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ptlo-20220626

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED June 26, 2022

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER: 001-40951

https://cdn.kscope.io/ecd256b99a5a5eec392cfc4359ef7736-ptlo-20220626_g1.jpg

PORTILLO'S INC.

(Exact name of registrant as specified in its charter)


Delaware						87-1104304
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification No.)
2001 Spring Road, Suite 400, Oak Brook, Illinois 60523
(Address of principal executive offices)

(630) 954-3773

(Registrant’s telephone number, including area code)


N/A
(Former name, former address and former fiscal year, if changed since last report)

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


Title of each class	Trading Symbol	Name of each exchange on which registered
Class A common stock, $0.01 par value per share	PTLO	Nasdaq Global Select Market

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

(Note: In the registrant’s last Quarterly Report on Form 10-Q filed on May 5, 2022, “No” was mistakenly marked when “Yes” should have been marked as it is above.)

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

☒ Yes ☐ No

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

Large accelerated filer

☐

Accelerated filer

☐

Non-accelerated filer

☒

Smaller reporting company

☐

Emerging growth company

☒

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

☐ Yes ☒ No

As of July 26, 2022, there were 36,218,355 shares of the registrant's Class A common stock, par value $0.01 per share, issued and outstanding.

TABLE OF CONTENTS


Cautionary Note Regarding Forward-Looking Information			1

Part I	Financial Information
	Item 1.	Financial Statements (Unaudited)	3
		Condensed Consolidated Balance Sheets	3
		Condensed Consolidated Statements of Operations	4
		Condensed Consolidated Statements of Stockholders' and Members' Equity	5
		Condensed Consolidated Statements of Cash Flows	7
		Notes to Condensed Consolidated Financial Statements	9
	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	22
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	35
	Item 4.	Controls and Procedures	35

Part II	Other Information
	Item 1.	Legal Proceedings	36
	Item 1A.	Risk Factors	36
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	36
	Item 3.	Defaults U pon Senior Securities	36
	Item 4.	Mine Safety Disclosures	36
	Item 5.	Other Information	36
	Item 6.	Exhibits	37

	Signatures		38

Table of Contents

Cautionary Note Regarding Forward-Looking Information

This Quarterly Report on Form 10-Q ("Form 10-Q") contains forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995 ("PSLRA"), which are subject to known and unknown risks, uncertainties and other important factors that may cause actual results to be materially different from the statements made herein. All statements other than statements of historical fact are forward-looking statements. Many of the forward-looking statements are located in Part I, Item 2 of this Form 10-Q under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations." Forward-looking statements discuss our current expectations and projections relating to our financial position, results of operations, plans, objectives, future performance and business. You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as "aim," "anticipate," "believe," "estimate," "expect," "forecast," "future," "outlook," "potential," "project," "projection," "plan," "intend," "seek," "may," "could," "would," "will," "should," "can," "can have," "likely," the negatives thereof and other similar expressions.

All forward-looking statements are expressly qualified in their entirety by these cautionary statements. You should evaluate all forward-looking statements made in this Form 10-Q in the context of the risks and uncertainties disclosed in our Annual Report on Form 10-K for the fiscal year ended December 26, 2021 filed with the Securities and Exchange Commission (the "SEC") on March 10, 2022, which is available on the SEC's website at www.sec.gov.

The forward-looking statements included in this Form 10-Q are made only as of the date hereof. The Company undertakes no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law.

Portillo's Inc.

Form 10-Q | 1

Table of Contents

PART I – FINANCIAL INFORMATION


Item 1. Financial Statements (Unaudited)
			Page
Condensed Consolidated Balance Sheets			3
Condensed Consolidated Statements of Operations			4
Condensed Consolidated Statements of Stockholders' and Members' Equity			5
Condensed Consolidated Statements of Cash Flows			7
Notes to Condensed Consolidated Financial Statements			9
Note 1. Description Of Business			9
Note 2. Summary Of Significant Accounting Policies			10
Note 3. Revenue Recognition			12
Note 4. Inventories			13
Note 5. Property & Equipment, Net			13
Note 6. Goodwill & Intangible Assets			14
Note 7. Fair Value of Financial Instruments			14
Note 8. Debt			16

Note 9. Non-Controlling Interests			18
Note 10. Equity-Based Compensation			19
Note 11. Income Taxes			19
Note 12. Earnings (Loss) Per Share			19
Note 13. Contingencies			20
Note 14. Related Party Transactions			20

Portillo's Inc.

