Portillo's Inc. (PTLO) FY 2021 MD&A

ITEM 7.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This section and other parts of this Annual Report on Form 10-K (“Form 10-K”) contain 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. 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," "intend," "outlook," "potential," "project," "projection," "plan," "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-K in the context of the risks and uncertainties disclosed in Part I, Item 1A "Risk Factors" and in Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations."

The forward-looking statements included in this Form 10-K are made only as of the date hereof. We undertake no obligation to publicly update any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law. If we do update one or more forward-looking statements, no inference should be made that we will make additional updates with respect to those or other forward-looking statements.

For a comparison of results of operations and financial condition for fiscal years 2020 and 2019, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Prospectus filed with the SEC on October 22, 2021.

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. We believe the difference in reporting periods does not have a material impact on comparability. Fiscal 2021 and 2020 each consisted of 52 weeks.

Overview

Portillo’s serves iconic Chicago street food through high-energy, multichannel restaurants designed to ignite the senses and create a memorable dining experience. Since our founding in 1963 in a small trailer which Dick Portillo called “The Dog House,” we have grown to become a treasured brand with a passionate (some might say obsessed) nationwide following. We create a consumer experience like no other by combining the best attributes of fast casual and quick service concepts with an exciting energy-filled atmosphere and restaurant model capable of generating tremendous volumes. Nearly all of our restaurants were built with double lane drive-thrus and have been thoughtfully designed with a layout that accommodates a variety of access modes including dine-in, carryout, delivery and catering in order to quickly and efficiently serve our guests. No matter how our guests order from us, our highly productive kitchens and team members consistently serve high-quality food and deliver a memorable guest experience. We believe the combination of our craveable food, multichannel sales model, dedication to operational excellence, and a distinctive culture driven by our team members gives us a competitive advantage.

As of December 26, 2021, we owned and operated 69 Portillo’s restaurants across nine states, including a restaurant owned by C&O Chicago, L.L.C. ("C&O") of which Portillo’s owns 50% of the equity.

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Recent Developments and Trends

Fiscal 2021 Highlights

Our fiscal 2021 financial highlights include:

•Total revenue increased 17.5% or $79.5 million to $535.0 million;

•Same-restaurant sales increased 10.5%;

•Operating income decreased $27.3 million to $30.0 million;

•Net income decreased $25.7 million to a net loss of $13.4 million;

•Restaurant-Level Adjusted EBITDA* increased $20.1 million to $142.1 million; and

•Adjusted EBITDA* increased $10.7 million to $98.5 million.

* Adjusted EBITDA and Restaurant-Level Adjusted EBITDA are non-GAAP measures. Definitions and reconciliations of Adjusted EBITDA to net (loss) income and Restaurant-Level Adjusted EBITDA to operating income, the most directly comparable financial measures presented in accordance with GAAP, are set forth under the section "Key Performance Indicators and Non-GAAP Financial Measures".

In addition, we completed an initial public offering ("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 and other offering expenses). The net proceeds and cash on hand were used as follows:

•to repay the redeemable preferred units in full (including the redemption premium) of $221.7 million;

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

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

COVID-19 Developments

As the COVID-19 pandemic continues and new variants emerge, such as Omicron in late 2021, our priority has been ensuring the health and safety of our team members and guests, and compliance with the applicable safety regulations. We first began to experience impacts from the COVID-19 pandemic during the second half of March 2020, as federal, state and local governments began to react to the public health crisis by encouraging or requiring social distancing, instituting stay-at-home orders, and requiring, in varying degrees, restaurant dine-in limitations, capacity limitations or other restrictions that largely limited restaurants to take-out, drive-thru and delivery sales.

We experienced a steady recovery during the year ended December 26, 2021, all while continuing to support our team members, guests and the communities in which we operate during the pandemic. Same-restaurant sales increased 0.8% in the first quarter ended March 28, 2021, increased 25.0% in the second quarter ended June 27, 2021, increased 6.8% in the third quarter ended September 26, 2021 and increased 10.3% in the fourth quarter ended December 26, 2021 versus the comparable periods in 2020. The Omicron variant began quickly spreading during the end of the fourth quarter 2021 and our sales, particularly our seasonal catering sales, were negatively impacted during the last few weeks of the fourth quarter. Impacts also included staffing shortages that carried into the first several weeks of fiscal 2022. However, the Company did see improvements in sales trends and staffing levels beginning in mid-January 2022.

