UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| | | | | |
(Mark One) | |
☑ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 24, 202030, 2021
OR
| | | | | |
☐ | 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: 001-36823
SHAKE SHACK INC.
(Exact name of registrant as specified in its charter)
| | | | | | | | | | | |
Delaware | | | 47-1941186 |
(State or other jurisdiction of incorporation or organization) | | | (IRS Employer Identification No.) |
225 Varick Street | | | |
Suite 301 | | | |
| New York, | New York | 10014 |
| (Address of principal executive offices) | | (Zip Code) |
(646) 747-7200
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act
| | | | | | | | |
Title of each class | Trading symbol(s) | Name of each exchange on which registered |
Class A Common Stock, par value $0.001 | SHAK | New York Stock Exchange |
Indicate by check mark if 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 ☑ o No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule-405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). þ Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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.
| | | | | | | | | | | | | | |
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 Act). ☐ Yes ☑ No
As of July 22, 2020,28, 2021, there were 38,237,01939,135,876 shares of Class A common stock outstanding and 3,117,0022,921,587 shares of Class B common stock outstanding.
SHAKE SHACK INC.
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, including risks related to the COVID-19 outbreak, uncertainties and other important factors that may cause actual results to be materially different.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," "intend," "outlook," "potential," "project," "projection," "plan," "intend," "seek," "may," "could," "would," "will," "should," "can," "can have," "likely," the negatives thereof and other similar expressions.
While we believe that our assumptions are reasonable, it is very difficult to predict the impact of known factors, and it is impossible to anticipate all factors that could affect our actual results. 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 Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 25, 201930, 2020 as filed with the U.S. Securities and Exchange Commission (the "SEC") under the heading "Risk Factors" and in Part II, Item 1A of this Quarterly Report on Form 10-Q for the quarterly period ended June 24, 2020..
The forward-looking statements included in this Form 10-Q are made only as of the date hereof. We undertakeThe 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.
Shake Shack Inc. Form 10-Q | 1
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited).
2 | Shake Shack Inc. Form 10-Q
SHAKE SHACK INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in thousands, except share and per share amounts)
| | | | June 24 2020 | | December 25 2019 | | | June 30 2021 | | December 30 2020 |
ASSETS | ASSETS | | | ASSETS | |
Current assets: | Current assets: | | | Current assets: | |
| | Cash and cash equivalents | | $ | 173,984 | | | $ | 37,099 | | | Cash and cash equivalents | $ | 340,103 | | | $ | 146,873 | |
| | Marketable securities | | 16,833 | | | 36,508 | | | Marketable securities | 80,105 | | | 36,887 | |
| | Accounts receivable | | 8,291 | | | 9,970 | | | Accounts receivable, net | 11,703 | | | 9,464 | |
| | Inventories, net | | 2,346 | | | 2,221 | | | Inventories | 3,560 | | | 2,888 | |
| | Prepaid expenses and other current assets | | 2,622 | | | 1,877 | | | Prepaid expenses and other current assets | 2,690 | | | 7,074 | |
| | Total current assets | | 204,076 | | | 87,675 | | | Total current assets | 438,161 | | | 203,186 | |
Property and equipment, net | | 322,162 | | | 314,862 | | |
Property and equipment, net of accumulated depreciation of $193,143 and $166,156, respectively | | Property and equipment, net of accumulated depreciation of $193,143 and $166,156, respectively | 356,202 | | | 336,541 | |
Operating lease assets | Operating lease assets | | 298,602 | | | 274,426 | | Operating lease assets | 326,744 | | | 306,317 | |
Deferred income taxes, net | Deferred income taxes, net | | 286,887 | | | 279,817 | | Deferred income taxes, net | 299,535 | | | 287,007 | |
Other assets | Other assets | | 12,208 | | | 11,488 | | Other assets | 11,625 | | | 12,297 | |
TOTAL ASSETS | TOTAL ASSETS | | $ | 1,123,935 | | | $ | 968,268 | | TOTAL ASSETS | $ | 1,432,267 | | | $ | 1,145,348 | |
LIABILITIES AND STOCKHOLDERS' EQUITY | LIABILITIES AND STOCKHOLDERS' EQUITY | | | LIABILITIES AND STOCKHOLDERS' EQUITY | |
Current liabilities: | Current liabilities: | | | Current liabilities: | |
| | | Accounts payable | | $ | 20,735 | | | $ | 14,300 | | | Accounts payable | $ | 26,292 | | | $ | 23,487 | |
| | Accrued expenses | | 19,807 | | | 24,140 | | | Accrued expenses | 32,759 | | | 25,920 | |
| | Accrued wages and related liabilities | | 7,649 | | | 11,451 | | | Accrued wages and related liabilities | 14,864 | | | 10,441 | |
| | Operating lease liabilities, current | | 37,082 | | | 30,002 | | | Operating lease liabilities, current | 36,677 | | | 35,657 | |
| | Other current liabilities | | 11,400 | | | 19,499 | | | Other current liabilities | 13,899 | | | 14,200 | |
| | Total current liabilities | | 96,673 | | | 99,392 | | | Total current liabilities | 124,491 | | | 109,705 | |
| | Long-term debt | | Long-term debt | 243,019 | | | 0 | |
| Long-term operating lease liabilities | Long-term operating lease liabilities | | 332,751 | | | 304,914 | | Long-term operating lease liabilities | 363,482 | | | 343,736 | |
Liabilities under tax receivable agreement, net of current portion | Liabilities under tax receivable agreement, net of current portion | | 228,096 | | | 226,649 | | Liabilities under tax receivable agreement, net of current portion | 234,049 | | | 232,954 | |
Other long-term liabilities | Other long-term liabilities | | 15,130 | | | 15,328 | | Other long-term liabilities | 23,694 | | | 24,460 | |
Total liabilities | Total liabilities | | 672,650 | | | 646,283 | | Total liabilities | 988,735 | | | 710,855 | |
Commitments and contingencies (Note 15) | | | |
Commitments and contingencies (Note 13) | | Commitments and contingencies (Note 13) | 0 | | 0 |
Stockholders' equity: | Stockholders' equity: | | | Stockholders' equity: | |
| | | Preferred stock, no par value—10,000,000 shares authorized; none issued and outstanding as of June 24, 2020 and December 25, 2019. | | — | | | — | | | Preferred stock, no par value—10,000,000 shares authorized; none issued and outstanding as of June 30, 2021 and December 30, 2020. | 0 | | | 0 | |
| | Class A common stock, $0.001 par value—200,000,000 shares authorized; 38,236,538 and 34,417,302 shares issued and outstanding as of June 24, 2020 and December 25, 2019, respectively. | | 38 | | | 35 | | | Class A common stock, $0.001 par value—200,000,000 shares authorized; 39,134,356 and 38,717,790 shares issued and outstanding as of June 30, 2021 and December 30, 2020, respectively. | 39 | | | 39 | |
| | Class B common stock, $0.001 par value—35,000,000 shares authorized; 3,117,002 and 3,145,197 shares issued and outstanding as of June 24, 2020 and December 25, 2019, respectively. | | 3 | | | 3 | | | Class B common stock, $0.001 par value—35,000,000 shares authorized; 2,921,587 and 2,951,188 shares issued and outstanding as of June 30, 2021 and December 30, 2020, respectively. | 3 | | | 3 | |
| | Additional paid-in capital | | 384,338 | | | 244,410 | | | Additional paid-in capital | 401,567 | | | 395,067 | |
| | Retained earnings | | 37,196 | | | 54,367 | | | Retained earnings | 15,462 | | | 12,209 | |
| | Accumulated other comprehensive income | | 3 | | | 2 | | | Accumulated other comprehensive income | 2 | | | 3 | |
| | Total stockholders' equity attributable to Shake Shack Inc. | | 421,578 | | | 298,817 | | | Total stockholders' equity attributable to Shake Shack Inc. | 417,073 | | | 407,321 | |
Non-controlling interests | Non-controlling interests | | 29,707 | | | 23,168 | | Non-controlling interests | 26,459 | | | 27,172 | |
Total equity | Total equity | | 451,285 | | | 321,985 | | Total equity | 443,532 | | | 434,493 | |
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | | $ | 1,123,935 | | | $ | 968,268 | | TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 1,432,267 | | | $ | 1,145,348 | |
See accompanying Notes to Condensed Consolidated Financial Statements.
