pbpb-10q_20150927.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 September 27, 2015

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 – 30,297,871 shares as of October 30, 2015

 

 

 

 

 


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

 

 

2


POTBELLY CORPORATION AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

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

 

 

 

September 27,

 

 

December 28,

 

 

 

2015

 

 

2014

 

ASSETS

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

42,768

 

 

$

63,005

 

Accounts receivable, net of allowances of $34 and $19 as of September 27, 2015 and

     December 28, 2014, respectively

 

 

5,406

 

 

 

4,016

 

Inventories

 

 

2,830

 

 

 

2,768

 

Deferred income taxes, current

 

 

564

 

 

 

507

 

Prepaid expenses and other current assets

 

 

9,793

 

 

 

9,922

 

Total current assets

 

 

61,361

 

 

 

80,218

 

Property and equipment, net

 

 

96,001

 

 

 

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

 

 

3,882

 

 

 

3,333

 

Total assets

 

$

183,936

 

 

$

191,947

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

3,442

 

 

$

3,301

 

Accrued expenses

 

 

21,920

 

 

 

16,349

 

Accrued income taxes

 

 

125

 

 

 

226

 

Current portion of long-term debt

 

 

 

 

 

1,008

 

Total current liabilities

 

 

25,487

 

 

 

20,884

 

Deferred rent and landlord allowances

 

 

17,083

 

 

 

14,012

 

Other long-term liabilities

 

 

676

 

 

 

726

 

Total liabilities

 

 

43,246

 

 

 

35,622

 

Equity

 

 

 

 

 

 

 

 

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

     27,366,312 and 28,934,700 shares as of September 27, 2015 and

     December 28, 2014, respectively

 

 

303

 

 

 

298

 

Warrants

 

 

909

 

 

 

909

 

Additional paid-in-capital

 

 

398,416

 

 

 

391,972

 

Treasury stock, held at cost, 2,921,811 and 827,090 shares as of September 27, 2015,

     and December 28, 2014, respectively

 

 

(37,276

)

 

 

(10,246

)

Accumulated deficit

 

 

(222,481

)

 

 

(226,874

)

Total stockholders’ equity

 

 

139,871

 

 

 

156,059

 

Non-controlling interest

 

 

819

 

 

 

266

 

Total equity

 

 

140,690

 

 

 

156,325

 

Total liabilities and equity

 

$

183,936

 

 

$

191,947

 

 

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 39 Weeks Ended

 

 

 

September 27,

 

 

September 28,

 

 

September 27,

 

 

September 28,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sandwich shop sales, net

 

$

95,564

 

 

$

84,340

 

 

$

276,527

 

 

$

241,131

 

Franchise royalties and fees

 

 

475

 

 

 

335

 

 

 

1,229

 

 

 

1,045

 

Total revenues

 

 

96,039

 

 

 

84,675

 

 

 

277,756

 

 

 

242,176

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sandwich shop operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of goods sold, excluding depreciation

 

 

27,256

 

 

 

24,044

 

 

 

78,854

 

 

 

69,066

 

Labor and related expenses

 

 

27,663

 

 

 

23,772

 

 

 

79,415

 

 

 

68,637

 

Occupancy expenses

 

 

11,855

 

 

 

10,467

 

 

 

34,741

 

 

 

30,629

 

Other operating expenses

 

 

10,501

 

 

 

8,847

 

 

 

30,128

 

 

 

25,696

 

General and administrative expenses

 

 

9,232

 

 

 

7,623

 

 

 

27,706

 

 

 

24,310

 

Depreciation expense

 

 

5,510

 

 

 

5,039

 

 

 

15,949

 

 

 

14,540

 

Pre-opening costs

 

 

510

 

 

 

314

 

 

 

1,587

 

 

 

839

 

Impairment and loss on disposal of property and equipment

 

 

1,133

 

 

 

1,315

 

 

 

1,965

 

 

 

2,192

 

Total expenses

 

 

93,660

 

 

 

81,421

 

 

 

270,345

 

 

 

235,909

 

Income from operations

 

 

2,379

 

 

 

3,254

 

 

 

7,411

 

 

 

6,267

 

Interest expense

 

 

56

 

 

 

42

 

 

 

180

 

 

 

124

 

Income before income taxes

 

 