During fiscal 2021, we also experienced certain supply shortages and transportation delays largely attributable to impacts of the COVID-19 pandemic as well as changes in customer demand and behaviors. While we expect these shortages and delays may continue into fiscal 2022, we view them to be temporary and do not believe they will have a material impact to our long-term growth and profitability. Absent significant and prolonged COVID-19 relapses or global economic disruptions, and based on the current trend of our business operations and our focused efforts to elevate customer experiences and enhance digital capabilities, we are confident in the strength of our brand to deliver consistent growth. We anticipate additional wage investments, along with increased supply chain and commodity costs, will have an impact to Restaurant-Level Adjusted EBITDA Margin in fiscal 2022. We plan to partially offset these expense increases through menu price increases and operational efficiencies. During the fourth quarter of 2021, we increased certain menu prices by approximately 3.0%, and during the first quarter of 2022, we increased certain prices to reflect an approximate 1.5% increase to menu prices, both actions to counter increases in labor and commodity expenses.

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Development Highlights

In fiscal 2021, we opened five new restaurants, successfully executing on our targeted growth plan for the year. We entered new markets this year in Detroit, Michigan and Orlando, Florida. We also opened additional restaurants in our current markets, opening restaurants in Arizona, Indiana and Wisconsin. Below are the restaurants opened during fiscal 2021:

Going forward, we plan to increase our number of restaurants by approximately 10% annually. Our near-term restaurant growth strategy is focused on leveraging our proven unit economic model primarily in adjacent and national markets outside Chicagoland with favorable macro-economic tailwinds where we already have a presence and brand awareness. We will also add select new restaurants in the Chicagoland market. For fiscal 2022, we are targeting opening seven new restaurants. Our development strategy for 2022 will focus on adding at least one restaurant in the Chicagoland market, as well as the expected opening of our first restaurant in Texas, and the remaining restaurants in adjacent and national markets outside Chicagoland. In February 2022, we opened our first off-premise only restaurant, located in Joliet, Illinois featuring three drive-thru lanes and a pick-up area at the restaurant.

Menu Innovation

Our primary strategy for menu innovation is to drive traffic through truly craveable foods that can be made with a Portillo's spin. New menu items are introduced when we believe they will offer superior guest satisfaction and typically coincide with the removal of an existing menu item to ensure a manageable menu size, so that our team members can maintain the operational efficiency that enables our high volumes and consistently high quality offerings. Fiscal 2021 marked a year of great achievements in menu innovation for us. We began offering a Spicy Chicken sandwich which features a spicy giardiniera sauce, a new signature sauce that can be used across multiple offerings. We also offer seasonal shakes and specialty cakes to compliment our existing menu.

Heart of Portillo's Foundation

We care deeply about our people and believe that by taking care of our team members, they will in turn take care of our guests. In June 2020 in response to the difficulties faced as a result of the COVID-19 pandemic, we started the “Heart of Portillo’s Fund,” a 501(c)(3) charitable fund within the Portillo’s organization that raised over $250,000 from members of the Portillo’s family to provide emergency assistance to other team members in need in 2021. In 2021, the fund awarded over 40 grants and has provided support for expenses following illness or injury, the unexpected death of a family member and other financial hardships.

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Consolidated Results of Operations

The following table summarizes our results of operations for the fiscal years ended December 26, 2021 and December 27, 2020 (in thousands):

Revenues, Net

Revenues primarily represent the aggregate sales of food and beverages, net of discounts. Sales taxes collected from customers are excluded from revenues. Revenues in any period are directly influenced by the number of operating weeks in the period, the number of open restaurants, restaurant traffic, our menu prices, third-party delivery platform prices and product mix.

Revenues for the year ended December 26, 2021 were $535.0 million compared to $455.5 million for the year ended December 27, 2020, an increase of $79.5 million or 17.5%. The increase in revenues was primarily attributed to an increase in our average check, increase in transactions and the opening of new restaurants. Two restaurants opened in the fourth quarter of 2020 and five new restaurants opened in the year ended December 26, 2021 positively impacted revenues in the year ended December 26, 2021 by approximately $33.0 million. Same-restaurant sales increased 10.5% during the year ended December 26, 2021, which was attributable to a 7.8% increase in average check and 2.7% increase in transactions. The higher average check was driven by an increase in menu prices and mix of items sold. For the purpose of calculating same-restaurant sales for December 26, 2021, sales for 61 restaurants were included in the Comparable Restaurant Base (as defined in "Key Performance Indicators and Non-GAAP Financial Measures" below) as of the end of fiscal 2021.

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At the end of 2021, the Company began to record the difference in higher third-party delivery menu prices, versus regular menu prices, in revenues. This markup was previously recorded in cost of goods sold, excluding depreciation and amortization. As a result, we anticipate this change to positively impact our same-restaurant sales growth by 2%-3% in each quarter in 2022 and for the full fiscal year 2022, with a corresponding increase to costs of goods sold, excluding depreciation and amortization. There is no anticipated or actual impact on operating income for any period.

