What changed in this filing

/stocks — the workspaceLOADING

Item 8. Financial Statements and Supplementary Data

2023-03-02 compared with 2022-03-10 · 475 added, 340 removed, 748 unchanged (52% of the section changed)

12 unchanged sentences

Goodwill & Intangible Assets

Equity Method Investment

Fair Value Of Financial Instruments

Supplemental Balance Sheet Information

Operating Leases

Redeemable Preferred Units

Stockholders' Equity

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the shareholders and the Board of Directors of Portillo’s Inc.

T o the shareholders and the Board of Directors of Portillo's Inc.

Opinion on the Financial Statements

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In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 25, 2022 and December 26, 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 25, 2022, in conformity with accounting principles generally accepted in the United States of America.

Change in Accounting Principle

As discussed in Note 2 to the financial statements, the Company has changed its method of accounting for leases effective December 27, 2021, due to adoption of FASB ASC 842, Leases, using the modified retrospective method.

Basis for Opinion

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CONSOLIDATED BALANCE SHEETS

(In thousands, except common unit and per share data)

(In thousands, except per share data)

December 25, 2022 December 26, 2021

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Property and equipment, net 227,036 190,834

OTHER ASSETS:

Operating lease assets 166,808 —

Goodwill 394,298 394,298

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Equity method investment 16,274 16,170

Deferred tax asset 74,455 —

Deferred tax assets 150,497 74,455

Other assets 4,119 5,042

1 unchanged sentence

TOTAL ASSETS $ 1,280,083 $ 999,573

LIABILITIES, REDEEMABLE PREFERRED UNITS AND STOCKHOLDERS' EQUITY

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:

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Current portion of long-term debt 4,155 3,324

Current portion of Tax Receivable Agreement liability 813 —

Current deferred revenue 7,292 6,893

Short-term operating lease liability 4,849 —

Accrued expenses 29,915 29,472

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Tax Receivable Agreement liability 252,003 156,638

Long-term operating lease liability 200,166 —

Other long-term liabilities 3,291 4,588

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COMMITMENTS AND CONTINGENCIES (NOTE 16)

REDEEMABLE PREFERRED UNITS, — and 100,000 units authorized, issued and outstanding as of December 26, 2021 and December 27, 2020, respectively (preferred liquidation amount 101 %)

STOCKHOLDERS' EQUITY:

Member's Equity — 140,709

Preferred stock, $ 0.01 par value per share, 10,000,000 shares authorized, — issued and outstanding

Class A common stock, $ 0.01 par value per share, 380,000,000 shares authorized, and 35,807,171 shares issued and outstanding

Class B common stock, $ 0.00001 par value per share, 50,000,000 shares authorized, and 35,673,321 shares issued and outstanding

Class A common stock, $ 0.01 par value per share, 380,000,000 shares authorized, and 48,420,723 and 35,807,171 shares issued and outstanding as of December 25, 2022 and December 26, 2021, respectively

Class B common stock, $ 0.00001 par value per share, 50,000,000 shares authorized, and 23,837,162 and 35,673,321 shares issued and outstanding as of December 25, 2022 and December 26, 2021, respectively

Additional paid-in-capital 260,664 186,856

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Total stockholders' equity 432,901 423,406

TOTAL LIABILITIES, REDEEMABLE PREFERRED UNITS AND STOCKHOLDERS' EQUITY $ 999,573 $ 910,222

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,280,083 $ 999,573

See accompanying notes to consolidated financial statements.

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Interest expense 27,644 39,694 45,031

Tax Receivable Agreement liability adjustment ( 5,345 ) — —

Loss on debt extinguishment — 7,265 —

(LOSS) INCOME BEFORE INCOME TAXES ( 16,947 ) 12,263 5,555

Income tax benefit ( 3,531 ) — —

NET (LOSS) INCOME ( 13,416 ) 12,263 5,555

INCOME (LOSS) BEFORE INCOME TAXES 18,980 ( 16,947 ) 12,263

Income tax expense (benefit) 1,823 ( 3,531 ) —

NET INCOME (LOSS) 17,157 ( 13,416 ) 12,263

Redeemable preferred units accretion — ( 21,176 ) ( 20,524 )

NET LOSS ATTRIBUTABLE TO COMMON HOLDERS ( 34,592 ) ( 8,261 ) ( 12,869 )

Net loss attributable to non-controlling interests ( 19,408 ) — —

NET LOSS ATTRIBUTABLE TO PORTILLO'S INC.

NET INCOME (LOSS) ATTRIBUTABLE TO COMMON HOLDERS 17,157 ( 34,592 ) ( 8,261 )

Net income (loss) attributable to non-controlling interests 6,306 ( 19,408 ) —

NET INCOME (LOSS) ATTRIBUTABLE TO PORTILLO'S INC.

$ 10,851 $ ( 15,184 ) $ ( 8,261 )

Loss per common share attributable to Portillo's Inc.:

Income (loss) per common share attributable to Portillo's Inc.:

Basic $ 0.28 $ ( 0.42 ) $ ( 0.16 )

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Balance, as of December 29, 2019

Net income — — 5,555 — — — — — — — 5,555

Cumulative effect of accounting changes — — 204 — — — — — — — 204

Unit-based compensation — — 1,286 — — — — — — — 1,286

Repayment of subscription receivable — — 251 — — — — — — — 251

Issuance of common units — — 100 — — — — — — — 100

Redeemable preferred units accretion — 18,424 ( 18,424 ) — — — — — — — ( 18,424 )

Balance, as of December 29, 2019 100,000 $ 180,047 $ 147,734 — $ — — $ — $ — $ — $ — 147,734

100,000 $ 180,047 $ 147,734 — $ — — $ — $ — $ — $ — $ 147,734

Net income — — 12,263 — — — — — — — 12,263

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Balance, as of December 27, 2020

See accompanying notes to consolidated financial statements.

Portillo's Inc.

Form 10-K | 53

PORTILLO'S INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' AND MEMBERS' EQUITY

(In thousands, except unit/share data)

FOR THE FISCAL YEARS ENDED DECEMBER 26, 2021

Preferred Units Class A

Common Stock Class B

Units Amount Members' Equity Shares Amount Shares Amount Additional Paid-In Capital Accumulated Deficit Non-controlling interest Total Equity

Balance, as of December 27, 2020 100,000 $ 200,571 $ 140,709 — $ — — $ — $ — $ — $ — $ 140,709

100,000 $ 200,571 $ 140,709 — $ — — $ — $ — $ — $ — $ 140,709

Redeemable preferred units accretion and redemption premium — 21,176 ( 21,176 ) — — — — — — — ( 21,176 )

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Balance, as of December 26, 2021

— $ — $ — 35,807,171 $ 358 35,673,321 $ — $ 186,856 $ ( 15,950 ) $ 252,142 $ 423,406

See accompanying notes to consolidated financial statements.

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PORTILLO'S INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' AND MEMBERS' EQUITY

(In thousands, except unit/share data)

FOR THE FISCAL YEAR ENDED DECEMBER 25, 2022

Preferred Units Class A

Common Stock Class B

Units Amount Members' Equity Shares Amount Shares Amount Additional Paid-In Capital Accumulated Deficit Non-controlling interest Total Equity

Balance, as of December 26, 2021

$ — $ — $ — 35,807,171 $ 358 35,673,321 $ — $ 186,856 $ ( 15,950 ) $ 252,142 $ 423,406

Net income — — — — — — — — 10,851 6,306 17,157

Adoption of Accounting Standards Codification 842 - Leases — — — — — — — — 287 174 461

Equity-based compensation expense — — — — — — — 8,820 — 7,317 16,137

Activity under equity-based compensation plans — — — 777,393 8 — — ( 606 ) — — ( 598 )

Redemption of LLC Units in connection with the secondary offering — — — 11,836,159 118 ( 11,836,159 ) — ( 118 ) — — —

Non-controlling interest adjustment — — — — — — — 89,374 — ( 89,374 ) —

Establishment of liabilities under tax

receivable agreement and related

changes to deferred tax assets

associated with increases in tax basis — — — — — — — ( 23,662 ) — — ( 23,662 )

Balance, as of December 25, 2022

— $ — $ — 48,420,723 $ 484 23,837,162 $ — $ 260,664 $ ( 4,812 ) $ 176,565 $ 432,901

See accompanying notes to consolidated financial statements.

Portillo's Inc.

Form 10-K | 55

PORTILLO'S INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

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CASH FLOWS FROM OPERATING ACTIVITIES:

Net (loss) income $ ( 13,416 ) $ 12,263 $ 5,555

Adjustments to reconcile net (loss) income to net cash provided by operating activities:

Net income (loss) $ 17,157 $ ( 13,416 ) $ 12,263

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

Depreciation and amortization 20,907 23,312 24,584

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Deferred rent and tenant allowance — 4,120 3,888

Deferred income tax benefit ( 3,532 ) — —

Deferred income tax provision (benefit) 1,820 ( 3,532 ) —

Tax Receivable Agreement liability adjustment ( 5,345 ) — —

Amortization of deferred lease incentives — ( 388 ) ( 330 )

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Other current assets 914 ( 2,921 ) ( 416 )

Operating lease assets 6,793 — —

Accounts payable ( 3,621 ) 1,788 1,354

Accrued expenses and other liabilities 1,587 ( 4,521 ) 6,573

Operating lease liabilities ( 2,426 ) — —

Deferred lease incentives 1,651 690 2,314

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Repayments of short-term debt — — ( 15,000 )

Proceeds from long-term debt — — 464,110

Payments of long-term debt ( 3,324 ) ( 158,324 ) ( 13,324 )

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Payment of initial public offering issuance costs ( 771 ) ( 6,279 ) —

Proceeds from stock option exercises 1,890 — —

Employee withholding taxes related to net settled equity awards ( 2,632 ) — —

Proceeds from Employee Stock Purchase Plan purchases 129 — —

Proceeds from issuance of common units — 100 26

Repayment of stock subscription receivable — 499 250

Payment of deferred financing costs — — ( 13,340 )

NET CASH USED IN FINANCING ACTIVITIES ( 4,708 ) ( 8,783 ) ( 18,048 )

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS AND RESTRICTED CASH ( 2,169 ) 18,803 9,592

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS AND RESTRICTED CASH 5,164 ( 2,169 ) 18,803

CASH AND CASH EQUIVALENTS AND RESTRICTED CASH AT BEGINNING OF THE PERIOD 39,263 41,432 22,629

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(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").

The Company was formed for the purpose of completing an initial public offering ("IPO") 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 a s sole managing member, the Company operates and controls all of the business and affairs of Portillo's OpCo.

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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 December 26, 2021 and December 27, 2020, the Company had 68 and 63 restaurants in operation, respectively.

