Portillo's Inc. 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO FINANCIAL STATEMENTS Page Report of Independent Registered Public Accounting Firm (PCAOB ID No. 34 ) 51 Consolidated Balance Sheets 52 Consolidated Statements of Operations 53 Consolidated Statements of Stockholders' and Members' Equity 54 Consolidated Statements of Cash Flows 56 Notes to Consolidated Financial Statements 58 Note 1. Description Of Business 58 Note 2. Summary Of Significant Accounting Policies 59 Note 3. Revenue Recognition 66 Note 4. Inventories 67 Note 5. Property & Equipment, Net 67 Note 6. Goodwill & Intangible Assets 67 Note 7. Fair Value Of Financial Instruments 69 Note 8. Supplemental Balance Sheet Information 70 Note 9. Debt 70 Note 10. Leases 72 Note 11. Stockholders' Equity 75 Note 12. Non-Controlling Interests 77 Note 13. Equity-Based Compensation 77 Note 14. Income Taxes 81 Note 15. Earnings (Loss) Per Share 83 Note 16. Contingencies 84 Note 17. Related Party Transactions 84 Note 18. Subsequent Events 85 Portillo's Inc. Form 10-K | 50 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM T o the shareholders and the Board of Directors of Portillo's Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Portillo's Inc. and subsidiaries (the "Company") as of December 25, 2022 and December 26, 2021, the related consolidated statements of operations, stockholders’ and members’ equity, and cash flows, for each of the three years in the period ended December 25, 2022, and the related notes and the schedule listed in the Index at Item 15 (collectively referred to as the "financial statements"). 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 These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ Deloitte & Touche LLP Chicago, Illinois March 2, 2023 We have served as the Company's auditor since 2014. Portillo's Inc. Form 10-K | 51 PORTILLO'S INC. CONSOLIDATED BALANCE SHEETS (In thousands, except per share data) December 25, 2022 December 26, 2021 ASSETS CURRENT ASSETS: Cash and cash equivalents and restricted cash $ 44,427 $ 39,263 Accounts receivable 8,590 7,840 Inventory 7,387 6,078 Prepaid expenses 4,922 5,836 Total current assets 65,326 59,017 Property and equipment, net 227,036 190,834 Operating lease assets 166,808 — Goodwill 394,298 394,298 Trade names 223,925 223,925 Other intangible assets, net 31,800 35,832 Equity method investment 16,274 16,170 Deferred tax assets 150,497 74,455 Other assets 4,119 5,042 Total other assets 820,913 749,722 TOTAL ASSETS $ 1,280,083 $ 999,573 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 30,273 $ 27,249 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 Total current liabilities 77,297 66,938 LONG-TERM LIABILITIES: Long-term debt, net of current portion 314,425 315,829 Deferred rent — 32,174 Tax Receivable Agreement liability 252,003 156,638 Long-term operating lease liability 200,166 — Other long-term liabilities 3,291 4,588 Total long-term liabilities 769,885 509,229 Total liabilities 847,182 576,167 COMMITMENTS AND CONTINGENCIES (NOTE 16) STOCKHOLDERS' EQUITY: 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 48,420,723 and 35,807,171 shares issued and outstanding as of December 25, 2022 and December 26, 2021, respectively 484 358 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 Accumulated deficit ( 4,812 ) ( 15,950 ) Total stockholders' equity attributable to Portillo's Inc. 256,336 171,264 Non-controlling interest 176,565 252,142 Total stockholders' equity 432,901 423,406 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,280,083 $ 999,573 See accompanying notes to consolidated financial statements. Portillo's Inc. Form 10-K | 52 PORTILLO'S INC CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands) Fiscal Years Ended December 25, 2022 December 26, 2021 December 27, 2020 REVENUES, NET $ 587,104 $ 534,952 $ 455,471 COST AND EXPENSES: Restaurant operating expenses: Cost of goods sold, excluding depreciation and amortization 204,237 166,764 142,446 Labor 154,392 138,788 115,991 Occupancy 30,657 28,060 24,920 Other operating expenses 65,312 59,258 50,169 Total restaurant operating expenses 454,598 392,870 333,526 General and administrative expenses 66,892 87,089 39,854 Pre-opening expenses 4,715 3,565 2,209 Depreciation and amortization 20,907 23,312 24,584 Net income attributable to equity method investment ( 1,083 ) ( 797 ) ( 459 ) Other income, net ( 204 ) ( 1,099 ) ( 1,537 ) OPERATING INCOME 41,279 30,012 57,294 Interest expense 27,644 39,694 45,031 Tax Receivable Agreement liability adjustment ( 5,345 ) — — Loss on debt extinguishment — 7,265 — 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 Less: Redeemable preferred units accretion — ( 21,176 ) ( 20,524 ) 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 ) Income (loss) per common share attributable to Portillo's Inc.: Basic $ 0.28 $ ( 0.42 ) $ ( 0.16 ) Diluted $ 0.25 $ ( 0.42 ) $ ( 0.16 ) Weighted-average common shares outstanding: Basic 38,902,259 35,807,171 51,189,017 Diluted 42,715,977 35,807,171 51,189,017 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 and DECEMBER 27, 2020 Preferred Units Class A Common Stock Class B Common Stock Units Amount Members' Equity Shares Amount Shares Amount Additional Paid-In Capital Accumulated Deficit Non-controlling interest Total Equity Balance, as of December 29, 2019 100,000 $ 180,047 $ 147,734 — $ — — $ — $ — $ — $ — $ 147,734 Net income — — 12,263 — — — — — — — 12,263 Unit-based compensation — — 960 — — — — — — — 960 Repayment of subscription receivable — — 250 — — — — — — — 250 Issuance of common units — — 26 — — — — — — — 26 Redeemable preferred units accretion — 20,524 ( 20,524 ) — — — — — — — ( 20,524 ) Balance, as of December 27, 2020 100,000 $ 200,571 $ 140,709 — $ — — $ — $ — $ — $ — $ 140,709 Redeemable preferred units accretion and redemption premium — 21,176 ( 21,176 ) — — — — — — — ( 21,176 ) Issuance of common units — — 100 — — — — — — — 100 Repayment of subscription receivable — — 499 — — — — — — — 499 Net income prior to the Transactions — — 21,942 — — — — — — — 21,942 Unit-based compensation prior to the Transactions — — 492 — — — — — — — 492 Effect of the Transactions — — ( 142,566 ) 12,496,361 125 35,673,321 — 71,416 — 71,150 125 Issuance of Class A common stock sold in initial public offering, net of underwriting discounts of $ 29.1 million and other offering expenses of $ 7.1 million — — — 23,310,810 233 — — 372,658 — — 