires in July 2022. The Credit Agreement amends and restates that certain amended and restated revolving credit facility agreement, dated as of December 9, 2015, and amended on May 3, 2019 (collectively, the "Prior Credit Agreement") with JPMorgan. The Credit Agreement provides, among other things, for a revolving credit facility in a maximum principal amount $40 million, with possible future increases of up to $20 million under an expansion feature. Borrowings under the credit facility generally bear interest at the Company’s option at either (i) a eurocurrency rate determined by reference to the applicable LIBOR rate plus a margin ranging from 1.25% to 1.75% or (ii) a prime rate as announced by JP Morgan plus a margin ranging from 0.00% to 0.50%. The applicable margin is determined based upon the Company’s consolidated total leverage ratio. On the last day of each calendar quarter, the Company is required to pay a commitment fee of 0.20% per annum in respect of any unused commitments under the credit facility. So long as certain total leverage ratios, EBITDA thresholds and minimum liquidity requirements are met and no default or event of default has occurred or would result, there is no limit on the “restricted payments” (primarily distributions and equity repurchases) that the Company may make, provided that proceeds of the loans under the Credit Agreement may not be used for purposes of making restricted payments.

12


 

On March 17, 2020, the Company fully drew the available capacity of $39.8 million under its Revolving Credit Facility as a precautionary measure in order to increase its cash position and preserve financial flexibility in light of current uncertainty in the global markets resulting from the COVID-19 pandemic. In accordance with the terms of its Revolving Credit Facility, the proceeds from these borrowings may in the future be used for working capital, general corporate or other permitted purposes.  As of March 29, 2020, the Company had $39.8 million outstanding under the Credit Agreement.  There were no borrowings outstanding as of March 31, 2019.  

The Credit Agreement was subsequently amended as of May 15, 2020 (the “Credit Agreement Amendment”) to, among other things (i) change the maturity date from July 31, 2022 to March 31, 2022; (ii) eliminate the $20.0 million expansion feature; (iii) amend the interest rate to the Company’s option at either (a) a eurocurrency rate determined by reference to the applicable LIBOR rate with a 1.00% floor plus a margin of 5.00% or (b) a prime rate as announced by JP Morgan plus 4.00%; (iv) amend the commitment fee to 1.00% per annum in respect of any unused commitments under the credit facility; (v) implement additional restrictions on restricted payments, acquisitions and other indebtedness; and (vi) implement additional financial covenants. Per the terms of the Credit Agreement Amendment, the Company repaid $15.0 million of its outstanding borrowing at the signing of the Credit Agreement Amendment, and may re-borrow this $15.0 million when its cash balances held by JP Morgan declines below $28.0 million.  Lastly, the Company is required to pay an upfront fee of 1% of the outstanding loan balance within fifteen business days of the signing of the Credit Agreement Amendment.

The Credit Agreement Amendment includes financial covenants that require the Company to maintain minimum liquidity levels, minimum building adjusted EBITDA, maximum total debt to adjusted EBITDA and a minimum trailing twelve months (“TTM”) adjusted EBITDA.  The Company is required to maintain (i) a minimum liquidity level of $45.0 million at April 30, 2020 and $32.5 million at May 31, 2020; (ii) a minimum building adjusted EBITDA of ($8.5) million for April 2020 and ($16.0) million for the period of April 2020 through May 2020; (iii) a maximum total debt to adjusted EBITDA ratio of 2.25 to 1.00 beginning June 30, 2020; and (iv) a minimum TTM adjusted EBITDA of $16.0 million beginning June 30, 2020, $15.0 million beginning September 30, 2020 and $17.0 million beginning September 30, 2021. Compliance with the financial covenants was waived for March 29, 2020 as part of the Credit Agreement Amendment.  The Company expects that it will be in compliance with the revised covenants for the April and May 2020 reporting periods.  The Company concluded that without any additional changes, it would likely not meet the maximum total debt to adjusted EBITDA and/or the minimum TTM adjusted EBITDA requirements beginning with the month of June 2020, in which case the lenders would have the ability to demand repayment of the outstanding debt at such time. Accordingly, the outstanding balance is presented as a current liability as of March 29, 2020 based on the guidance in ASC 470, Debt.