The Company also had 3 and 4 non-traditional locations in operation as of December 26, 2021 and December 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 Inc., additionally has a 50 % interest in a single restaurant in Chicago, IL, that is referred to in Note 7.

"Equity Method Investment." There were no restaurant closings during any period presented in the financial statements.

As of December 25, 2022 and December 26, 2021, the Company had 71 and 68 restaurants in operation, respectively, excluding a restaurant owned by C&O Chicago, LLC ("C&O").

The Company also had two and three non-traditional locations in operation as of December 25, 2022 and December 26, 2021, respectively.

These non-traditional locations include a food truck and a ghost kitchen (small kitchen with no store-front presence, used to fill online orders).

Portillo's Inc., additionally has a 50 % interest in a single restaurant owned by C&O, that is referred to in Note 2.

Summary Of Significant Accounting Policies.

There were no restaurant closings during any period presented in the financial statements.

The Company’s principal corporate offices are located in Oak Brook, Illinois.

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The Company's registration statement on Form S-1, as amended (Registration No.

333-259810), related to its initial public offering ("IPO") was declared effective October 20, 2021, and the Company's Class A common stock began trading on the Nasdaq Global Select Market under the symbol "PTLO" on October 21, 2021.

333-259810), 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 under the symbol "PTLO" 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) , at an offering price of $ 20.00 per share.

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In addition, because Portillo’s OpCo was under the common control of the pre-IPO LLC Members before and after the Transactions, we measured the assets and liabilities of Portillo’s OpCo at their carrying amounts as of the date of the completion of the Transactions.

• We amended and restated our certificate of incorporation to authorize the issuance of two classes of common stock:

• We amended and restated our certificate of incorporation to authorize the issuance of two series of common stock:

Class A common stock and Class B common stock.

Each share of Class A common stock and Class B common stock entitles its holder to one vote per share on all matters submitted to a vote of our stockholders.

Each share of Class A common stock and Class B common stock entitles its holder to one vote per share on all matters submitted to a vote of our shareholders.

The Class B common stock is not entitled to economic interests in Portillo’s Inc.

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• to repay all of the borrowings outstanding under the Second Lien Credit Agreement (including any prepayment penalties) of $ 158.1 million;

• to purchase LLC Units or shares of Class A common stock from certain pre-IPO LLC Members of $ 57.0 million.

• to purchase LLC Units and corresponding shares of Class B common stock or shares of Class A common stock from certain pre-IPO LLC Members of $ 57.0 million.

Portillo's Inc.

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In connection with the IPO, the Company entered into a Tax Receivable Agreement ("TRA") with certain pre-IPO LLC Members, in which the Company will be generally obligated to pay 85 % of the amount of applicable cash savings, if any, in U.S.

federal, state, and local income tax that the Company actually realizes or is deemed to realize as a result of (i) our allocable share of existing tax basis in depreciable or amortizable assets relating to LLC Units acquired in the IPO, (ii) certain favorable tax attributes acquired by the Company from Blocker Companies (including net operating losses and the Blocker Companies' allocable share of existing tax basis), (iii) increases in our allocable share of then existing tax basis in depreciable or amortizable assets, and adjustments to the tax basis of the tangible and intangible assets, of Portillo’s OpCo and its subsidiaries, as a result of (x) sales or exchanges of interests in Portillo’s OpCo (including the repayment of the redeemable preferred units) in connection with the IPO and (y) future or exchanges of LLC Units by pre-IPO LLC Members for Class A common stock and (iv) certain other tax benefits related to entering into the TRA, including payments made under the TRA.

tax purposes that held LLC Units prior to the Transactions ("Blocker Companies") (including net operating losses and the Blocker Companies' allocable share of existing tax basis), (iii) increases in our allocable share of then existing tax basis in depreciable or amortizable assets, and adjustments to the tax basis of the tangible and intangible assets, of Portillo’s OpCo and its subsidiaries, as a result of (x) sales or exchanges of interests in Portillo’s OpCo (including the repayment of the redeemable preferred units) in connection with the IPO and (y) future or exchanges of LLC Units by pre-IPO LLC Members for Class A common stock and (iv) certain other tax benefits related to entering into the TRA, including payments made under the TRA.

We will retain the benefit of the remaining 15 % of these tax savings.

Secondary Offerings

In the third quarter of 2022, the Company completed a secondary offering of 8,066,458 shares of the Company's Class A common stock at an offering price of $ 23.75 per share ("Q3 Secondary Offering").

We used all of the net proceeds from the Q3 Secondary Offering to purchase LLC Units and corresponding shares of Class B common stock from certain pre-IPO LLC Members and to repurchase shares of Class A common stock from the shareholders of the Blocker Companies at a price per LLC Unit or share of Class A common stock, as applicable, equal to the public offering price per share of Class A common stock, less the underwriting discounts and commissions.

The proceeds from the Q3 Secondary Offering were used to (i) purchase 2,123,899 existing shares of Class A common stock from the shareholders of the Blocker Companies and (ii) redeem 5,942,559 LLC Units held by certain pre-IPO LLC Members.

In connection with the redemption, 5,942,559 shares of Class B common stock were surrendered by the pre-IPO LLC Members and canceled and the Company received 5,942,559 newly-issued LLC Units, increasing the Company's total ownership interest in Portillo's OpCo.

As a result, Portillo’s did not receive any proceeds from the offering, and the total number of shares of Class A common stock and Class B common stock did not change;

however, the number of outstanding shares of Class A common stock increased by the same number of the canceled shares of Class B common stock.

In the fourth quarter of 2022, the Company completed a secondary offering of 8,000,000 shares of the Company's Class A common stock at an offering price of $ 22.69 per share ("Q4 Secondary Offering").

We used all of the net proceeds from the Q4 Secondary Offering to purchase LLC Units and corresponding shares of Class B common stock from certain pre-IPO LLC Members and to repurchase shares of Class A common stock from the shareholders of the Blocker Companies at a price per LLC Unit or share of Class A common stock, as applicable.

The proceeds from the Q4 Secondary Offering were used to (i) purchase 2,106,400 existing shares of Class A common stock from the shareholders of the Blocker Companies and (ii) redeem 5,893,000 LLC Units held by the pre-IPO LLC Members.

In connection with the redemption, 5,893,000 shares of Class B common stock were surrendered by the pre-IPO LLC Members and canceled and the Company received 5,893,000 newly-issued LLC Units, increasing the Company's total ownership interest in Portillo's OpCo.

As a result, Portillo’s did not receive any proceeds from the offering, and the total number of shares of Class A common stock and Class B common stock did not change;

however, the number of outstanding shares of Class A common stock increased by the same number of the canceled shares of Class B common stock.

As of December 25, 2022, the Company owned 67.0 % of Portillo's OpCo and the pre-IPO LLC Members owned the remaining 33.0 % of Portillo's OpCo.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).

The consolidated financial statements as of December 26, 2021 and December 27, 2020 include the accounts of the Company and its subsidiaries.

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and include the accounts of the Company and its subsidiaries.

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 consolidated financial statements, and therefore, does not separately present a statement of comprehensive income (loss).

In fiscal year 2019, the Company changed from a calendar year ending on December 31 to a 52-53 week fiscal year ending on the Sunday prior to December 31, effective beginning with the first quarter of 2019.

Portillo's Inc.

Form 10-K | 59

PORTILLO'S INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

The Company operates on a 52- or 53-week fiscal year ending on the Sunday on or prior to December 31.

In a 52-week fiscal year, each quarterly period is comprised of 13 weeks.

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The preparation of these 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 reporting period.

Significant estimates inherent in the preparation of the consolidated financial statements include useful lives and impairments of long-lived tangible and intangible assets, accounting for income taxes and related uncertain tax positions, the valuation of equity-based compensation and awards, and reserves for litigation and other contingencies, amongst others.

Actual results could differ from those estimates.

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Amounts receivable from credit card processors are considered cash equivalents because they are both short in term and highly liquid in nature and are typically converted to cash within three business days of the sales transactions.

Restricted cash includes amounts that are held in the Company’s bank accounts subject to minimum balance requirements for medical claim disbursements and escrow requirements related to certain new restaurant construction projects.

Portillo's Inc.

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PORTILLO'S INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Restricted cash includes amounts that are held in the Company’s bank accounts subject to minimum balance requirements for medical claim disbursements.

Accounts Receivable

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Inventory, which consists mainly of food products, is valued at the lower of cost or net realizable value, with cost determined on the first-in, first-out (FIFO) method.

The Company had no allowance and a $ 0.06 million allowance for excess and obsolete inventories as of December 26, 2021 and December 27, 2020, respectively.

The estimate was based on the value of slow-moving catering trays and the likelihood that the overstocked volume will be sold prior to expiration date.

No other adjustment is deemed necessary to reduce inventory to lower of cost or net realizable value due to the rapid turnover and high utilization of inventory.

Certain of the Company’s inventories are held at its distributors on a short-term consignment basis.

Inventories subject to these consignment arrangements are recorded on the Company’s consolidated balance sheet and totaled $ 0.4 million and $ 0.2 million as of December 26, 2021 and December 27, 2020, respectively.

The Company operates two commissaries to supply the Company's restaurants with several products and ensures product consistency and quality.

The commissaries derive revenue principally from the sale and distribution of food to our distributors, who, in turn, sell the food to the restaurants.

This is considered under ASC 845, Non-Monetary Transactions, and the impact on the statement of operations is not material.

These products are held as inventory at distributors on a short-term consignment basis.

Inventories subject to these consignment arrangements are recorded on the Company’s consolidated balance sheet and were $ 0.7 million and $ 0.4 million as of December 25, 2022 and December 26, 2021, respectively.

Portillo's Inc.

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PORTILLO'S INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Equity Method Investment

The Company has a 50 % interest in C&O.

The Company accounts for the investment and financial results in the 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.

Long-Lived Assets and Valuation

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Leasehold improvements are amortized over the shorter of the estimated lives of the asset or the lease term.

The Company reviews its long-lived assets, including property and equipment and definite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group might not be recoverable.

The Company reviews its long-lived assets, including property and equipment, definite-lived intangible assets and operating lease assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group might not be recoverable.

Recoverability is measured by a comparison of the carrying amount to future undiscounted cash flows that are expected to be generated by the asset or asset group.

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The Company has one reporting unit which is evaluated for impairment annually.

Fair value of the reporting unit is estimated using the income approach and the market approach.

Further given the timing of the Transactions, an IPO approach was also applied, which is a form of the market approach using the transactional method.

Under the income approach, fair value is based on the present value of estimated future cash flows.

The market approach is based upon both the price-earnings multiples of comparable public companies, transactional data from similar companies that were recently sold, and transactional data from the Company's IPO.

Fair value of the reporting unit is estimated using the market approach that uses publicly available market data, including publicly traded stock prices and total shares outstanding to determine the fair value of the reporting unit.