Form 10-Q | 2

PORTILLO'S INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(In thousands, except share and per share data)


	June 26, 2022		December 26, 2021
ASSETS
CURRENT ASSETS:
Cash and cash equivalents and restricted cash	$	49,730	$	39,263
Accounts receivable	8,830		7,840
Inventory	5,639		6,078
Prepaid expenses	5,082		5,836
Total current assets	69,281		59,017
Property and equipment, net	193,813		190,834

OTHER ASSETS:
Goodwill	394,298		394,298
Trade names	223,925		223,925
Other intangible assets, net	34,263		35,832
Equity method investment	16,083		16,170
Deferred tax asset	71,949		74,455
Other assets	4,282		5,042
Total other assets	744,800		749,722
TOTAL ASSETS	$	1,007,894	$	999,573

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable	$	20,382	$	27,249
Current portion of long-term debt	3,324		3,324


Current deferred revenue	4,649		6,893

Accrued expenses	25,123		29,472
Total current liabilities	53,478		66,938
LONG-TERM LIABILITIES:
Long-term debt, net of current portion	315,410		315,829
Deferred rent	36,511		32,174
Tax receivable agreement liability	154,883		156,638

Other long-term liabilities	3,800		4,588
Total long-term liabilities	510,604		509,229
Total liabilities	564,082		576,167

COMMITMENTS AND CONTINGENCIES (NOTE 13)
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 36,218,355 and 35,807,171 shares issued and outstanding at June 26, 2022 and December 26, 2021, respectively.	362		358
Class B common stock, $0.00001 par value per share, 50,000,000 shares authorized, and 35,673,321 shares issued and outstanding at June 26, 2022 and December 26, 2021, respectively.	—		—
Additional paid-in-capital	192,862		186,856
Accumulated deficit	(10,645)		(15,950)
Total stockholders' equity attributable to Portillo's Inc.	182,579		171,264
Non-controlling interest	261,233		252,142
Total stockholders' equity	443,812		423,406
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	1,007,894	$	999,573

See accompanying notes to unaudited condensed consolidated financial statements.

Portillo's Inc.

Form 10-Q | 3

PORTILLO'S INC

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

(UNAUDITED)

(In thousands, except share and per share data)


	Quarter Ended				Two Quarters Ended
	June 26, 2022		June 27, 2021		June 26, 2022		June 27, 2021

REVENUES, NET	$	150,623	$	140,734	$	285,105	$	258,041

COST AND EXPENSES:
Restaurant operating expenses:
Cost of goods sold, excluding depreciation and amortization	51,774		42,156		98,040		77,180
Labor	37,906		34,482		75,219		65,512
Occupancy	7,379		7,106		15,134		13,890
Other operating expenses	15,178		13,925		30,343		28,633
Total restaurant operating expenses	112,237		97,669		218,736		185,215

General and administrative expenses	15,439		12,170		31,126		24,005
Pre-opening expenses	423		671		979		1,960
Depreciation and amortization	5,309		6,420		10,514		12,709
Net income attributable to equity method investment	(275)		(295)		(398)		(359)
Other loss (income), net	51		(362)		(105)		(803)
OPERATING INCOME	17,439		24,461		24,253		35,314
Interest expense	6,097		10,712		12,196		21,441
Tax Receivable Agreement liability adjustment	(1,754)		—		(1,754)		—

INCOME BEFORE INCOME TAXES	13,096		13,749		13,811		13,873
Income tax expense	2,340		—		2,505		—
NET INCOME	10,756		13,749		11,306		13,873
Less: Redeemable preferred units accretion	—		(5,577)		—		(11,092)
NET INCOME ATTRIBUTABLE TO COMMON UNIT HOLDERS	10,756		8,172		11,306		2,781
Net income attributable to non-controlling interests	5,645		—		6,001		—
NET INCOME ATTRIBUTABLE TO PORTILLO'S INC.	$	5,111	$	8,172	$	5,305	$	2,781

Income per common share attributable to Portillo's Inc.:
Basic	$	0.14	$	0.16	$	0.15	$	0.05
Diluted	$	0.13	$	0.16	$	0.13	$	0.05

Weighted-average common shares outstanding:
Basic	35,991,079		51,200,644		35,899,125		51,196,539
Diluted	39,687,090		51,568,909		39,839,292		51,563,292

See accompanying notes to unaudited condensed consolidated financial statements.

Portillo's Inc.