(8) Capital Stock

On May 8, 2018, the Company announced that its Board of Directors authorized a stock repurchase program for up to $65.0 million of its outstanding common stock. The 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 and Exchange Act of 1934, as amended) or in privately negotiated transactions.  The number of common shares actually repurchased, and the timing and price of repurchases, will depend upon market conditions, SEC requirements and other factors. Purchases may be started or stopped at any time without prior notice depending on market conditions and other factors.  For the 13 weeks ended March 29, 2020, the Company did not repurchase any shares of its common stock. Due to the COVID-19 pandemic, the Company does not have plans to repurchase any common stock under its share repurchase program at this time.  For the 13 weeks ended March 31, 2019, the Company repurchased 135,000 shares of its common stock for approximately $1.1 million under the stock repurchase program, including cost and commission, in open market transactions.  Repurchased shares are included as treasury stock in the condensed consolidated balance sheets and the condensed consolidated statements of equity.

13


 

(9) Stock-Based Compensation

Stock options

The Company has awarded stock options to certain employees of the Company and certain non-employee members of its Board of Directors.  The grants generally vest over a four-year period.  The fair value of stock options is determined using the Black-Scholes option pricing model. There were no stock options granted during the 13 weeks ended March 29, 2020.

 

A summary of stock option activity for the 13 weeks ended March 29, 2020 is as follows:

 

Options

 

Shares

(Thousands)

 

 

Weighted

Average

Exercise

Price

 

 

Aggregate

Intrinsic

Value

(Thousands)

 

 

Weighted

Average

Remaining

Term

(Years)

 

Outstanding—December 29, 2019

 

 

1,774

 

 

$

11.34

 

 

$

 

 

 

4.33

 

Granted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercised

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Canceled

 

 

(33

)

 

 

10.51

 

 

 

 

 

 

 

 

 

Outstanding—March 29, 2020

 

 

1,741

 

 

 

11.35

 

 

$

 

 

 

4.01

 

Exercisable—March 29, 2020

 

 

1,563

 

 

$

11.12

 

 

$

 

 

 

3.60

 

 

Stock-based compensation related to stock options is measured at the grant date based on the calculated fair value of the award, and is recognized as expense over the requisite employee service period, which is generally the vesting period of the grant with a corresponding increase to additional paid-in capital. For the 13 weeks ended March 29, 2020, the Company recognized stock-based compensation expense related to stock options of $0.2 million. For the 13 weeks ended March 31, 2019, the Company recognized stock-based compensation expense related to stock options of $0.3 million. As of March 29, 2020, unrecognized stock-based compensation expense for stock options was $0.6 million, which will be recognized through fiscal year 2022. The Company records stock-based compensation expense within general and administrative expenses in the condensed consolidated statements of operations.

Restricted stock units

The Company awards restricted stock units (“RSUs”) to certain employees of the Company and certain non-employee members of its Board of Directors. The Board of Director grants 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 employee grants vest in one-third increments over a three-year period. For the 13 weeks ended March 29, 2020, the Company recognized stock-based compensation expense related to RSUs of $0.3 million. For the 13 weeks ended March 31, 2019, the Company recognized stock-based compensation expense related to RSUs of $0.2 million. As of March 29, 2020, unrecognized stock-based compensation expense for RSUs was $1.9 million, which will be recognized though fiscal year 2023.

A summary of RSU activity for the 13 weeks ended March 29, 2020 is as follows:

 

RSUs

 

Number of RSUs

(Thousands)

 

 

Weighted Average

Fair Value per Share

 

Non-vested as of December 29, 2019

 

 

463

 

 

$

7.59

 

Granted

 

 

158

 

 

 

3.88

 

Vested

 

 

(68

)

 

 

3.18

 

Canceled

 

 

 

 

 

 

Non-vested as of March 29, 2020

 

 

553

 

 

$

6.38

 

 

14


 

Performance stock units

The Company awards performance share units (“PSUs”) to eligible employees; the PSUs are subject to service and performance vesting conditions. In March 2019 the Company issued 188,414 PSUs with a grant date fair value of $8.46 per share. The PSUs will vest based on the Company’s achievement of certain targets related to adjusted EBITDA and same store sales goals. The PSUs will vest fully on the third anniversary of the grant date. The quantity of shares that will vest ranges from 0% to 200% of the targeted number of shares. If the defined minimum targets are not met, then no shares will vest. For the 13 weeks ended March 29, 2020 and March 31, 2019, no expense was recognized related to PSUs.