If the fair value of the reporting unit is less than its carrying value, an impairment loss is recorded for the difference between the fair value of the reporting unit and the carrying value of the reporting unit.

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If the fair value of the trade name is less than its carrying value, an impairment loss is recorded for the difference between the estimated fair value and carrying value of the intangible assets.

Portillo's Inc.

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PORTILLO'S INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Fair Value of Financial Instruments

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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.

Portillo's Inc.

Form 10-K | 61

PORTILLO'S INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Reverse Common Unit Split

On October 20, 2021, the members of Portillo's OpCo amended the LLC Agreement , effecting a 7.4-for-1 reverse common unit split.

All applicable unit data, per unit amounts and related information in the consolidated financial statements and notes thereto for the year ended December 27, 2020 and December 29, 2019 have been adjusted retroactively to give effect to the 7.4-for-1 reverse common unit split.

All applicable unit data, per unit amounts and related information in the consolidated financial statements and notes thereto for the year ended December 27, 2020 have been adjusted retroactively to give effect to the 7.4-for-1 reverse common unit split.

Offering Costs

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For delivery sales through Portillos.com or the Portillo's App, the Company recognizes revenue, including delivery fees, when the performance obligation is complete and the food is transferred to the customer.

For delivery sales through a non-Company owned channel, such as the delivery partner’s website or app, as of the end of 2021, we recognize marketplace sales, including third-party delivery menu price premiums, as revenue when the control of the food is transferred to the delivery service, excluding any delivery or service fees charged to the customer.

For delivery sales through a non-Company owned channel, such as the delivery partner’s website or app, as of the end of 2021, we recognize marketplace sales, including third-party delivery menu price premiums, as revenue when control of the food is transferred to the delivery service, excluding any delivery or service fees charged to the customer.

Prior to the end of 2021, this price premium was previously recorded in cost of goods sold, excluding depreciation and amortization.

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Overall pricing agreements are established in an effort to maintain a more consistent food cost without creating long-term purchase commitments.

Portillo's Inc.

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PORTILLO'S INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Employee Benefits

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Assets held in the rabbi trust are invested in mutual funds, which are purchased and held principally for the purpose of selling them in the near term, and are classified as trading securities and carried at fair value.

Portillo's Inc.

Form 10-K | 62

PORTILLO'S INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Equity-Based Compensation

The Company has issued non-qualified stock options, restricted stock units, and performance based stock options.

The Company has issued non-qualified stock options, performance-based stock options, restricted stock units and restricted stock awards.

Equity-based compensation expense is measured based on the grant-date fair value of those awards and is recognized on a straight-line basis over the vesting period.

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Equity-based compensation expense is included within general and administrative expenses and labor in the consolidated statements of operations.

In connection with the IPO, each option under the 2014 Equity Incentive Plan ("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 Equity Incentive Plan ("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 $ 6.6 million, which was recorded in the fourth quarter of 2021.

In addition, as a result of the waiver and the resultant modification in the terms of certain performance-vesting awards we recorded compensation expense based on the fair value of the modified awards.

Assuming all of the options vest and an offering price of $ 20.00 per share of Class A common stock, we recognized a cash compensation expense of approximately $ 1.3 million and non-cash compensation expense of approximately $ 26.2 million, each at the modification date in the fourth quarter of fiscal 2021.

The Company adopted an Employee Share Purchase Plan (“ESPP”) in June 2022 under which qualifying employees may be granted purchase rights to the Company’s common shares at not less than 85 % of the market price on the purchase date, subject to Company discretion.

The ESPP has a maximum of 250,000 shares of the Company's Class A common stock available for issuance.

Eligible employees are able to contribute up to 15 % of their gross base earnings for purchases under the ESPP through regular payroll deductions, subject to an annual maximum dollar amount.

The expense incurred under the ESPP was immaterial for the year ended December 25, 2022 and is included within general and administrative expenses and labor in the consolidated statements of operations.

Advertising and Marketing Expenses

The costs of producing advertising are expensed the first-time advertising takes place, while the costs of communicating advertising are expensed as services are received.

Advertising costs are expensed the first-time advertising takes place, while the costs of producing advertising are expensed during production and the costs of communicating advertising are expensed as services are received.

Advertising and marketing expenses totaled $ 4.0 million, $ 3.1 million and $ 2.6 million for the years ended December 25, 2022, December 26, 2021 and December 27, 2020, respectively.

Advertising and marketing expenses included in other operating expenses in the consolidated statements of operations is primarily related to sponsorships, in-store merchandising, and charitable giving;

those included in general and administrative expenses in the consolidated statements of operations primarily consist of branding initiatives.

The Company leases retail restaurants, commissaries, and office space under operating leases.

Some lease agreements contain tenant improvement allowances, rent escalation clauses and/or contingent rent provisions.

For purposes of recognizing incentives and minimum rental expenses on a straight-line basis over the terms of the leases, the Company uses the date it takes possession of the leased space for construction purposes as the beginning of the term.

For leases with renewal periods at the Company’s option, the Company determines the expected lease period based on whether the renewal of any option is reasonably assured at the inception of the lease.

In addition to rental expense, certain leases require the Company to pay a portion of real estate taxes, utilities, building operating expenses, insurance, common area maintenance charges, and other charges.

For rent escalations, and rent holidays, the Company records a deferred rent liability and amortizes the deferred rent over the terms of the leases as reductions to occupancy expense.

Leasehold improvements financed by the landlord through lease incentive allowances are recorded as deferred lease incentives.

The Company classifies lease incentive allowances as deferred rent on the consolidated balance sheets and amortizes the lease incentives on a straight-line basis over the defined lease term as an adjustment to occupancy expense.

Advertising and marketing expenses included in other operating expenses in the consolidated statements of operations primarily relate to sponsorships, restaurant merchandising and charitable giving;

and those expenses included in general and administrative expenses in the consolidated statements of operations primarily consist of branding initiatives.

On December 27, 2021, the Company adopted ASU 2016-02, Leases (Topic 842) , along with related clarifications and improvements, using a modified retrospective approach.

Results for reporting periods beginning on or after December 27, 2021 are presented under ASC 842.

Prior period amounts were not revised and continue to be reported in accordance with ASC 840, the accounting standard then in effect.

The Company currently leases land for its retail restaurants and commissaries, and office space under various long-term operating lease agreements that expire on various dates through 2068.

We also lease equipment, which primarily consists of restaurant equipment and copiers.

We have immaterial short-term operating leases, such as those for seasonal rentals and training spaces.

We evaluate the contracts to determine whether the contract involves the use of property or equipment, which is either explicitly or implicitly identified.

We evaluate whether we control the use of the asset, which is determined by assessing whether we obtain substantially all economic benefits from the use of the asset, and whether we have the right to direct the use of the asset.

If these criteria are met and we have identified a lease, we account for the contract under the requirements of ASC 842.

Upon the possession of a leased asset, we determine its classification as an operating or finance lease.

As of December 25, 2022, all of our leases are classified as operating leases.

Operating lease assets and liabilities are recognized at the lease commencement date.

We make judgments regarding the probable term for each lease, which can impact the classification and accounting for a lease as operating or financing, as well as the amount of straight-lined rent expense in a particular period.

Generally, the leases for the Company's restaurant locations have an initial term of 10 years to 20 years and typically provide for renewal options in five-year increments, as well as rent escalations.

Renewal options are generally recognized as part of the right-of-use assets and lease liabilities as it is reasonably certain at commencement date that we would exercise the options to extend the lease.

Some of our real estate leases provide for base rent, plus if applicable additional rent based on gross sales, as defined in each lease agreement, which is considered to be variable rent.

When the achievement of such sales thresholds are deemed to be probable, contingent rent is accrued in proportion to the sales recognized during the period.

For operating leases that include rent holidays and rent escalation clauses, we recognize lease expense on a straight-line basis over the lease term from the date we take possession of the leased property.

Lease expense incurred before a restaurant opens is recorded in pre-opening expenses in the consolidated statements of operations.

Once a restaurant opens, we record the straight-line lease expense and any contingent rent, if applicable, in occupancy on the consolidated statements of operations.

Many of our leases also require us to pay real estate taxes, common area maintenance costs and other occupancy costs which are included in occupancy and other operating expenses on the consolidated statements of operations and is generally considered to be variable rent.

For leases with a lease term of 12 months or less ("short-term operating lease"), any fixed lease payments are recognized on a straight-line basis over such term, and are not recognized on the consolidated balance sheets.

Portillo's Inc.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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 fiscal year ended December 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 consolidated financial statements as of December 27, 2020.

The Company did not receive any concessions from landlords during the fiscal year ended December 26, 2021 or December 29, 2019.

Per the ASC 842 requirements, a lessee is required to use the rate implicit in the lease when readily determinable;

alternatively, it would use the incremental borrowing rate in determining the present value of future lease payments.

We estimate our incremental borrowing rates corresponding to the maturities of our leases.

We estimate this rate based on prevailing financial market conditions, indications for the Company's credit rating, and other benchmarks related to the Company's outstanding secured borrowings.

We expend cash for leasehold improvements to build out our leased premises.

Generally, a portion of the leasehold improvements and building costs are reimbursed by our landlords as landlord incentives pursuant to agreed-upon terms in our lease agreements.

If obtained, landlord incentives usually take the form of cash, full or partial credits against our future minimum or contingent rents otherwise payable by us, or a combination thereof.

In most cases, the tenant improvement allowances are received after we take possession of the property, as we meet required milestones during the construction of the property.

We include these amounts in the measurement of the initial operating lease liability, which are also reflected as a reduction to the initial measurement of the right-of-use asset.

Pre-Opening Expenses

Pre-opening expenses consist primarily of occupancy expenses, which represent rent expense recognized during the period between the date of possession of the restaurant facility and the restaurant opening date, wages, travel for the opening team, food, beverage and the initial stocking of operating supplies.

Pre-opening expenses consist primarily of wages, occupancy expenses, which represent rent expense recognized during the period between the date of possession of the restaurant facility and the restaurant opening date, travel for the opening team, food, beverage, and the initial stocking of operating supplies.

These are expensed as incurred prior to the restaurant opening for business.

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A valuation allowance is recognized if we determine it is more likely than not that all or a portion of a deferred tax asset will not be recognized.

In making such determination, the Company considers all available evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent and expected future results of operations.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was signed into law.

It intended to provide economic relief to those impacted by the COVID-19 pandemic.

The CARES Act also allowed eligible employers to defer the remittance of employer social security taxes otherwise payable during calendar year 2020 and remit half of such deferred amounts on or before December 31, 2021 and half on or before December 31, 2022.

The Company deferred approximately $ 5.4 million of social security tax remittances under this provision as of December 27, 2020, of which $ 2.7 million was paid during the year ended December 31, 2021.