Shake Shack Inc. Form 10-Q | 3
SHAKE SHACK INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(UNAUDITED)
(in thousands, except per share amounts)
| | | Thirteen Weeks Ended | | | Twenty-Six Weeks Ended | | | Thirteen Weeks Ended | | Twenty-Six Weeks Ended |
| | | June 24 2020 | | June 26 2019 | | June 24 2020 | | June 26 2019 | | | June 30 2021 | | June 24 2020 | | June 30 2021 | | June 24 2020 |
Shack sales | Shack sales | | $ | 89,519 | | | $ | 147,876 | | | $ | 227,567 | | | $ | 276,445 | | Shack sales | $ | 181,470 | | | $ | 89,519 | | | $ | 332,138 | | | $ | 227,567 | |
Licensing revenue | Licensing revenue | | 2,267 | | | 4,837 | | | 7,389 | | | 8,877 | | Licensing revenue | 5,990 | | | 2,267 | | | 10,604 | | | 7,389 | |
TOTAL REVENUE | TOTAL REVENUE | | 91,786 | | | 152,713 | | | 234,956 | | | 285,322 | | TOTAL REVENUE | 187,460 | | | 91,786 | | | 342,742 | | | 234,956 | |
Shack-level operating expenses: | Shack-level operating expenses: | | | Shack-level operating expenses: | |
| | Food and paper costs | | 30,027 | | | 42,899 | | | 69,591 | | | 80,890 | | | Food and paper costs | 54,917 | | | 30,027 | | | 99,547 | | | 69,591 | |
| | Labor and related expenses | | 30,933 | | | 40,197 | | | 72,699 | | | 77,290 | | | Labor and related expenses | 52,631 | | | 30,933 | | | 99,013 | | | 72,699 | |
| | Other operating expenses | | 14,304 | | | 16,755 | | | 32,083 | | | 32,323 | | | Other operating expenses | 24,275 | | | 14,304 | | | 47,419 | | | 32,083 | |
| | Occupancy and related expenses | | 12,323 | | | 11,873 | | | 24,881 | | | 22,772 | | | Occupancy and related expenses | 14,876 | | | 12,323 | | | 28,787 | | | 24,881 | |
General and administrative expenses | General and administrative expenses | | 14,017 | | | 15,393 | | | 30,208 | | | 29,330 | | General and administrative expenses | 20,366 | | | 14,017 | | | 39,931 | | | 30,208 | |
Depreciation expense | | 12,089 | | | 9,799 | | | 23,857 | | | 18,765 | | |
Depreciation and amortization expense | | Depreciation and amortization expense | 14,472 | | | 12,089 | | | 28,198 | | | 23,857 | |
Pre-opening costs | Pre-opening costs | | 1,734 | | | 3,549 | | | 3,977 | | | 6,191 | | Pre-opening costs | 2,258 | | | 1,734 | | | 5,834 | | | 3,977 | |
Impairment and loss on disposal of assets | Impairment and loss on disposal of assets | | 434 | | | 377 | | | 2,522 | | | 728 | | Impairment and loss on disposal of assets | 358 | | | 434 | | | 727 | | | 2,522 | |
TOTAL EXPENSES | TOTAL EXPENSES | | 115,861 | | | 140,842 | | | 259,818 | | | 268,289 | | TOTAL EXPENSES | 184,153 | | | 115,861 | | | 349,456 | | | 259,818 | |
OPERATING INCOME (LOSS) | OPERATING INCOME (LOSS) | | (24,075) | | | 11,871 | | | (24,862) | | | 17,033 | | OPERATING INCOME (LOSS) | 3,307 | | | (24,075) | | | (6,714) | | | (24,862) | |
Other income (loss), net | | 394 | | | 447 | | | 301 | | | 1,011 | | |
Other income, net | | Other income, net | 108 | | | 394 | | | 139 | | | 301 | |
Interest expense | Interest expense | | (442) | | | (97) | | | (554) | | | (169) | | Interest expense | (359) | | | (442) | | | (874) | | | (554) | |
INCOME (LOSS) BEFORE INCOME TAXES | INCOME (LOSS) BEFORE INCOME TAXES | | (24,123) | | | 12,221 | | | (25,115) | | | 17,875 | | INCOME (LOSS) BEFORE INCOME TAXES | 3,056 | | | (24,123) | | | (7,449) | | | (25,115) | |
Income tax expense (benefit) | Income tax expense (benefit) | | (6,092) | | | 1,050 | | | (6,005) | | | 3,097 | | Income tax expense (benefit) | 991 | | | (6,092) | | | (10,089) | | | (6,005) | |
NET INCOME (LOSS) | NET INCOME (LOSS) | | (18,031) | | | 11,171 | | | (19,110) | | | 14,778 | | NET INCOME (LOSS) | 2,065 | | | (18,031) | | | 2,640 | | | (19,110) | |
Less: net income (loss) attributable to non-controlling interests | | (1,820) | | | 2,141 | | | (1,939) | | | 3,202 | | |
Less: Net income (loss) attributable to non-controlling interests | | Less: Net income (loss) attributable to non-controlling interests | 121 | | | (1,820) | | | (613) | | | (1,939) | |
NET INCOME (LOSS) ATTRIBUTABLE TO SHAKE SHACK INC. | NET INCOME (LOSS) ATTRIBUTABLE TO SHAKE SHACK INC. | | $ | (16,211) | | | $ | 9,030 | | | $ | (17,171) | | | $ | 11,576 | | NET INCOME (LOSS) ATTRIBUTABLE TO SHAKE SHACK INC. | $ | 1,944 | | | $ | (16,211) | | | $ | 3,253 | | | $ | (17,171) | |
Earnings (loss) per share of Class A common stock: | Earnings (loss) per share of Class A common stock: | | | Earnings (loss) per share of Class A common stock: | |
| | Basic | | $ | (0.43) | | | $ | 0.30 | | | $ | (0.48) | | | $ | 0.39 | | | Basic | $ | 0.05 | | | $ | (0.43) | | | $ | 0.08 | | | $ | (0.48) | |
| | Diluted | | $ | (0.43) | | | $ | 0.29 | | | $ | (0.48) | | | $ | 0.38 | | | Diluted | $ | 0.05 | | | $ | (0.43) | | | $ | 0.06 | | | $ | (0.48) | |
Weighted-average shares of Class A common stock outstanding: | Weighted-average shares of Class A common stock outstanding: | | | Weighted-average shares of Class A common stock outstanding: | |
| | Basic | | 37,309 | | | 30,122 | | | 35,876 | | | 29,842 | | | Basic | 39,114 | | | 37,309 | | | 39,031 | | | 35,876 | |
| | Diluted | | 37,309 | | | 31,015 | | | 35,876 | | | 30,703 | | | Diluted | 43,789 | | | 37,309 | | | 43,289 | | | 35,876 | |
See accompanying Notes to Condensed Consolidated Financial Statements.
