Item 1. Financial Statements
Item 1. Financial Statements (Unaudited)
Page
Portillo's Inc.
Condensed Balance Sheet
3
Notes to the Condensed Balance Sheet
4
PHD Group Holdings LLC
Condensed Consolidated Balance Sheets
6
Condensed Consolidated Statements of Operations
7
Condensed Consolidated Statements of Changes in Redeemable Preferred Units and Equity
8
Condensed Consolidated Statements of Cash Flows
10
Notes to Condensed Consolidated Financial Statements
11
Note 1 . Description Of Business
11
Note 2. Summary Of Significant Accounting Policies
11
Note 3. Revenue Recognition
13
Note 4. Fair Value of Financial Instruments
14
Note 5. Invento ries
15
Note 6. Property & Equipment, Net
15
Note 7. Goodwill & Intangible Assets
15
Note 8. Equity Method Investment
17
Note 9 . Debt
18
Note 10 . Redeemable Preferred Units
19
Note 1 1 . Common Units And Unit-Based Compensation
20
Note 1 2 . Contingencies
21
Note 1 3 . Related Party Transaction
21
Note 1 4 . Earnings (Loss) Per Unit
22
Note 1 5 . Subsequent Events
23
Portillo's Inc. Form 10-Q | 2
PORTILLO'S INC.
CONDENSED BALANCE SHEET
(UNAUDITED)
(In thousands, except common stock and per common share data)
September 26, 2021
Cash and cash equivalents $ 1
ASSETS $ 1
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Class A common stock, par value 0.01 per share, 100 shares authorized, 100 issued and outstanding
—
Additional paid-in-capital 1
TOTAL STOCKHOLDERS' EQUITY $ 1
Portillo's Inc. Form 10-Q | 3
PORTILLO'S INC.
NOTES TO THE CONDENSED BALANCE SHEET
NOTE 1. DESCRIPTION OF BUSINESS
Portillo’s Inc. (the “Company’) was formed and incorporated as a Delaware corporation on June 8, 2021. The Company was formed for the purpose of completing a public offering and related reorganization transactions (collectively, the "Transactions”) in order to carry on the business of PHD Group Holdings LLC and its subsidiaries (“Portillo’s OpCo”). Following the consummation of the Transactions on October 20, 2021, the Company became the sole managing member of Portillo’s OpCo and has the sole voting interest in, and controls the management of, Portillo’s OpCo. See Note 4 for more information. As of September 26, 2021, the Company had not yet commenced operations. All activities for the period from June 8, 2021 through September 26, 2021 relates to the Company's formation and the preparation for the initial public offering ("IPO"), which is described below.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying condensed balance sheet is presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of the financial statement in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statement. Separate statements of operations, changes in stockholders' equity, and cash flows have not been presented because the Company has not engaged in any business or other activities other than the initial issuance of Class A common stock, par value $ 0.01 per share ("Class A common stock").
Fiscal Year
The Company uses a 52- or 53-week fiscal year ending on the Sunday prior to December 31. In a 52-week fiscal year, each quarterly period is comprised of 13 weeks. The additional week in a 53-week fiscal year is added to the fourth quarter.
Offering Costs
In connection with the IPO, Portillo's OpCo incurred certain legal, accounting, and other IPO-related costs, which were reimbursed by the Company upon the consummation of the IPO. Such costs are deferred and recorded in stockholders’ equity as reduction from the proceeds of the offer. As of September 26, 2021, $ 4.6 million of deferred offering costs had been recorded.
NOTE 3. STOCKHOLDERS' EQUITY
On August 11, 2021, the Company issued 100 shares of common stock to Portillo’s OpCo for $ 1,000 . The excess paid over par value of $ 0.01 per share was recorded to additional paid-in capital.
NOTE 4. SUBSEQUENT EVENTS
The Company's registration statement on Form S-1, as amended (Registration No. 333-259810) (the "Registration Statement"), related to its IPO was declared effective October 20, 2021, and the Company's Class A common stock began trading on the Nasdaq Global Select Market on October 21, 2021. On October 25, 2021, the Company completed its IPO of 23,310,810 shares of the Company's Class A common stock ( including 3,040,540 shares sold to the underwriters pursuant to their overallotment option) , $ 0.01 par value per share, at an offering price of $ 20.00 per share. The Company received aggregate net proceeds of approximately $ 429.9 million after deducting underwriting discounts and commissions of $ 29.1 million and other offering expenses of approximately $ 7.2 million.
In connection with the IPO, we completed the following:
• We amended and restated the limited liability company agreement of Portillo’s OpCo to, among other things, convert all outstanding equity interests (except for those redeemable preferred units which were redeemed in connection with this offering) into LLC Units.
Portillo's Inc. Form 10-Q | 4
PORTILLO'S INC.
NOTES TO THE CONDENSED BALANCE SHEET
• We became the sole managing member of Portillo's OpCo. Because we manage and operate the business and control the strategic decisions and day-to-day operations of Portillo’s OpCo and because we also have a substantial financial interest in Portillo’s OpCo, we will consolidate the financial results of Portillo’s OpCo, and a portion of our net income will be allocated to non-controlling interests to reflect the entitlement of the pre-IPO LLC members who retained their equity ownership in Portillo's OpCo. In addition, because Portillo’s OpCo will be under the common control of the pre-IPO LLC members before and after the reorganization, we will initially measure the assets and liabilities of Portillo’s OpCo at their carrying amounts as of the date of the completion of the reorganization.
• We amended and restated our certificate of incorporation to authorize the issuance of two classes of common stock: Class A common stock and Class B common stock. Each share of Class A common stock and Class B common stock will entitle its holder to one vote per share on all matters submitted to a vote of our stockholders. The Class B common stock is not entitled to economic interests in Portillo’s Inc.
The Company received net proceeds from the offering of approximately $ 429.9 million (after deducting underwriting fees and commissions and offering expenses). The net proceeds and cash on hand were used as follows:
• to repay the redeemable preferred units in full (including the redemption premium) of $ 221.7 million;
• to repay all of the borrowings outstanding under the Second Lien Credit Agreement (including any prepayment penalties) of $ 158.1 million; and
• to purchase LLC Units or shares of Class A common stock from certain pre-IPO LLC members of $ 57.0 million.
In connection with the IPO, the Company entered into a Tax Receivable Agreement (the “Tax Receivable Agreement”) with certain pre-IPO LLC Members, pursuant to which Portillo's Inc. is obligated to pay 85 % of the amount of applicable cash tax savings, if any, in U.S. federal, state, and local income tax or franchise tax that Portillo's Inc. actually realizes as a result of (a) the increases in tax basis attributable to exchanges of LLC Units by pre-IPO LLC Members and (b) tax benefits related to imputed interest deemed to be paid by Portillo's Inc. as a result of the Tax Receivable Agreement. We will retain the benefit of the remaining 15 % of these tax savings.
In connection with the IPO, each option under the 2014 Equity Incentive Plan (the "2014 Plan") that was outstanding, whether vested or unvested, was substituted for an option to purchase a number of shares of Class A common stock under the Company's 2021 Equity Incentive Plan (the "2021 Plan") adopted in connection with the IPO, and the option holders received a cash payment in respect of their options (whether vested or unvested) in an aggregate amount of approximately $ 6.3 million, which we expect to make in the fourth quarter of fiscal 2021.