Form 10-Q | 4

PORTILLO'S INC

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' AND MEMBERS' EQUITY

(UNAUDITED)

(In thousands, except share data)


Quarter Ended June 26, 2022 and June 27, 2021
	Preferred Units					Class A Common Stock			Class B Common Stock
	Units	Amounts		Member's Equity		Shares	Amount		Shares	Amount		Additional Paid-in Capital		Accumulated Deficit		Non-Controlling Interest		Total Stockholders' Equity
Balance at March 28, 2021	100,000	$	206,086	$	135,673	—	$	—	—	$	—	$	—	$	—	$	—	$	135,673
Net income	—	—		13,749		—	—		—	—		—		—		—		13,749

Issuance of common units	—	—		100		—	—		—	—		—		—		—		100
Equity-based compensation	—	—		168		—	—		—	—		—		—		—		168
Redeemable preferred units accretion	—	5,577		(5,577)		—	—		—	—		—		—		—		(5,577)
Balance at June 27, 2021	100,000	211,663		144,113		—	—		—	—		—		—		—		144,113

Balance at March 27, 2022	—	—		—		35,807,171	358		35,673,321	—		188,752		(15,756)		254,387		427,741
Net income	—	—		—		—	—		—	—		—		5,111		5,645		10,756
Equity-based compensation	—	—		—		—	—		—	—		1,941		—		1,923		3,864
Exercise of stock options	—	—		—		411,184	4		—	—		1,447		—		—		1,451
Non-controlling interest adjustment	—	—		—		—	—		—	—		722		—		(722)		—
Balance at June 26, 2022	—	$	—	$	—	36,218,355	$	362	35,673,321	$	—	$	192,862	$	(10,645)	$	261,233	$	443,812

See accompanying notes to unaudited condensed consolidated financial statements.

Portillo's Inc.

Form 10-Q | 5

PORTILLO'S INC

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' AND MEMBERS' EQUITY

(UNAUDITED)

(In thousands, except share data)


Two Quarters Ended June 26, 2022 and June 27, 2021
	Preferred Units					Class A Common Stock			Class B Common Stock
	Units	Amounts		Member's Equity		Shares	Amount		Shares	Amount		Additional Paid-in Capital		Accumulated Deficit		Non-Controlling Interest		Total Stockholders' Equity
Balance at December 27, 2020	100,000	$	200,571	$	140,709	—	$	—	—	$	—	$	—	$	—	$	—	$	140,709
Net income	—	—		13,873		—	—		—	—		—		—		—		13,873
Equity-based compensation	—	—		273		—	—		—	—		—		—		—		273
Repayment of subscription receivable	—	—		250		—	—		—	—		—		—		—		250
Issuance of common units	—	—		100		—	—		—	—		—		—		—		100
Redeemable preferred units accretion	—	11,092		(11,092)		—	—		—	—		—		—		—		(11,092)
Balance at June 27, 2021	100,000	211,663		144,113		—	—		—	—		—		—		—		144,113

Balance at December 26, 2021	—	—		—		35,807,171	358		35,673,321	—		186,856		(15,950)		252,142		423,406
Net income	—	—		—		—	—		—	—		—		5,305		6,001		11,306
Equity-based compensation	—	—		—		—	—		—	—		3,837		—		3,812		7,649
Exercise of stock options	—	—		—		411,184	4		—	—		1,447		—		—		1,451
Non-controlling interest adjustment	—	—		—		—	—		—	—		722		—		(722)		—
Balance at June 26, 2022	—	$	—	$	—	36,218,355	$	362	35,673,321	$	—	$	192,862	$	(10,645)	$	261,233	$	443,812

See accompanying notes to unaudited condensed consolidated financial statements.

Portillo's Inc.

Form 10-Q | 6

PORTILLO'S INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(In thousands)


	Two Quarters Ended
	June 26, 2022		June 27, 2021
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	11,306	$	13,873
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	10,514		12,709
Amortization of debt issuance costs and discount	1,243		1,920
Loss on sales of assets	107		114
Equity-based compensation	7,649		273
Deferred rent and tenant allowance	2,112		2,083
Deferred income tax expense	2,505		—
Tax Receivable Agreement liability adjustment	(1,754)		—
Amortization of deferred lease incentives	(166)		(189)

Gift card breakage	(474)		(419)

Changes in operating assets and liabilities:
Accounts receivable	(1,089)		535
Receivables from related parties	(66)		(159)
Inventory	439		1,502
Other current assets	754		(297)
Accounts payable	(2,908)		(532)
Accrued expenses and other liabilities	(6,140)		856