Cost of Goods Sold, Excluding Depreciation and Amortization

Cost of goods sold, excluding depreciation and amortization includes the direct costs associated with food and beverages, including paper products and third-party delivery commissions. The components of cost of goods sold, excluding depreciation and amortization are variable by nature, change with sales volume, are impacted by product mix and are subject to increases or decreases in commodity costs. We anticipate the comparability of cost of goods sold, excluding depreciation and amortization, to be impacted in 2022 versus 2021 due to the aforementioned change in how the Company records third-party delivery menu prices. There is no anticipated or actual impact on operating income for any period.

Cost of goods sold, excluding depreciation and amortization for the year ended December 26, 2021 was $166.8 million compared to $142.4 million for the year ended December 27, 2020, an increase of $24.3 million or 17.1%. This increase was primarily driven by the opening of two new restaurants in the fourth quarter of 2020, five new restaurants in 2021, an increase in commodity prices, primarily beef, chicken and pork. As a percentage of revenues, cost of goods sold, excluding depreciation and amortization, decreased 0.1% during the year ended December 26, 2021. This decrease was primarily due to an increase in our average check, partially offset by higher commodity prices.

Labor Expenses

Labor expenses include hourly and management wages, bonuses, payroll taxes, workers’ compensation expense, equity-based compensation expense and team member benefits. Factors that influence labor costs include minimum wage and payroll tax legislation, health care costs and the performance of our restaurants.

Labor expenses for the year ended December 26, 2021 were $138.8 million compared to $116.0 million for the year ended December 27, 2020, an increase of $22.8 million or 19.7%. This increase was primarily driven by incremental investments to support our team members, including hourly rate increases, training costs and discretionary bonuses and the opening of two new restaurants in the fourth quarter of 2020 and five new restaurants in 2021, partially offset by lower staffing levels and increased productivity in our restaurants. As a percentage of revenues, labor expenses increased 0.5% during the year ended December 26, 2021 primarily due to the aforementioned incremental investments to support our team members, including hourly rate increases, training costs and discretionary bonuses, partially offset by an increase in our average check and lower staffing levels and increased productivity in our restaurants.

Occupancy Expenses

Occupancy expenses primarily consist of rent, property insurance, common area expenses and property taxes.

Occupancy expenses for the year ended December 26, 2021 were $28.1 million compared to $24.9 million for the year ended December 27, 2020, an increase of $3.1 million or 12.6%, primarily driven by the opening of two new restaurants in the fourth quarter of 2020 and five new restaurants opened during in 2021. As a percentage of revenues, occupancy expenses decreased 0.2% during the year ended December 26, 2021 due primarily to the leveraging of higher same-restaurant sales.

Other Operating Expenses

Other operating expenses consist of direct marketing expenses, utilities and other operating expenses incidental to operating our restaurants, such as credit card fees and repairs and maintenance.

Other operating expenses for the year ended December 26, 2021 were $59.3 million compared to $50.2 million for the year ended December 27, 2020, an increase of $9.1 million or 18.1%, primarily driven by the opening of two new restaurants in the fourth quarter of 2020, five new restaurants opened in 2021 and incremental costs associated with cleaning and utilities as a result of continued expansion of our dine-in capacity due to the recovery from the COVID-19 pandemic, as well as an increase in repair and maintenance, variable credit card fees and operating supplies.

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General and Administrative Expenses

General and administrative expenses primarily consist of costs associated with our corporate and administrative functions that support restaurant development and operations, including marketing and advertising costs incurred as well as legal and professional fees. General and administrative expenses also include equity-based compensation expense. General and administrative expenses are impacted by changes in our team member count and costs related to strategic and growth initiatives.

General and administrative expenses for the year ended December 26, 2021 were $87.1 million compared to $39.9 million for the year ended December 27, 2020, an increase of $47.2 million or 118.5%. This increase was primarily driven by an increase in equity-based stock compensation of $29.2 million. In connection with the IPO, as a result of the waiver and the resultant modification in the terms of certain performance-vesting awards, we recognized cash stock-compensation expense of approximately $1.3 million and non-cash stock-compensation expense of approximately $27.3 million for the quarter. The remainder of equity-based compensation expense is related to awards under the 2014 Equity Incentive Plan and 2021 Equity Incentive Plan as described in Note 15. "Equity-Based Compensation" to our consolidated financial statements. The remainder of the increase in general and administrative expenses was driven by an option holder payment in connection with the IPO of $6.6 million, an increase in costs associated with being a public company of $3.2 million, including costs related to the preparation for Sarbanes-Oxley compliance and other transaction-related fees and expenses, and an increase in salaries and wages attributable to annual rate increases, filling open positions, and training program costs for future restaurant managers. In 2020, the lower costs were driven by a disciplined cost reduction strategy across the majority of discretionary spend categories including travel and advertising.