372,891 Allocation of equity to non-controlling interests — — — — — — — ( 185,980 ) — 185,980 — Payoff of redeemable preferred units ( 100,000 ) ( 221,747 ) — — — — — — — — — Net loss subsequent to the Transactions — — — — — — — — ( 15,950 ) ( 19,408 ) ( 35,358 ) Equity-based compensation subsequent to the Transactions — — — — — — — 14,477 — 14,420 28,897 Establishment of Tax Receivable Agreement liability and corresponding deferred tax assets — — — — — — — ( 85,715 ) — — ( 85,715 ) 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. Portillo's Inc. Form 10-K | 54 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 Common Stock 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 (In thousands) Fiscal Years Ended December 25, 2022 December 26, 2021 December 27, 2020 CASH FLOWS FROM 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 Amortization of debt issuance costs and discount 2,751 3,607 3,863 Loss on sales of assets 398 256 98 Equity-based compensation 16,137 29,389 960 Deferred rent and tenant allowance — 4,120 3,888 Deferred income tax provision (benefit) 1,820 ( 3,532 ) — Tax Receivable Agreement liability adjustment ( 5,345 ) — — Amortization of deferred lease incentives — ( 388 ) ( 330 ) Gift card breakage ( 798 ) ( 715 ) ( 700 ) Loss on debt extinguishment — 7,265 — Changes in operating assets and liabilities: Accounts receivables 191 ( 777 ) ( 753 ) Receivables from related parties 96 ( 152 ) 280 Inventory ( 1,309 ) ( 1,003 ) ( 1,180 ) 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 Other assets and liabilities ( 14 ) ( 128 ) 5,473 NET CASH PROVIDED BY OPERATING ACTIVITIES 56,889 42,874 58,271 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment ( 47,061 ) ( 36,183 ) ( 21,452 ) Purchase of investment securities — ( 200 ) — Proceeds from the sale of property and equipment 44 123 32 NET CASH USED IN INVESTING ACTIVITIES ( 47,017 ) ( 36,260 ) ( 21,420 ) CASH FLOWS FROM FINANCING ACTIVITIES: Repayments of short-term debt — — ( 15,000 ) Payments of long-term debt ( 3,324 ) ( 158,324 ) ( 13,324 ) Proceeds from Paycheck Protection Program loan — — 10,000 Payment of long-term debt prepayment penalty — ( 3,100 ) — Proceeds from equity offering, net of underwriting discounts 364,956 437,078 — Repurchase of outstanding equity / Portillo's OpCo units ( 364,956 ) ( 57,010 ) — Payment of preferred units and preferred units liquidation — ( 221,747 ) — 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 NET CASH USED IN FINANCING ACTIVITIES ( 4,708 ) ( 8,783 ) ( 18,048 ) 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 CASH AND CASH EQUIVALENTS AND RESTRICTED CASH AT END OF THE PERIOD $ 44,427 $ 39,263 $ 41,432 See accompanying notes to consolidated financial statements. Portillo's Inc. Form 10-K | 56 PORTILLO'S INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Fiscal Years Ended December 25, 2022 December 26, 2021 December 27, 2020 SUPPLEMENTAL CASH FLOW INFORMATION Interest paid $ 23,968 $ 43,544 $ 34,294 Income tax paid — — — NON-CASH INVESTING AND FINANCING ACTIVITIES: Accrued capital expenditures $ 9,796 $ 2,195 $ 5,008 Redeemable preferred units accretion — ( 21,176 ) ( 20,524 ) Deferred offering costs in accounts payable — 771 — Establishment of liabilities under Tax Receivable Agreement 101,524 156,638 — See accompanying notes to consolidated financial statements. Portillo's Inc. Form 10-K | 57 PORTILLO'S INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. DESCRIPTION OF BUSINESS Portillo’s Inc. (the "Company") was formed and incorporated as a Delaware corporation on June 8, 2021. The Company was formed for the purpose of completing 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. As a result, the Company consolidates the financial results of Portillo's OpCo and reports a non-controlling interest representing the economic interest in Portillo's OpCo held by the other members of Portillo's OpCo (the "pre-IPO LLC Members"). Unless the context otherwise requires, references to "we," "us," "our," "Portillo's," and the "Company" refer to Portillo's Inc. and its subsidiaries, including Portillo's OpCo. We operate fast-casual restaurants in Illinois, Indiana, California, Arizona, Florida, Wisconsin, Minnesota, Iowa and Michigan, along with two food production commissaries in Illinois. As of 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. Initial Public Offering The Company's registration statement on Form S-1, as amended (Registration No. 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. The Company received aggregate net proceeds of approximately $ 430.0 million after deducting underwriting discounts and commissions of $ 29.1 million and other offering expenses of approximately $ 7.1 million. In connection with the IPO, we completed the following: • We amended and restated the limited liability company agreement of Portillo’s OpCo ("LLC Agreement") to, among other things, convert all outstanding equity interests (except for those redeemable preferred units which were redeemed in connection with the IPO) into LLC Units. • We became the sole managing member of Portillo's OpCo. Because we manage and operate the business and control the strategic decisions and day-to-day operations of Portillo’s OpCo and because we also have a substantial financial interest in Portillo’s OpCo, we consolidated the financial results of Portillo’s OpCo, and a portion of our net income was allocated to non-controlling interests to reflect the entitlement of the pre-IPO LLC Members who retained their equity ownership in Portillo's OpCo. In addition, because Portillo’s OpCo 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 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 shareholders. The Class B common stock is not entitled to economic interests in Portillo’s Inc. The net proceeds and cash on hand were used as follows: • to repay the redeemable preferred units in full (including the redemption premium) of $ 221.7 million; • to repay all of the borrowings outstanding under the Second Lien Credit Agreement (including any prepayment penalties) of $ 158.1 million; and • to purchase LLC Units 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. Form 10-K | 58 PORTILLO'S INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 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 entities treated as corporations for U.S. 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. NOTE 2. 