The remaining deferred balance of $ 2.7 million as of December 26, 2021 was included in accounts payable in the consolidated balance sheet.

The CARES Act provides refundable employee retention credits, which can be used to offset payroll tax liabilities.

In making such determination, the Company considers all available evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, prudent and feasible tax planning strategies and recent and expected future results of operations.

The assumptions utilized in determining future taxable income require significant judgment and are consistent with the plans and estimates we use to manage our business.

Actual operating results in future years could differ from our current assumptions, judgments and estimates, which could have a material impact on the amount of deferred tax assets we ultimately realize.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act') was signed into law.

The CARES Act intended to provide economic relief to those impacted by the COVID-19 pandemic.

The CARES Act also allowed eligible employers to defer the remittance of employer federal payroll taxes otherwise payable during calendar year 2020 and remit half of such deferred amounts on or before December 31, 2021 and half on or before December 31, 2022.

The Company deferred approximately $ 5.4 million of federal payroll tax remittances under this provision as of December 27, 2020, of which $ 2.7 million was paid during the year ended December 26, 2021 and the remaining deferred balance of $ 2.7 million was paid during the year ended December 25, 2022.

The CARES Act provides refundable employee retention credits, which can be used to offset federal payroll tax liabilities.

For the year ended December 27, 2020, the Company recorded a benefit of $ 0.3 million, which is included in other income in the consolidated statement of operations.

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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 will adopt this standard on December 27, 2021, electing the optional transition method to apply the standard as of the transition date.

As a result, we will not apply the standard to the comparative periods presented.

We have elected the transition package of three practical expedients permitted under the new standard, which among other things, allows us to carryforward our historical lease classifications.

We also made certain accounting policy elections for new leases post-transition, including the election to combine components.

The adoption will have a significant impact to our consolidated balance sheet given the extent of our real estate lease portfolio.

We will record a right-of-use asset and lease liability for those leases as well as all other existing leases, the majority of which are real estate operating leases.

We expect the adoption to result in a net increase of betwee n $ 230 million to $ 270 million in right-of-use assets and $ 260 million to $ 300 million in lease liabilities.

The difference between the right-of-use assets and lease liabilities, will be recorded as an adjustment through equity.

Our existing operating leases will not have a material impact on our statement of operations post-transition.

We are substantially complete with our implementation efforts.

In March 2020, the FASB issued ASU No.

In March 2020, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No.

2020-04, Reference Rate Reform (Topic 848):

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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 does not expect a significant impact on its consolidated financial statements.

FASB has extended the sunset date to December 31, 2024.

The Company does not believe the impact of the transition from LIBOR to alternative reference rates is material to its consolidated financial statements.

Subsequent Events for discussion of the New Credit Agreement, effective February 2, 2023.

Recently Adopted Accounting Standards

In May 2014, the FASB issued ASU No.

2014-09, Revenue from Contracts with Customers (Topic 606), as amended by multiple standards updates.

The update was issued to clarify the principles for recognizing revenue and to develop a common revenue standard and disclosure requirements for GAAP and International Financial Reporting Standards (“IFRS”).

The FASB approved a one-year deferral of the effective date of ASU 2014-09, such that it became effective for the annual period beginning after December 15, 2018.

The Company adopted the standard effective January 1, 2019 and applied the amendments using the modified retrospective method applied to contracts that were not completed as of the date of adoption.

The adoption did not have a material impact on restaurant sales but did impact gift card breakage.

The Company sells gift cards to customers, records the sale as a contract liability and recognizes the associated revenue as the gift card is redeemed.

A portion of these gift cards are not redeemed by the customer, which is recognized by the Company as revenue in proportion to the pattern of rights exercised by the customer.

The expected breakage amount recognized was determined based on a portfolio assessment of historical data on gift card redemption patterns.

Upon adoption of this standard, the Company’s retained earnings increased by approximately $ 0.2 million.

Refer to Note 3.

"Revenue Recognition" for additional information.

In February 2016, the FASB issued ASU No.

2016-02, Leases (Topic 842) ("ASC 842"), along with related clarifications and improvements.

The pronouncement requires lessees to recognize a liability, which represents the discounted obligation to make future minimum lease payments, and a corresponding right-of-use asset on the balance sheet.

The update is effective for fiscal years beginning after December 15, 2021, with early adoption permitted.

The Company adopted this standard effective December 27, 2021, electing the modified retrospective approach to apply the standard as of the transition date.

As a result, we did not apply the standard to the comparative periods presented.

We have elected the transition package of three practical expedients permitted under the new standard, which eliminates the requirement to reassess the conclusions about historical lease identifications, lease classifications, and initial direct costs.

We did not elect the hindsight practical expedient, which permits the use of hindsight when determining lease terms and impairments of right-of-use assets.

We elected to apply the practical expedient of combining lease and non-lease components.

Additionally, we elected to utilize the short-term lease exception policy, which allows us to not apply the recognition requirements of this standard to leases with a term of 12 months or less.

The adoption of this standard had a significant impact on the Company’s consolidated balance sheet as we recognized the right-of-use asset and lease liabilities for our operating leases.

The adoption had an immaterial impact on the consolidated statement of income, cash flows and overall liquidity.

Leases for additional information.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820):

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The adoption of this new standard did not have a material effect on our consolidated financial statements.

Portillo's Inc.

Form 10-K | 63

PORTILLO'S INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

In December 2019, the FASB issued ASU No.

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The adoption of this new standard did not have a material effect on our consolidated financial statements.

Portillo's Inc.

Form 10-K | 65

PORTILLO'S INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

In August 2020, the FASB issued ASU 2020-06, Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40), an amendment that simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity.

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For these sales, the Company receives payment directly from the customer at the time of sale.

With respect to Marketplace Sales, the Company 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.

With respect to Marketplace Sales, the Company recognizes revenue, including third-party menu price premiums, excluding delivery or service 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 the food.

The payment terms with respect to Marketplace Sales are short-term in nature and are generally paid one week in arrears.

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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 consolidated statements of operations.

The Company recognized gift card breakage of $ 0.7 million in each of the years ended December 26, 2021 and December 27, 2020 and $ 0.8 million for the year ended December 29, 2019, respectively.

Gift card breakage is recorded within revenues, net in the consolidated statements of operations.

The Company recognized gift card breakage of $ 0.8 million in the year ended December 25, 2022 and $ 0.7 million in each of the years ended December 26, 2021 and December 27, 2020, respectively.

The Company’s revenue related to performance obligations not yet satisfied is revenue from gift cards sold but not yet redeemed.

2 unchanged sentences

Gift card liability $ 6,988 $ 6,606

Portillo's Inc.

Form 10-K | 64

PORTILLO'S INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Revenue recognized in the consolidated statements 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):

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Revenue recognized from gift card liability balance at the beginning of the year $ 3,598 $ 3,279 $ 3,197

Portillo's Inc.

Form 10-K | 66

PORTILLO'S INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Inventories consisted of the following (in thousands):

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333,507 280,064

Less accumulated depreciation ( 89,230 ) ( 74,020 )

accumulated depreciation ( 106,471 ) ( 89,230 )

$ 227,036 $ 190,834

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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.

Further given the timing of the Transactions, an IPO approach was also applied in 2021, which is a form of the market approach using the transactional method.

Under the income approach, fair value is based on the present value of estimated future cash flows.

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.

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 were 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 IPO approach utilized a range of contemplated share offering prices as well as shares outstanding.

The Company used the market approach to test goodwill.

The market approach utilized publicly available market data, including publicly traded stock prices and total shares outstanding to determine the fair value of the reporting unit.

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 years ended December 25, 2022, December 26, 2021 and December 27, 2020 .

Portillo's Inc.

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NOTES TO THE 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 years ended December 26, 2021, December 27, 2020 and December 29, 2019 .

Intangibles, net consisted of the following (in thousands):

As of December 25, 2022

Gross Carrying Amount Accumulated Amortization Net Carrying Amount

Gross Carrying Amount Accumulated Amortization ASC 842 Adjustment Net Carrying Amount

Indefinite-lived intangible assets:

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$ 323,832 $ ( 64,075 ) $ 259,757

Approximately $ 1.1 million of net favorable rental contract intangible assets were reclassified to operating lease assets in the consolidated balance sheet in accordance with ASC 842 upon transition at December 27, 2021.

Amortization expense was $ 2.9 million, $ 6.4 million, and $ 8.8 million for the years ended December 25, 2022, December 26, 2021 and December 27, 2020 respectively, and was included in depreciation and amortization in the consolidated statements of operations.

The estimated aggregate amortization expense for the intangibles for the next five years and thereafter are $ 3.1 million, $ 3.1 million, $ 3.1 million, $ 3.0 million, $ 2.9 million and $ 20.6 million, respectively.

Portillo's Inc.

Form 10-K | 66

PORTILLO'S INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

EQUITY METHOD INVESTMENT

The Company has a 50 % interest in a single restaurant owned by C&O.

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):

December 26, 2021 December 27, 2020

Current assets $ 1,957 $ 1,349

Property, plant, and equipment, net of accumulated depreciation $ 5,951 and $ 5,838 in 2021 and 2020, respectively

Total assets 2,774 2,186

Current liabilities 757 681

Non-current liabilities

Deferred rent 1,211 1,193

Total liabilities 1,968 1,874

Members’ equity 806 312

Total liabilities and members' equity $ 2,774 $ 2,186

Fiscal Years Ended

December 26, 2021 December 27, 2020 December 29, 2019

Results from operations:

Revenues, net $ 12,268 $ 10,885 $ 16,143

Net income 1,595 918 1,533

The estimated aggregate amortization expense related to intangible assets held at December 25, 2022 for the next five years and thereafter is as follows (in thousands):

Estimated Amortization

2028 and thereafter 17,977

Portillo's Inc.

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As of December 25, 2022 and December 26, 2021 we had no Level 2 or Level 3 assets.

The mutual fund investments and deferred compensation obligations are included in other assets, accrued expenses and other long-term liabilities in the consolidated balance sheets.

The deferred compensation investments and obligations are included in other assets, accrued expenses and other long-term liabilities in the 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 consolidated statements of operations and offsetting increases or decreases in the deferred compensation obligation are recorded in other long-term liabilities in the consolidated balance sheets.

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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.

Assets and liabilities that are measured at fair value on a non-recurring basis include property and equipment, net, operating lease assets, 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 years ended December 25, 2022, December 26, 2021 and December 27, 2020.

Portillo's Inc.

Form 10-K | 69

PORTILLO'S INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

SUPPLEMENTAL BALANCE SHEET INFORMATION

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$ 4,922 $ 5,836

Prepaid insurance increased related to an increase in director's and officer liability insurance coverage in connection with our IPO as described in Note 1.