Pre-Opening Expenses

Pre-opening expenses consist primarily of occupancy expenses, which represent rent expense recognized during the period between the date of possession of the restaurant facility and the restaurant opening date, wages, travel for the opening team, food, beverage, and the initial stocking of operating supplies. All such costs incurred prior to the opening are expensed in the period in which the expense was incurred. Pre-opening expenses can fluctuate significantly from period to period, based on the number and timing of openings and the specific pre-opening expenses incurred for each restaurant. Additionally, restaurant openings in new geographic market areas will initially experience higher pre-opening expenses than our established geographic market areas, such as the Chicagoland area, where we have greater economies of scale and incur lower travel and lodging costs for our training team.

Pre-opening expenses for the year ended December 26, 2021 were $3.6 million compared to $2.2 million for the year ended December 27, 2020, an increase of $1.4 million or 61.4%. This increase was due to five new restaurants opened in 2021 compared to two new restaurants opened in 2020.

Depreciation and Amortization

Depreciation and amortization expenses consist of the depreciation of fixed assets, including leasehold improvements, fixtures and equipment and the amortization of definite-lived intangible assets, which are primarily comprised of recipes, non-compete agreements and favorable leasehold positions.

Depreciation and amortization expense for the year ended December 26, 2021 was $23.3 million compared to $24.6 million for the year ended December 27, 2020, a decrease of $1.3 million or 5.2%. This decrease was primarily attributable to an expiring non-compete intangible asset, partially offset by incremental depreciation of capital expenditures related to the opening of two new restaurants in 2020 and five new restaurants in 2021.

Net Income Attributable to Equity Method Investment

Net income attributable to equity method investment consists of a 50% interest in C&O, which runs a single restaurant located within the Chicagoland market. We account for the investment and financial results in the consolidated financial statements under the equity method of accounting as we have significant influence but do not have control.

Net income attributable to equity method investment for the year ended December 26, 2021 was $0.8 million compared to $0.5 million for the year ended December 27, 2020. This increase was primarily driven by increased revenues due to an increase in guest traffic as a result of the recovery from the COVID-19 pandemic.

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Other Income, Net

Other income, net includes among other items, income resulting from discounts received for timely filing of sales tax returns, management fee income associated with our investment in C&O, trading gains or losses on our deferred compensation plan and gains or losses on asset disposals.

Other income, net for the year ended December 26, 2021 was $1.1 million compared to $1.5 million for the year ended December 27, 2020, a decrease of $0.4 million or 28.5%. Other income, net decreased primarily due to a decrease in trading gains in our deferred compensation plan and an increase in losses on asset disposals.

Interest Expense

Interest expense primarily consists of interest and fees on our Credit Facilities and the amortization expense for debt discount and deferred issuance costs.

Interest expense for year ended December 26, 2021 was $39.7 million compared to $45.0 million for year ended December 27, 2020, a decrease of $5.3 million or 11.9%. This decrease was primarily driven by decreased borrowings on the First Lien Term B-3 Loans and the payoff of the Second Term B-3 Loans with the use of IPO proceeds during the year ended December 26, 2021. There were no outstanding borrowings or repayments under the Revolving Facility during the year ended December 26, 2021.

Loss on Debt Extinguishment

Loss on debt extinguishment for year ended December 26, 2021 was $7.3 million due to prepayment penalties of $3.1 million and the write-off of debt discount and deferred issuance costs of $4.2 million associated with the payoff of the Second Term B-3 Loans. There was no such loss for year ended December 27, 2020.

Income Tax Expense

Portillo's OpCo is treated as a partnership for U.S. federal, as well as state and local income tax purposes and is not subject to taxes. Rather, 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 on a pro rata basis. As of the IPO, we are subject to U.S. federal, as well as state and local income taxes with respect to our allocable share of any taxable income or loss of Portillo's OpCo, as well as any stand-alone income or loss generated by Portillo's Inc.

Income tax benefit for year ended December 26, 2021 was $3.5 million. Our effective income tax rate for year ended December 26, 2021 was 20.9%. There was no income tax expense for year ended December 27, 2020.

Net Loss Attributable to Non-controlling Interests

In connection with the IPO, we became the sole managing member of Portillo's OpCo. We manage and operate the business and control the strategic decisions and day-to-day operations of Portillo’s OpCo and we also have a substantial financial interest in Portillo’s OpCo. Accordingly, we consolidate the financial results of Portillo’s OpCo, and a portion of our net income is allocated to non-controlling interests to reflect the entitlement of the pre-IPO LLC Members who retained their equity ownership in Portillo's OpCo (the "pre-IPO LLC Members"). The weighted average ownership percentages for the applicable reporting periods are used to attribute net income (loss) to Portillo's Inc. and the non-controlling interest holders.

Net loss attributable to non-controlling interests for year ended December 26, 2021 was $19.4 million. There was no such loss for year ended December 27, 2020.