4 | Shake Shack Inc. Form 10-Q
SHAKE SHACK INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
(in thousands)
| | | Thirteen Weeks Ended | | | Twenty-Six Weeks Ended | | | Thirteen Weeks Ended | | Twenty-Six Weeks Ended |
| | | June 24 2020 | | June 26 2019 | | June 24 2020 | | June 26 2019 | | | June 30 2021 | | June 24 2020 | | June 30 2021 | | June 24 2020 |
Net income (loss) | Net income (loss) | | $ | (18,031) | | | $ | 11,171 | | | $ | (19,110) | | | $ | 14,778 | | Net income (loss) | $ | 2,065 | | | $ | (18,031) | | | $ | 2,640 | | | $ | (19,110) | |
Other comprehensive income, net of tax(1): | | | |
Other comprehensive income (loss), net of tax(1): | | Other comprehensive income (loss), net of tax(1): | |
| | Change in foreign currency translation adjustment | | — | | | — | | | 1 | | | — | | | Change in foreign currency translation adjustment | 0 | | | 0 | | | (1) | | | 1 | |
| | | | | Net change | — | | | — | | | 1 | | | — | | | | Net change | 0 | | | 0 | | | (1) | | | 1 | |
OTHER COMPREHENSIVE INCOME | | — | | | — | | | 1 | | | — | | |
OTHER COMPREHENSIVE INCOME (LOSS) | | OTHER COMPREHENSIVE INCOME (LOSS) | 0 | | | 0 | | | (1) | | | 1 | |
COMPREHENSIVE INCOME (LOSS) | COMPREHENSIVE INCOME (LOSS) | | (18,031) | | | 11,171 | | | (19,109) | | | 14,778 | | COMPREHENSIVE INCOME (LOSS) | 2,065 | | | (18,031) | | | 2,639 | | | (19,109) | |
Less: comprehensive income (loss) attributable to non-controlling interest | Less: comprehensive income (loss) attributable to non-controlling interest | | (1,820) | | | 2,141 | | | (1,939) | | | 3,202 | | Less: comprehensive income (loss) attributable to non-controlling interest | 121 | | | (1,820) | | | (613) | | | (1,939) | |
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO SHAKE SHACK INC. | COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO SHAKE SHACK INC. | | $ | (16,211) | | | $ | 9,030 | | | $ | (17,170) | | | $ | 11,576 | | COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO SHAKE SHACK INC. | $ | 1,944 | | | $ | (16,211) | | | $ | 3,252 | | | $ | (17,170) | |
(1)Net of tax expense of $0 for the thirteen and twenty-six weeks ended June 30, 2021 and June 24, 2020 and June 26, 2019.2020.
See accompanying Notes to Condensed Consolidated Financial Statements.
Shake Shack Inc. Form 10-Q | 5
SHAKE SHACK INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
(in thousands, except share amounts)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
For the Thirteen Weeks Ended June 24, 2020 and June 26, 2019 | | | | | | | | | | | | | | | | | | |
| | Class A Common Stock | | | | Class B Common Stock | | | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Income | | Non- Controlling Interest | | Total Equity |
| | Shares | | Amount | | Shares | | Amount | | | | | | | | | | |
BALANCE, MARCH 25, 2020 | | 34,523,400 | | | $ | 35 | | | 3,117,002 | | | $ | 3 | | | $ | 246,970 | | | $ | 53,407 | | | $ | 3 | | | $ | 22,188 | | | $ | 322,606 | |
| | | | | | | | | | | | | | | | | | |
| Net loss | | | | | | | | | | | (16,211) | | | | | (1,820) | | | (18,031) | |
| Other comprehensive income: | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| Net change in foreign currency translation adjustment | | | | | | | | | | | | | | | | | — | |
| Equity-based compensation | | | | | | | | | 1,429 | | | | | | | | | 1,429 | |
| Activity under stock compensation plans | 63,601 | | | — | | | | | | | (164) | | | | | | | 72 | | | (92) | |
| | | | | | | | | | | | | | | | | | |
| Redemption of LLC Interests | — | | | — | | | — | | | — | | | | | | | | | | | — | |
| | | | | | | | | | | | | | | | | | |
| Establishment of liabilities under tax receivable agreement and related changes to deferred tax assets associated with increases in tax basis | | | | | | | | | 385 | | | | | | | | | 385 | |
| Issuance of Class A common stock sold in equity offerings, net of underwriting discounts, commissions and offering costs | 3,649,537 | | | 3 | | | | | | | 135,718 | | | | | | | 9,276 | | | 144,997 | |
| Distributions paid to non-controlling interest holders | | | | | | | | | | | | | | | (9) | | | (9) | |
BALANCE, JUNE 24, 2020 | | 38,236,538 | | | $ | 38 | | | 3,117,002 | | | $ | 3 | | | $ | 384,338 | | | $ | 37,196 | | | $ | 3 | | | $ | 29,707 | | | $ | 451,285 | |
| | | | | | | | | | | | | | | | | | |
BALANCE, MARCH 27, 2019 | | 29,698,228 | | | $ | 31 | | | 7,453,515 | | | $ | 7 | | | $ | 199,315 | | | $ | 37,086 | | | $ | — | | | $ | 49,299 | | | $ | 285,738 | |
| | | | | | | | | | | | | | | | | | |
| Net income | | | | | | | | | | | 9,030 | | | | | 2,141 | | | 11,171 | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| Equity-based compensation | | | | | | | | | 2,263 | | | | | | | | | 2,263 | |
| Activity under stock compensation plans | 137,151 | | | | | | | | | (43) | | | | | | | 657 | | | 614 | |
| Redemption of LLC Interests | 722,306 | | | | | (722,306) | | | | | 4,886 | | | | | | | (4,886) | | | — | |
| Establishment of liabilities under tax receivable agreement and related changes to deferred tax assets associated with increases in tax basis | | | | | | | | | 2,445 | | | | | | | | | 2,445 | |
| Distributions paid to non-controlling interest holders | | | | | | | | | | | | | | | (1,558) | | | (1,558) | |
BALANCE, JUNE 26, 2019 | | 30,557,685 | | | $ | 31 | | | 6,731,209 | | | $ | 7 | | | $ | 208,866 | | | $ | 46,116 | | | $ | — | | | $ | 45,653 | | | $ | 300,673 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
For the Thirteen Weeks Ended June 30, 2021 and June 24, 2020 |
| | Class A Common Stock | | Class B Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Income | | Non- Controlling Interest | | Total Equity |
| | Shares | | Amount | | Shares | | Amount | | | | | |
BALANCE, MARCH 31, 2021 | 39,103,239 | | | $ | 39 | | | 2,921,588 | | | $ | 3 | | | $ | 400,371 | | | $ | 13,518 | | | $ | 2 | | | $ | 26,017 | | | $ | 439,950 | |
| | | | | | | | | | | | | | | | | | |
| Net income (loss) | | | | | | | | | | | 1,944 | | | | | 121 | | | 2,065 | |
| Other comprehensive income (loss): | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| Net change in foreign currency translation adjustment | | | | | | | | | | | | | — | | | | | — | |
| Equity-based compensation | | | | | | | | | 1,987 | | | | | | | | | 1,987 | |
| Activity under stock compensation plans | 31,116 | | | — | | | | | | | (788) | | | | | | | 557 | | | (231) | |
| | | | | | | | | | | | | | | | | | |
| Redemption of LLC Interests | 1 | | | — | | | (1) | | | — | | | (3) | | | | | | | 3 | | | 0 | |
| | | | | | | | | | | | | | | | | | |
| Establishment of liabilities under tax receivable agreement and related changes to deferred tax assets associated with increases in tax basis | | | | | | | | | — | | | | | | | | | — | |