"Description Of Business."

Portillo's Inc.

Form 10-K | 68

PORTILLO'S INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Accrued expenses consisted of the following (in thousands):

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Salaries, wages, and other compensation $ 16,699 $ 18,065

Interest 1,597 9,377

Rent and real estate taxes 5,738 5,111

Insurance 2,866 2,572

Interest 2,262 1,597

Sales tax 1,956 1,970

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Revolving Loans — —

Second Lien Term B-3 Loans — 155,000

Unamortized discount and debt issuance costs ( 3,848 ) ( 6,599 )

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Long-term debt, net $ 314,425 $ 315,829

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 Company, through its wholly-owned subsidiaries, PHD Intermediate LLC (“Holdings”), Portillo’s Holdings LLC (the “Borrower”) and certain other 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”).

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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 December 26, 2021, the interest rate on the Term Loans was 6.50 %.

As of December 26, 2021, December 27, 2020 and December 29, 2019, the effective interest rate on the Term Loans was 7.63 %, 7.38 % and 7.90 %, 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 December 26, 2021 and December 27, 2020, the Company had zero borrowings under the Revolver outstanding.

As of December 26, 2021, December 27, 2020 and December 29, 2019, the interest rate on the Revolver was 3.25 %, 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 December 26, 2021, December 27, 2020 and December 29, 2019, the commitment fees, pursuant to the First Lien, to maintain the Revolver were 0.250 %, 0.250 % and 0.375 % respectively.

Also pursuant to the First Lien Credit Agreement, as of December 26, 2021, December 27, 2020 and December 29, 2019, letter of credit fronting fees were 0.125 %, respectively.

Commitment fees and letter of credit fronting fees were recorded as interest expense in the consolidated statements of operations.

Portillo's Inc.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

The Company had $ 5.0 million and $ 5.8 million of letters of credit issued against the Revolving Facility as of December 26, 2021 and December 27, 2020, respectively.

As of December 25, 2022, December 26, 2021, and December 27, 2020 the interest rate on the First Lien Term B-3 Loans was 9.57 %, 6.50 %, and 6.50 %, respectively .

As of December 25, 2022 and December 26, 2021, the Company had no borrowings under the Revolving Facility.

As of December 25, 2022, December 26, 2021 and December 27, 2020, the interest rate on the Revolving Facility was 3.25 %, subject to change based on a consolidated first lien net leverage ratio as defined in the First Lien Credit Agreement.

As of December 25, 2022, December 26, 2021 and December 27, 2020, the commitment fees, pursuant to the First Lien, to maintain the Revolving Facility were 0.250 %.

Also pursuant to the First Lien Credit Agreement, as of December 25, 2022, December 26, 2021 and December 27, 2020, letter of credit fronting fees were 0.125 %, respectively.

Commitment fees and letter of credit fronting fees were recorded as interest expense in the consolidated statements of operations.

As of December 25, 2022, December 26, 2021, and December 27, 2020, the effective interest rate was 10.39 %, 7.63 %, and 7.38 %, r espectively.

The Company had $ 4.2 million of letters of credit issued against the Revolving Facility as of December 25, 2022 and December 26, 2021.

As of December 25, 2022, the Company had $ 45.8 million of availability under the Revolving Facility.

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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.

Portillo's Inc.

Form 10-K | 71

PORTILLO'S INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

In connection with the repayment of the Second Lien Term B-3 Loans as described above, deferred financing costs and original issuance discount of $ 4.2 million were recorded as a loss on debt extinguishment during the year ended December 26, 2021 in the consolidated statement of operations.

1 unchanged sentence

In addition, the Company also amortized $ 0.8 million, $ 1.5 million and $ 1.6 million in original issue discount related to the long-term debt, respectively, during each of the years ended December 25, 2022, December 26, 2021 and December 27, 2020 which was included in interest expense in the consolidated statements of operations.

Total interest costs incurred were $ 39.7 million, $ 45.0 million and $ 43.4 million for the years ended December 26, 2021, December 27, 2020 and December 29, 2019.

Total interest costs incurred were $ 27.6 million, $ 39.7 million and $ 45.0 million for the years ended December 25, 2022, December 26, 2021 and December 27, 2020, respectively.

Total loss on debt extinguishment was $ 7.3 million for the year ended December 26, 2021.

There was no such loss for the years ended December 25, 2022 and December 27, 2020.

Portillo's Inc.

Form 10-K | 70

PORTILLO'S INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

As of December 25, 2022 and December 26, 2021, 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.

Borrowings under the First 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.

1 unchanged sentence

As of December 25, 2022, the Company was in compliance with all covenants.

Subsequent Events for a description of a new credit agreement and the repayment of borrowings under the First Lien Credit Agreement.

On December 27, 2021, the Company adopted ASU 2016-02, Leases (Topic 842) , along with related clarifications and improvements, using a modified retrospective approach.

Results for reporting periods beginning on or after December 27, 2021 are presented under ASC 842.

Prior period amounts were not revised and continue to be reported in accordance with ASC 840, the accounting standard then in effect.

Upon transition, on December 27, 2021, we recorded the following increases (decreases) to the respective line items on the consolidated balance sheet, including a net increase to opening stockholders' equity, due to the cumulative impact of adopting ASC 842 (in thousands):

Adjustment as of December 27, 2021

Operating lease assets $ 162,810

Intangible assets, net ( 1,142 )

Short-term operating lease liability 4,405

Deferred rent ( 32,174 )

Long-term operating lease liability 189,682

Other long-term liabilities ( 461 )

Stockholders' equity 1

1 The unamortized balance of a deferred gain associated with sale leaseback transactions totaling approximately $ 0.5 million was written-off to stockholders' equity on the date of transition.

Portillo's Inc.

Form 10-K | 72

PORTILLO'S INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

A summary of operating lease right-of-use assets and liabilities is as follows (in thousands):

Operating leases Classification December 25, 2022

Right-of-use assets Operating lease assets $ 166,808

Current lease liabilities Short-term operating lease liability 4,849

Non-current lease liabilities Long-term operating lease liability 200,166

The components of lease expense were as follows (in thousands):

Fiscal Year Ended

Operating leases Classification December 25, 2022

Operating lease cost Occupancy

Other operating expenses

General and administrative expenses

Pre-opening expenses $ 25,735

Short-term operating lease cost Occupancy

Other operating expenses 698

Variable lease cost Occupancy

Other operating expenses

General and administrative expenses 3,604

A summary of lease terms and discount rates for operating leases is as follows:

Operating leases December 25, 2022

Weighted-average remaining lease term (years):

Weighted-average discount rate:

Portillo's Inc.

Form 10-K | 73

PORTILLO'S INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Supplemental cash flow information related to leases is as follows (in thousands):

Fiscal Year Ended

December 25, 2022

Cash paid for amounts included in the measurement of lease liabilities:

Operating cash flows for operating leases $ 21,476

Operating lease assets obtained in exchange for lease liabilities:

Operating leases 10,682

The Company leases retail restaurants, commissaries, and office space under various long-term operating lease agreements.

The leases for the Company’s restaurant locations generally have an initial term of 10 years to 20 years and typically provide for renewal options in five-year increments, as well as rent escalations.

These leases expire or become subject to renewal clauses at various dates from 2024 to 2068.

Some of the leases provide for base rent, plus additional rent based on gross sales, as defined in each lease agreement.

The Company is also generally obligated to pay certain real estate taxes, utilities, building operating expenses, insurance and various other expenses associated with the properties.

The Company does not own the real properties of any of its restaurant or commissary locations.

A summary of rent expense under operating lease agreements is as follows (in thousands):

As of December 25, 2022, the maturity analysis of the lease liabilities consisted of the following (in thousands):

Year Ending Operating Leases

2023 $ 22,914

Thereafter 516,959

Total lease payments 630,796

imputed interest ( 425,781 )

Total operating lease liabilities $ 205,015

As of December 25, 2022, operating lease payments include $ 347.9 million related to options to extend lease terms that are reasonably certain of being exercised and exclude $ 11.8 million of legally binding minimum payments for leases signed but not yet commenced.

Below are disclosures in accordance with the prior guidance, ASC 840, disclosed previously in our Annual Report on Form 10-K for the fiscal years ended December 26, 2021 and December 27, 2020.

A summary of rent expense under ASC 840 for operating lease agreements were as follows (in thousands):

Fiscal Years Ended

December 26, 2021 December 27, 2020 December 29, 2019

December 26, 2021 December 27, 2020

Minimum rentals $ 22,363 $ 19,787

1 unchanged sentence

Total rental expense $ 23,042 $ 20,273

A schedule by year of future minimum rental payments required under operating leases, excluding contingent rent, that have initial or remaining noncancellable lease terms in excess of one year, as of December 26, 2021, is as follows (in thousands):

Future minimum rental payments for our operating leases under ASC 840 for each of the next five years and in total were as follows as of December 26, 2021 (in thousands):

Year Ending Minimum Amount

1 unchanged sentence

Thereafter 508,217

Total minimum payments required $ 612,621

Total minimum rental payments $ 612,621

Portillo's Inc.

2 unchanged sentences

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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 had all the rights, privileges, and obligations as provided for in the previous Amended and Restated Limited Liability Company Agreement of the OpCo, which included redemption rights and the amounts payable upon liquidation, but excluded dividend and conversion rights.

In connection with the IPO, the Company received aggregate net proceeds of approximately $ 430.0 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 of $ 2.2 million.

As of December 26, 2021 and December 27, 2020, the Company had recorded $ 0.0 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 were classified outside of permanent equity within the consolidated balance sheets.

The above future minimum rental amounts exclude the amortization of deferred lease incentives, renewal options that are not reasonably assured of renewal, and contingent rent.

The Company generally has escalating rents over the term of the leases and records rent expense on a straight-line basis.

STOCKHOLDER'S EQUITY

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(iii) authorization of 10,000,000 shares of preferred stock, par value $ 0.01 per share;

and (iv) provides that our Board will be elected annually to serve until the next annual meeting of stockholders or until their successors are duly elected and qualified.

Holders of shares of our Class A common stock are entitled to one vote for each share held of record on all matters on which stockholders are entitled to vote generally, including the election or removal of directors.

and (iv) provides that our Board will be elected annually to serve until the next annual meeting of shareholders or until their successors are duly elected and qualified.

Holders of shares of our Class A common stock are entitled to one vote for each share held of record on all matters on which shareholders are entitled to vote generally, including the election or removal of directors.

Holders of shares of our Class A common stock are entitled to receive dividends when and if declared by our Board out of funds legally available therefor, subject to any statutory or contractual restrictions on the payment of dividends and to any restrictions on the payment of dividends imposed by the terms of any outstanding preferred stock.