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Key Performance Indicators and Non-GAAP Financial Measures

In addition to the GAAP measures presented in our financial statements, we use the following key performance indicators and non-GAAP financial measures to evaluate our business, measure our performance, develop financial forecasts and make strategic decisions. These key measures include same-restaurant sales, new restaurant openings, average unit volume ("AUV"), Adjusted EBITDA, Adjusted EBITDA Margin, Restaurant-Level Adjusted EBITDA and Restaurant-Level Adjusted EBITDA Margin. The Company includes these measures because management believes that they are important to day-to-day operations and overall strategy and are useful to investors in that they provide for greater transparency with respect to supplemental information used by management in its financial and operational decision-making.

(a) Includes a restaurant that is owned by C&O of which Portillo’s owns 50% of the equity, as described in Note 7. "Equity Method Investment" in our consolidated financial statements.

(b) Excludes a restaurant that is owned by C&O of which Portillo’s owns 50% of the equity.

Change in Same-Restaurant Sales

The change in same-restaurant sales is the percentage change in year-over-year revenue (excluding gift card breakage) for the comparable restaurant base, which is defined as the number of restaurants open for at least 24 full fiscal periods (the “Comparable Restaurant Base”). For the years ended December 26, 2021 and December 27, 2020, there were 61 and 56 restaurants in our Comparable Restaurant Base, respectively. The Comparable Restaurant Base excludes a restaurant that is owned by C&O, of which Portillo’s owns 50% of the equity, as described in Note 7. "Equity Method Investment" in our consolidated financial statements.

Average Unit Volume

AUV is the total revenue (excluding gift card breakage) recognized in the Comparable Restaurant Base, divided by the number of restaurants in the Comparable Restaurant Base by period.

Non-GAAP Financial Measures

To supplement the consolidated financial statements, which are prepared and presented in accordance with GAAP, we use the following non-GAAP financial measures: Adjusted EBITDA and Adjusted EBITDA Margin, and Restaurant-Level Adjusted EBITDA and Restaurant-Level Adjusted EBITDA Margin. Accordingly, these measures are not required by, nor presented in accordance with GAAP, but rather are supplemental measures of operating performance of our restaurants. You should be aware that these measures are not indicative of overall results for the Company and that Restaurant-Level Adjusted EBITDA and Restaurant-Level Adjusted EBITDA Margin do not accrue directly to the benefit of stockholders because of corporate-level expenses excluded from such measures. These measures are supplemental measures of operating performance and our calculations thereof may not be comparable to similar measures reported by other companies. These measures are important measures to evaluate the performance and profitability of our restaurants, individually and in the aggregate, but also have important limitations as analytical tools and should not be considered in isolation as substitutes for analysis of our results as reported under GAAP.

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Adjusted EBITDA and Adjusted EBITDA Margin

Adjusted EBITDA represents net income (loss) before depreciation and amortization, interest expense and income taxes, adjusted for the impact of certain non-cash and other items that we do not consider in our evaluation of ongoing core operating performance as identified in the reconciliation of net income (loss), the most directly comparable GAAP measure to Adjusted EBITDA. Adjusted EBITDA Margin represents Adjusted EBITDA as a percentage of total revenues.

We use Adjusted EBITDA and Adjusted EBITDA Margin (i) to evaluate our operating results and the effectiveness of our business strategies, (ii) internally as benchmarks to compare our performance to that of our competitors and (iii) as factors in evaluating management’s performance when determining incentive compensation.

We believe that Adjusted EBITDA and Adjusted EBITDA Margin are important measures of operating performance because they eliminate the impact of expenses that do not relate to our core operating performance.

The following table reconciles net (loss) income to Adjusted EBITDA and Adjusted EBITDA margin (in thousands):

(1) Represents the difference between cash rent payments and the recognition of straight-line rent expense recognized over the lease term.

(2) Represents an option holder payment in connection with the IPO and consulting fees related to our former owner.

(3) Represents loss on disposal of property and equipment.

(4) Represents fees and expenses associated with public company readiness.

Restaurant-Level Adjusted EBITDA and Restaurant-Level Adjusted EBITDA Margin

Restaurant-Level Adjusted EBITDA is defined as revenue, less restaurant operating expenses, which include cost of goods sold (excluding depreciation and amortization), labor expenses, occupancy expenses and other operating expenses. Restaurant-Level Adjusted EBITDA excludes corporate level expenses and depreciation and amortization on restaurant property and equipment. Restaurant-Level Adjusted EBITDA Margin represents Restaurant-Level Adjusted EBITDA as a percentage of revenue.

We believe that Restaurant-Level Adjusted EBITDA and Restaurant-Level Adjusted EBITDA Margin are important measures to evaluate the performance and profitability of our restaurants, individually and in the aggregate.

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The following table reconciles operating income to Restaurant-Level Adjusted EBITDA and Restaurant-Level Adjusted EBITDA Margin (in thousands):

Liquidity and Capital Resources

Our primary sources of liquidity are cash from operations, cash and cash equivalents on hand, and availability under our Revolving Facility. As of December 26, 2021, we maintained cash and cash equivalents and restricted cash balance of $39.3 million and had $45.0 million of availability under our Revolver.