2,323

 

 

 

3,212

 

 

 

7,231

 

 

 

6,143

 

Income tax expense

 

 

866

 

 

 

1,260

 

 

 

2,780

 

 

 

2,476

 

Net income

 

 

1,457

 

 

 

1,952

 

 

 

4,451

 

 

 

3,667

 

Net income attributable to non-controlling interest

 

 

56

 

 

 

5

 

 

 

58

 

 

 

11

 

Net income attributable to Potbelly Corporation

 

$

1,401

 

 

$

1,947

 

 

$

4,393

 

 

$

3,656

 

Net income per common share attributable to common

   stockholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.05

 

 

$

0.07

 

 

$

0.15

 

 

$

0.12

 

Diluted

 

$

0.05

 

 

$

0.06

 

 

$

0.15

 

 

$

0.12

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

27,850,394

 

 

 

29,358,822

 

 

 

28,450,063

 

 

 

29,284,058

 

Diluted

 

 

28,369,775

 

 

 

30,044,456

 

 

 

29,137,537

 

 

 

30,463,093

 

 

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 29, 2013

 

 

29,148,029

 

 

$

291

 

 

$

 

 

$

909

 

 

$

383,077

 

 

$

(231,232

)

 

$

228

 

 

$

153,273

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,656

 

 

 

11

 

 

 

3,667

 

Issuance of unrestricted

   common stock

 

 

28,240

 

 

 

 

 

 

 

 

 

 

 

 

432

 

 

 

 

 

 

 

 

 

432

 

Exercise of stock options

 

 

338,946

 

 

 

4

 

 

 

 

 

 

 

 

 

2,964

 

 

 

 

 

 

 

 

 

2,968

 

Repurchases of common

   stock

 

 

(471,290

)

 

 

 

 

 

(5,797

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(5,797

)

Distribution to non-

   controlling interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(34

)

 

 

(34

)

Amortization of

   stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,590

 

 

 

 

 

 

 

 

 

1,590

 

Balance at September 28, 2014

 

 

29,043,925

 

 

$

295

 

 

$

(5,797

)

 

$

909

 

 

$

388,063

 

 

$

(227,576

)

 

$

205

 

 

$

156,099

 

Balance at December 28, 2014

 

 

28,934,700

 

 

$

298

 

 

$

(10,246

)

 

$

909

 

 

$

391,972

 

 

$

(226,874

)

 

$

266

 

 

$

156,325

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,393

 

 

 

58

 

 

 

4,451

 

Exercise of stock options

 

 

526,333

 

 

 

5

 

 

 

 

 

 

 

 

 

4,315

 

 

 

 

 

 

 

 

 

4,320

 

Excess tax benefits

   associated with exercise

   of stock options

 

 

 

 

 

 

 

 

 

 

 

 

 

 

334

 

 

 

 

 

 

 

 

 

334

 

Repurchases of common

   stock

 

 

(2,094,721

)

 

 

 

 

 

(27,030

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(27,030

)

Distribution to non-

   controlling interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(85

)

 

 

(85

)

Contributions from

   non-controlling interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

580

 

 

 

580

 

Amortization of

   stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,795

 

 

 

 

 

 

 

 

 

1,795

 

Balance at September 27, 2015

 

 

27,366,312

 

 

$

303

 

 

$

(37,276

)

 

$

909

 

 

$

398,416

 

 

$

(222,481

)

 

$

819

 

 

$

140,690

 

 

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 39 Weeks Ended

 

 

 

September 27,

 

 

September 28,

 

 

 

2015

 

 

2014

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net income

 

$

4,451

 

 

$

3,667

 

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

 

 

 

 

 

 

 

 

Depreciation

 

 

15,949

 

 

 

14,540

 

Deferred income tax

 

 

(57

)

 

 

116

 

Deferred rent and landlord allowances

 

 

3,071

 

 

 

1,086

 

Amortization of stock compensation expense

 

 

1,795

 

 

 

2,022

 

Excess tax benefit from stock-based compensation

 

 

(334

)

 

 

 

Asset impairment, store closure and disposal of property and equipment

 

 

2,160

 

 

 

2,192

 

Amortization of debt issuance costs

 

 

53

 

 

 

53

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable, net

 

 

(1,259

)

 

 