| | | | | | | | | | | | | | | | | | |
| Issuance of Class A common stock sold in equity offerings, net of underwriting discounts, commissions and offering costs | — | | | — | | | | | | | — | | | | | | | — | | | — | |
| Distributions paid to non-controlling interest holders | | | | | | | | | | | | | | | (239) | | | (239) | |
BALANCE, JUNE 30, 2021 | 39,134,356 | | | $ | 39 | | | 2,921,587 | | | $ | 3 | | | $ | 401,567 | | | $ | 15,462 | | | $ | 2 | | | $ | 26,459 | | | $ | 443,532 | |
| | | | | | | | | | | | | | | | | | |
BALANCE, MARCH 25, 2020 | 34,523,400 | | | $ | 35 | | | 3,117,002 | | | $ | 3 | | | $ | 246,970 | | | $ | 53,407 | | | $ | 3 | | | $ | 22,188 | | | $ | 322,606 | |
| | | | | | | | | | | | | | | | | | |
| Net income (loss) | | | | | | | | | | | (16,211) | | | | | (1,820) | | | (18,031) | |
| Other comprehensive income (loss): | | | | | | | | | | | | | | | | | |
| Net change in foreign currency translation adjustment | | | | | | | | | | | | | — | | | | | — | |
| Equity-based compensation | | | | | | | | | 1,429 | | | | | | | | | 1,429 | |
| Activity under stock compensation plans | 63,601 | | | — | | | | | | | (164) | | | | | | | 72 | | | (92) | |
| Redemption of LLC Interests | — | | | — | | | — | | | — | | | | | | | | | | | 0 | |
| | | | | | | | | | | | | | | | | | |
| Establishment of liabilities under tax receivable agreement and related changes to deferred tax assets associated with increases in tax basis | | | | | | | | | 385 | | | | | | | | | 385 | |
| Issuance of Class A common stock sold in equity offerings, net of underwriting discounts, commissions and offering costs | 3,649,537 | | | 3 | | | | | | | 135,718 | | | | | | | 9,276 | | | 144,997 | |
| Distributions paid to non-controlling interest holders | | | | | | | | | | | | | | | (9) | | | (9) | |
BALANCE, JUNE 24, 2020 | 38,236,538 | | | $ | 38 | | | 3,117,002 | | | $ | 3 | | | $ | 384,338 | | | $ | 37,196 | | | $ | 3 | | | $ | 29,707 | | | $ | 451,285 | |
6 | Shake Shack Inc. Form 10-Q
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
For the Twenty-Six Weeks Ended June 24, 2020 and June 26, 2019 | | | | | | | | | | | | | | | | | | |
| | Class A Common Stock | | | | Class B Common Stock | | | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Income | | Non- Controlling Interest | | Total Equity |
| | Shares | | Amount | | Shares | | Amount | | | | | | | | | | |
BALANCE, DECEMBER 25, 2019 | | 34,417,302 | | | $ | 35 | | | 3,145,197 | | | $ | 3 | | | $ | 244,410 | | | $ | 54,367 | | | $ | 2 | | | $ | 23,168 | | | $ | 321,985 | |
| | | | | | | | | | | | | | | | | | |
| Net loss | | | | | | | | | | | (17,171) | | | | | (1,939) | | | (19,110) | |
| Other comprehensive income: | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| Net change in foreign currency translation adjustment | | | | | | | | | | | | | 1 | | | | | 1 | |
| Equity-based compensation | | | | | | | | | 2,742 | | | | | | | | | 2,742 | |
| Activity under stock compensation plans | 141,504 | | | — | | | | | | | 260 | | | | | | | (289) | | | (29) | |
| | | | | | | | | | | | | | | | | | |
| Redemption of LLC Interests | 28,195 | | | — | | | (28,195) | | | — | | | 195 | | | | | | | (195) | | | — | |
| | | | | | | | | | | | | | | | | | |
| Establishment of liabilities under tax receivable agreement and related changes to deferred tax assets associated with increases in tax basis | | | | | | | | | 1,013 | | | | | | | | | 1,013 | |
| Issuance of Class A common stock sold in equity offerings, net of underwriting discounts, commissions and offering costs | 3,649,537 | | | 3 | | | | | | | 135,718 | | | | | | | 9,276 | | | 144,997 | |
| Distributions paid to non-controlling interest holders | | | | | | | | | | | | | | | (314) | | | (314) | |
BALANCE, JUNE 24, 2020 | | 38,236,538 | | | $ | 38 | | | 3,117,002 | | | $ | 3 | | | $ | 384,338 | | | $ | 37,196 | | | $ | 3 | | | $ | 29,707 | | | $ | 451,285 | |
| | | | | | | | | | | | | | | | | | |
BALANCE, DECEMBER 26, 2018 | | 29,520,833 | | | $ | 30 | | | 7,557,347 | | | $ | 8 | | | $ | 195,633 | | | $ | 30,404 | | | $ | — | | | $ | 47,380 | | | $ | 273,455 | |
| Cumulative effect of accounting changes | | | | | | | | | | | 4,136 | | | | | 1,059 | | | 5,195 | |
| Net income | | | | | | | | | | | 11,576 | | | | | 3,202 | | | 14,778 | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| Equity-based compensation | | | | | | | | | 4,010 | | | | | | | | | 4,010 | |
| Activity under stock compensation plans | 210,714 | | | — | | | | | | | 932 | | | | | | | 1,159 | | | 2,091 | |
| Redemption of LLC Interests | 826,138 | | | 1 | | | (826,138) | | | (1) | | | 5,480 | | | | | | | (5,480) | | | — | |
| Establishment of liabilities under tax receivable agreement and related changes to deferred tax assets associated with increases in tax basis | | | | | | | | | 2,811 | | | | | | | | | 2,811 | |
| Distributions paid to non-controlling interest holders | | | | | | | | | | | | | | | (1,667) | | | (1,667) | |
BALANCE, JUNE 26, 2019 | | 30,557,685 | | | $ | 31 | | | 6,731,209 | | | $ | 7 | | | $ | 208,866 | | | $ | 46,116 | | | $ | — | | | $ | 45,653 | | | $ | 300,673 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
For the Twenty-Six Weeks Ended June 30, 2021 and June 24, 2020 |
| | Class A Common Stock | | Class B Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Income | | Non- Controlling Interest | | Total Equity |
| | Shares | | Amount | | Shares | | Amount | | | | | |
BALANCE, DECEMBER 30, 2020 | 38,717,790 | | | $ | 39 | | | 2,951,188 | | | $ | 3 | | | $ | 395,067 | | | $ | 12,209 | | | $ | 3 | | | $ | 27,172 | | | $ | 434,493 | |
| | | | | | | | | | | | | | | | | | |
| Net income (loss) | | | | | | | | | | | 3,253 | | | | | (613) | | | 2,640 | |
| Other comprehensive income (loss): | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| Net change in foreign currency translation adjustment | | | | | | | | | | | | | (1) | | | | | (1) | |
| Equity-based compensation | | | | | | | | | 3,683 | | | | | | | | | 3,683 | |
| Activity under stock compensation plans | 386,965 | | | — | | | | | | | 2,571 | | | | | | | 639 | | | 3,210 | |
| | | | | | | | | | | | | | | | | | |
| Redemption of LLC Interests | 29,601 | | | — | | | (29,601) | | | — | | | 33 | | | | | | | (33) | | | 0 | |
| | | | | | | | | | | | | | | | | | |
| Establishment of liabilities under tax receivable agreement and related changes to deferred tax assets associated with increases in tax basis | | | | | | | | | 213 | | | | | | | | | 213 | |
| Issuance of Class A common stock sold in equity offerings, net of underwriting discounts, commissions and offering costs | 0 | | | 0 | | | | | | | 0 | | | | | | | 0 | | | 0 | |
| Distributions paid to non-controlling interest holders | | | | | | | | | | | | | | | (706) | | | (706) | |