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”) 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). Portillo's Inc. Form 10-K | 59 PORTILLO'S INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Fiscal Year 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. The additional week in a 53-week fiscal year is added to the fourth quarter. Fiscal 2022, 2021 and 2020 each consisted of 52 weeks. The fiscal periods presented in this report are years ended December 25, 2022, December 26, 2021 and December 27, 2020, respectively. Unless otherwise stated, references to years in this report relate to fiscal years. Segment Reporting The Company owns and operates fast-casual restaurants in the United States, along with two food production commissaries in Illinois. The Company’s chief operating decision maker (the “CODM”) is its Chief Executive Officer ("CEO"). As the CODM reviews financial performance and allocates resources at a consolidated level on a recurring basis, the Company has one operating segment and one reportable segment. Use of Estimates 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. Actual results could differ from those estimates. Cash and Cash Equivalents and Restricted Cash Cash includes amounts that are either held in the Company’s bank accounts or represent deposits in transit. 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. Accounts Receivable Accounts receivable consist primarily of vendor rebates, tenant improvement receivables, and delivery receivables as well as receivables from related parties (see Note 17. Related Party Transactions). The Company evaluates the collectability of its accounts receivable based on a variety of factors, including historical experience, current and future economic and market conditions and other factors. Based on these factors, no allowance for uncollectible accounts was recorded at December 25, 2022 or December 26, 2021. Inventory 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. 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. 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. Form 10-K | 60 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 The Company’s long-lived assets include property and equipment and definite-lived intangible assets. Depreciation and amortization are computed using the straight-line method. Except for leasehold improvements, depreciation is computed over the estimated useful life of each asset (generally ranging from three to ten years ). 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, 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. If the carrying amount exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying value exceeds the estimated fair value. Restaurant-level assets are grouped by restaurant for the purpose of the impairment assessment because a restaurant represents the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. No impairment charge was recorded for any period presented. Goodwill and Indefinite-Lived Intangible Assets Goodwill and indefinite-lived intangible assets are assessed for impairment annually in the fourth quarter or more frequently if events and circumstances indicate that it is more likely than not that the fair value of a reporting unit or an intangible asset is less than its carrying value. The Company has one reporting unit which is evaluated for impairment annually. 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. The Company’s indefinite-lived intangible assets consist of trade names and trade marks (collectively “trade names”). The Company estimates the fair value of its trade names using a relief-from-royalty income approach. 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. Fair Value of Financial Instruments The Company discloses and recognizes the fair value of its assets and liabilities using a hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. The guidance establishes three levels of the fair value hierarchy as follows: Level 1 - Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date; Level 2 - Inputs are observable, unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities; and Level 3 - Unobservable inputs that are significant to the measurement of the fair value of the assets or liabilities that are supported by little or no market data. 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 have been adjusted retroactively to give effect to the 7.4-for-1 reverse common unit split. Offering Costs In connection with the IPO, Portillo's OpCo incurred certain legal, accounting, and other IPO-related costs. Such costs are recorded in stockholders’ equity as a reduction from the proceeds of the offering. As of December 26, 2021, $ 7.1 million of offering costs had been recorded in stockholders' equity. Revenue Recognition Revenues from retail restaurants are presented net of discounts and recognized when food and beverage products are sold to the end customer. Sales taxes collected from customers are excluded from revenues and the obligation is included in accrued liabilities until the taxes are remitted to the appropriate taxing authorities. The Company offers delivery services to its customers. 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 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. The amount of the price premium recorded in 2021 and prior periods is not material and there is no anticipated or actual impact on operating income or net income for any period. Generally, revenue is recognized as promised goods or services transfer to the guest or customer in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. Revenues are recognized when payment is tendered at the point of sale as the performance obligation has been satisfied. Refer to Note 3. Revenue Recognition for additional detail. Commitments The majority of the food products the Company purchases are subject to changes in price primarily due to the effect of supply and demand of the commodities, in particular, proteins, dairy, produce and grains. Overall pricing agreements are established in an effort to maintain a more consistent food cost without creating long-term purchase commitments. Employee Benefits The Company sponsors a 401(k) plan for all employees that are eligible based upon age and length of service. The expenses incurred for Company matching contributions to the plan were approximately $ 0.4 million, $ 0.5 million and $ 0.4 million for the years ended December 25, 2022, December 26, 2021 and December 27, 2020, respectively. The Company offers a non-qualified deferred compensation plan to certain officers and other members of management. Under the plan, eligible employees may defer up to 80 % of their annual salary and annual bonus. The Company has elected to fund its deferred compensation obligations through a rabbi trust. The rabbi trust is subject to creditor claims in the event of insolvency, but such assets are not available for general corporate purposes. 