In addition, as a result of the waiver and the resultant modification in the terms of certain performance-vesting awards, we will record compensation expense based on the fair value of the modified awards in the fourth quarter of fiscal 2021. We would expect to recognize a cash compensation expense of approximately $ 1.3 million and a non-cash compensation expense of approximately $ 23.3 million, each in the fourth quarter of fiscal 2021, as well as, an additional non-cash compensation expense of approximately $ 12.7 million ratably over the next 4.5 years.
In connection with the IPO, the Company granted options to purchase shares of Class A common stock under the 2021 Plan. The 2021 Plan permits the granting of awards to any employee, officer, non-employee director, consultant or other personal service provider of the Company in the form of stock options, stock appreciation rights, restricted stock awards, restricted stock units and stock-based awards. All awards granted to participants under the 2021 Plan generally will be represented by an award agreement. 7,148,049 shares of Class A common stock are available for awards under the 2021 Plan (excluding options previously awarded under the 2014 Plan that were assumed by the 2021 Plan). The 2021 Plan gives broad powers to the Company’s Board of Directors (the "Board") to administer and interpret the 2021 Plan, including the authority to select the individuals to be granted awards and rights to prescribe the particular form and conditions of each award to be granted.
The Company is a holding company and its sole material asset is an ownership interest in Portillo’s OpCo.
Portillo's Inc. Form 10-Q | 5
PHD GROUP HOLDINGS LLC
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In thousands, except common unit and per common unit data)
September 26, 2021 December 27, 2020
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 49,367 $ 41,211
Restricted cash 190 221
Accounts receivable 5,727 5,204
Inventory 4,399 5,075
Other current assets 7,445 2,915
Total current assets 67,128 54,626
Property and equipment, net 186,621 174,769
OTHER ASSETS:
Goodwill 394,298 394,298
Intangible assets-net of accumulated amortization 260,541 266,180
Equity method investment 16,278 16,015
Other assets 4,596 4,334
Total other assets 675,713 680,827
TOTAL ASSETS $ 929,462 $ 910,222
LIABILITIES, REDEEMABLE PREFERRED UNITS AND COMMON EQUITY
CURRENT LIABILITIES:
Accounts payable $ 21,531 $ 21,427
Current portion of long-term debt 3,324 3,324
Current deferred revenue 3,929 6,774
Accrued expenses 33,482 34,827
Total current liabilities 62,266 66,352
LONG-TERM LIABILITIES:
Long-term debt, net of current portion 466,764 466,380
Deferred rent 30,844 26,694
Other long-term liabilities 6,862 9,516
Total long-term liabilities 504,470 502,590
Total liabilities 566,736 568,942
COMMITMENTS AND CONTINGENCIES (NOTE 12)
REDEEMABLE PREFERRED UNITS 217,549 200,571
COMMON EQUITY:
Common units— 51,210,222 and 51,192,434 units authorized, 51,210,222 and 51,192,434 units issued and outstanding as of September 26, 2021 and December 27, 2020
— —
Stock subscription receivable — ( 499 )
Additional paid-in-capital 141,751 141,208
Retained earnings 3,426 —
Total common equity 145,177 140,709
TOTAL LIABILITIES, REDEEMABLE PREFERRED UNITS AND COMMON EQUITY $ 929,462 $ 910,222
See accompanying notes to unaudited condensed consolidated financial statements.
Portillo's Inc. Form 10-Q | 6
PHD GROUP HOLDINGS LLC
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(In thousands)
Quarter Ended Three Quarters Ended
September 26, 2021 September 27, 2020 September 26, 2021 September 27, 2020
REVENUES $ 138,003 $ 119,700 $ 396,044 $ 336,960
COST AND EXPENSES:
Restaurant operating expenses:
Cost of goods sold, excluding depreciation and amortization 44,285 36,572 121,465 106,095
Labor 36,921 29,125 102,433 87,205
Occupancy 7,000 6,368 20,890 18,717
Other operating expenses 15,554 13,012 44,187 37,559
Total restaurant operating expenses 103,760 85,077 288,975 249,576
General and administrative expenses 11,750 9,706 35,755 27,918
Pre-opening expenses 347 544 2,307 838
Depreciation and amortization 5,516 6,138 18,225 18,404
Net income attributable to equity method investment ( 292 ) ( 121 ) ( 651 ) ( 353 )
Other income, net ( 292 ) ( 514 ) ( 1,095 ) ( 1,092 )
OPERATING INCOME 17,214 18,870 52,528 41,669
Interest expense 10,683 10,766 32,124 34,298
NET INCOME 6,531 8,104 20,404 7,371
Less: Redeemable preferred units accretion ( 5,886 ) ( 5,282 ) ( 16,978 ) ( 15,240 )
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON UNIT HOLDERS $ 645 $ 2,822 $ 3,426 $ ( 7,869 )
Earnings/(loss) per common unit:
Basic $ 0.01 $ 0.06 $ 0.07 $ ( 0.15 )
Diluted $ 0.01 $ 0.05 $ 0.07 $ ( 0.15 )
Weighted-average common units outstanding:
Basic 51,210,222 51,192,285 51,201,100 51,187,878
Diluted 51,581,685 51,410,002 51,569,034 51,187,878
See accompanying notes to unaudited condensed consolidated financial statements.
Portillo's Inc. Form 10-Q | 7
PHD GROUP HOLDINGS LLC
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN REDEEMABLE PREFERRED UNITS AND EQUITY
(UNAUDITED)
(In thousands, except unit data)
Quarter Ended September 26, 2021 and September 27, 2020
Preferred Units Common Units
Units Amounts Units Amounts Stock Subscription Receivable Additional Paid-In Capital Retained Earnings Total Common Equity
Balance, as of June 28, 2020 100,000 $ 190,005 51,185,674 $ — $ ( 499 ) $ 138,902 $ ( 733 ) $ 137,670
Net income — — — — — — 8,104 8,104
Unit-based compensation — — — — — 187 — 187
Repayment of subscription receivable — — — — — — — —
Issuance of common units — — 6,760 — — 25 — 25
Redeemable preferred units accretion — 5,282 — — — — ( 5,282 ) ( 5,282 )
Balance, as of September 27, 2020 100,000 195,287 51,192,434 — ( 499 ) 139,114 2,089 140,704
Balance, as of June 27, 2021 100,000 211,663 51,210,223 — ( 249 ) 141,581 2,781 144,113
Net income — — — — — — 6,531 6,531
Unit-based compensation — — — — — 170 — 170
Repayment of subscription receivable — — — — 249 — — 249
Issuance of common units — — — — — — — —
Redeemable preferred units accretion — 5,886 — — — — ( 5,886 ) ( 5,886 )
Balance, as of September 26, 2021 100,000 $ 217,549 51,210,223 — — $ 141,751 $ 3,426 $ 145,177
See accompanying notes to unaudited condensed consolidated financial statements.