BALANCE, JUNE 30, 2021 | 39,134,356 | | | $ | 39 | | | 2,921,587 | | | $ | 3 | | | $ | 401,567 | | | $ | 15,462 | | | $ | 2 | | | $ | 26,459 | | | $ | 443,532 | |
| | | | | | | | | | | | | | | | | | |
BALANCE, DECEMBER 25, 2019 | 34,417,302 | | | $ | 35 | | | 3,145,197 | | | $ | 3 | | | $ | 244,410 | | | $ | 54,367 | | | $ | 2 | | | $ | 23,168 | | | $ | 321,985 | |
| | | | | | | | | | | | | | | | | | |
| Net income (loss) | | | | | | | | | | | (17,171) | | | | | (1,939) | | | (19,110) | |
| Other comprehensive income (loss): | | | | | | | | | | | | | | | | | |
| Net change in foreign currency translation adjustment | | | | | | | | | | | | | 1 | | | | | 1 | |
| Equity-based compensation | | | | | | | | | 2,742 | | | | | | | | | 2,742 | |
| Activity under stock compensation plans | 141,504 | | | — | | | | | | | 260 | | | | | | | (289) | | | (29) | |
| Redemption of LLC Interests | 28,195 | | | — | | | (28,195) | | | — | | | 195 | | | | | | | (195) | | | 0 | |
| | | | | | | | | | | | | | | | | | |
| Establishment of liabilities under tax receivable agreement and related changes to deferred tax assets associated with increases in tax basis | | | | | | | | | 1,013 | | | | | | | | | 1,013 | |
| Issuance of Class A common stock sold in equity offerings, net of underwriting discounts, commissions and offering costs | 3,649,537 | | | 3 | | | | | | | 135,718 | | | | | | | 9,276 | | | 144,997 | |
| Distributions paid to non-controlling interest holders | | | | | | | | | | | | | | | (314) | | | (314) | |
BALANCE, JUNE 24, 2020 | 38,236,538 | | | $ | 38 | | | 3,117,002 | | | $ | 3 | | | $ | 384,338 | | | $ | 37,196 | | | $ | 3 | | | $ | 29,707 | | | $ | 451,285 | |
See accompanying Notes to Condensed Consolidated Financial Statements.
Shake Shack Inc. Form 10-Q | 7
SHAKE SHACK INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
| | | Twenty-Six Weeks Ended | | | Twenty-Six Weeks Ended |
| | | June 24 2020 | | June 26 2019 | | | June 30 2021 | | June 24 2020 |
OPERATING ACTIVITIES | OPERATING ACTIVITIES | | | OPERATING ACTIVITIES | |
Net income (loss) (including amounts attributable to non-controlling interests) | Net income (loss) (including amounts attributable to non-controlling interests) | | $ | (19,110) | | | $ | 14,778 | | Net income (loss) (including amounts attributable to non-controlling interests) | $ | 2,640 | | | $ | (19,110) | |
Adjustments to reconcile net income (loss) to net cash provided by operating activities | Adjustments to reconcile net income (loss) to net cash provided by operating activities | | | Adjustments to reconcile net income (loss) to net cash provided by operating activities | |
| | | Depreciation and amortization expense | 28,198 | | | 23,857 | |
| | Depreciation expense | | 23,857 | | | 18,765 | | | Amortization of debt issuance costs | 344 | | | 0 | |
| | Amortization of cloud computing asset | | 628 | | | — | | | Amortization of cloud computing asset | 627 | | | 628 | |
| | Non-cash operating lease cost | | 22,220 | | | 18,765 | | | Non-cash operating lease cost | 24,716 | | | 22,220 | |
| | Equity-based compensation | | 2,719 | | | 3,872 | | | Equity-based compensation | 3,639 | | | 2,719 | |
| | Deferred income taxes | | 11,225 | | | 317 | | | Deferred income taxes | 6,265 | | | 11,225 | |
| | Non-cash interest expense | | 16 | | | — | | | Non-cash interest expense | 343 | | | 16 | |
| | | Gain on sale of marketable securities | | (79) | | | (22) | | | Loss (gain) on sale of marketable securities | 5 | | | (79) | |
| | Impairment and loss on disposal of assets | | 2,522 | | | 728 | | | Impairment and loss on disposal of assets | 727 | | | 2,522 | |
| | Unrealized (gain) loss on available-for-sale securities | | 22 | | | (231) | | | Unrealized loss on equity securities | 37 | | | 22 | |
| | Other non-cash expense | | 897 | | | 2 | | | Other non-cash (income) expense | (1) | | | 897 | |
| | | Changes in operating assets and liabilities: | | | | Changes in operating assets and liabilities: | |
| | Accounts receivable | | 1,679 | | | 7,252 | | | Accounts receivable | (2,239) | | | 1,679 | |
| | Inventories | | (125) | | | 57 | | | Inventories | (672) | | | (125) | |
| | Prepaid expenses and other current assets | | (745) | | | (3,908) | | | Prepaid expenses and other current assets | 4,384 | | | (745) | |
| | Other assets | | (1,542) | | | (5,354) | | | Other assets | (488) | | | (1,542) | |
| | Accounts payable | | 5,802 | | | (5,202) | | | Accounts payable | 4,236 | | | 5,802 | |
| | Accrued expenses | | (15,179) | | | 3,870 | | | Accrued expenses | (13,643) | | | (15,179) | |
| | Accrued wages and related liabilities | | (3,802) | | | (1,271) | | | Accrued wages and related liabilities | 4,423 | | | (3,802) | |
| | Other current liabilities | | (782) | | | 862 | | | Other current liabilities | (1,515) | | | (782) | |
| | | Long-term operating lease liabilities | | (12,649) | | | (17,408) | | | Long-term operating lease liabilities | (24,583) | | | (12,649) | |
| | | Other long-term liabilities | | 419 | | | 19 | | | | Other long-term liabilities | (438) | | | 419 | |
NET CASH PROVIDED BY OPERATING ACTIVITIES | NET CASH PROVIDED BY OPERATING ACTIVITIES | | 17,993 | | | 35,891 | | NET CASH PROVIDED BY OPERATING ACTIVITIES | 37,005 | | | 17,993 | |
INVESTING ACTIVITIES | INVESTING ACTIVITIES | | | INVESTING ACTIVITIES | |
Purchases of property and equipment | Purchases of property and equipment | | (37,637) | | | (55,998) | | Purchases of property and equipment | (44,709) | | | (37,637) | |
Purchases of marketable securities | Purchases of marketable securities | | (268) | | | (715) | | Purchases of marketable securities | (47,264) | | | (268) | |
Sales of marketable securities | Sales of marketable securities | | 20,000 | | | 27,000 | | Sales of marketable securities | 4,004 | | | 20,000 | |
NET CASH USED IN INVESTING ACTIVITIES | NET CASH USED IN INVESTING ACTIVITIES | | (17,905) | | | (29,713) | | NET CASH USED IN INVESTING ACTIVITIES | (87,969) | | | (17,905) | |
FINANCING ACTIVITIES | FINANCING ACTIVITIES | | | FINANCING ACTIVITIES | |
| Proceeds from issuance of convertible notes, net of discount | | Proceeds from issuance of convertible notes, net of discount | 243,750 | | | 0 | |
Proceeds from revolving credit facility | Proceeds from revolving credit facility | | 50,000 | | | — | | Proceeds from revolving credit facility | 0 | | | 50,000 | |
Payments on revolving credit facility | Payments on revolving credit facility | | (50,000) | | | — | | Payments on revolving credit facility | 0 | | | (50,000) | |
| Deferred financing costs | Deferred financing costs | | (64) | | | — | | Deferred financing costs | (101) | | | (64) | |