Each share of Class B common stock will entitle its holder to one vote per share on all matters submitted to a vote of our stockholders.

Each share of Class B common stock will entitle its holder to one vote per share on all matters submitted to a vote of our shareholders.

The Class B common stock is not entitled to economic interests in Portillo’s Inc.

Holders of our Class B common stock do not have any right to receive dividends.

We must, at all times, maintain a one-to-one ratio between the number of outstanding shares of Class A common stock and the number of LLC Interests owned by us (subject to certain exceptions for treasury shares and shares underlying certain convertible or exchangeable securities).

Amended and Restated LLC Agreement

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Description Of Business, we amended and restated the LLC agreement of Portillo’s OpCo to, among other things, convert all outstanding equity interests into LLC Units.

The LLC Agreement also provides that holders of LLC Interests may, from time to time, redeem all or a portion of their LLC Interests for newly-issued shares of Class A common stock on a one-for-one basis.

Upon receipt of a redemption request, we may, instead, elect to effect a direct exchange of LLC Interests directly with the holder.

In connection with any redemption or exchange, we will receive a corresponding number of LLC Interests, increasing our total ownership interest.

The LLC Agreement also provides that holders of LLC Units may, from time to time, redeem all or a portion of their LLC Units for newly-issued shares of Class A common stock on a one -for-one basis.

Upon receipt of a redemption request, we may, instead, elect to effect a direct exchange of LLC Units directly with the holder.

In connection with any redemption or exchange, we will receive a corresponding number of LLC Units, increasing our total ownership interest.

Additionally, an equivalent number of shares of Class B common stock will be surrendered and canceled.

The amendment also requires that Portillo's OpCo, at all times, maintain (i) a one-to-one ratio between the number of outstanding shares of Class A common stock and the number of LLC Interests owned by us and (ii) a one-to-one ratio between the number of shares of Class B common stock owned by the pre-IPO LLC Members and the number of LLC Interests owned by the pre-IPO LLC Members.

Portillo's Inc.

Form 10-K | 72

PORTILLO'S INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

The LLC Agreement also requires that Portillo's OpCo, at all times, maintain (i) a one -to-one ratio between the number of outstanding shares of Class A common stock and the number of LLC Units owned by us and (ii) a one -to-one ratio between the number of shares of Class B common stock owned by the pre-IPO LLC Members and the number of LLC Units owned by the pre-IPO LLC Members.

Initial Public Offering

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In connection with our IPO, we issued 12,496,361 shares of Class A common stock to pre-IPO LLC Members and 35,673,321 shares of Class B common stock to pre-IPO LLC Members.

Following the completion of the Transactions, Portillo's Inc.

owns 50.1 % of Portillo’s OpCo.

The other pre-IPO LLC Members own the remaining 49.9 % of Portillo’s OpCo.

Portillo's Inc.

Form 10-K | 75

PORTILLO'S INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Redemption of LLC Units in connection with Secondary Offerings

As described in Note 1.

Description Of Business, in the third quarter of 2022, the Company completed the Q3 Secondary Offering of 8,066,458 shares of the Company's Class A common stock at an offering price of $ 23.75 per share.

As a result, Portillo's did not receive any proceeds from the offering, and the total number of shares of Class A common stock and Class B common stock did not change;

however, the number of outstanding shares of Class A common stock increased by the same number of the canceled shares of Class B common stock.

In the fourth quarter of 2022, the Company completed the Q4 Secondary Offering of 8,000,000 shares of the Company's Class A common stock at an offering price of $ 22.69 per share ("Q4 Secondary Offering").

As a result, Portillo's did not receive any proceeds from the offering, and the total number of shares of Class A common stock and Class B common stock did not change;

however, the number of outstanding shares of Class A common stock increased by the same number of the canceled shares of Class B common stock.

As of December 25, 2022, the Company owned 67.0 % of Portillo's OpCo and the pre-IPO LLC Members owned the remaining 33.0 % of Portillo's OpCo.

As of December 25, 2022, shareholders of the Blocker Companies and pre-IPO LLC Members owned 8,266,062 shares of Class A common stock and 23,837,162 shares of Class B common stock, respectively .

Equity-Based Compensation Plan Activity

We received an aggregate of 777,393 LLC Units in connection with the activity under our equity-based compensation plans during December 25, 2022, related to the exercise of stock options, vested restricted stock awards and restricted stock units, and employee stock purchase plan purchases.

Equity-Based Compensation.

Portillo's Inc.

Form 10-K | 76

PORTILLO'S INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NON-CONTROLLING INTERESTS

1 unchanged sentence

Description Of Business we are the sole managing member of Portillo's OpCo, and as a result, consolidated the financial results of Portillo's OpCo.

We report a non-controlling interest representing the LLC interests in Portillo's OpCo held by pre-IPO LLC Members.

We report a non-controlling interest representing the LLC Units in Portillo's OpCo held by pre-IPO LLC Members.

Changes in our ownership interest in Portillo's OpCo while we retain our controlling interest in Portillo's OpCo will be accounted for as equity transactions.

As such, future redemptions or direct exchanges of LLC interests in Portillo's OpCo by the pre-IPO LLC members will result in a change in ownership and reduce the amount recorded as non-controlling interest and increase additional paid-in capital.

As of December 26, 2021, there were 71,480,492 LLC interests outstanding, of which we owned 35,807,171 LLC Interests, representing a 50.1 % ownership interest in Portillo's OpCo.

As such, future redemptions or direct exchanges of LLC Units in Portillo's OpCo by the pre-IPO LLC members will result in a change in ownership and reduce the amount recorded as non-controlling interest and increase additional paid-in capital.

In the third and fourth quarters of 2022, in connection with the secondary offerings described in Note 1.

Description Of Business, 5,942,559 and 5,893,000 LLC Units, respectively, were redeemed by the pre-IPO LLC Members for newly-issued shares of Class A common stock and we received 5,942,559 and 5,893,000 , respectively, newly-issued LLC Units, increasing our total ownership interest in Portillo's OpCo.

The following table summarizes the LLC interest ownership by Portillo's Inc.

and pre-IPO LLC members:

December 25, 2022 December 26, 2021

LLC Units Ownership % LLC Units Ownership %

Portillo's Inc.

48,420,723 67.0 % 35,807,171 50.1 %

pre-IPO LLC Members 23,837,162 33.0 % 35,673,321 49.9 %

Total 72,257,885 100.0 % 71,480,492 100.0 %

The weighted average ownership percentages for the applicable reporting periods are used to attribute net income to Portillo's Inc.

and the pre-IPO LLC Members.

The pre-IPO LLC Members' weighted average ownership percentage for the fiscal year ended December 25, 2022 was 45.8 %.

The following table summarizes the effects of changes in ownership in Portillo's OpCo on the Company’s equity (in thousands):

Fiscal Year Ended

December 25, 2022

Net income attributable to Portillo's Inc.

Activity under equity-based compensation plans ( 606 )

Non-controlling interest adjustments, including the secondary offerings 89,374

Redemption of LLC Units in connection with the secondary offerings ( 118 )

Establishment of liabilities under tax receivable agreement and related changes to deferred tax assets associated with increases in tax basis ( 23,662 )

Total effect of changes in ownership interest on equity attributable to Portillo's Inc.

EQUITY-BASED COMPENSATION

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The 2021 Plan is administered and interpreted by the Company's Board, including the authority to select persons to participate in the 2021 Plan, determine the form and substance of awards under the 2021 Plan, determine the conditions and restrictions, if any, subject to which such awards will be made, modify the terms of awards, accelerate the vesting of awards, and make determinations regarding a participant’s termination of employment or service for purposes of an award.

The types of awards available under the 2021 Plan include stock options (both incentive and non-qualified), stock appreciation rights ("SARs"), restricted stock awards, restricted stock units ("RSUs"), and stock-based awards.

The types of awards available under the 2021 Plan include stock options (both incentive and non-qualified), stock appreciation rights ("SARs"), restricted stock awards ("RSAs"), restricted stock units ("RSUs"), and stock-based awards.

Employees, officers, non-employee directors or any natural person who is a consultant or other personal service provider to the Company or any of its subsidiaries or affiliates are eligible to participate in the 2021 Plan.

All awards granted to participants under the 2021 Plan will be represented by an award agreement.

Approximately 7.1 million shares of Class A common stock are available for awards.

In connection with the IPO, we granted approximately 882,875 RSUs under the 2021 Plan to certain employees and directors, including our named executive officers.

The outstanding RSUs have time-based vesting criteria.

Outstanding time-based RSUs will vest one-third (1/3rd) on each of the first three (3) anniversaries of the date of grant subject to continued service on such date.

In addition, in connection with the IPO, we granted 1,794,195 performance based stock options on our Class A common stock (“PSOs”) under the 2021 Plan to certain executives.

These PSOs will be eligible to vest in three (3) tranches based on stock performance conditions.

Portillo's Inc.

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Restricted Stock Units

An RSU granted under the 2021 Plan will give the participant a right to receive, upon vesting and settlement of the RSUs, one share per vested unit or an amount per vested unit equal to the fair market value of one share as of the date of determination.

Outstanding time-based RSUs generally vest equally over periods ranging from one to three years on each of the anniversaries of the date of grant subject to continued service on such date.

Activity for the Company's RSUs was as follows:

3 unchanged sentences

Granted 75 24.08

Vested ( 277 ) 20.04

Forfeited ( 71 ) 20.01

1 unchanged sentence

As of December 25, 2022, there was $ 10.3 million of total unrecognized compensation cost related to unvested restricted stock units, which is expected to vest over a weighted-average period of 1.9 years.

Restricted Stock Awards

On December 23, 2022, the Company granted 57,870 restricted stock awards (“RSAs”) to certain of its executive officers in recognition of their work and accomplishments in 2022.

The RSAs vested immediately upon grant with certain transfer restrictions.

RSAs surrendered to fulfill withholding tax obligations were not subject to any transfer restrictions, and 50 % of the balance of the underlying shares were subject to a one-year holding requirement, and the other 50 % of the balance of underlying shares was subject to a two-year holding requirement.

The fair value of the RSAs surrendered was determined using Portillo's closing stock price on the date of grant, which was $ 17.19 .