Portillo's Inc. Form 10-Q | 8
PHD GROUP HOLDINGS LLC
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN REDEEMABLE PREFERRED UNITS AND EQUITY
(UNAUDITED)
(In thousands, except unit data)
Three Quarters Ended September 26, 2021 and September 27, 2020
Preferred Units Common Units
Units Amounts Units Amounts Stock Subscription Receivable Additional Paid-In Capital Retained Earnings Total Common Equity
Balance, as of December 29, 2019 100,000 $ 180,047 51,185,674 $ — $ ( 749 ) $ 148,483 $ — $ 147,734
Net income — — — — — — 7,371 7,371
Unit-based compensation — — — — — 564 — 564
Repayment of subscription receivable — — — — 250 — — 250
Issuance of common units — — 6,760 — — 25 — 25
Redeemable preferred units accretion — 15,240 — — — ( 9,958 ) ( 5,282 ) ( 15,240 )
Balance, as of September 27, 2020 100,000 $ 195,287 51,192,434 — ( 499 ) 139,114 2,089 140,704
Balance, as of December 27, 2020 100,000 $ 200,571 51,192,434 — ( 499 ) 141,208 — 140,709
Net income — — — — — — 20,404 20,404
Unit-based compensation — — — — — 443 — 443
Repayment of subscription receivable — — — — 499 — — 499
Issuance of common units — — 17,789 — — 100 — 100
Redeemable preferred units accretion — 16,978 — — — — ( 16,978 ) ( 16,978 )
Balance, as of September 26, 2021 100,000 $ 217,549 51,210,223 $ — $ — $ 141,751 $ 3,426 $ 145,177
See accompanying notes to unaudited condensed consolidated financial statements.
Portillo's Inc. Form 10-Q | 9
PHD GROUP HOLDINGS LLC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
Three Quarters Ended
September 26, 2021 September 27, 2020
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 20,404 $ 7,371
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 18,225 18,404
Amortization of debt issuance costs and discount 2,877 2,901
Loss on sales of assets 130 19
Unit-based compensation 443 564
Deferred rent and tenant allowance 3,099 2,726
Amortization of deferred lease incentives ( 289 ) ( 241 )
Gift card breakage ( 554 ) ( 556 )
Changes in operating assets and liabilities:
Accounts receivables ( 89 ) 804
Receivables from related parties ( 144 ) 204
Inventory 676 83
Other current assets 807 572
Accounts payable ( 2,511 ) ( 881 )
Accrued expenses and other liabilities ( 3,634 ) 583
Deferred lease incentives 690 1,976
Other assets and liabilities ( 239 ) 3,576
NET CASH PROVIDED BY OPERATING ACTIVITIES 39,891 38,105
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment ( 27,687 ) ( 10,138 )
Purchase of investment securities ( 200 ) —
Proceeds from the sale of property and equipment 123 30
NET CASH USED IN INVESTING ACTIVITIES ( 27,764 ) ( 10,108 )
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of short-term debt — ( 15,000 )
Payments of long-term debt ( 2,493 ) ( 12,493 )
Proceeds from Paycheck Protection Program loan — 10,000
Proceeds from issuance of common units 100 25
Repayment of stock subscription receivable 499 250
Payments for in-process equity financings (offering costs) ( 2,108 ) —
NET CASH USED IN FINANCING ACTIVITIES ( 4,002 ) ( 17,218 )
NET INCREASE IN CASH AND CASH EQUIVALENTS AND RESTRICTED CASH 8,125 10,779
CASH AND CASH EQUIVALENTS AND RESTRICTED CASH AT BEGINNING OF THE PERIOD 41,432 22,629
CASH AND CASH EQUIVALENTS AND RESTRICTED CASH AT END OF THE PERIOD $ 49,557 $ 33,408
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid 29,043 24,468
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Accrued capital expenditures 2,041 3,411
Proceeds from the sale of property and equipment 41 61
Redeemable preferred units accretion ( 16,978 ) ( 15,240 )
Deferred offering costs in accounts payable 2,446 —
See accompanying notes to unaudited condensed consolidated financial statements.
Portillo's Inc. Form 10-Q | 10
PHD GROUP HOLDINGS LLC
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. DESCRIPTION OF BUSINESS
Portillo’s Inc. was formed and incorporated as a Delaware corporation on June 8, 2021. The Company was formed for the purpose of completing a public offering and related reorganization transactions in order to carry on the business of PHD Group Holdings LLC and its subsidiaries. Unless the context otherwise requires, references to "we," "us," "our," "Portillo's," and the "Company" refer to Portillo's Inc. and its subsidiaries, including PHD Group Holdings LLC, which we refer to as "Portillo's OpCo".
We operate fast-casual restaurants in Illinois, Indiana, California, Arizona, Florida, Wisconsin, Minnesota, Iowa and Michigan, along with two food production commissaries in Illinois. As of September 26, 2021 and December 27, 2020, the Company had 66 and 63 restaurants in operation, respectively. The Company also had 3 and 4 non-traditional locations in operation as of September 26, 2021 and September 27, 2020, respectively. These non-traditional locations include a food truck, ghost kitchen (small kitchen with no store-front presence, used to fill online orders), and concessions. Portillo's Hot Dogs, LLC additionally has a 50 % interest in a single restaurant in Chicago, IL, that is referred to in Note 8. There were no restaurant closings during any period presented in the financial statements. The Company’s principal corporate offices are located in Oak Brook, IL.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information.
The Company has prepared the accompanying unaudited condensed consolidated financial statements in accordance with GAAP for interim financial statements and pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"). In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments consisting of normal recurring adjustments necessary for a fair presentation of our financial position and results of operations. Interim results of operations are not necessarily indicative of the results that may be achieved for the full year. The financial statements and related notes do not include all information and footnotes required by GAAP for annual reports. The unaudited condensed consolidated financial statements should be read in conjunction with the consolidated f inancial statements and notes thereto for the fiscal year ended December 27, 2020 included in our Registration Statement, which was declared effective on October 20, 2021 .
All intercompany balances and transactions have been eliminated in consolidation.
The Company does not have any components of other comprehensive income (loss) recorded within its condensed consolidated financial statements, and therefore, does not separately present a statement of comprehensive income (loss).
The Company’s chief operating decision maker (the “CODM”) is its Chief Executive Officer. The CODM reviews financial performance and allocates resources at a consolidated level on a recurring basis. The Company has aggregated its operations into one operating segment and one reportable segment.
Fiscal Year
We use a 52- or 53-week fiscal year ending on the Sunday prior to December 31, effective beginning with the first quarter of 2019. In a 52-week fiscal year, each quarterly period is comprised of 13 weeks. The additional week in a 53-week fiscal year is added to the fourth quarter. Fiscal 2021 and 2020 each consist of 52 weeks. The fiscal periods presented in this report are the quarter and three quarters ended September 26, 2021 and September 27, 2020, respectively.
Portillo's Inc. Form 10-Q | 11
PHD GROUP HOLDINGS LLC
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Use of Estimates
The preparation of these condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of sales and expenses during the period. Actual results could differ from those estimates.
Reverse Common Unit Split
On October 20, 2021, the members of Portillo's OpCo executed the Second A mended and Restated Limited Liability Company Agreement for Portillo's OpCo , effecting a 7.4-for-1 reverse common unit split. All applicable unit data, per unit amounts and related information in the condensed consolidated financial statements and notes thereto have been adjusted retroactively to give effect to the 7.4-for-1 reverse common unit split.