| Proceeds from issuance of Class A common stock sold in equity offerings, net of underwriting discounts, commissions and offering costs | Proceeds from issuance of Class A common stock sold in equity offerings, net of underwriting discounts, commissions and offering costs | | 144,997 | | | — | | Proceeds from issuance of Class A common stock sold in equity offerings, net of underwriting discounts, commissions and offering costs | 0 | | | 144,997 | |
Payments on principal of finance leases | Payments on principal of finance leases | | (1,150) | | | (912) | | Payments on principal of finance leases | (1,272) | | | (1,150) | |
Distributions paid to non-controlling interest holders | Distributions paid to non-controlling interest holders | | (314) | | | (1,667) | | Distributions paid to non-controlling interest holders | (706) | | | (314) | |
| Payments under tax receivable agreement | Payments under tax receivable agreement | | (6,643) | | | (707) | | Payments under tax receivable agreement | 0 | | | (6,643) | |
Debt issuance costs | | Debt issuance costs | (687) | | | 0 | |
Proceeds from stock option exercises | Proceeds from stock option exercises | | 1,740 | | | 3,427 | | Proceeds from stock option exercises | 6,610 | | | 1,740 | |
Employee withholding taxes related to net settled equity awards | Employee withholding taxes related to net settled equity awards | | (1,769) | | | (1,336) | | Employee withholding taxes related to net settled equity awards | (3,400) | | | (1,769) | |
| NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES | | 136,797 | | | (1,195) | | |
NET CASH PROVIDED BY FINANCING ACTIVITIES | | NET CASH PROVIDED BY FINANCING ACTIVITIES | 244,194 | | | 136,797 | |
NET INCREASE IN CASH AND CASH EQUIVALENTS | NET INCREASE IN CASH AND CASH EQUIVALENTS | | 136,885 | | | 4,983 | | NET INCREASE IN CASH AND CASH EQUIVALENTS | 193,230 | | | 136,885 | |
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | | 37,099 | | | 24,750 | | CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | 146,873 | | | 37,099 | |
CASH AND CASH EQUIVALENTS AT END OF PERIOD | CASH AND CASH EQUIVALENTS AT END OF PERIOD | | $ | 173,984 | | | $ | 29,733 | | CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | 340,103 | | | $ | 173,984 | |
See accompanying Notes to Condensed Consolidated Financial Statements.
8 | Shake Shack Inc. Form 10-Q
SHAKE SHACK INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
Shake Shack Inc. Form 10-Q | 9
NOTE 1: NATURE OF OPERATIONS
Shake Shack Inc. ("we," "us," "our," "Shake Shack" and the "Company") was formed on September 23, 2014 as a Delaware corporation for the purpose of facilitating an initial public offering and other related transactions in order to carry on the business of SSE Holdings, LLC and its subsidiaries ("SSE Holdings"). We areShake Shack is the sole managing member of SSE Holdings and, as sole managing member, we operatethe Company operates and controlcontrols all of the business and affairs of SSE Holdings. As a result, we consolidatethe Company consolidates the financial results of SSE Holdings and reportreports a non-controlling interest representing the economic interest in SSE Holdings held by the other members of SSE Holdings. As of June 24, 2020 we30, 2021 the Company owned 92.5%93.1% of SSE Holdings. Unless the context otherwise requires, "we," "us," "our," "Shake Shack," the "Company" and other similar references, refer to Shake Shack Inc. and, unless otherwise stated, all of its subsidiaries, including SSE Holdings.
We operateThe Company operates and licenselicenses Shake Shack restaurants ("Shacks"), which serve hamburgers, hot dogs, chicken, crinkle-cut fries, shakes, frozen custard, beer, wine and more. As of June 24, 2020,30, 2021, there were 292339 Shacks in operation, system-wide, of which 171200 were domestic company-operatedCompany-operated Shacks, 2223 were domestic licensed Shacks and 99116 were international licensed Shacks. As of June 24, 2020,30, 2021, one domestic Company-operated Shack and 8 domestic company-operated Shacks and 27 licensed Shacks were temporarily closed due to COVID-19.the COVID-19 pandemic.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include the accounts of Shake Shack Inc. and its subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. These interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") and on a basis consistent in all material respects with the accounting policies described in ourits Annual Report on Form 10-K for the fiscal year ended December 25, 201930, 2020 ("20192020 Form 10-K"). Certain information and footnote disclosures normally presented in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. These interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes thereto included in our 2019its 2020 Form 10-K. In ourthe Company's opinion, all adjustments, which are normal and recurring in nature, necessary for a fair presentation of ourthe financial position and results of operation have been included. Operating results for interim periods are not necessarily indicative of the results that may be expected for a full fiscal year.
SSE Holdings is considered a variable interest entity. Shake Shack Inc. is the primary beneficiary as we havethe Company has the majority economic interest in SSE Holdings and, as the sole managing member, havehas decision making authority that significantly affects the economic performance of the entity, while the limited partners have no substantive kick-out or participating rights. As a result, we consolidatethe Company consolidates SSE Holdings. The assets and liabilities of SSE Holdings represent substantially all of ourthe Company's consolidated assets and liabilities with the exception of certain deferred taxes and liabilities under the Tax Receivable Agreement. As of June 24, 202030, 2021 and December 25, 2019,30, 2020, the net assets of SSE Holdings were $394,424$384,193 and $270,542,$383,669, respectively. The assets of SSE Holdings are subject to certain restrictions in SSE Holdings' revolving credit agreement. SeeRefer to Note 86, Debt, for moreadditional information.
Fiscal Year
We operateThe Company operates on a 52/53 week fiscal year ending on the last Wednesday in December. Fiscal 20202021 contains 5352 weeks and ends on December 30, 2020.29, 2021. Fiscal 20192020 contained 5253 weeks and ended on December 25, 2019.30, 2020. Unless otherwise stated, references to years in this report relate to fiscal years.
10 | Shake Shack Inc. Form 10-Q
Use of Estimates
The preparation of these condensed consolidated financial statements in conformity with GAAP requires usmanagement to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of sales and expenses during the reporting period. Actual results could differ from those estimates.