Deferred lease incentives	1,251		690
Other assets and liabilities	76		(142)
NET CASH PROVIDED BY OPERATING ACTIVITIES	25,359		32,817
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment	(13,940)		(18,468)
Purchase of investment securities	—		(200)
Proceeds from the sale of property and equipment	30		123
NET CASH USED IN INVESTING ACTIVITIES	(13,910)		(18,545)
CASH FLOWS FROM FINANCING ACTIVITIES:


Payments of long-term debt	(1,662)		(1,662)





Payment of initial public offering issuance costs	(771)		—
Proceeds from stock option exercise	1,451		—
Proceeds from issuance of common units	—		100
Repayment of stock subscription receivable	—		250
NET CASH USED IN FINANCING ACTIVITIES	(982)		(1,312)
NET INCREASE IN CASH AND CASH EQUIVALENTS AND RESTRICTED CASH	10,467		12,960
CASH AND CASH EQUIVALENTS AND RESTRICTED CASH AT BEGINNING OF THE PERIOD	39,263		41,432
CASH AND CASH EQUIVALENTS AND RESTRICTED CASH AT END OF THE PERIOD	$	49,730	$	54,392

See accompanying notes to unaudited condensed consolidated financial statements.

Portillo's Inc.

Form 10-Q | 7

PORTILLO'S INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(In thousands)


	Two Quarters Ended
	June 26, 2022		June 27, 2021
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid	$	10,815	$	19,378
Income tax paid	—		—
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Accrued capital expenditures	$	333	$	1,259
Redeemable preferred units accretion	—		(11,092)
Deferred offering costs in accounts payable	—		783

See accompanying notes to unaudited condensed consolidated financial statements.

Portillo's Inc.

Form 10-Q | 8

PORTILLO'S INC.

NOTES TO THE UNAUDITED CONDENSED 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 a public offering and related reorganization transactions (collectively, the "Transactions”) in order to carry on the business of PHD Group Holdings LLC and its subsidiaries ("Portillo's OpCo"). Following the consummation of the Transactions on October 20, 2021, the Company became the sole managing member of Portillo’s OpCo, and as 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.

The Company operates fast-casual restaurants in Illinois, Indiana, California, Arizona, Florida, Wisconsin, Minnesota, Iowa and Michigan, along with two food production commissaries in Illinois. As of June 26, 2022 and December 26, 2021, the Company had 70 and 68 restaurants in operation, respectively, excluding a restaurant owned by C&O Chicago, LLC ("C&O"), of which Portillo's owns 50% of the equity. The Company also had three non-traditional locations in operation as of June 26, 2022 and December 26, 2021. These non-traditional locations include a food truck, ghost kitchen (small kitchen with no store-front presence, used to fill online orders), and concessions. Portillo's additionally has a 50% interest in a single restaurant owned by C&O, that is referred to in Note 2. The Company’s principal corporate offices are located in Oak Brook, IL.

Initial Public Offering

The Company's registration statement on Form S-1, as amended (Registration No. 333-259810), related to its initial public offering ("IPO") was declared effective October 20, 2021, and the Company's Class A common stock began trading on the Nasdaq Global Select Market under the symbol "PTLO" on October 21, 2021. 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 classes of common stock: Class A common stock and Class B common stock. Each share of Class A common stock and Class B common stock entitles its holder to one vote per share on all matters submitted to a vote of our stockholders. The Class B common stock is not entitled to economic interests in Portillo’s Inc.

The 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 prepayment penalties) of $158.1 million; and

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

Portillo's Inc.

Form 10-Q | 9

PORTILLO'S INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

In connection with the IPO, the Company entered into a Tax Receivable Agreement ("TRA") with certain pre-IPO LLC Members, pursuant to 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 redemptions 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.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information.

The Company has prepared the accompanying unaudited condensed consolidated financial statements in accordance with GAAP for interim financial statements and pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"). In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments consisting of normal recurring adjustments necessary for a fair presentation of our financial position and results of operations. Interim results of operations are not necessarily indicative of the results that may be achieved for the full year. The financial statements and related notes do not include all information and footnotes required by GAAP for annual reports. The unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the fiscal year ended December 26, 2021 included in our Annual Report on Form 10-K for the fiscal year ended December 26, 2021.

All intercompany balances and transactions have been eliminated in consolidation.

The Company does not have any components of other comprehensive income (loss) recorded within its consolidated financial statements, and therefore, does not separately present a statement of comprehensive income (loss).

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"). 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.

Fiscal Year

We use a 52- or 53-week fiscal year ending on the Sunday prior to December 31. In a 52-week fiscal year, each quarterly period is comprised of 13 weeks. The additional week in a 53-week fiscal year is added to the fourth quarter. Fiscal 2022 and 2021 each consist of 52 weeks. The fiscal periods presented in this report are the quarter and two quarters ended June 26, 2022 and June 27, 2021, respectively.