Our primary requirements for liquidity are to fund our working capital needs, operating lease obligations, capital expenditures, and general restaurant support center needs. Our requirements for working capital are not significant because our guests pay for their food and beverage purchases in cash or on debit or credit cards at the time of the sale and we are able to sell many of our inventory items before payment is due to the supplier of such items. Our ongoing capital expenditures are principally related to opening of new restaurants, existing capital investments (both for remodels and maintenance), as well as investments in our restaurant support center infrastructure.

Based upon current levels of operations and anticipated growth, we expect that cash flows from operations will be sufficient to meet our needs for at least the next twelve months and the foreseeable future.

Liquidity Upon IPO

On October 25, 2021, we completed an IPO of 23,310,810 shares of the Class A common stock (including 3,040,540 shares sold to the underwriters pursuant to their overallotment option). We received net proceeds from the offering of approximately $430.0 million (after deducting underwriting discounts and commissions and other offering expenses). The net proceeds and cash on hand were used as follows:

•to repay the redeemable preferred units in full (including the redemption premium) of $221.7 million;

•to repay all of the borrowings outstanding under the Second Lien Credit Agreement (including 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.

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In connection with the IPO, we entered into a Tax Receivable Agreement ("TRA") with certain of our pre-IPO LLC Members, in which we will generally be required to pay 85% of the amount of cash savings, if any, in U.S. federal, state, and local income tax that we actually realize or be 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 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.

As of December 26, 2021, such TRA obligations totaled $156.6 million. Amounts payable under the TRA are contingent upon, among other things, (i) generation of future taxable income over the term of the TRA and (ii) future changes in tax laws. If we do not generate sufficient taxable income in the aggregate over the term of the TRA to utilize the tax benefits, then we would not be required to make the related TRA payments. The payments that we are required to make will generally reduce the amount of overall cash flow that might have otherwise been available to us, but we expect the cash tax savings we will realize to fund the required payments. Assuming no material changes in relevant tax law and that we earn sufficient taxable income to realize all tax benefits that are subject to the TRA, we estimate that the tax savings associated with all tax attributes described above would aggregate to approximately $184.2 million as of December 26, 2021. Under this scenario, we would be required to pay the TRA Parties approximately 85% of such amount, or $156.6 million, primarily over the next 15 years, substantially declining in year 16 through year 47.

Summary of Cash Flows

The following table presents a summary of our cash flows from operating, investing and financing activities:

Operating Activities

Net cash provided by operating activities for the year ended December 26, 2021 was $42.9 million compared to net cash provided by operating activities of $58.3 million for the year ended December 27, 2020, a decrease of $15.4 million or 26.4%. This decrease was driven by an decrease in net income of $25.7 million, a change in operating assets and liabilities of $20.7 million, partially offset by an increase in non-cash charges of $31.0 million.

The $20.7 million change in our operating asset and liability balances was primarily driven by operating assets and liabilities being a use of net cash of $7.0 million in year ended December 26, 2021, compared to a source of net cash of $13.6 million in year ended December 27, 2020 driven by increased payments for insurance, interest and employer social security taxes pursuant to the Coronavirus Aid, Relief, and Economic Security ("CARES") Act for the year ended December 26, 2021 offset by an increase in the receipt of deferred lease incentives and the deferral of employer social security taxes pursuant to the CARES Act in the year ended December 27, 2020. The CARES Act allowed eligible employers to defer the remittance of certain employer social security taxes otherwise payable during calendar year 2020 and remit half of such deferred amounts on or before December 31, 2021 and half on or before December 31, 2022.

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Investing Activities

Net cash used in investing activities was $36.3 million for the year ended December 26, 2021 compared to net cash used in investing activities of $21.4 million for the year ended December 27, 2020, an increase of $14.8 million or 69.3%. This increase was primarily due to the opening of five new restaurants in 2021 compared to two new restaurants in 2020.

Financing Activities

Net cash used in financing activities was $8.8 million for the year ended December 26, 2021 compared to net cash used in financing activities of $18.0 million for the year ended December 27, 2020, a decrease of $9.3 million. For the year ended December 26, 2021, we received proceeds from our IPO of $437.1 million, net of underwriting discounts and commissions. As discussed in Liquidity and Capital Resources, the proceeds were used 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. In addition, payments of IPO offering costs were $6.3 million and payments on long term-debt were $3.3 million. During the year ended December 27, 2020, we made repayments on borrowings of $18.3 million.

Revolving Facility and Liens

We maintain a Revolving Facility that provides for a revolving total commitment amount of $50.0 million. The Revolving Facility will mature and all amounts outstanding will be due and payable in June 2024. The Revolving Facility permits the issuance of letters of credit upon our request.