10 | Shake Shack Inc. Form 10-Q
Recently Adopted Accounting Pronouncements
WeThe Company adopted the Accounting Standards Updates (“ASUs”) summarized below in fiscal 2020.2021.
| | | | | | | | |
Accounting Standards Update (“ASU”) | Description | Date Adopted |
Simplifying the Accounting for Income Taxes
(ASU 2019-12) | MeasurementThis standard simplifies various aspects related to accounting for income taxes by removing certain exceptions to the general principles in ASC 740, “Income Taxes” (“ASC 740”), and clarifying certain aspects of Credit Losses on Financial Instrumentsthe current guidance to promote consistency among reporting entities.
(ASU 2016-13)
| This standard replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates.
The adoption of this standard did not have a material impact to ourthe Company's condensed consolidated financial statements. | December 26, 2019
|
Facilitation of the Effects of Reference Rate Reform on Financial Reporting
(ASU 2020-04) | This standard provides optional guidance for a limited time to ease the potential accounting burden associated with transitioning away from reference rates that are expected to be discontinued.
The adoption of this standard did not have a material impact to our consolidated financial statements. | Effective upon issuance (March 12, 2020) |
Recently Issued Accounting Pronouncements
| | | | | | | | | | | |
Accounting Standards Update (“ASU”) | Description | Expected Impact | Effective Date |
Simplifying the Accounting for Income Taxes
(ASU 2019-12)
| This standard removes certain exceptions for recognizing deferred taxes for investments, performing intra-period allocation and calculating income taxes in interim periods. It also adds guidance in certain areas, including the recognition of franchise taxes, recognition of deferred taxes for tax goodwill, allocation of taxes to members of a consolidated group, computation of annual effective tax rates related to enacted changes in tax laws, and minor improvements related to employee stock ownership plans and investments in qualified affordable housing projects accounted for using the equity method. | We are currently evaluating the impact this standard will have on our consolidated financial statements. | December 31, 2020 |
Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity's Own Equity (Subtopic 815-40)—Accounting For Convertible Instruments and Contracts in an Entity's Own Equity.
Early adoption (ASU 2020-06) | This ASU amends the guidance on convertible instruments and the derivatives scope exception for contracts in an entity’s own equity and improves and amends the related earnings per share guidance for both Subtopics.
The Company elected to early adopt this standard, beginning December 31, 2020.
The guidance of this ASU is permitted.applicable to the convertible notes issued in March 2021. As a result, the convertible notes are accounted for as a single liability measured at amortized cost. The if-converted earnings per share ("EPS") method is used, with the effect of potential share settlement included in diluted EPS. Refer to Note 6, Debt, and Note 11, Earnings Per Share, for additional information. | December 31, 2020 |
NOTE 3: REVENUE
Revenue Recognition
Revenue consists of Shack sales and licensingLicensing revenue. Generally, revenue is recognized as promised goods or services transfer to the guest or customer in an amount that reflects the consideration we expectthe Company expects to be entitled to in exchange for those goods or services. Shack sales are recognized when payment is tendered at the point of sale as the performance obligation has been satisfied.
Revenue from Shack sales is presented net of discounts and recognized when food, beverage and retail products are sold. Sales tax collected from customers is excluded from Shack sales and the obligation is included in sales tax payable until the taxes are remitted to the appropriate taxing authorities. Revenue from our gift cards is deferred and recognized upon redemption.
Licensing revenues includerevenue includes initial territory fees, Shack opening fees, and ongoing sales-based royalty fees from licensed Shacks. Generally, the licenses granted to develop, open and operate each Shack in a specified territory are the predominant goods or services transferred to the licensee in ourthe contracts, and represent distinct performance obligations. Ancillary promised services, such as training and assistance during the initial opening of a Shack, are typically combined with the licenses and considered as one performance obligation per Shack. We determineThe Company determines the transaction price for each contract, which is comprised of the initial territory fee, and an estimate of the total Shack opening fees we expectthe Company expects to be entitled to. The calculation of total Shack opening fees included in the transaction price requires judgment, as it is based on an estimate of the number of Shacks we expectthe Company expects the licensee to open. The transaction price is then allocated equally to each Shack expected to open. The performance obligations are satisfied over time, starting when a Shack opens, through the end of the term of the
Shake Shack Inc. Form 10-Q | 11
license granted to the Shack. Because we arethe Company is transferring licenses to access our intellectual property during a contractual term, revenue is recognized on a straight-line basis over the license term. Generally, payment for the initial territory fee is received upon execution of the licensing agreement,
Shake Shack Inc. Form 10-Q | 11
and payment for the restaurantShack opening fees are received either in advance of or upon opening the related restaurant.Shack. These payments are initially deferred and recognized as revenue as the performance obligations are satisfied, which occurs over a long-term period.
Revenue from sales-based royalties is recognized as the related sales occur.
Revenue recognized during the thirteen and twenty-six weeks ended June 24, 202030, 2021 and June 26, 2019,24, 2020, disaggregated by type is as follows:
| | | Thirteen Weeks Ended | | | Twenty-Six Weeks Ended | | | Thirteen Weeks Ended | | Twenty-Six Weeks Ended |
| | June 24 2020 | | June 26 2019 | | June 24 2020 | | June 26 2019 | | June 30 2021 | | June 24 2020 | | June 30 2021 | | June 24 2020 |
Shack sales | Shack sales | $ | 89,519 | | | $ | 147,876 | | | $ | 227,567 | | | $ | 276,445 | | Shack sales | $ | 181,470 | | | $ | 89,519 | | | $ | 332,138 | | | $ | 227,567 | |
Licensing revenue: | Licensing revenue: | | | | | | | | Licensing revenue: | |
Sales-based royalties | Sales-based royalties | 2,133 | | | 4,741 | | | 7,076 | | | 8,645 | | Sales-based royalties | 5,825 | | | 2,133 | | | 10,250 | | | 7,076 | |
Initial territory and opening fees | Initial territory and opening fees | 134 | | | 96 | | | 313 | | | 232 | | Initial territory and opening fees | 165 | | | 134 | | | 354 | | | 313 | |
Total revenue | Total revenue | $ | 91,786 | | | $ | 152,713 | | | $ | 234,956 | | | $ | 285,322 | | Total revenue | $ | 187,460 | | | $ | 91,786 | | | $ | 342,742 | | | $ | 234,956 | |
The aggregate amount of the transaction price allocated to performance obligations that are unsatisfied (or partially unsatisfied) as of June 30, 2021 and June 24, 2020 was $15,794. We expect$17,633 and $15,794, respectively. The Company expects to recognize this amount as revenue over a long-term period, as the license term for each Shack ranges from 5 to 20 years. This amount excludes any variable consideration related to sales-based royalties.