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, 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. Equity-based compensation expense is 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 is included within general and administrative expenses and labor in the consolidated statements of operations. 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 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 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. Leases 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. Form 10-K | 63 PORTILLO'S INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 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 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. Income and Other Taxes We account for income taxes pursuant to the asset and liability method which requires the recognition of deferred income tax assets and liabilities related to the expected future tax consequences arising from temporary differences between the carrying amounts and tax bases of assets and liabilities based on enacted statutory tax rates applicable to the periods in which the temporary differences are expected to reverse. Any effects of changes in income tax rates or laws are included in income tax expense in the period of enactment. 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, 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. Earnings (Loss) Per Share Basic earnings (loss) per share is calculated by dividing the net income (loss) attributable to common shareholders by the weighted-average number of shares outstanding. Diluted earnings (loss) per share adjusts the basic earnings (loss) per unit attributable to shareholders and the weighted-average number of units of shares outstanding for the potential dilutive impact of shares, using the treasury-stock method. Diluted earnings (loss) per share considers the impact of potentially dilutive securities except in periods in which there is a loss because the inclusion of the potential common units would have an anti-dilutive effect. Portillo's Inc. Form 10-K | 64 PORTILLO'S INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Recently Issued Accounting Standards In March 2020, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The pronouncement provides temporary optional expedients and exceptions to the current guidance on contract modifications and hedge accounting to ease the financial reporting burden related to the expected market transition from the London Interbank Offered Rate ("LIBOR") and other interbank offered rates to alternative reference rates. The guidance was effective upon issuance and generally can be applied to applicable contract modifications through December 31, 2022. 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. See Note 18. Subsequent Events for discussion of the New Credit Agreement, effective February 2, 2023. Recently Adopted Accounting Standards 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 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 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. See Note 10. Leases for additional information. In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement, which amends the disclosure requirements for fair value measurements by removing, modifying and adding certain disclosures. The Company adopted this standard effective December 28, 2020. The adoption of this new standard did not have a material effect on our consolidated financial statements. In August 2018, the FASB issued ASU No. 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which clarifies the accounting for implementation costs in cloud computing arrangements that is a service contract. The Company adopted this standard effective December 28, 2020. Subsequent to the adoption of ASU 2018-15, the Company capitalized such costs within other current assets or other assets on its consolidated balance sheets. The Company amortizes the implementation costs once the system is ready for its intended use, on a straight-line basis, over the term of the related service agreements, including all reasonably certain renewals. The amortization expense related to cloud computing arrangements that are service contracts are recorded within general and administrative expenses or other operating expenses on the Company's consolidated statements of operations. The adoption of this new standard did not have a material effect on our consolidated financial statements. In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes (Topic 740), which modifies certain technical guidelines for accounting for income taxes. ASU 2019-12 is effective for reporting periods beginning after December 15, 2022, and early adoption is permitted. The Company adopted the new standard as of December 28, 2020. 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. The amendment simplifies accounting for convertible instruments by removing major separation models required under current accounting guidance. In addition, the amendment removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, which will permit more equity contracts to qualify for the exception, and also simplifies the diluted earnings per share calculation in certain areas. The amendment is effective beginning after December 15, 2023, and early adoption is permitted. The Company adopted the new standard as of December 28, 2020. The adoption of this new standard did not have a material effect on our consolidated financial statements. The Company reviewed all other recently issued accounting pronouncements and concluded that they were either not applicable or not expected to have a significant impact to its consolidated financial statements. NOTE 3. REVENUE RECOGNITION Revenues from retail restaurants are presented net of discounts and recognized when food and beverage products are sold to the end customer. Sales taxes collected from customers