Leases
In April 2020, the Financial Accounting Standards Board ("FASB") issued guidance related to rent concessions resulting from the COVID-19 pandemic. This guidance allows entities an election to account for eligible concessions, regardless of their form, either by (1) applying the modification framework for these concessions in accordance with FASB Accounting Standards Codification ("ASC") Topic 840, Leases or (2) accounting for the concessions as if they were made under the enforceable rights included in the original agreement. The election applies to any lessor-provided lease concession related to the impact of the COVID-19 pandemic, provided the concession does not result in a substantial increase in the rights of the lessor or in the obligations of the lessee. During the three quarters ended September 27, 2020, the Company received non-substantial concessions from certain landlords in the form of rent deferrals and abatements. The Company has elected to account for these rent concessions as if they were made under the enforceable rights included in the original agreements. The recognition of rent concessions resulting from the COVID-19 pandemic did not have a material impact on the Company's condensed consolidated financial statements as of September 26, 2021 or September 27, 2020.
Deferred Offering Costs
Deferred offering costs consist of costs incurred in connection with the sale of the Company’s Class A common stock in an IPO including certain legal, accounting, and other IPO related costs. At the completion of the IPO, deferred offering costs were recorded in stockholders’ equity as reduction from the proceeds of the offering. No deferred offering costs were recorded as of December 27, 2020. As of September 26, 2021, $ 4.6 million of deferred offering costs had been recorded in other current assets on the Company’s condensed consolidated balance sheets.
Recently Issued Accounting Standards
In February 2016, the FASB issued Accounting Standards Update ("ASU") No. 2016-02, Leases (Topic 842) ("ASC 842"). The pronouncement requires lessees to recognize a liability for lease obligations, which represents the discounted obligation to make future minimum lease payments, and a corresponding right-of-use asset on the balance sheet. The guidance requires disclosure of key information about leasing arrangements that is intended to give financial statement users the ability to assess the amount, timing, and potential uncertainty of cash flows related to leases. The update is effective for fiscal years beginning after December 15, 2021, with early adoption permitted. The Company is in the process of implementing ASC 842 and expects this guidance to materially impact the Company's consolidated financial statements by significantly increasing assets and liabilities on the consolidated balance sheet in order to record the right-of-use assets and related lease liabilities. However, the Company does not expect this guidance to have a significant impact on its consolidated statements of operations or consolidated statements of cash flows.
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The pronouncement provides temporary optional expedients and exceptions to the current guidance on contract modifications and hedge accounting to ease the financial reporting burden related to the expected market transition from the London Interbank Offered Rate ("LIBOR") and other interbank offered rates to alternative reference rates. The guidance was effective upon issuance and generally can be applied to applicable contract modifications through December 31, 2022. The Company is currently evaluating the impact of the transition from LIBOR to alternative reference rates but do not expect a significant impact on its consolidated financial statements.
Portillo's Inc. Form 10-Q | 12
PHD GROUP HOLDINGS LLC
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Recently Adopted Accounting Standards
In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement,” which amends the disclosure requirements for fair value measurements by removing, modifying and adding certain disclosures. This guidance is effective for years beginning after December 15, 2020, with early adoption permitted. The adoption of ASU 2018-13 did not result in a material change to its consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which clarifies the accounting for implementation costs in cloud computing arrangements that is a service contract. The update is effective for fiscal years beginning after December 15, 2020, with early adoption permitted. The Company adopted this standard effective December 28, 2020. Subsequent to the adoption of ASU 2018-15, the Company will capitalize such costs within other current assets or other assets on its condensed consolidated balance sheets. The Company will amortize the implementation costs once the system is ready for its intended use, on a straight-line basis, over the term of the related service agreements, including all reasonably certain renewals. The amortization expense related to cloud computing arrangements that are service contracts will be recorded within general and administrative expenses or other operating expenses on the Company's condensed consolidated statements of operations. The adoption of ASU 2018-15 did not result in a material change to its consolidated financial statements.
The Company reviewed all other recently issued accounting pronouncements and concluded that they were either not applicable or not expected to have a significant impact to its consolidated financial statements.
NOTE 3. REVENUE RECOGNITION
Revenues from retail restaurants are presented net of discounts and recognized when food and beverage products are sold to the end customer. Sales taxes collected from customers are excluded from revenues and the obligation is included in accrued liabilities until the taxes are remitted to the appropriate taxing authorities.
The Company offers delivery services to its customers. Delivery services are fulfilled by the Company and third-party service providers. In some cases, the Company makes delivery sales through Portillos.com or the Portillo's App ("Dispatch Sales"). In other cases, the Company makes delivery sales through a non-Company owned channel, such as the delivery partner’s website or app (“Marketplace Sales”).
With respect to Dispatch Sales, delivery may be performed by the Company or through a third-party service provider. The Company generally recognizes revenue, including delivery fees, when the performance obligation is complete and the food is transferred to the customer. For these sales, the Company receives payment directly from the customer at the time of sale.
With respect to Marketplace Sales, the Company generally recognizes revenue, excluding delivery fees collected by the delivery partner, when the performance obligation is complete, and control of the food is transferred to the delivery partner. The Company receives payment subsequent to the transfer of food. The payment terms with respect to Marketplace Sales are short-term in nature and are generally paid one week in arrears.
The Company sells gift cards which do not have expiration dates. The Company records the sale of the gift card as a contract liability and recognizes revenue from gift cards when: (i) the gift card is redeemed by the customer; or (ii) in the event a gift card is not expected to be redeemed, in proportion to the pattern of rights exercised by the customer (gift card breakage). The Company has determined that 11 % of gift card sales will not be redeemed and will be retained by us based on a portfolio assessment of historical data on gift card redemption patterns. Gift card breakage is recorded within revenues in the condensed consolidated statements of operations. The Company recognized gift card breakage of $ 0.1 million and $ 0.6 million for the quarter and three quarters ended September 26, 2021 , respectively, and $ 0.1 million and $ 0.6 million for the quarter and three quarters ended September 27, 2020 , respectively.
The Company’s only revenue related to performance obligations not yet satisfied is revenue from gift cards sold but not yet redeemed. The gift card liability included in current deferred revenue on the condensed consolidated balance sheets is as follows (in thousands):
September 26, 2021 December 27, 2020
Gift card liability $ 3,852 $ 6,216
Portillo's Inc. Form 10-Q | 13
PHD GROUP HOLDINGS LLC
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Revenue recognized in the condensed consolidated statement of operations for the redemption of gift cards that were included in their respective liability balances at the beginning of the year is as follows (in thousands):
Quarter Ended Three Quarters Ended
September 26, 2021 September 27, 2020 September 26, 2021 September 27, 2020
Revenue recognized from gift card liability balance at the beginning of the year $ 446 $ 443 $ 2,923 $ 2,890
NOTE 4. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company discloses and recognizes the fair value of its assets and liabilities using a hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. The guidance establishes three levels of the fair value hierarchy as follows:
Level 1—Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date;
Level 2—Inputs are observable, unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities; and
Level 3—Unobservable inputs that are significant to the measurement of the fair value of the assets or liabilities that are supported by little or no market data
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The carrying value of the Company's cash and cash equivalents, restricted cash, accounts receivable, accounts payable and all other current assets and liabilities approximate fair values due to the short-term nature of these financial instruments.
Other assets consist of a deferred compensation plan with related assets held in a rabbi trust.