As of December 26, 2021, there were no borrowings outstanding under the Revolver. We had $45.0 million of availability, as of December 26, 2021, after giving effect to $5.0 million in outstanding letters of credit.

In March 2020, we borrowed $40.0 million under the Revolving Facility to enhance liquidity and provide financial flexibility given the uncertain market conditions created by the COVID-19 pandemic. We repaid this amount in full, plus interest, in June 2020.

On April 30, 2020, the Company was granted a loan in the aggregate amount of $10.0 million, pursuant to the Paycheck Protection Program (the “PPP”) under Division A, Title I of the CARES Act, which was enacted March 27, 2020. On May 5, 2020, the Company repaid the $10.0 million proceeds from the loan.

In connection with the IPO, the Company received aggregate net proceeds of approximately $430.0 million after deducting underwriting discounts and commissions and other offering expenses. Net proceeds of $158.1 million were used to repay the Second Lien Term B-3 Loans (including prepayment penalties) in full.

Borrowings under the First Lien Credit Agreement and Second Lien Credit Agreement are guaranteed by PHD Intermediate LLC ("Holdings"), Portillo’s Holdings LLC (the "Borrower") and certain of the Borrower’s subsidiaries, and Holdings, the Borrower and certain of the Borrower’s subsidiaries have pledged substantially all tangible and intangible assets as collateral, subject to certain exclusions and exceptions.

The Borrower is subject to certain financial and reporting covenants pursuant to the terms of the First Lien Credit Agreement and Second Lien Credit Agreement. These covenants are customary for these types of debt agreements. As of December 26, 2021, the Company was in compliance with all covenants.

Material Cash Requirements

Our material cash requirements greater than twelve months include:

Long-term debt. Refer to "Note 10. Debt" to the consolidated financial statements for further information of our obligations and the timing of expected payments.

Operating leases obligations. Refer to "Note 11. Operating Leases" to the consolidated financial statements for further information of our obligations and the timing of expected payments.

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Liabilities under the tax receivable agreement. Refer to "Note 16. Income Taxes" to the consolidated financial statements for further information of our obligations.

We also enter into short-term, exclusive contracts with certain vendors to supply us with food, beverages and paper goods, obligating us to purchase specified quantities and/or products at fixed prices. These commitments are cancellable and there are no material financial penalties associated with these agreements in the event of early termination. Additionally, we enter into purchase commitments related to construction, marketing and other service-related arrangements that occur in the normal course of business. Such commitments are typically short-term in nature and are not material as of December 26, 2021.

Critical Accounting Estimates

This discussion and analysis of financial condition and results of operations is based upon the Company's consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States of America ("GAAP"). The preparation of these financial statements requires the Company to make estimates, judgments, and assumptions that can have a meaningful effect on the reporting of consolidated financial statements. We describe our significant accounting policies in Note 2. "Summary Of Significant Accounting Policies" to the consolidated financial statements.

Critical accounting estimates are defined as those reflective of significant judgments, estimates and uncertainties, which may result in materially different results under different assumptions and conditions. As conditions resulting from the COVID-19 pandemic continue to evolve, the Company expects these judgments and estimates may be subject to change, which could materially impact future periods.

Goodwill and Indefinite-Lived Intangible Assets

Goodwill and indefinite-lived intangible assets are assessed for impairment annually 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.

We have one reporting unit which is evaluated for goodwill impairment annually. Fair value of the reporting unit is estimated using the income approach and the market approach. Under the income approach, fair value is based on the present value of estimated future cash flows. The market approach is based upon both the price-earnings multiples of comparable public companies, as well as transactional data from similar companies that were recently sold. Further given the timing of the Transactions, an IPO approach was also applied, which is a form of the market approach using the transactional method. 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. As of December 26, 2021, the fair value of the reporting unit substantially exceeded its carrying value. No impairment charge was recorded for any period presented.

Our indefinite-lived intangible assets consist of trade names and trade marks (collectively “trade names”). We estimate the fair value of our 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. As of December 26, 2021, the fair value of our trade names exceeded its carrying value by greater than 20%. No impairment charge was recorded for any period presented.

Equity-based Compensation

We have granted equity-based awards consisting of non-qualified stock options, restricted stock units, and performance based stock options to team members, officers and directors. 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. The grant-date fair value of the stock options is determined using the Black-Scholes option pricing model. The grant-date fair value of the performance based stock options is determined using a Monte Carlo simulation model. Both of these models require the input of highly subjective assumptions, including the fair value of the underlying common stock, the risk-free interest rate, the expected equity volatility, and the expected term of the option.

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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.