Portillo's Inc.

Form 10-Q | 10

PORTILLO'S INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Use of Estimates

The preparation of these condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of sales and expenses during the period. Actual results could differ from those estimates.

Reverse Common Unit Split

On October 20, 2021, the members of Portillo's OpCo executed the Second Amended and Restated Limited Liability Company Agreement for Portillo's OpCo, effecting a 7.4-for-1 reverse common unit split. All applicable unit data, per unit amounts and related information in the consolidated financial statements and notes thereto have been adjusted retroactively to give effect to the 7.4-for-1 reverse common unit split.

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 expenses on the Company’s consolidated balance sheet 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, we recognize marketplace sales, including third-party delivery menu price premiums, as revenue when the control of the food is transferred to the delivery service, excluding any delivery or service fees charged to the customer. Prior to the end of 2021, this price premium was previously recorded in Cost of goods sold, excluding depreciation and amortization. At the end of 2021, the Company began to record the difference in higher third-party delivery menu prices, versus regular menu prices, in revenue. 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.

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 totaled $0.6 million and $0.4 million as of June 26, 2022 and December 26, 2021, respectively.

Equity Method Investments

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.

Portillo's Inc.

Form 10-Q | 11

PORTILLO'S INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Recently Issued Accounting Standards

In February 2016, the FASB issued Accounting Standards Update ("ASU") No. 2016-02, Leases (Topic 842) ("ASC 842"), along with related clarifications and improvements. The pronouncement requires lessees to recognize a lease 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 will adopt this standard for the annual period ending December 25, 2022. We expect the adoption of this standard will have a significant impact on the Company’s consolidated balance sheet as we recognize the operating lease assets and lease liabilities for our operating leases. We anticipate the adoption will have an immaterial impact on the condensed consolidated statements of operations, stockholders' equity, and cash flows.

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The pronouncement provides temporary optional expedients and exceptions to the current guidance on contract modifications and hedge accounting to ease the financial reporting burden related to the expected market transition from the London Interbank Offered Rate ("LIBOR") and other interbank offered rates to alternative reference rates. The guidance was effective upon issuance and generally can be applied to applicable contract modifications through December 31, 2022. The Company is currently evaluating the impact of the transition from LIBOR to alternative reference rates but does not expect a significant impact on its consolidated financial statements.

The Company reviewed all other recently issued accounting pronouncements and concluded that they were either not applicable or not expected to have a significant impact to its consolidated financial statements.

NOTE 3. REVENUE RECOGNITION

Revenues from retail restaurants are presented net of discounts and recognized when food and beverage products are sold to the end customer. Sales taxes collected from customers are excluded from revenues and the obligation is included in accrued liabilities until the taxes are remitted to the appropriate taxing authorities.

The Company offers delivery services to its customers. Delivery services are fulfilled by the Company and third-party service providers. In some cases, the Company makes delivery sales through Portillos.com or the Portillo's App ("Dispatch Sales"). In other cases, the Company makes delivery sales through a non-Company owned channel, such as the delivery partner’s website or app (“Marketplace Sales”).

With respect to Dispatch Sales, delivery may be performed by the Company or through a third-party service provider. The Company 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 fees collected by the delivery partner, when the performance obligation is complete, and control of the food is transferred to the delivery partner. The Company receives payment subsequent to the transfer of food. The payment terms with respect to Marketplace Sales are short-term in nature and are generally paid one week in arrears.

The Company sells gift cards which do not have expiration dates. The Company records the sale of the gift card as a contract liability and recognizes revenue from gift cards when: (i) the gift card is redeemed by the customer; or (ii) in the event a gift card is not expected to be redeemed, in proportion to the pattern of rights exercised by the customer (gift card breakage). The Company has determined that 11% of gift card sales will not be redeemed and will be retained by us based on a portfolio assessment of historical data on gift card redemption patterns. Gift card breakage is recorded within revenues, net in the condensed consolidated statements of operations. The Company recognized gift card breakage of $0.2 million and $0.5 million for the quarter and two quarters ended June 26, 2022, respectively, and $0.2 million and $0.4 million for the quarter and two quarters ended June 27, 2021, 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 included in current deferred revenue on the consolidated balance sheets is as follows (in thousands):

Portillo's Inc.