Deferred Compensation Plan - The Company maintains a rabbi trust to fund obligations under a deferred compensation plan. Amounts in the rabbi trust are invested in mutual funds, which are designated as trading securities carried at fair value. The fair value measurement of these trading securities is considered Level 1 of the fair value hierarchy as they are measured using quoted market prices. As of September 26, 2021 and December 27, 2020, the fair value of the mutual fund investments and deferred compensation obligations were as follows:
September 26, 2021 December 27, 2020
Level 1 Level 2 Level 3 Level 1 Level 2 Level 3
Assets - Investments designated for deferred compensation plan
Cash/money accounts $ 1,447 $ — $ — $ 481 $ — $ —
Mutual Funds 2,776 — — 3,643 — —
Total assets $ 4,223 $ — $ — $ 4,124 $ — $ —
The mutual fund investments and deferred compensation obligations are included in other assets, accrued expenses and other long-term liabilities in the condensed consolidated balance sheets. Changes in the fair value of securities held in the rabbi trust are recognized as trading gains and losses and included in other income in the condensed consolidated statements of operations and offsetting increases or decreases in the deferred compensation obligation are recorded in other long-term liabilities in the condensed consolidated balance sheets.
Refer to "Note 9 – Debt" for additional information relating to the fair value of the Company's outstanding debt instruments.
Portillo's Inc. Form 10-Q | 14
PHD GROUP HOLDINGS LLC
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
Assets and liabilities that are measured at fair value on a non-recurring basis include property and equipment, net, equity-method investment, goodwill and indefinite-lived intangible assets. These assets are measured at fair value whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. There were no impairment charges recognized during the quarter and three quarters ended September 26, 2021 and September 27, 2020.
NOTE 5. INVENTORIES
Inventories consisted of the following (in thousands):
September 26, 2021 December 27, 2020
Raw materials $ 2,705 $ 3,999
Work in progress 99 112
Finished goods 1,168 715
Consigned inventory 427 249
$ 4,399 $ 5,075
NOTE 6. PROPERTY & EQUIPMENT, NET
Property and equipment, net consisted of the following (in thousands):
September 26, 2021 December 27, 2020
Land improvements $ 15,347 $ 15,039
Furniture, fixtures, and equipment 112,930 105,059
Leasehold improvements 130,093 115,695
Transportation equipment 2,203 2,285
Construction-in-progress 12,206 10,711
272,779 248,789
Less accumulated depreciation ( 86,158 ) ( 74,020 )
$ 186,621 $ 174,769
Depreciation expense was $ 4.3 million and $ 12.6 million for the quarter and three quarters ended September 26, 2021, respectively, and $ 3.9 million and $ 11.8 million for the quarter and three quarters ended September 27, 2020 , respectively, and is included in depreciation and amortization in the condensed consolidated statements of operations.
NOTE 7. GOODWILL & INTANGIBLE ASSETS
The Company has one reporting unit for goodwill which is evaluated for impairment annually in the fourth quarter of each fiscal year. The Company used the income approach and market approach to test goodwill. Under the income approach, fair value is based on the present value of estimated future cash flows. The market approach utilized both the price-earnings multiples of comparable public companies, as well as transactional data from similar companies that were recently sold. Adjustments are then made for any dissimilarities, to appropriately compare and correlate the market transactions used in this method. In estimating the fair value of the Company under the market approach, the most significant assumptions include the selection of the guideline public companies used in the analysis and the selection of EBITDA multiples. The most significant assumptions utilized in the fair value estimate of the income approach include projected annual revenue, earnings before interest, taxes, depreciation and amortization ("EBITDA"), capital expenditures and the discount rate. Growth assumptions were primarily based on a combination of historical performance, expected comparable store sales growth, the number of new restaurant additions, and performance of new restaurants.
Portillo's Inc. Form 10-Q | 15
PHD GROUP HOLDINGS LLC
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For indefinite-lived intangibles, the relief-from-royalty method estimates the fair value of an intangible asset based on what a third party would pay for the right to use that asset. The most significant assumptions utilized in the relief-from-royalty method are projected revenues and the royalty rate.
No impairment charges were recognized for goodwill or indefinite-lived intangible assets for the quarter and three quarters ended September 26, 2021 and September 27, 2020 .
Intangibles, net consisted of the following (in thousands):
As of September 26, 2021
Gross Carrying Amount Accumulated Amortization Net Carrying Amount
Indefinite-lived intangible assets:
Trade names $ 223,925 $ — $ 223,925
Intangibles subject to amortization:
Recipes 56,117 ( 20,705 ) 35,412
Covenants not-to-compete 40,799 ( 40,799 ) —
Favorable rental contracts 2,991 ( 1,787 ) 1,204
$ 323,832 $ ( 63,291 ) $ 260,541
As of December 27, 2020
Gross Carrying Amount Accumulated Amortization Net Carrying Amount
Indefinite-lived intangible assets:
Trade names $ 223,925 $ — $ 223,925
Intangibles subject to amortization:
Recipes 56,117 ( 18,538 ) 37,579
Covenants not-to-compete 40,799 ( 37,515 ) 3,284
Favorable rental contracts 2,991 ( 1,599 ) 1,392
$ 323,832 $ ( 57,652 ) $ 266,180
Amortization expense was $ 1.2 million and $ 5.6 million for the quarter and three quarters ended September 26, 2021, respectively, and $ 2.2 million and $ 6.6 million for the quarter and three quarters ended September 27, 2020 , respectively, and is included in depreciation and amortization in the condensed consolidated statements of operations.
The estimated aggregate amortization expense for the intangibles for the remainder of this year and the succeeding five years and thereafter are $ 0.8 million, $ 3.1 million, $ 3.1 million, $ 3.0 million, $ 3.0 million, $ 2.9 million and $ 20.7 million, respectively.
Portillo's Inc. Form 10-Q | 16
PHD GROUP HOLDINGS LLC
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. EQUITY METHOD INVESTMENT
The Company has a 50 % interest in C&O Chicago, LLC ("C&O"). The Company accounts for the investment and financial results in the condensed consolidated financial statements under the equity method of accounting as the Company has significant influence but does not have control. The investment is adjusted to reflect the Company’s share of C&O’s earnings and losses to date and any distributions received.
A summary of financial information for C&O is as follows (in thousands):
September 26, 2021 December 27, 2020
Assets:
Current assets $ 2,058 $ 1,349
Property, plant, and equipment, net of accumulated depreciation $ 5,921 and $ 5,838 in 2021 and 2020, respectively
821 837
Total assets 2,879 2,186
Liabilities:
Current liabilities 709 681
Non-current liabilities
Deferred rent 1,206 1,193
Total liabilities 1,915 1,874
Members’ equity 964 312
Total liabilities and members' equity $ 2,879 $ 2,186
Quarter Ended Three Quarters Ended
September 26, 2021 September 27, 2020 September 26, 2021 September 27, 2020
Results from operations:
Sales $ 3,608 $ 2,815 $ 9,205 $ 8,480
Net income 585 242 1,303 707
Portillo's Inc. Form 10-Q | 17
PHD GROUP HOLDINGS LLC
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. DEBT
Debt consisted of the following (in thousands):
September 26, 2021 December 27, 2020
First Lien Term B-3 Loans $ 326,583 $ 329,076
Revolving Loans — —
Second Lien Term B-3 Loans 155,000 155,000
Unamortized discount and debt issuance costs ( 11,495 ) ( 14,372 )
Total debt, net 470,088 469,704
Less: current portion ( 3,324 ) ( 3,324 )
Long-term debt, net $ 466,764 $ 466,380
First Lien
PHD Intermediate LLC (“Holdings”), Portillo’s Holdings LLC (the “Borrower”) and certain of its subsidiaries entered into the First Lien Credit Agreement ("First Lien Credit Agreement"), dated as of August 1, 2014 and as amended October 25, 2016, May 18, 2018 and December 6, 2019, with UBS AG, Stamford Branch, as the administrative agent and collateral agent, and other lenders from time to time party thereto (the “First Lien Lenders”). The First Lien Lenders extended credit in the form of (i) first lien initial term loans in an initial aggregate principal amount of $ 335.0 million and (ii) a revolving credit facility in an original principal amount equal to $ 30.0 million, including a letter of credit sub-facility with a $ 7.5 million sublimit (the “Revolving Facility” and the loans thereunder, the “Revolving Loans”).