are excluded from revenues and the obligation is included in accrued liabilities until the taxes are remitted to the appropriate taxing authorities. The Company offers delivery services to its customers. Delivery services are fulfilled by the Company and third-party service providers. In some cases, the Company makes delivery sales through Portillos.com or the Portillo's App ("Dispatch Sales"). In other cases, the Company makes delivery sales through a non-Company owned channel, such as the delivery partner’s website or app (“Marketplace Sales”). With respect to Dispatch Sales, delivery may be performed by the Company or through a third-party service provider. The Company recognizes revenue, including delivery fees, when the performance obligation is complete and the food is transferred to the customer. For these sales, the Company receives payment directly from the customer at the time of sale. With respect to Marketplace Sales, the Company 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. The Company sells gift cards which do not have expiration dates. The Company records the sale of the gift card as a contract liability and recognizes revenue from gift cards when: (i) the gift card is redeemed by the customer; or (ii) in the event a gift card is not expected to be redeemed, in proportion to the pattern of rights exercised by the customer (gift card breakage). The Company has determined that 11 % of gift card sales will not be redeemed and will be retained by us based on a portfolio assessment of historical data on gift card redemption patterns. Gift card breakage is recorded within revenues, 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. The gift card liability is included in current deferred revenue on the consolidated balance sheets as follows (in thousands): December 25, 2022 December 26, 2021 Gift card liability $ 6,988 $ 6,606 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): Fiscal Years Ended December 25, 2022 December 26, 2021 December 27, 2020 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 NOTE 4. INVENTORIES Inventories consisted of the following (in thousands): December 25, 2022 December 26, 2021 Raw materials $ 5,722 $ 4,181 Work in progress 104 114 Finished goods 876 1,395 Consigned inventory 685 388 $ 7,387 $ 6,078 NOTE 5. PROPERTY & EQUIPMENT, NET Property and equipment, net consisted of the following (in thousands): December 25, 2022 December 26, 2021 Land improvements $ 16,369 $ 15,451 Furniture, fixtures, and equipment 126,130 115,187 Leasehold improvements 153,341 138,923 Transportation equipment 2,281 2,203 Construction-in-progress 35,386 8,300 333,507 280,064 Less: accumulated depreciation ( 106,471 ) ( 89,230 ) $ 227,036 $ 190,834 Depreciation expense was $ 18.0 million, $ 16.9 million, and $ 15.8 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. NOTE 6. GOODWILL & INTANGIBLE ASSETS The Company has one reporting unit for goodwill which is evaluated for impairment annually in the fourth quarter of each fiscal year. The Company used the 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. Form 10-K | 67 PORTILLO'S INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Intangibles, net consisted of the following (in thousands): As of December 25, 2022 Gross Carrying Amount Accumulated Amortization ASC 842 Adjustment Net Carrying Amount Indefinite-lived intangible assets: Trade names $ 223,925 $ — $ — $ 223,925 Intangibles subject to amortization: Recipes 56,117 ( 24,317 ) — 31,800 Covenants not-to-compete 40,799 ( 40,799 ) — — Favorable rental contracts 2,991 ( 1,849 ) ( 1,142 ) — $ 323,832 $ ( 66,965 ) $ ( 1,142 ) $ 255,725 As of December 26, 2021 Gross Carrying Amount Accumulated Amortization Net Carrying Amount Indefinite-lived intangible assets: Trade names $ 223,925 $ — $ 223,925 Intangibles subject to amortization: Recipes 56,117 ( 21,427 ) 34,690 Covenants not-to-compete 40,799 ( 40,799 ) — Favorable rental contracts 2,991 ( 1,849 ) 1,142 $ 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 related to intangible assets held at December 25, 2022 for the next five years and thereafter is as follows (in thousands): Estimated Amortization 2023 $ 2,889 2024 2,813 2025 2,707 2026 2,707 2027 2,707 2028 and thereafter 17,977 $ 31,800 Portillo's Inc. Form 10-K | 68 PORTILLO'S INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 7. FAIR VALUE OF FINANCIAL INSTRUMENTS Assets and Liabilities Measured at Fair Value on a Recurring Basis The carrying value of the Company's cash and cash equivalents and restricted cash, accounts receivable, accounts payable and all other current assets and liabilities approximate fair values due to the short-term nature of these financial instruments. Other assets consist of a deferred compensation plan with related assets held in a rabbi trust. Deferred Compensation Plan - The Company maintains a rabbi trust to fund obligations under a deferred compensation plan. Amounts in the rabbi trust are invested in mutual funds, which are designated as trading securities carried at fair value. The fair value measurement of these trading securities is considered Level 1 of the fair value hierarchy as they are measured using quoted market prices. As of December 25, 2022 and December 26, 2021, the fair value of the mutual fund investments and deferred compensation obligations were as follows (in thousands): December 25, 2022 December 26, 2021 Level 1 Assets - Investments designated for deferred compensation plan Cash/money accounts $ 1,470 $ 1,482 Mutual Funds 2,241 3,185 Total assets $ 3,711 $ 4,667 As of December 25, 2022 and December 26, 2021 we had no Level 2 or Level 3 assets. 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. Refer to Note 9. Debt for additional information relating to the fair value of the Company's outstanding debt instruments. 