The fair value of the awards with post-vesting restrictions was determined using the Black-Scholes option pricing model and the weighted average assumptions were as follows:

Fair value $ 14.98

Stock price $ 17.19

Risk-free interest rate 4.45 %

Expected life (years) 1.5

Annualized equity volatility 34.4 %

Performance Stock Options

In connection with the IPO, the Company granted PSOs to certain executives that will be eligible to vest in three (3) tranches based on stock performance conditions (i) one-third (1/3rd) of the PSOs will vest on the third anniversary of the date of grant if the 20 -day volume-weighted average price ("VWAP") for a share of common stock is $ 30.00 per share ( 1.5 times the IPO price) measured over any twenty ( 20 ) consecutive trading day period commencing on the second anniversary of the date of grant and ending on the last trading day immediately preceding the third anniversary of the date of grant;

The Company has granted PSOs to certain executive officers that will be eligible to vest in three (3) tranches based on stock performance conditions (i) one-third (1/3rd) of the PSOs will vest on the third anniversary of the date of grant if the 20 -day volume-weighted average price ("VWAP") for a share of common stock is $ 30.00 per share ( 1.5 times the IPO price) measured over any twenty ( 20 ) consecutive trading day period commencing on the second anniversary of the date of grant and ending on the last trading day immediately preceding the third anniversary of the date of grant;

(ii) one-third (1/3rd) of the PSOs will vest on the fourth anniversary of the date of grant if the 20 -day VWAP for a share of common stock is $ 40.00 per share ( 2 times the IPO price) measured over any twenty ( 20 ) consecutive trading day period commencing on the third anniversary of the date of grant and ending on the last trading day immediately preceding the fourth anniversary of the date of grant;

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The awards granted are exercisable within a 10-year period from the date of grant.

Portillo's Inc.

Form 10-K | 78

PORTILLO'S INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

The grant date fair value of these awards was determined using a Monte-Carlo simulation model.

5 unchanged sentences

Annualized equity volatility 51.9 % 54.4 %

Portillo's Inc.

Form 10-K | 74

PORTILLO'S INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Activity for the Company's PSOs was as follows:

1 unchanged sentence

Outstanding-December 26, 2021

1,794 $ 20.00

Granted 68 22.19

1 unchanged sentence

Forfeited ( 55 ) 20.00

Expired — — — —

Outstanding-December 25, 2022

1,807 20.08 8.9 —

Exercisable-December 25, 2022

Vested and expected to vest-December 25, 2022

1,565 $ 20.08 8.9 $ —

As of December 25, 2022, there was $ 8.7 million of total unrecognized compensation cost related to unvested PSOs, which is expected to be recognized over a weighted average period of 2.9 years.

10 unchanged sentences

As a result of the waiver and resultant modification in the terms of the performance-vesting awards, we recognized a cash compensation expense of approximately $ 1.3 million and a non-cash compensation expense of approximately $ 26.2 million , each at the modification date in the fourth quarter of fiscal 2021 .

In connection with the IPO, each option outstanding, whether vested or unvested, was substituted for an option to purchase a number of shares of Class A common stock.

In connection with the IPO, each option outstanding under the 2014 Plan, 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 $ 6.6 million, which was recorded in the fourth quarter of 2021.

Following the IPO, no further options will be granted under the 2014 Plan.

6 unchanged sentences

Outstanding-December 26, 2021

Granted 433 5.68 9.3 —

Exercised ( 582 ) 3.78

Forfeited ( 14 ) 5.63

Expired — — — —

Outstanding-December 25, 2022

5,830 $ 4.60 4.6 $ 73,416

Vested-December 25, 2022

4,823 $ 4.50 4.1 $ 61,187

Vested and expected to vest-December 25, 2022

Stock Options Valuation - The Company estimates the fair value of stock options on the date of grant using the Black-Scholes option-pricing model.

5,770 $ 4.59 4.6 $ 72,681

The Company estimates the fair value of stock options on the date of grant using the Black-Scholes option-pricing model.

The Black-Scholes option-pricing model requires estimates of highly subjective assumptions, which greatly affect the fair value of each stock option.

3 unchanged sentences

Expected life (years) 6.5 6.5

Expected dividend yield — —

Volatility 54.7 % 43.8 %

1 unchanged sentence

Equity-Based Compensation Expense

Equity-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 equity-based compensation expense will be recognized at that time.

Equity-based compensation expense included in the Company’s consolidated statements of operations was as follows:

4 unchanged sentences

Total equity-based compensation expense $ 16,137 $ 30,708 $ 960

Total equity-based compensation expense increased from prior year primarily because the Company recognized a cash compensation expense of approximately $ 1.3 million and a non-cash compensation expense of approximately $ 26.2 million, due to the aforementioned modification of performance-vesting awards.

Total equity-based compensation expense decreased from prior year primarily because the Company recognized a cash compensation expense of approximately $ 1.3 million and a non-cash compensation expense of approximately $ 26.2 million in fiscal year 2021, due to the aforementioned modification of performance-vesting awards.

Employee Stock Purchase Plan

During the year ended December 25, 2022, the Company issued 6,831 shares under the ESPP.

At December 25, 2022, 242,882 shares remained available for issuance under the ESPP.

Portillo's Inc.

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federal and certain state and local income taxes.

Any taxable income or loss generated by Portillo's OpCo is passed through to and included in the taxable income or loss of its members, including us, on a pro rata basis.

Any taxable income or loss generated by Portillo's OpCo is passed through to and included in the taxable income or loss of its members, including us, based upon the respective member's ownership percentage in Portillo's OpCo.

Beginning in Fiscal 2021, we are subject to U.S.

federal income taxes, in addition to state and local income taxes with respect to our allocable share of any taxable income or loss of Portillo's OpCo subsequent to the IPO and Transactions, as well as any stand-alone income or loss generated by Portillo's Inc.

Income Tax (Benefit) Expense

The components of income tax (benefit) expense are as follows (in thousands):

December 26, 2021

Income Tax Expense (Benefit)

The components of income tax expense (benefit) are as follows (in thousands):

Fiscal Years Ended

December 25, 2022 December 26, 2021

Current income taxes:

Federal $ — $ —

State and local 3 1

4 unchanged sentences

Total deferred income taxes 1,820 ( 3,532 )

Income tax (benefit) expense $ ( 3,531 )

Reconciliations of income tax (benefit) expense computed at the U.S.

federal statutory income tax rate to the recognized income tax (benefit) expense and the U.S.

Income tax expense (benefit) $ 1,823 $ ( 3,531 )

Reconciliations of income tax expense (benefit) computed at the U.S.

federal statutory income tax rate to the recognized income tax expense (benefit) and the U.S.

statutory income tax rate to our effective tax rates are as follows (in thousands):

December 26, 2021

Fiscal Years Ended

December 25, 2022 December 26, 2021

Expected U.S.

1 unchanged sentence

State and local income taxes, net of federal benefit 3,217 16.9 % ( 878 ) 5.2 %

Non-deductible expenses ( 369 ) ( 1.9 ) % — — %

Non-controlling interest ( 1,312 ) ( 6.9 ) % 4,076 ( 24.0 ) %

LLC flow-through structure ( 2,849 ) ( 15.0 ) % ( 4,608 ) 27.2 %

Change in valuation allowance ( 1,923 ) ( 10.1 ) % — — %

Other 1,073 5.6 % 1,438 ( 8.5 ) %

Income tax expense (benefit) $ 1,823 9.6 % $ ( 3,531 ) 20.9 %

Our effective income tax rate for the year ended December 26, 2021 was 20.9 %.

The Company’s annual effective tax rate was less than the statutory rate of 21 % primarily because the Company is not liable for income taxes on the portion of OpCo’s earnings that are attributable to non-controlling interests.

Our effective income tax rates for the year ended December 25, 2022 and December 26, 2021 were 9.6 % and 20.9 %, respectively.

The change in our effective income tax rate from the year ended December 25, 2022 to the year ended December 26, 2021 was primarily driven by the change in the valuation allowance and the tax benefit from the exercise and vesting of equity-based awards.

The Company’s annual effective tax rate for the year ended December 25, 2022 and December 26, 2021 was less than the statutory rate of 21 % primarily because the Company is not liable for income taxes on the portion of OpCo’s earnings that are attributable to non-controlling interests and the change in valuation allowance.

Portillo's Inc.

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The components of deferred tax assets and liabilities are as follows (in thousands):

December 26, 2021

December 25, 2022 December 26, 2021

Deferred tax assets:

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Description Of Business and Note 11.

"Stockholder's Equity", we acquired 35,807,171 LLC interests in connection with the IPO and Transactions.

During the year ended December 26, 2021, we recognized a deferred tax asset in the amount of $ 67.9 million associated with the basis difference in our investment in Portillo's OpCo from acquiring these LLC Interests.

During the year ended December 26, 2021, we also recognized $ 30.9 million of deferred tax assets related to additional tax basis increases generated from expected future payments under the TRA and related deductions for imputed interest on such payments.

Stockholder's Equity, we acquired LLC Units in connection with the IPO and Transactions and Secondary Offerings.

During the years ended December 25, 2022 and December 26, 2021, we recognized a deferred tax asset in the amount of $ 79.2 million and $ 67.9 million, respectively, associated with the basis difference in our investment in Portillo's OpCo from acquiring these LLC Units.

During the years ended December 25, 2022 and December 26, 2021, we also recognized deferred tax assets in the amount of $ 58.3 million and $ 30.9 million, respectively, related to additional tax basis increases generated from expected future payments under the TRA and related deductions for imputed interest on such payments.

We evaluate the realizability of our deferred tax assets on a quarterly basis and establish valuation allowances when it is more likely than not that all or a portion of a deferred tax asset may not be realized.

During the year ended December 26, 2021, the Company recognized a deferred tax asset of $ 67.9 million associated with the basis difference in its investment in Portillo's OpCo from acquiring these LLC interests.

However, a portion of the total basis difference will only reverse upon the eventual sale of its interest in Portillo's OpCo, which we expect would result in a capital loss.

As of December 26, 2021, the Company established a valuation allowance in the amount of $ 38.4 million against the deferred tax asset.

Uncertain Tax Positions

No uncertain tax positions existed as of December 26, 2021 and December 27, 2020.

During the years ended December 25, 2022 and December 26, 2021, the Company recognized deferred tax assets of $ 79.2 million and $ 67.9 million, respectively, associated with the basis difference in its investment in Portillo's OpCo from acquiring these LLC Units.

However, a portion of the total basis difference will only reverse upon the eventual sale of its interest in Portillo's OpCo, which we expect would result in a capital loss which we do not expect to be able to utilize.

As of December 25, 2022 and December 26, 2021, the Company recorded a valuation allowance in the amount of $ 11.3 million and $ 38.4 million, respectively, against the deferred tax asset.

As of December 25, 2022 and December 26, 2021, the Company had federal and state net operating loss carry forwards of $ 19.8 million and $ 12.8 million, respectively, available to reduce future taxable income, if any.

Federal losses that arose prior to 2018 will begin to expire in 2034.

Federal losses generated after 2017 will be carried forward indefinitely.

The majority of state losses will begin to expire in 2034 and future periods.

Unrecognized Tax Benefits

The Company recorded no unrecognized tax benefits as of December 25, 2022 and December 26, 2021.

Portillo's Inc.