On December 6, 2019, the Borrower entered a third amendment to the First Lien Credit Agreement (the “Third Amendment to First Lien Credit Agreement”) whereby the aggregate principal amount of the term loans as of the effective date of the Third Amendment to First Lien Credit Agreement was $ 332.4 million (the “First Lien Term B-3 Loans”), and the Revolving Facility was increased by $ 50 million. The maturity date with respect to the First Lien Term B-3 Loans was extended to September 6, 2024 and the maturity date with respect to the Revolving Loans date was extended to June 6, 2024.
In connection with the Third Amendment to First Lien Credit Agreement, the interest rates spread for the First Lien Term B-3 Loans increased by 100 basis points to 5.50 % for the adjusted London interbank offered rate ("Eurocurrency Rate") loans. As of September 26, 2021, the interest rate on the Term Loans was 6.50 %. As of September 26, 2021 and September 27, 2020, the effective interest rate on the Term Loans was 7.80 % and 7.52 %, r espectively. Beginning with December 31, 2019, the Company is required to pay on the last business day of each calendar quarter, March 31, June 30, September 30, and December 31, an aggregate principal amount of $ 0.8 million.
As of September 26, 2021 and December 27, 2020, the Company had $ 0.0 million in borrowings under the Revolver outstanding, respectively. As of September 26, 2021 and September 27, 2020, the interest rate on the Revolver was 3.25 % and 3.50 %, respectively, subject to change based on a consolidated first lien net leverage ratio as defined in the First Lien Credit Agreement. As of September 26, 2021 and September 27, 2020, the commitment fees, pursuant to the First Lien, to maintain the Revolver were 0.250 % and 0.375 %, respectively. Also pursuant to the First Lien Credit Agreement, as of September 26, 2021 and September 27, 2020, letter of credit fronting fees were 0.125 %. Commitment fees and letter of credit fronting fees are recorded as interest expense in the condensed consolidated statements of operations.
The Company had $ 5.3 million and $ 5.8 million of letters of credit issued against the Revolving Facility as of September 26, 2021 and December 27, 2020, respectively. As of September 26, 2021, the Company had $ 44.7 million of availability under the Revolving Facility.
Second Lien
Holdings, the Borrower and certain of its subsidiaries entered into the Second Lien Credit Agreement (the “Second Lien Credit Agreement”) dated as of August 1, 2014 and as amended on October 25, 2016 and December 6, 2019 with UBS AG, Stamford Branch, as administrative agent and collateral agent, and other lenders from time to time party thereto (the “Second Lien Lenders”). The Second Lien Lenders extended
credit in the form of initial second lien term loans in an initial aggregate principal amount of $ 80.0 million.
Portillo's Inc. Form 10-Q | 18
PHD GROUP HOLDINGS LLC
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
On December 6, 2019, the Borrower entered into second amendment to the Second Lien Credit Agreement (the “Second Amendment to Second Lien Credit Agreement”) whereby the aggregate principal amount of the term loans as of the effective date of the Second Amendment to the Second Lien Credit Agreement was $ 155.0 million (the “Second Lien Term B-3 Loans”). The maturity date of the Second Lien Term B-3 Loans was extended to December 6, 2024 (the “Second Lien Maturity Date”). In addition to the increased principal amount, the interest rates spread for the Second Lien Term B-3 Loans increased by 150 basis points to 9.50 % for Eurocurrency Rate loans. The Borrower determined interest on the Second Lien at the Eurocurrency Rate, plus 9.50 %. As of September 26, 2021, the interest rate on the Term Loans was 10.75 %. As of September 26, 2021 and September 27, 2020, the effective interest rate on the Second Lien was 12.22 % and 11.90 % , respectively. No principal payments are required. The aggregate principal is due on the Second Lien Maturity Date.
In connection with the IPO, the Company received aggregate net proceeds of approximately $ 429.9 million after deducting underwriting discounts and commissions and offering expenses. Net proceeds of $ 158.1 million were used to repay the Second Lien Term B-3 Loans (including prepayment penalties) in full.
Discount and Debt Issuance Costs
In connection with entering into the Third Amendment to First Lien Credit Agreement and the Second Amendment to Second Lien Credit Agreement, in each case, dated as of December 6, 2019, the Borrower paid debt issuance costs of $ 14.5 million, of which $ 13.3 million were capitalized and are being amortized over the term of the related debt agreements, and $ 1.2 million were expensed as incurred.
The Company amortized $ 0.6 million of deferred financing costs, respectively, during each of the quarters ended September 26, 2021 and September 27, 2020, and $ 1.7 million of deferred financing costs, respectively, during each of the three quarters ended September 26, 2021 and September 27, 2020, which is included in interest expense in the condensed consolidated statements of operations. In addition, the Company also amortized $ 0.4 million in original issue discount related to the long-term debt, which is included in interest expense in the condensed consolidated statements of operations in each of the quarters ended September 26, 2021 and September 27, 2020, respectively, and $ 1.2 million in original issue discount related to long-term debt in each of the three quarters ended September 26, 2021 and September 27, 2020, which is included in interest expense in the condensed consolidated statements of operations.
Total interest costs incurred were $ 10.7 million and $ 10.8 million for the quarters ended September 26, 2021 and September 27, 2020, respectively and $ 32.1 million and $ 34.3 million for the three quarters ended September 26, 2021 and September 27, 2020.
As of September 26, 2021 and December 27, 2020, the fair value of long-term debt approximates the carrying value as it is variable rate debt. The fair value measurement of this debt is considered Level 2 of the fair value hierarchy as inputs to interest are observable, unadjusted quoted prices in active markets for similar assets or liabilities.
Borrowings under the First Lien Credit Agreement and Second Lien Credit Agreement are guaranteed by Holdings, the Borrower and certain of the Borrower’s subsidiaries, and Holdings, the Borrower and certain of the Borrower’s subsidiaries have pledged substantially all tangible and intangible assets as collateral, subject to certain exclusions and exceptions.
The Borrower is subject to certain financial and reporting covenants pursuant to the terms of the First Lien Credit Agreement and Second Lien Credit Agreement. These covenants are customary for these types of debt agreements. As of September 26, 2021, the Company was in compliance with all covenants.
NOTE 10. REDEEMABLE PREFERRED UNITS
Pursuant to a unit purchase agreement, dated August 1, 2014, between the Company and Broad Street Principal Investments (the “Preferred Investor”), Portillo's OpCo issued 100,000 preferred units in exchange for a capital contribution of $ 97.7 million, net of discounts and fees as agreed between the parties. The Preferred Units have all the rights, privileges, and obligations as provided for in the Amended and Restated Limited Liability Company Agreement of the Company (the “LLC Agreement”), which include redemption rights and the amounts payable upon liquidation, but exclude dividend and conversion rights.