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, 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 NOTE 8. SUPPLEMENTAL BALANCE SHEET INFORMATION Prepaid expenses consisted of the following (in thousands): December 25, 2022 December 26, 2021 Prepaid insurance $ 1,969 $ 2,869 Prepaid occupancy 504 494 Other prepaid expenses 2,449 2,473 $ 4,922 $ 5,836 Accrued expenses consisted of the following (in thousands): December 25, 2022 December 26, 2021 Salaries, wages, and other compensation $ 16,699 $ 18,065 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 Other accrued expenses 394 157 $ 29,915 $ 29,472 NOTE 9. DEBT Debt consisted of the following (in thousands): December 25, 2022 December 26, 2021 First Lien Term B-3 Loans $ 322,428 $ 325,752 Revolving Loans — — Unamortized discount and debt issuance costs ( 3,848 ) ( 6,599 ) Total debt, net 318,580 319,153 Less: current portion ( 4,155 ) ( 3,324 ) Long-term debt, net $ 314,425 $ 315,829 First Lien 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”). On December 6, 2019, the Borrower entered a third amendment to the First Lien Credit Agreement (the “Third Amendment to First Lien Credit Agreement”) whereby the aggregate principal amount of the term loans as of the effective date of the Third Amendment to First Lien Credit Agreement was $ 332.4 million (the “First Lien Term B-3 Loans”), and the Revolving Facility was increased by $ 50 million. The maturity date with respect to the First Lien Term B-3 Loans was extended to September 6, 2024 and the maturity date with respect to the Revolving Loans date was extended to June 6, 2024. Portillo's Inc. Form 10-K | 70 PORTILLO'S INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 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 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 . 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 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. Second Lien Holdings, the Borrower and certain of its subsidiaries entered into the Second Lien Credit Agreement (the “Second Lien Credit Agreement”) dated as of August 1, 2014 and as amended on October 25, 2016 and December 6, 2019 with UBS AG, Stamford Branch, as administrative agent and collateral agent, and other lenders from time to time party thereto (the “Second Lien Lenders”). The Second Lien Lenders extended credit in the form of initial second lien term loans in an initial aggregate principal amount of $ 80.0 million. On December 6, 2019, the Borrower entered into second amendment to the Second Lien Credit Agreement (the “Second Amendment to Second Lien Credit Agreement”) whereby the aggregate principal amount of the term loans as of the effective date of the Second Amendment to the Second Lien Credit Agreement was $ 155.0 million (the “Second Lien Term B-3 Loans”). The maturity date of the Second Lien Term B-3 Loans was extended to December 6, 2024. In addition to the increased principal amount, the interest rates spread for the Second Lien Term B-3 Loans increased by 150 basis points to 9.50 % for Eurocurrency Rate loans. The Borrower determined interest on the Second Lien at the Eurocurrency Rate, plus 9.50 %. 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 $ 158.1 million were used to repay the Second Lien Term B-3 Loans in full, including a $ 3.1 million prepayment penalty, which was recorded as a loss on debt extinguishment during the year ended December 26, 2021 in the consolidated statement of operations. Maturities of long-term debt Principal payments on long-term debt (excluding the Revolving Facility) outstanding at December 25, 2022 for each year through maturity are as follows (in thousands): 2023 $ 4,155 2024 318,273 $ 322,428 Discount and Debt Issuance Costs In connection with entering into the Third Amendment to First Lien Credit Agreement and the Second Amendment to Second Lien Credit Agreement, in each case, dated as of December 6, 2019, the Borrower paid debt issuance costs of $ 14.5 million, of which $ 13.3 million were capitalized and are being amortized over the term of the related debt agreements, and $ 1.2 million were expensed as incurred. 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. The Company amortized $ 2.0 million, $ 2.1 million and $ 2.2 million of deferred financing costs, 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. 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 $ 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. 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 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. These covenants are customary for these types of debt agreements. As of December 25, 2022, the Company was in compliance with all covenants. See Note 18. Subsequent Events for a description of a new credit agreement and the repayment of borrowings under the First Lien Credit Agreement. NOTE 10. LEASES 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 1 461 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 $ 166,808 166,808 Current lease liabilities Short-term operating lease liability 4,849 Non-current lease liabilities Long-term operating lease liability 200,166 $ 205,015 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 $ 30,037 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): 25.0 Weighted-average discount rate: 9.8 % 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 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 2024 22,837 2025 22,893 2026 22,971 2027 22,222 Thereafter 516,959 Total lease payments 630,796 Less: 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 Minimum rentals $ 22,363 $ 19,787 Contingent rentals 679 486 Total rental expense $ 23,042 $ 20,273 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 2022 $ 20,298 2023 20,784 2024 21,099 2025 20,969 2026 21,254 Thereafter 508,217 Total minimum rental payments $ 612,621 Portillo's Inc. Form 10-K | 74 PORTILLO'S INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 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. NOTE 11. STOCKHOLDER'S EQUITY Amended and Restated Certificate of Incorporation In connection with the IPO, we amended and restated our certificate of incorporation to, among other things, provide for the (i) authorization of 380,000,000 shares of Class A common stock, par value $ 0.01 per share; (ii) authorization of 50,000,000 shares of Class B common stock, par value $ 0.00001 ; (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 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 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. Amended and Restated LLC Agreement As described in Note 1. 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 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 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 As described in Note 1. Description Of Business, on October 25, 2021, we completed an 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. The Company received aggregate net proceeds of approximately $ 430.0 million after deducting underwriting discounts and commissions of $ 29.1 million and other offering expenses of approximately $ 7.1 million. 