 

(10) Commitments and Contingencies

The Company is 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 the Company’s financial position or results of operations and cash flows.

In October 2017, plaintiffs filed a purported collective and class action lawsuit (the “Complaint”) in the United States District Court for the Southern District of New York against the Company alleging violations of the Fair Labor Standards Act (FLSA) and New York Labor Law (NYLL). The plaintiffs allege that the Company violated the FLSA and NYLL by not paying overtime compensation to our assistant managers and violated NYLL by not paying spread-of-hours pay. The Complaint was brought as a nationwide “collective action” under the FLSA and as a “class action” under NYLL. Since the filing of the Complaint, the plaintiffs filed a proposed amended complaint removing the NYLL class claim, but adding a proposed Illinois state law class action. In May 2019, the parties participated in a mediation and resolved the claims, which received final court approval on February 4, 2020. All charges related to the claims are reflected in the statement of operations.

 

(11) Subsequent Events

Paycheck Protection Program Loan

On April 10, 2020, Potbelly Sandwich Works, LLC, an indirect subsidiary of the Company, was granted a loan (the “Loan”) from JPMorgan Chase Bank, N.A. in the aggregate amount of $10.0 million, pursuant to the Paycheck Protection Program under Division A, Title I of the CARES Act, which was enacted March 27, 2020.  On April 28, 2020, the Company repaid the $10.0 million proceeds from the loan.

Credit Facility

On May 15, 2020, the Company entered in to an amendment to its Credit Agreement.  See Note 7 for further details.

15


 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

The following discussion of our financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q and with our audited consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 29, 2019. This discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the Private Securities Litigation Reform Act of 1995, and involves numerous risks and uncertainties. Forward-looking statements may include, among others, statements relating to: our future financial position and results of operations, estimated costs associated with our closure of underperforming shops, and the implementation and results of strategic initiatives. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts and generally contain words such as “believes,” “expects,” “may,” “will,” “should,” “seeks,” “intends,” “plans,” “strives,” “goal,” “estimates,” “forecasts,” “projects” or “anticipates” and the negative of these terms or similar expressions. Our forward-looking statements are subject to risks and uncertainties, which may cause actual results to differ materially from those projected or implied by the forward-looking statement, due to reasons including, but not limited to, the COVID-19 outbreak; compliance with covenants in our credit facility; competition; general economic conditions; our ability to successfully implement our business strategy; the success of our initiatives to increase sales and traffic; changes in commodity, energy and other costs; our ability to attract and retain management and employees; consumer reaction to industry-related public health issues and perceptions of food safety; our ability to manage our growth; reputational and brand issues; price and availability of commodities; consumer confidence and spending patterns; and weather conditions. Forward-looking statements are based on current expectations and assumptions and currently available data and are neither predictions nor guarantees of future events or performance. You should not place undue reliance on forward-looking statements, which speak only as of the date hereof. See “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements” included in our Annual Report on Form 10-K for the fiscal year ended December 29, 2019, for a discussion of factors that could cause our actual results to differ from those expressed or implied by forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law.

Business

Potbelly Corporation is a neighborhood sandwich concept that has been a much-needed lunch-break escape for more than 40 years. Potbelly owns and operates Potbelly Sandwich Shop concepts in the United States. The Company also has domestic franchise operations of Potbelly Sandwich Shop concepts. Potbelly’s chief operating decision maker is our Chief Executive Officer. Based on how our Chief Executive Officer reviews financial performance and allocates resources on a recurring basis, the Company has one operating segment and one reportable segment.

Our shop model is designed to generate, and has generated, strong cash flow, attractive shop-level financial results and high returns on investment. We operate our shops successfully in a wide range of geographic markets, population densities and real estate settings. We aim to generate average shop-level profit margins, a non-GAAP measure, that range from the high teens to above 20%. Our ability to achieve such margins and returns depends on a number of factors. For example, we face increasing labor and commodity costs, which we have partially offset by increasing menu prices. Although there is no guarantee that we will be able to maintain these returns, we believe our attractive shop economics support our ability to profitably grow our brand in new and existing markets.

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

 

 

 

Company-