Form 10-Q | 12

PORTILLO'S INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


	June 26, 2022		December 26, 2021
Gift card liability	$	4,518	$	6,606

Revenue recognized in the condensed consolidated statement of operations for the redemption of gift cards that were included in their respective liability balances at the beginning of the year is as follows (in thousands):


	Quarter Ended				Two Quarters Ended
	June 26, 2022		June 27, 2021		June 26, 2022		June 27, 2021
Revenue recognized from gift card liability balance at the beginning of the year	$	830	$	771	$	2,681	$	2,459

NOTE 4. INVENTORY

Inventories consisted of the following (in thousands):


	June 26, 2022		December 26, 2021
Raw materials	$	4,206	$	4,181
Work in progress	116		114
Finished goods	706		1,395
Consigned inventory	611		388
	$	5,639	$	6,078

NOTE 5. PROPERTY & EQUIPMENT, NET

Property and equipment, net consisted of the following (in thousands):


	June 26, 2022		December 26, 2021
Land improvements	$	15,686	$	15,451
Furniture, fixtures, and equipment	118,557		115,187
Leasehold improvements	147,311		138,923
Transportation equipment	2,212		2,203
Construction-in-progress	7,885		8,300
	291,651		280,064
Less accumulated depreciation	(97,838)		(89,230)
	$	193,813	$	190,834

Depreciation expense was $4.5 million and $8.9 million for the quarter and two quarters ended June 26, 2022, respectively, and $4.2 million and $8.3 million for the quarter and two quarters ended June 27, 2021, respectively, and is included in depreciation and amortization in the condensed consolidated statements of operations.

Portillo's Inc.

Form 10-Q | 13

PORTILLO'S INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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.

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


	As of June 26, 2022

	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		(22,872)		33,245
Favorable rental contracts	2,991		(1,973)		1,018
	$	283,033	$	(24,845)	$	258,188

	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
Favorable rental contracts	2,991		(1,849)		1,142
	$	283,033	$	(23,276)	$	259,757

Amortization expense was $0.8 million and $1.6 million for the quarter and two quarters ended June 26, 2022, respectively, and $2.2 million and $4.4 million for the quarter and two quarters ended June 27, 2021, respectively, and is included in depreciation and amortization in the condensed consolidated statements of operations.

The estimated aggregate amortization expense for the intangibles for the remainder of this year and the succeeding five years and thereafter are $1.6 million, $3.1 million, $3.1 million, $3.0 million, $2.9 million, $2.7 million, and $17.9 million, respectively.

NOTE 7. 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

Portillo's Inc.

Form 10-Q | 14

PORTILLO'S INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Level 3 - Unobservable inputs that are significant to the measurement of the fair value of the assets or liabilities that are supported by little or no market data

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The carrying value of the Company's cash and cash equivalents, restricted cash, accounts receivable, accounts payable and all other current assets and liabilities approximate fair values due to the short-term nature of these financial instruments.

Other assets consist of a deferred compensation plan with related assets held in a rabbi trust.

Deferred Compensation Plan - The Company maintains a rabbi trust to fund obligations under a deferred compensation plan. Amounts in the rabbi trust are invested in mutual funds, which are designated as trading securities carried at fair value. The fair value measurement of these trading securities is considered Level 1 of the fair value hierarchy as they are measured using quoted market prices. As of June 26, 2022 and December 26, 2021, the fair value of the mutual fund investments and deferred compensation obligations were as follows (in thousands):


	June 26, 2022		December 26, 2021
	Level 1			Level 1
Assets - Investments designated for deferred compensation plan
Cash/money accounts	$	1,685		$	1,482
Mutual funds	2,218			3,185
Total assets	$	3,903		$	4,667

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

The mutual fund investments and deferred compensation obligations are included in other assets, accrued expenses and other long-term liabilities in the consolidated balance sheets. 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 8. 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, equity-method investment, goodwill and indefinite-lived intangible assets. These assets are measured at fair value whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. There were no impairment charges recognized during the quarter or two quarters ended June 26, 2022 and June 27, 2021.

Portillo's Inc.