In connection with the IPO, each option under the 2014 Equity Incentive Plan that was outstanding, whether vested or unvested, was substituted for an option to purchase a number of shares of Class A common stock under the 2021 Equity Incentive Plan, and the option holders received a cash payment in respect of their options (whether vested or unvested) in an aggregate amount of approximately $6.6 million, which was recorded in the fourth quarter of 2021. In addition, as a result of the waiver and the resultant modification in the terms of certain performance-vesting awards we recorded compensation expense based on the fair value of the modified awards. Assuming all of the options vest and an offering price of $20.00 per share of Class A common stock, we recognized a cash compensation expense of approximately $1.3 million and a non-cash compensation expense of approximately $26.2 million, each at the modification date in the fourth quarter of fiscal 2021.

Liabilities Under Tax Receivable Agreement

As described in "Liquidity Upon IPO", we are a party to the TRA under which we are contractually committed to pay certain of our pre-IPO LLC Members 85% of the amount of any tax savings that we actually realize, or in some cases are deemed to realize, as a result of certain transactions. Amounts payable under the TRA are contingent upon, among other things, (i) generation of future taxable income over the term of the TRA and (ii) future changes in tax laws. If we do not generate sufficient taxable income in the aggregate over the term of the TRA to utilize the tax benefits, then we would not be required to make the related TRA payments. Therefore, we would only recognize a liability for TRA payments if we determine it is probable that we will generate sufficient future taxable income over the term of the TRA to utilize the related tax benefits. As of December 26, 2021, we recognized $156.6 million of liabilities relating to our obligations under the TRA, after concluding that it was probable that we would have sufficient future taxable income to utilize the related tax benefits. If we determine in the future that we will not be able to fully utilize all or part of the related tax benefits, we would de-recognize the portion of the liability related the benefits not expected to be utilized.

Additionally, we estimate the amount of TRA Payments expected to be paid within the next 12 months and classify this amount as current on our consolidated balance sheet. This determination is based on our estimate of taxable income for the next fiscal year and the timing of the anticipated payments. To the extent our estimate differs from actual results, we may be required to reclassify portions of our liabilities under the TRA between current and non-current.

Income Taxes

We are subject to U.S. federal, state and local income taxes with respect to our allocable share of any taxable income of Portillo’s OpCo and will be taxed at the prevailing corporate tax rates. In addition to tax expenses, we also will incur expenses related to our operations, plus payments under the TRA, which will be significant. We intend to cause Portillo’s OpCo to make distributions in an amount sufficient to allow us to pay our tax obligations and operating expenses, including distributions to fund any ordinary course payments due under the TRA. We anticipate that we will account for the income tax effects and corresponding TRA’s effects resulting from future taxable exchanges or redemptions of LLC Units of pre-IPO LLC Members by us or Portillo’s OpCo by recognizing an increase in our deferred tax assets, based on enacted tax rates at the date of the purchase or redemption.

The amounts recorded for both the deferred tax assets and the liability for our obligations under the TRA were estimated at the time of the IPO as a reduction to shareholders’ equity, and the effects of changes in any of our estimates after this date will be included in net income (loss). Similarly, the effect of subsequent changes in the enacted tax rates will be included in net income (loss).

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some or all of the deferred tax assets will be realized and, when necessary, a valuation allowance is established. The ultimate realization of the deferred tax assets is dependent upon the generation of future taxable income during the periods in which temporary differences become deductible. As of December 26, 2021, we had $74.5 million of deferred tax assets, net of valuation allowances.

Under the provisions of ASC 740—Income Taxes, as it relates to accounting for uncertainties in tax positions, we recognize the tax benefit of tax positions to the extent that the benefit will more likely than not be realized. The determination as to whether the tax benefit will more likely than not be realized is based upon the technical merits of the tax position as well as consideration of the available facts and circumstances. For the tax year ended December 26, 2021, we did not have any uncertain tax positions.

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JOBS Act

We qualify as an emerging growth company ("EGC") pursuant to the provisions of the Jumpstart our Business Startups (“JOBS”) Act. For as long as we are an EGC, we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not EGCs, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, exemptions from the requirements of holding advisory “say-on-pay” votes on executive compensation and shareholder advisory votes on golden parachute compensation.

In addition, Section 107 of the JOBS Act also provides that an EGC can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. An EGC can therefore delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We intend to take advantage of the extended transition period.

We will remain an EGC until the last day of the fiscal year following the fifth anniversary of the date of the first sale of our Class A common stock pursuant to an effective registration statement, which was October 21, 2021, unless, prior to that time, we have more than $1.07 billion in annual gross revenue, have a market value for our common stock held by non-affiliates of more than $700 million as of the last day of our second fiscal quarter of the fiscal year and a determination is made that we are deemed to be a “large accelerated filer,” as defined in Rule 12b-2 promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or issue more than $1.0 billion of non-convertible debt over a three-year period, whether or not issued in a registered offering. We have availed ourselves of the reduced reporting obligations with respect to executive compensation disclosure and expect to continue to avail ourselves of the reduced reporting obligations available to EGCs in future filings.

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