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. 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. 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 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 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"). 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. 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. See Note 13. Equity-Based Compensation. Portillo's Inc. Form 10-K | 76 PORTILLO'S INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 12. NON-CONTROLLING INTERESTS In connection with the Transactions described in Note 1. 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 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 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. $ 10,851 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. $ 75,839 NOTE 13. EQUITY-BASED COMPENSATION 2021 Equity Incentive Plan In connection with the IPO, the Company adopted the 2021 Equity Incentive Plan (the "2021 Plan"). 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 ("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. Portillo's Inc. Form 10-K | 77 PORTILLO'S INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 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: Restricted Stock Units (in thousands) Weighted-average grant date fair value per share Non-vested, December 26, 2021 883 $ 20.00 Granted 75 24.08 Vested ( 277 ) 20.04 Forfeited ( 71 ) 20.01 Non-vested, December 25, 2022 610 $ 20.48 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: 2022 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 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; and (iii) one-third (1/3rd) of the PSOs will vest on the fifth anniversary of the date of grant if the 20 -day VWAP for a share of common stock is $ 50.00 per share ( 2.5 times the IPO price) measured over any twenty ( 20 ) consecutive trading day period commencing on the fourth anniversary of the date of grant and ending on the last trading day immediately preceding the fifth anniversary of the date of grant. All PSOs are subject to continued service at each tranche date and if any tranches fail to vest, the unvested portion of such PSOs will be forfeited and will not be eligible to vest in subsequent years. 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. The fair value and weighted average assumptions used to estimate the fair value of these PSOs were as follows: 2022 2021 Fair value $ 7.93 $ 7.58 Stock price $ 22.19 $ 20.00 Risk-free interest rate 3.37 % 0.93 % Expected life (years) 3.2 4.0 Annualized equity volatility 51.9 % 54.4 % Activity for the Company's PSOs was as follows: PSOs (in thousands) Weighted Average Exercise Price Weighted Average Remaining Term (Years) Aggregate Intrinsic Value Outstanding-December 26, 2021 1,794 $ 20.00 Granted 68 22.19 Exercised — — 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. 2014 Equity Incentive Plan Prior to the IPO, the Company had granted stock options under its 2014 Equity Incentive Plan, as amended (the “2014 Plan”). The 2014 Plan permitted the granting of awards to employees, officers, directors and consultants of the Company and affiliates in the form of options, unit appreciation rights, Restricted Class A Units, unrestricted Class A Units, Performance Awards and awards convertible into or otherwise based on Class A Units. Prior to the IPO, the 2014 Plan gave broad powers to the Company’s board of managers for its administration and interpretation, including the authority to select the individuals to be granted awards and rights to prescribe the particular form and conditions of each award to be granted. Under the 2014 Plan, the number of shares and exercise price of each option were determined by the board of managers, or a committee designated by the board of managers. The awards granted were generally exercisable within a 10-year period from the date of grant. The unit option grants were equally divided between (i) options subject to time-based vesting, and (ii) options subject to both time-based and performance-based vesting. The time-based vesting options vest, in general, in equal annual installments over a 5-year period and have a 10-year term from the date of the grant. The options subject to both time-based and performance-based vesting have a ten-year term from the date of the grant and vest, in general, in equal annual installments over a 5-year period from the date of grant, subject to acceleration in the event of a sale transaction, and have a performance condition that is satisfied upon achievement of a specified internal rate of return and a minimum multiple of invested capital. In connection with the IPO, the performance condition was waived and all such options became subject to time-based vesting only. 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 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. Portillo's Inc. Form 10-K | 79 PORTILLO'S INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Activity under the 2014 Plan for the year ended December 25, 2022 was as follows: Options (in thousands) Weighted Average Exercise Price Weighted Average Remaining Term (Years) Aggregate Intrinsic Value Outstanding-December 26, 2021 6,426 $ 4.53 Granted — — 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 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. The weighted average assumptions used to estimate the fair value of stock options granted during the years ended December 26, 2021 and December 27, 2020 were as follows: 2021 2020 Fair value of stock option $ 2.16 $ 3.40 Risk-free interest rate 1.21 % 1.86 % Expected life (years) 6.5 6.5 Volatility 54.7 % 43.8 % As of December 25, 2022, there was $ 6.5 million of total unrecognized compensation cost related to unvested options under the 2014 plan, which is expected to be recognized over a weighted average period o f 1.9 years. Equity-Based Compensation Expense Equity-based compensation expense included in the Company’s consolidated statements of operations was as follows: Fiscal Years Ended December 25, 2022 December 26, 2021 December 27, 2020 Labor $ 1,448 $ 561 $ — General and administrative expenses 14,689 30,147 960 Total equity-based compensation expense $ 16,137 $ 30,708 $ 960 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. Form 10-K | 80 PORTILLO'S INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 14. INCOME TAXES As a result of the IPO and Transactions described in Note 1. Description Of Business we became the sole managing member of Portillo's OpCo, and as a result, began consolidating the financial results of Portillo's OpCo. Portillo's OpCo is treated as a partnership for U.S. federal and most applicable state and local income tax purposes. As a partnership, Portillo's OpCo is not subject to U.S. 