Form 10-Q | 15

PORTILLO'S INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8. DEBT

Debt consisted of the following (in thousands):


	June 26, 2022		December 26, 2021
First Lien Term B-3 Loans	$	324,090	$	325,752
Revolving Loans	—		—

Unamortized discount and debt issuance costs	(5,356)		(6,599)
Total debt, net	318,734		319,153
Less: current portion	(3,324)		(3,324)
Long-term debt, net	$	315,410	$	315,829

First Lien

PHD Intermediate LLC (“Holdings”), Portillo’s Holdings LLC (the “Borrower”) and certain of its subsidiaries entered into the First Lien Credit Agreement ("First Lien Credit Agreement"), dated as of August 1, 2014 and as amended October 25, 2016, May 18, 2018 and December 6, 2019, with UBS AG, Stamford Branch, as the administrative agent and collateral agent, and other lenders from time to time party thereto (the “First Lien Lenders”). The First Lien Lenders extended credit in the form of (i) first lien initial term loans in an initial aggregate principal amount of $335.0 million and (ii) a revolving credit facility in an original principal amount equal to $30.0 million, including a letter of credit sub-facility with a $7.5 million sublimit (the “Revolving Facility” and the loans thereunder, the “Revolving Loans”).

On December 6, 2019, the Borrower entered a third amendment to the First Lien Credit Agreement (the “Third Amendment to First Lien Credit Agreement”) whereby the aggregate principal amount of the term loans as of the effective date of the Third Amendment to First Lien Credit Agreement was $332.4 million (the “First Lien Term B-3 Loans”), and the Revolving Facility was increased to $50.0 million. The maturity date with respect to the First Lien Term B-3 Loans was extended to September 6, 2024, and the maturity date with respect to the Revolving Loans date was extended to June 6, 2024.

In connection with the Third Amendment to First Lien Credit Agreement, the interest rates spread for the First Lien Term B-3 Loans increased by 100 basis points to 5.50% for the adjusted London interbank offered rate ("Eurocurrency Rate") loans. As of June 26, 2022 and June 27, 2021, the interest rate on the Term Loans was 6.56% and 6.50%, respectively. As of June 26, 2022 and June 27, 2021, the effective interest rate on the Term Loans was 7.38% and 7.63%, 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 June 26, 2022 and December 26, 2021, the Company had no borrowings under the Revolver outstanding, respectively. As of both June 26, 2022 and June 27, 2021, the interest rate on the Revolver 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 both June 26, 2022 and June 27, 2021, the commitment fees, pursuant to the First Lien, to maintain the Revolver were 0.250%. Also pursuant to the First Lien Credit Agreement, as of both June 26, 2022 and June 27, 2021, letter of credit fronting fees were 0.125%. Commitment fees and letter of credit fronting fees are recorded as interest expense in the condensed consolidated statements of operations.

The Company had $5.0 million of letters of credit issued against the Revolving Facility as of both June 26, 2022 and December 26, 2021, respectively. As of June 26, 2022, the Company had $45.0 million of availability under the Revolving Facility.

Second Lien

Holdings, the Borrower and certain of its subsidiaries entered into the Second Lien Credit Agreement (the “Second Lien Credit Agreement”) dated as of August 1, 2014 and as amended on October 25, 2016 and December 6, 2019 with UBS AG, Stamford Branch, as administrative agent and collateral agent, and other lenders from time to time party thereto (the “Second Lien Lenders”). The Second Lien Lenders extended credit in the form of initial second lien term loans in an initial aggregate principal amount of $80.0 million.

Portillo's Inc.

Form 10-Q | 16

PORTILLO'S INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

On December 6, 2019, the Borrower entered into second amendment to the Second Lien Credit Agreement (the “Second Amendment to Second Lien Credit Agreement”) whereby the aggregate principal amount of the term loans as of the effective date of the Second Amendment to the Second Lien Credit Agreement was $155.0 million (the “Second Lien Term B-3 Loans”). The maturity date of the Second Lien Term B-3 Loans was extended to December 6, 2024 (the “Second Lien Maturity Date”). In addition to the increased principal amount, the interest rates spread for the Second Lien Term B-3 Loans increased by 150 basis points to 9.50% for Eurocurrency Rate loans. The Borrower determined interest on the Second Lien at the Eurocurrency Rate, plus 9.50%.

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.

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.

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 $0.5 million and $0.9 million of deferred financing costs during the quarter and two quarters ended June 26, 2022, respectively, and $0.6 million and $1.1 million, respectively, during the quarter and two quarters ended June 27, 2021, which is included in interest expense in the condensed consolidated statements of operations. In addition, the Company also amortized $0.1 million and $0.3 million in original issue discount related to the long term debt during the quarter and two quarters ended June 26, 2022, respectively, and $0.4 million and $0.8 million, respectively, in the quarter and two quarters ended June 27, 2021 which is included in interest expense in the condensed consolidated statements of operations.

Total interest costs incurred were $6.1 million and $12.2 million for the quarter and two quarters ended June 26, 2022, respectively, and $10.7 million and $21.4 million for the quarter and two quarters ended June 27, 2021, respectively.