(1,572

)

Inventories

 

 

(56

)

 

 

(184

)

Prepaid expenses and other assets

 

 

(646

)

 

 

(2,125

)

Accounts payable

 

 

136

 

 

 

1,235

 

Accrued and other liabilities

 

 

5,060

 

 

 

2,264

 

Net cash provided by operating activities

 

 

30,323

 

 

 

23,294

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Acquisition of franchise shop

 

 

(333

)

 

 

 

Purchases of property and equipment

 

 

(27,324

)

 

 

(20,544

)

Net cash (used in) investing activities

 

 

(27,657

)

 

 

(20,544

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Payments on note payable

 

 

(1,022

)

 

 

(63

)

Proceeds from exercise of stock options

 

 

5,291

 

 

 

3,780

 

Payment of payroll taxes related to stock-based compensation awards

 

 

(971

)

 

 

(812

)

Treasury stock repurchase

 

 

(27,030

)

 

 

(5,797

)

Excess tax benefit from stock-based compensation

 

 

334

 

 

 

 

Contributions from non-controlling interest

 

 

580

 

 

 

 

Distribution to non-controlling interest

 

 

(85

)

 

 

(34

)

Net cash (used in) financing activities

 

 

(22,903

)

 

 

(2,926

)

NET (DECREASE) IN CASH AND CASH EQUIVALENTS

 

 

(20,237

)

 

 

(176

)

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

 

 

63,005

 

 

 

69,579

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

 

$

42,768

 

 

$

69,403

 

Supplemental cash flow information :

 

 

 

 

 

 

 

 

Income taxes paid

 

$

2,301

 

 

$

867

 

Interest paid

 

 

155

 

 

 

124

 

Supplemental non-cash investing and financing activities :

 

 

 

 

 

 

 

 

Unpaid liability for purchases of property and equipment

 

$

3,364

 

 

$

3,059

 

 

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 Potbelly Sandwich Works sandwich shops in 28 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, and in July 2015, the Company opened its first franchise shop in the United Kingdom. Additionally, during July 2015, the Company transitioned a franchise shop to a company-operated shop at a cost of $0.3 million. The Company did not record any goodwill related to the transaction.

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 29, 2013

 

 

296

 

 

 

11

 

 

 

12

 

 

 

23

 

 

 

319

 

Shops opened

 

 

23

 

 

 

3

 

 

 

1

 

 

 

4

 

 

 

27

 

Shop closed(1)

 

 

 

 

 

 

 

 

(1

)

 

 

(1

)

 

 

(1

)

Shops as of September 28, 2014

 

 

319

 

 

 

14

 

 

 

12

 

 

 

26

 

 

 

345

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shops as of December 28, 2014

 

 

334

 

 

 

17

 

 

 

12

 

 

 

29

 

 

 

363

 

Shops opened

 

 

28

 

 

 

2

 

 

 

2

 

 

 

4

 

 

 

32

 

Shop purchased from franchisee

 

 

1

 

 

 

(1

)

 

 

 

 

 

(1

)

 

 

 

Shops closed(2)

 

 

(5

)

 

 

 

 

 

(1

)

 

 

(1

)

 

 

(6

)

Shops as of September 27, 2015

 

 

358

 

 

 

18

 

 

 

13

 

 

 

31

 

 

 

389

 

_______________

(1)  Shop closure during the 39 weeks ended September 28, 2014 was driven by an underperforming shop.

(2)  Shop closures during the 39 weeks ended September 27, 2015 were related to planned shop closures in airport terminal locations as well as planned closures for underperforming shops with expiring leases.

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 September 27, 2015 and December 28, 2014, its statement of operations for the 13 and 39 weeks ended September 27, 2015 and September 28, 2014 and its statement of cash flows for the 39 weeks ended September 27, 2015 and September 28, 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.

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 2015 and 2014 each consist of 52 weeks. The fiscal quarters ended September 27, 2015 and September 28, 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 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

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.