Portillo's Inc. Form 10-Q | 19
PHD GROUP HOLDINGS LLC
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Preferred Yield
Pursuant to the LLC Agreement, each Preferred Unit accrues on a daily basis the following applicable preferred rate, subject to certain triggering events as defined in the LLC Agreement that would result in an additional 2 % to the prevailing rate below:
• 11 % per year until the eighth anniversary of the closing date
• 12 % per year from the eighth to the tenth anniversary of the closing date
• 13 % per year thereafter
The rate accrues daily and compounds semiannually on June 30 and December 31 of each year on the sum of the preferred unreturned capital contributions and the unpaid Preferred Yield outstanding that has compounded for all prior periods.
Call Rights
The Company can, on or after the first anniversary of the closing date, choose to redeem the Preferred Units in whole or in part, by giving proper written notice as required in the LLC Agreement. The redemption price is a premium percentage, as noted below, applied to the sum of the unreturned capital contributions for the Preferred Units and the unpaid Preferred Yield (together, the “Preferred Liquidation Amount”). As of September 26, 2021, the percentage of Preferred Liquidation Amount is 101 %.
Put Rights
The Preferred Units holder can also require the Company to redeem the Preferred Units, in whole or in part, by delivering proper written notice (i) immediately prior to or simultaneously with a sale of the Company or (ii) at any time from and after the twelfth anniversary of the closing date. The redemption price is specified in the LLC Agreement.
As of September 26, 2021 and December 27, 2020, the Company had recorded $ 217.5 million and $ 200.6 million respectively, as Redeemable Preferred Units. These transactions were recorded in accordance with FASB ASC 480 Distinguishing Between Liabilities and Equity . As a result of the probability of the redemption by holder feature, the Preferred Units are classified outside of permanent equity within the condensed consolidated balance sheets.
In connection with the IPO, the Company received aggregate net proceeds of approximately $ 429.9 million after deducting underwriting discounts and commissions and offering expenses. Net proceeds of $ 221.7 million were used to repay the redeemable preferred units in full including the Preferred Liquidation Amount.
NOTE 11. COMMON UNITS AND UNIT-BASED COMPENSATION
Common Units
As of September 26, 2021 and December 27, 2020, the Company had 51,210,222 and 51,192,434 Class A Common Units outstanding, respectively. The increase of 131,578 Class A Common Units was primarily attributable to the issuance of common units to a member of the Company’s Board during the three quarters ended September 26, 2021.The Company has 7,477,256 options authorized to purchase Class A Common Units as designated by the Company’s 2014 Equity Incentive Plan, as amended (the "2014 Plan").
2014 Equity Incentive Plan
The Company has granted options to acquire units under its 2014 Plan. The 2014 Plan permits the granting of awards to employees, officers, directors and consultants of the Company and affiliates in the form of options, unit appreciation rights, Restricted Class A Units, Unrestricted Class A Units, Performance Awards and awards convertible into or otherwise based on Class A Units. The 2014 Plan gives broad powers to the Company’s Board to administer and interpret the 2014 Plan, including the authority to select the individuals to be granted awards and rights to prescribe the particular form and conditions of each award to be granted.
As of September 26, 2021, the Co mpany had 40,558 options available to be issued under the 2014 Plan.
Portillo's Inc. Form 10-Q | 20
PHD GROUP HOLDINGS LLC
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Under the 2014 Plan, the number of common units and exercise price of each option were determined prior to the IPO by the board of managers (the “Board of Managers”), or a committee designated by the Board of Managers. The awards granted are generally exercisable within a 10-year period from the date of grant. As of September 26, 2021 , the Company has issued options with time vesting, and other options with time and performance vesting. The Company’s performance condition restricts certain option holders’ ability to exercise vested options until a liquidity event and payback criteria to the Buyer are both met. Because these events, conditions or criteria were not considered probable as of September 26, 2021 , no compensation expense related to these options to acquire units was recognized. For options to acquire units granted without performance conditions, the Company records compensation expense over the vesting period based on the grant-date fair value of the option, determined using the Black-Scholes option pricing valuation model. Options issued and outstanding expire on various dates through the year 2031. The exercise price on all options outstanding as of September 26, 2021 , range from $ 3.25 to $ 5.77 , and the options vest over a range of immediately to five-year periods.
No additional options will be issued under the 2014 Plan. See "Note 15 – Subsequent Events" for a description of the treatment of the options to acquire units in connection with the IPO.
Unit-Based Compensation Expense
In accordance with FASB 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 service period (generally the vesting period of the grant). The Company recognized $ 0.2 million and $ 0.4 million of stock-based compensation expense for the quarter and three quarters ended September 26, 2021 and $ 0.2 million and $ 0.6 million for the quarter and three quarters ended September 27, 2020, respectively, with a corresponding increase to additional paid-in-capital. Unit-based compensation expense is calculated based on awards ultimately expected to vest and is reduced for estimated forfeitures. Forfeitures are revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates and an adjustment to unit-based compensation expense will be recognized at that time. Unit-based compensation expense is included in general and administrative expenses on the condensed consolidated statements of operations.
NOTE 12. CONTINGENCIES
The Company is party to legal proceedings and potential claims arising in the normal conduct of business, including claims related to employment matters, contractual disputes, customer injuries, and property damage. Although the ultimate outcome of these claims and lawsuits cannot be predicted with certainty, management believes that the resulting liability, if any, will not have a material effect on the Company’s consolidated financial statements.
The Company is subject to unclaimed property laws by states in the ordinary course of business. These laws generally require entities to report and remit abandoned and unclaimed property to the state which includes unclaimed wages, gift card funds, vendor payments, and customer refunds. Failure to timely report and remit the property can result in assessments that could include interest and penalties, in addition to the payment of the escheat liability. The Company routinely remits payments to states in compliance with applicable unclaimed property laws. As of September 26, 2021 and December 27, 2020, the Company recorded a $ 0.0 million and $ 0.9 million loss contingency related to the probable loss that may arise from an obligation to report and deliver unclaimed gift card funds. This loss contingency was resolved during the quarter ended September 26, 2021 for $ 0.8 million.
NOTE 13. RELATED PARTY TRANSACTIONS
As of September 26, 2021 and December 27, 2020, the related parties’ receivables consisted of a receivable balance due from C&O of $ 0.3 million and $ 0.2 million, respectively, which is included in accounts receivable in the condensed consolidated balance sheets.
The Company previously issued 195,933 common units to the CEO and President for a unit subscription receivable of $ 1.0 million. As of September 26, 2021 and December 27, 2020, the Company had $ 0.0 million and $ 0.5 million recorded as subscription receivable, respectively. On August 13, 2021, the remaining stock subscription receivable of $ 0.2 million was fully repaid.
Also, Noah Glass, a member of the Company's Board, is the founder and CEO of Mobo Systems, Inc. (also known as "Olo"), a platform the Company uses in connection with our mobile ordering application and delivery. The Company incurred $ 0.3 million and $ 0.7 million in net Olo-related costs for the quarter and three quarters ended September 26, 2021. Of these expenses, $ 0.2 million and $ 0.4 million, respectively, were included in cost of goods sold and $ 0.1 million and $ 0.3 million, respectively, were included in other operating expenses in the condensed
Portillo's Inc. Form 10-Q | 21
PHD GROUP HOLDINGS LLC
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
consolidated statements of operations. The Company incurred $ 0.3 million and $ 0.9 million in net Olo-related costs for the quarter and three quarters ended September 27, 2020. Of these expenses, $ 0.2 million and $ 0.6 million, respectively, were included in cost of goods sold and $ 0.1 million and $ 0.3 million, respectively, were included in other operating expenses in the condensed consolidated statements of operations. As of September 26, 2021 and December 27, 2020, $ 0.0 million and $ 0.2 million was payable to Olo and was included in accounts payable in the consolidated balance sheets.