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, 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 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 Total current income taxes 3 1 Deferred income taxes: Federal ( 178 ) ( 2,653 ) State and local 1,998 ( 879 ) Total deferred income taxes 1,820 ( 3,532 ) 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): Fiscal Years Ended December 25, 2022 December 26, 2021 Expected U.S. federal income taxes at statutory rate $ 3,986 21.0 % $ ( 3,559 ) 21.0 % 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 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. Form 10-K | 81 PORTILLO'S INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Deferred Tax Assets The components of deferred tax assets and liabilities are as follows (in thousands): December 25, 2022 December 26, 2021 Deferred tax assets: Investment in partnership $ 79,181 $ 67,865 Tax Receivable Agreement 58,281 30,910 Net operating loss carryforwards 19,833 12,806 Other assets 4,551 1,289 Total gross deferred tax assets 161,846 112,870 Valuation allowance ( 11,349 ) ( 38,415 ) Net deferred tax assets $ 150,497 $ 74,455 As described in Note 1. Description Of Business and Note 11. 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 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. was formed in June 2021 and did not engage in any operations prior to the IPO and Transactions. Portillo's Inc. 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. Additionally, although Portillo's OpCo is treated as a partnership for U.S. federal and state income taxes purposes, it is still required to file an annual U.S. 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 Pursuant to the Company's election under section 754 of the Internal Revenue Code (the "Code"), the Company expects to obtain an increase in its share of the tax basis in the net assets of Portillo's OpCo when LLC Units are exchanged by other members. The Company intends to treat any exchanges of LLC Units as direct purchases of LLC Units for U.S. federal income tax purposes. 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. 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. federal, state, or local tax that the Company actually realizes (or is deemed to realize in certain circumstances) 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 the 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 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. The Company expects to benefit from the remaining 15 % of any tax savings. The Company expects a payment of $ 0.8 million to be paid within the next 12 months. NOTE 15. EARNINGS (LOSS) PER SHARE Basic net earnings (loss) per share of Class A Common Stock is computed by dividing net income (loss) attributable to Portillo's Inc. by the weighted-average number of Class A common stock outstanding. 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 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. The computations of earnings per share for periods prior to our IPO do not consider the 23,310,810 shares of Class A common stock issued to investors in our IPO. Diluted earnings (loss) per share is computed by dividing net income (loss) attributable to Portillo's Inc. 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): Fiscal Years Ended December 25, 2022 December 26, 2021 December 27, 2020 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 ) Shares: Weighted-average number of common shares outstanding-basic 38,902 35,807 51,189 Dilutive unit awards 3,814 — — Weighted-average number of common shares outstanding-diluted 42,716 35,807 51,189 Basic net income (loss) per share attributable to Portillo's Inc. $ 0.28 $ ( 0.42 ) $ ( 0.16 ) Diluted net income (loss) per share attributable to Portillo's Inc. $ 0.25 $ ( 0.42 ) $ ( 0.16 ) Shares of the Company’s Class B Common Stock do not participate in the earnings or losses of Portillo's Inc. and are therefore not participating securities. 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 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 NOTE 16. CONTINGENCIES The Company is party to legal proceedings and potential claims arising in the normal conduct of business, including claims related to employment matters, contractual disputes, customer injuries, and property damage. Although the ultimate outcome of these claims and lawsuits cannot be predicted with certainty, management believes that the resulting liability, if any, will not have a material effect on the Company’s consolidated financial statements. As of December 25, 2022 and December 26, 2021, the Company recorded no loss contingencies. NOTE 17. RELATED PARTY TRANSACTIONS 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. 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 Olo, Inc. 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 25, 2022, December 26, 2021, and December 27, 2020 (in thousands): Fiscal Years Ended December 25, 2022 December 26, 2021 December 27, 2020 Cost of goods sold, excluding depreciation and amortization $ 2,008 $ 633 $ 731 Other operating expenses 443 469 541 Net Olo-related costs $ 2,451 $ 1,102 $ 1,272 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. Mr. Glass received $ 0.1 million with respect to these payments. Tax Receivable Agreement As described in Note 14. Income Taxes, we entered into a TRA with certain members of Portillo's OpCo that provides for the payment by us of 85 % of the amount of tax benefits, if any, that Portillo's Inc. 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 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. NOTE 18. SUBSEQUENT EVENTS 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 Table of Contents Schedule II: Valuation and Qualifying Accounts Additions 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. Portillo's Inc. Form 10-K | 87 Table of Contents ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None.