In July 2015, the FASB issued ASU No. 2015-11, “Inventory (Topic 330)”. The pronouncement was issued to simplify the measurement of inventory and changes the measurement from lower of cost or market to lower of cost and net realizable value. This pronouncement is effective for reporting periods beginning after December 15, 2016. The adoption of ASU 2015-11 is not expected to have a significant impact 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

8


POTBELLY CORPORATION AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

 

 

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 each 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 $1.0 million and $1.6 million for the 13 and 39 weeks ended September 27, 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 September 27, 2015, the fair value of the investments in the rabbi trust was $97 thousand, which is included in other assets in the 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 September 27, 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 per share are calculated using the weighted average number of shares outstanding for the period as follows:

 

 

 

For the 13 Weeks Ended

 

 

For the 39 Weeks Ended

 

 

 

September 27,

 

 

September 28,

 

 

September 27,

 

 

September 28,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Net income attributable to Potbelly Corporation

 

$

1,401

 

 

$

1,947

 

 

$

4,393

 

 

$

3,656

 

Weighted average common shares outstanding-basic

 

 

27,850,394

 

 

 

29,358,822

 

 

 

28,450,063

 

 

 

29,284,058

 

Plus: Effect of potential stock options exercise

 

 

471,579

 

 

 

602,982

 

 

 

630,043

 

 

 

1,054,632

 

Plus: Effect of potential warrant exercise

 

 

47,802

 

 

 

82,652

 

 

 

57,431

 

 

 

124,403

 

Weighted average common shares outstanding-diluted

 

 

28,369,775

 

 

 

30,044,456

 

 

 

29,137,537

 

 

 

30,463,093

 

Income per share available to common stockholders-basic

 

$

0.05

 

 

$

0.07

 

 

$

0.15

 

 

$

0.12

 

Income per share available to common stockholders-diluted

 

$

0.05

 

 

$

0.06

 

 

$

0.15

 

 

$

0.12

 

Potentially dilutive shares that are considered anti-dilutive:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common share options

 

 

1,192,579

 

 

 

869,317

 

 

 

803,582

 

 

 

537,318

 

Warrants

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4) Income Taxes

The Company recognized income tax expense of $2.8 million on pre-tax income of $7.2 million, or an effective tax rate of 38.4%, for the 39 weeks ended September 27, 2015, compared to income tax expense of $2.5 million on pre-tax income of $6.1 million, or an effective tax rate of 40.3%, for the 39 weeks ended September 28, 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 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 replaces the previously authorized share repurchase program, which was completed in the third quarter of 2015. Under the current program, the Company may, from time to time, purchase shares in the open market (including

9


POTBELLY CORPORATION AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

 

 

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 39 weeks ended September 27, 2015, the Company repurchased 2,094,721 shares of its common stock for approximately $27.0 million in open market transactions, which includes shares purchased under both the new plan and the completed plan. As of September 27, 2015, the remaining dollar value of authorization under the new share repurchase program was $32.7 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 39 weeks ended September 27, 2015, the Company issued 558,479 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 39 weeks ended September 27, 2015 was $6.45 per share, as estimated using the following weighted average assumptions: expected life of options –seven years; volatility –45.25%; 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.

A summary of activity for the 39 weeks ended September 27, 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

 

 

558

 

 

 

13.23

 

 

 

 

 

 

 

 

 

Exercised

 

 

(526

)

 

 

8.21

 

 

 

 

 

 

 

 

 

Canceled

 

 

(197

)

 

 

14.24

 

 

 

 

 

 

 

 

 

Outstanding—September 27, 2015

 

 

4,448

 

 

 

10.53

 

 

$

6,326

 

 

 

5.38

 

Exercisable—September 27, 2015

 

 

3,207

 

 

 

9.46

 

 

$

5,884

 

 

 

4.12

 

 

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 39 weeks ended September 27, 2015, the Company recognized $0.7 million and $1.8 million, respectively. For the 13 and 39 weeks ended September 28, 2014, the Company recognized $0.6 million and $2.0 million, respectively, which includes $32 thousand and $0.4 million related to the May 2014 unrestricted common stock grants, respectively. As of September 27, 2015, the unrecognized stock-based compensation expense was $6.8 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 fair value 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. In August 2015, the Company issued 5,221 shares of RSUs to the new non-employee member of its Board of Directors. The RSUs had a grant-date fair value of $11.88 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 all of these RSUs.    

 

 

 

10


 

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.

11


 

13 Weeks Ended September 27, 2015 Compared to 13 Weeks Ended September 28, 2014

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

 

 

 

For the 13 Weeks Ended