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Portillo's Inc.

will first file tax returns for tax year 2021, which is the first tax year subject to examination by taxing authorities for U.S.

filed tax returns for tax year 2021, which is the first tax year subject to examination by taxing authorities for U.S.

federal and state income tax purposes.

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Return of Partnership Income, which is subject to examination by the Internal Revenue Service ("IRS").

As of December 25, 2022, there are no ongoing U.S.

federal or state income tax return examinations.

Portillo's Inc.

Form 10-K | 82

PORTILLO'S INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Tax Receivable Agreement

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federal income tax purposes.

These increases in tax basis may reduce the amounts that would otherwise be paid in the future to various tax authorities.

These increases in tax basis may reduce the amounts that would otherwise be paid in the future to the U.S.

federal and state authorities.

They may also decrease gains (or increase losses) on future dispositions of certain assets to the extent tax basis is allocated to those assets.

In connection with the IPO, the Company entered into a TRA and recorded a liability under the TRA of $ 156.6 million as of December 26, 2021 through equity as part of the Transactions.

As of December 25, 2022, we estimate that our obligation for future payments under the TRA totaled $ 252.8 million.

Under the TRA, the Company will be generally required to pay certain of our pre-IPO LLC Members 85 % of the amount of cash savings, if any, in U.S.

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The Company expects to benefit from the remaining 15 % of any tax savings.

No payment is expected to be paid within the next 12 months.

Portillo's Inc.

Form 10-K | 78

PORTILLO'S INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

The Company expects a payment of $ 0.8 million to be paid within the next 12 months.

EARNINGS (LOSS) PER SHARE

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As described in Note 1.

"Description Of Business", in connection with the IPO, the Portillo's OpCo LLC Agreement was amended and restated to, among other things, (i) to authorize the issuance of two classes of common stock and (ii) convert all outstanding equity interests (except for those redeemable preferred units which were redeemed in connection with the IPO) into LLC Units .

Description Of Business, in connection with the IPO, the Portillo's OpCo LLC Agreement was amended and restated to, among other things, (i) to authorize the issuance of two series of common stock and (ii) convert all outstanding equity interests (except for those redeemable preferred units which were redeemed in connection with the IPO) into LLC Units .

For purposes of calculating earnings per share, the prior period amounts have been retroactively adjusted to give effect to the above-mentioned amendment and resulting recapitalization.

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by the weighted-average number of dilutive securities, using the treasury stock method.

Portillo's Inc.

Form 10-K | 83

PORTILLO'S INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

The computations of basic and diluted earnings (loss) per share for the years ended December 25, 2022, December 26, 2021 and December 27, 2020 are as follows (in thousands, except per share amounts):

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December 25, 2022 December 26, 2021 December 27, 2020

Net loss attributable to common unit holders $ ( 34,592 ) $ ( 8,261 ) $ ( 12,869 )

Net loss attributable to non-controlling interests ( 19,408 ) — —

Net loss attributable to Portillo's Inc.

Net income (loss) attributable to common unit holders $ 17,157 $ ( 34,592 ) $ ( 8,261 )

Net income (loss) attributable to non-controlling interests 6,306 ( 19,408 ) —

Net income (loss) attributable to Portillo's Inc.

$ 10,851 $ ( 15,184 ) $ ( 8,261 )

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Weighted-average number of common shares outstanding-diluted 42,716 35,807 51,189

Basic net loss per share attributable to Portillo's Inc.

Basic net income (loss) per share attributable to Portillo's Inc.

$ 0.28 $ ( 0.42 ) $ ( 0.16 )

Diluted net loss per share attributable to Portillo's Inc.

Diluted net income (loss) per share attributable to Portillo's Inc.

$ 0.25 $ ( 0.42 ) $ ( 0.16 )

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As such, separate presentation of basic and diluted earnings per share of Class B Common Stock under the two-class method has not been presented.

The following table presents potentially dilutive securities excluded from the computation of diluted net loss per share for the period presented because their effect would have been anti-dilutive (in thousands):

The following shares were excluded from the calculation of diluted earnings per share because they would be antidilutive (in thousands) :

Fiscal Years Ended

December 25, 2022 December 26, 2021 December 27, 2020

Shares subject to performance conditions 1,807 1,224 318

Share that were antidilutive — — 361

Total shares excluded from diluted loss per share 1,807 1,224 679

Portillo's Inc.

Form 10-K | 79

PORTILLO'S INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

CONTINGENCIES

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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 December 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 from 2018.

The 2018 loss contingency was resolved during the year ended December 26, 2021 for $ 0.8 million.

As of December 25, 2022 and December 26, 2021, the Company recorded no loss contingencies.

RELATED PARTY TRANSACTIONS

As of December 26, 2021 and December 27, 2020, the related parties’ receivables consisted of a receivable balance due from C&O of $ 0.4 million and $ 0.2 million, respectively, which was included in accounts receivable in the consolidated balance sheets.

As of December 25, 2022 and December 26, 2021, the related parties’ receivables balance consisted of $ 0.3 million and $ 0.4 million, respectively, due from C&O, which is included in accounts receivable in the consolidated balance sheet.

Stock Subscription Receivable

The Company previously issued 195,933 common units to the CEO and President for a unit subscription receivable of $ 1.0 million.

As of December 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.

Portillo's Inc.

Form 10-K | 84

PORTILLO'S INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Noah Glass, a member of the Company's Board, is the founder and CEO of Olo, Inc.

("Olo"), a platform the Company uses in connection with our mobile ordering application and delivery.

The Company incurred the following Olo-related costs for th e years ended December 26, 2021 and December 27, 2020 (in thousands):

The Company incurred the following Olo-related costs for th e years ended December 25, 2022, December 26, 2021, and December 27, 2020 (in thousands):

Fiscal Years Ended

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Net Olo-related costs $ 2,451 $ 1,102 $ 1,272

As of December 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.

As of December 25, 2022 and December 26, 2021, $ 0.2 million and immaterial amounts, respectively, were payable to Olo and was included in accounts payable in the consolidated balance sheets.

In connection with the IPO, each option outstanding, whether vested or unvested, was substituted for an option to purchase a number of shares of Class A common stock, and the option holders received a cash payment.

Glass received $ 0.1 million with respect to these payments.

Portillo's Inc.

Form 10-K | 80

PORTILLO'S INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Operating Leases and Consulting Agreement

Additionally, the Company leases 23 real properties from entities owned and controlled by Richard Portillo.

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 $ 7.9 million, $ 7.1 million and $ 7.1 million in rental payments, during each of the years ended December 26, 2021, December 27, 2020 and December 29, 2019, respectively.

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 statements of operations.

The Consulting Agreement terminated on July 31, 2021 and was not renewed.

Tax Receivable Agreement

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actually realizes or in some cases is deemed to realize as a result of certain transactions.

There were no amounts paid under the TRA for the years ended December 25, 2022 and December 26, 2021.

Fiscal Years Ended

(in thousands) December 26, 2021

(in thousands) December 25, 2022 December 26, 2021

Current portion of Tax Receivable Agreement liability $ 813 $ —

Tax Receivable Agreement liability 252,003 156,638

Secondary Offerings

In the third and fourth quarters of 2022, in connection with the secondary offerings previously discussed in Note 1.

Description Of Business, we purchased LLC Units and shares of Class A common stock using the proceeds of the secondary offering at a price equal to the public offering price less the underwriting discounts and commissions from certain pre-IPO LLC Members and shareholders of the Blocker Companies, including from funds affiliated with Berkshire Partners LLC, which is our controlling shareholder that beneficially owns approximately 42.8 % of the Company as of December 25, 2022.

SUBSEQUENT EVENTS

The Company opened one new restaurant subsequent to December 26, 2021 for a total of 69 restaurants, excluding a restaurant owned by related party C&O, of which Portillo's owns 50 % of the equity.

New Restaurants

The Company opened three restaurants subsequent to December 25, 2022 for a total of 74 restaurants, excluding C&O.

The three restaurants are located in Kissimmee, Florida, The Colony, Texas, and Tucson, Arizona.

Portillo's Inc.

Form 10-K | 85

PORTILLO'S INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

New Credit Agreement

On February 2, 2023, Holdings, the Borrower, the other Guarantors party thereto from time to time, each lender party thereto from time to time and Fifth Third Bank, National Association, as Administrative Agent, L/C Issuer and Swing Line Lender entered into a Credit Agreement (“New Credit Agreement”) which provides for a Term A Loan ("Term Loan") in an initial aggregate principal amount of $ 300.0 million and initial Revolving Credit Commitments in an initial aggregate principal amount of $ 100.0 million (the “New Revolver Facility”).

The New Credit Agreement is guaranteed by all domestic subsidiaries of the Borrower (subject to customary exceptions) and secured by liens on substantially all of the assets of Holdings, the Borrower and the subsidiary guarantors (subject to customary exceptions).

The New Credit Agreement also includes certain financial covenants with respect to cash interest coverage and total net rent adjusted leverage.

The Term Loan and New Revolver Facility are scheduled to mature on February 2, 2028.

The proceeds under the Term Loan and New Revolver Facility, along with cash on hand, were used to repay outstanding indebtedness under the First Lien Credit Agreement and to pay related transaction expenses.

The Company anticipates using the remainder of the loan proceeds for general corporate purposes and working capital needs.

The New Revolver Facility under the New Credit Agreement replaces the $ 50 million Revolving Facility under the First Lien Credit Agreement.

As of February 2, 2023, outstanding borrowings under the New Credit Agreement totaled $ 315.0 million, comprising $ 300.0 million under the Term Loan and $ 15.0 million under the New Revolver Facility, and letters of credit issued under the New Revolver Facility totaled $ 4.4 million.

As a result, as of February 2, 2023, the Company had $ 80.6 million available under the New Revolver Facility.

On February 28, 2023, the Company made a $ 5.0 million payment on the New Revolver Facility.

The outstanding balance of the New Revolver Facility upon payment is $ 10.0 million.

As a result, as of February 28, 2023, the Company had $ 85.6 million available under the New Revolver Facility.

Portillo's Inc.

Form 10-K | 86

Valuation and Qualifying Accounts

(in thousands) Balance at beginning of period Charged to costs and expenses Charged to other accounts Reductions Balance at end of period

Deferred tax asset valuation allowance:

Deferred tax asset valuation allowance (in thousands):

Balance at beginning of period Charged to costs and expenses Charged to other accounts Reductions Balance at end of period

Fiscal year ended December 25, 2022 $ 38,415 $ 2,277 $ — $ 29,343 $ 11,349

Fiscal year ended December 26, 2021 $ — $ 1,904 $ 36,511 (1) $ — $ 38,415

(1) Amounts relate to a valuation allowance established on deferred tax assets related to our investment in Portillo's OpCo.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 8. Financial Statements and Supplementary Data