As of June 26, 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 June 26, 2022, the Company was in compliance with all covenants.

Portillo's Inc.

Form 10-Q | 17

PORTILLO'S INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 9. 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 interests in Portillo's OpCo held by pre-IPO LLC Members. Changes in our ownership interest in Portillo's OpCo while we retain our controlling interest in Portillo's OpCo will be accounted for as equity transactions. As such, future redemptions or direct exchanges of LLC interests in Portillo's OpCo by the pre-IPO LLC members will result in a change in ownership and reduce the amount recorded as non-controlling interest and increase additional paid-in capital.

The following table summarizes the LLC interest ownership by Portillo's Inc. and pre-IPO LLC members:


	As of June 26, 2022			As of	As of December 26, 2021
	LLC Interests	Ownership %			LLC Interests	Ownership %
Portillo's Inc.	36,218,355	50.4	%		35,807,171	50.1	%
pre-IPO LLC Members	35,673,321	49.6	%		35,673,321	49.9	%
Total	71,891,676	100.0	%		71,480,492	100.0	%

The weighted average ownership percentages for the applicable reporting periods are used to attribute net income (loss) to Portillo's Inc. and the pre-IPO LLC Members. The pre-IPO LLC Members' weighted average ownership percentage for both the quarter and two quarters ended June 26, 2022 was 49.8%, respectively.

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


	Quarter Ended		Two Quarters Ended
	June 26, 2022
Net income attributable to Portillo's Inc.	$	5,111	$	5,305
Transfers to non-controlling interests:
Increase in additional paid-in capital as a result of activity under stock compensation plans	1,447		1,447
Increase in additional paid-in capital as a result of non-controlling interest adjustments	722		722
Total effect of changes in ownership interest on equity attributable to Portillo's Inc.	$	7,280	$	7,474

Portillo's Inc.

Form 10-Q | 18

PORTILLO'S INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10. EQUITY-BASED COMPENSATION

Equity-based compensation expense is calculated based on awards ultimately expected to vest and is reduced for estimated forfeitures. Forfeitures are revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates and an adjustment to equity-based compensation expense will be recognized at that time.

Equity-based compensation expense included in the Company’s consolidated statements of operations is as follows (in thousands):


	Quarter Ended				Two Quarters Ended
	June 26, 2022		June 27, 2021		June 26, 2022		June 27, 2021
Labor	$	340	$	—	$	689	$	—
General and administrative expenses	3,525		168		6,960		273
Total equity-based compensation expense	$	3,865	$	168	$	7,649	$	273

Employee Stock Purchase Plan

On April 14, 2022, the Company's board of directors approved, subject to stockholder approval, the Company's 2022 Employee Stock Purchase Plan (the "ESPP"), which was approved by stockholders on June 22, 2022. Under the ESPP, up to 250,000 shares of the Company's Class A common stock will be made available for purchase by eligible employees, who are entitled to purchase shares of common stock with accumulated payroll deductions. During the quarter and two quarters ended June 26, 2022, the Company has not issued any shares under the ESPP.

NOTE 11. 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, on a pro rata basis. Beginning at the time of the IPO in 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

The effective income tax rate for the quarter and two quarters ended June 26, 2022 was 17.9% and 18.1%. The Company’s annual effective tax rate was less than the statutory rate of 21% primarily because the Company is not liable for income taxes on the portion of OpCo’s earnings that are attributable to non-controlling interests.

NOTE 12. EARNINGS PER SHARE

Basic net earnings (loss) per share of Class A Common Stock is computed by dividing net income 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 classes of common stock and (ii) convert all outstanding equity interests (except for those redeemable preferred units which were redeemed in connection with the IPO) into LLC Units. 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 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-Q | 19

PORTILLO'S INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The computations of basic and diluted earnings per share for the quarter and two quarters ended June 26, 2022 and June 27, 2021 are as follows (in thousands):


	Quarter Ended				Two Quarters Ended
	June 26, 2022		June 27, 2021		June 26, 2022		June 27, 2021
Net income attributable to common unit holders	$	10,756	$	8,172	$	11,306	$	2,781
Net income attributable to non-controlling interests	5,645		—		6,001		—
Net income attributable to Portillo's Inc.	$	5,111	$	8,172	$	5,305	$	2,781

Shares:
Weighted-average number of common shares outstanding-basic	35,991		51,201		35,899		51,197
Dilutive share awards	3,696		368		3,940		366
Weighted-average number of common shares outstanding-diluted	39,687		51,569