Additionally, the Company leases 23 real properties from entities owned and controlled by Richard Portillo. Mr. Portillo was the former President, CEO, and Owner of the Company, as comprised at the date of the merger transaction in August 2014 through which the Company was acquired by funds affiliated or managed by Berkshire Partners LLC. The Company made $ 2.0 million and $ 1.9 million in rental payments related to the aforementioned 23 locations, during each of the quarters ended September 26, 2021 and September 27, 2020, respectively, and $ 5.9 million and $ 5.6 million in rental payments, during each of the three quarters ended September 26, 2021 and September 27, 2020. Beginning in 2014 through July 31, 2021, Mr. Portillo served as a consultant, under an Agreement with Portillo's Holdings, LLC (the "Consulting Agreement"). Under the terms of the Consulting Agreement, $ 2.0 million was paid annually for various consulting services, which was included in general and administrative expenses in the condensed statements of operations. The Consulting Agreement terminated on July 31, 2021 and has not been renewed.
NOTE 14. EARNINGS (LOSS) PER UNIT
Basic earnings (loss) per unit is computed by dividing net income (loss) available to common unitholders by the weighted-average number of common units outstanding during the year.
Net income (loss) applicable to common unitholders is calculated after deducting any redeemable preferred unit accretion.
Diluted earnings (loss) per unit is computed by dividing net income available to common unit holders by the weighted-average number of common units outstanding inclusive of the incentive common units, using the treasury stock method, if dilutive.
For the quarter and three quarters ended September 26, 2021 and September 27, 2020, the potential dilutive units related to the incentive common units were not included in the computation of diluted net loss per unit as the effect of including these units in the calculation would have been anti-dilutive.
The computations of basic and diluted earnings (loss) per unit for the quarter and three quarters ended September 26, 2021 and September 27, 2020 are as follows (in thousands, except per share amounts):
Quarter Ended Three Quarters Ended
September 26, 2021 September 27, 2020 September 26, 2021 September 27, 2020
Net income $ 6,531 $ 8,104 $ 20,404 $ 7,371
Less: Redeemable Preferred Units Accretion ( 5,886 ) ( 5,282 ) ( 16,978 ) ( 15,240 )
Net income (loss) attributable to common unit holders $ 645 $ 2,822 $ 3,426 $ ( 7,869 )
Units:
Weighted-average number of common units outstanding-basic 51,210,222 51,192,285 51,201,100 51,187,878
Dilutive unit awards 371,463 217,717 367,934 —
Weighted-average number of common units outstanding-diluted 51,581,685 51,410,002 51,569,034 51,187,878
Basic net income (loss) per unit $ 0.01 $ 0.06 $ 0.07 $ ( 0.15 )
Diluted net income (loss) per unit $ 0.01 $ 0.05 $ 0.07 $ ( 0.15 )
Portillo's Inc. Form 10-Q | 22
PHD GROUP HOLDINGS LLC
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following units were excluded from the calculation of diluted earnings per share because they would be anti-dilutive:
Quarter Ended Three Quarters Ended
September 26, 2021 September 27, 2020 September 26, 2021 September 27, 2020
Units subject to performance conditions 318,514 57,729 318,704 57,729
Units that were antidilutive — — — 216,926
Total units excluded from diluted income (loss) per unit 318,514 57,729 318,704 274,655
NOTE 15. SUBSEQUENT EVENTS
The Company opened one new restaurant subsequent to September 26, 2021 for a total of 67 restaurants, excluding a restaurant owned by C&O, of which Portillo's owns 50 % of the equity.
On October 25, 2021, Portillo's Inc. completed the IPO of its Class A common stock. Portillo's Inc. issued 23,310,810 shares, including 3,040,540 shares sold to the underwriters pursuant to their overallotment option. Portillo's Inc. received net proceeds from the offering of approximately $ 429.9 million (after deducting $ 29.1 million of underwriting fees and commissions and approximately $ 7.2 million of offering expenses). The net proceeds and cash on hand were used to as follows:
• to repay the redeemable preferred units in full (including the redemption premium) of $ 221.7 million;
• to repay all of the borrowings outstanding under the Second Lien Credit Agreement (including prepayment penalties) of $ 158.1 million ; and
• to purchase LLC Units or shares of Class A common stock from certain pre-IPO LLC members of $ 57.0 million.
On October 20, 2021, the members of Portillo's OpCo executed the Second A mended and Restated Limited Liability Company Agreement for Portillo's OpCo , effecting a 7.4-for-1 reverse common unit split.
In connection with the IPO, Portillo's Inc. entered into a Tax Receivable Agreement (the “Tax Receivable Agreement”) with certain pre-IPO LLC Members, pursuant to which Portillo's Inc. is obligated to pay 85 % of the amount of applicable cash tax savings, if any, in U.S. federal, state, and local income tax or franchise tax that Portillo's Inc. actually realizes as a result of (a) the increases in tax basis attributable to exchanges of LLC Units by pre-IPO LLC Members and (b) tax benefits related to imputed interest deemed to be paid by Portillo's Inc. as a result of the Tax Receivable Agreement. We will retain the benefit of the remaining 15 % of these tax savings.
In connection with the IPO, each option under the 2014 Plan that was outstanding, whether vested or unvested, was substituted for an option to purchase a number of shares of Class A common stock under the 2021 Plan, and the option holders received a cash payment in respect of their options (whether vested or unvested) in an aggregate amount of approximately $ 6.3 million, which Portillo's Inc. expects to make in the fourth quarter of fiscal 2021. In addition, as a result of the waiver and the resultant modification in the terms of certain performance-vesting awards, Portillo's Inc. will record compensation expense based on the fair value of the modified awards in the fourth quarter of fiscal 2021. We would expect to recognize a cash compensation expense of approximately $ 1.3 million and a non-cash compensation expense of approximately $ 23.3 million, each in the fourth quarter of fiscal 2021, as well as an additional non-cash compensation expense of approximately $ 12.7 million ratably over the next 4.5 years.
In connection with the IPO, Portillo's Inc. granted options to purchase shares of Class A common stock under its 2021 Plan. The 2021 Plan permits the granting of awards to any employee, officer, non-employee director, consultant or other personal service provider of the Company in the form of stock options, stock appreciation rights, restricted stock awards, restricted stock units and stock-based awards. All awards granted to participants under the 2021 Plan generally will be represented by an award agreement. 7,148,049 shares of Class A common stock are available for awards under the 2021 Plan (excluding options previously awarded under the 2014 Plan that were assumed by the 2021 Plan). The 2021 Plan gives broad powers to the Board to administer and interpret the 2021 Plan, including the authority to select the individuals to be granted awards and rights to prescribe the particular form and conditions of each award to be granted.
As of October 25, 2021, following the issuance of the stock sold in the IPO, Portillo's Inc. had a total of 35,807,171 shares of Class A common stock issued and outstanding, 35,673,321 shares of Class B common stock issued and outstanding and no preferred shares issued and outstanding.
Portillo's Inc. Form 10-Q | 23
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