Contract Balances
Opening and closing balances of contract liabilities and receivables from contracts with customers is as follows:
| | | | June 24 2020 | | December 26 2019 | | June 30 2021 | | December 31 2020 |
Shack sales receivables | Shack sales receivables | | $ | 3,713 | | | $ | 4,265 | | Shack sales receivables | $ | 5,880 | | | $ | 5,373 | |
Licensing receivables | | 2,664 | | | 4,510 | | |
Licensing receivables, net of allowance for doubtful accounts | | Licensing receivables, net of allowance for doubtful accounts | 4,003 | | | 2,647 | |
Gift card liability | Gift card liability | | 2,188 | | | 2,258 | | Gift card liability | 2,641 | | | 2,637 | |
Deferred revenue, current | Deferred revenue, current | | 552 | | | 511 | | Deferred revenue, current | 681 | | | 608 | |
Deferred revenue, long-term | Deferred revenue, long-term | | 11,221 | | | 11,310 | | Deferred revenue, long-term | 12,704 | | | 12,151 | |
Revenue recognized during the thirteen and twenty-six weeks ended June 24, 202030, 2021 and June 26, 201924, 2020 that was included in their respective liability balances at the beginning of the period is as follows:
| | | Thirteen Weeks Ended | | | Twenty-Six Weeks Ended | | | Thirteen Weeks Ended | | Twenty-Six Weeks Ended |
| | June 24 2020 | | June 26 2019 | | June 24 2020 | | June 26 2019 | | June 30 2021 | | June 24 2020 | | June 30 2021 | | June 24 2020 |
Gift card liability | Gift card liability | $ | 46 | | | $ | 105 | | | $ | 345 | | | $ | 383 | | Gift card liability | $ | 108 | | | $ | 46 | | | $ | 327 | | | $ | 345 | |
Deferred revenue | Deferred revenue | 134 | | | 85 | | | 305 | | | 219 | | Deferred revenue | 159 | | | 134 | | | 340 | | | 305 | |
NOTE 4: FAIR VALUE MEASUREMENTS
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following tables present information about our financial assetscarrying value of the Company's Cash and liabilities measured atcash equivalents, Accounts receivable, net, Accounts payable and Accrued expenses approximate their fair value on a recurring basis asdue to the short-term nature of June 24, 2020 and December 25, 2019, and indicate the classification within the fair value hierarchy.
these financial instruments.
Shake Shack Inc. Form 10-Q | 12
Cash, Cash EquivalentsAs of June 30, 2021 and December 30, 2020, the Company held certain assets that are required to be measured at fair value on a recurring basis including Marketable Securitiessecurities, which consist of investments in equity securities. Fair value of these investments is measured using Level 1 inputs (unadjusted quoted prices in active markets for identical assets). The carrying value of these investments in equity securities approximates fair value.
The following tables summarize our cash, cash equivalents and marketable securities by significant investment categoriesAssets measured at fair value on a recurring basis as of June 24, 202030, 2021 and December 25, 2019:30, 2020 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | June 24, 2020 | | | | | | | | | | |
| | Cost Basis | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | | Cash and Cash Equivalents | | Marketable Securities |
Cash | | $ | 173,984 | | | $ | — | | | $ | — | | | $ | 173,984 | | | $ | 173,984 | | | $ | — | |
Level 1: | | | | | | | | | | | | |
| Money market funds | — | | | — | | | — | | | — | | | — | | | — | |
| Mutual funds | 16,783 | | | 50 | | | — | | | 16,833 | | | — | | | 16,833 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Total | | $ | 190,767 | | | $ | 50 | | | $ | — | | | $ | 190,817 | | | $ | 173,984 | | | $ | 16,833 | |
| | | | | | | | | | | | | | |
| | | Fair Value Measurements |
| | | June 30 2021 | December 30 2020 |
| | | Level 1 | Level 1 |
Equity securities: | | | |
| Mutual funds | | $ | 80,105 | | $ | 36,887 | |
Total Marketable securities | | $ | 80,105 | | $ | 36,887 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 25, 2019 | | | | | | | | | | |
| | Cost Basis | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | | Cash and Cash Equivalents | | Marketable Securities |
Cash | | $ | 32,094 | | | $ | — | | | $ | — | | | $ | 32,094 | | | $ | 32,094 | | | $ | — | |
Level 1: | | | | | | | | | | | | |
| Money market funds | 5,005 | | | — | | | — | | | 5,005 | | | 5,005 | | | — | |
| Mutual funds | 36,436 | | | 72 | | | — | | | 36,508 | | | — | | | 36,508 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Total | | $ | 73,535 | | | $ | 72 | | | $ | — | | | $ | 73,607 | | | $ | 37,099 | | | $ | 36,508 | |
Refer to Note 6, Debt, for additional information relating to the fair value of the Company's outstanding debt instruments.
A summary of otherOther income, (loss)net from equity securities recognized during the thirteen and twenty-six weeks ended June 24, 202030, 2021 and June 26, 201924, 2020 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Thirteen Weeks Ended | | | | Twenty-Six Weeks Ended | | | | | | |
| | June 24 2020 | | June 26 2019 | | June 24 2020 | | June 26 2019 | | | | |
Equity securities: | | | | | | | | | | | | |
| Dividend income | $ | 66 | | | $ | 351 | | | $ | 250 | | | $ | 743 | | | | | |
| | | | | | | | | | | | |
| Realized gain (loss) on sale of investments | — | | | 36 | | | 79 | | | 22 | | | | | |
| Unrealized gain (loss) on equity securities | 334 | | | 74 | | | (22) | | | 231 | | | | | |
Total | | $ | 400 | | | $ | 461 | | | $ | 307 | | | $ | 996 | | | | | |
A summary of equity securities sold and gross realized gains and losses recognized during the thirteen and twenty-six weeks ended June 24, 2020 and June 26, 2019 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Thirteen Weeks Ended | | | | Twenty-Six Weeks Ended | | |
| | June 24 2020 | | June 26 2019 | | June 24 2020 | | June 26 2019 |
Equity securities: | | | | | | | | |
| Gross proceeds from sales and redemptions | $ | — | | | $ | 12,000 | | | $ | 20,000 | | | $ | 27,000 | |
| Cost basis of sales and redemptions | — | | | 11,964 | | | 19,921 | | | 26,978 | |
| Gross realized gains included in net income (loss) | — | | | 36 | | | 79 | | | 36 | |
| Gross realized losses included in net income (loss) | — | | | — | | | — | | | (14) | |
| | | | | | | | |
Realized gains and losses are determined on a specific identification method and are included in other income, net on the Condensed Consolidated Statements of Income (Loss). As of June 24, 2020 and December 25, 2019, there was no decline in the market value of our marketable securities investment portfolio.
Shake Shack Inc. Form 10-Q | 13
Other Financial Instruments
The carrying value of our other financial instruments, including accounts receivable, accounts payable, and accrued expenses as of June 24, 2020 and December 25, 2019 approximated their fair value due to the short-term nature of these financial instruments. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Thirteen Weeks Ended | | Twenty-Six Weeks Ended | | |
| June 30 2021 | | June 24 2020 | | June 30 2021 | | June 24 2020 | | | | |
Equity securities: | | | | | | | | | | | |
| Dividend income | $ | 93 | | | $ | 66 | | | $ | 167 | | | $ | 250 | | | | | |
| | | | | | | | | | | | |
| Realized gain (loss) on sale of investments | (5) | | | 0 | | | (5) | | | 79 | | | | | |
| Unrealized gain (loss) on equity securities | 9 | | | 334 | | | (37) | | | (22) | | | | | |
Total | $ | 97 | | | $ | 400 | | | $ | 125 | | | $ | 307 | | | | | |
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 our long-lived assets, operating lease right-of-use assets and indefinite-lived intangible assets. There were no impairment charges recognized during the thirteen and twenty-six weeks ended June 30, 2021. During the twenty-six weeks ended June 24, 2020, wethe Company recognized an impairment charge of $1,132 at one location. Of the total impairment charge, $736 was attributed to property and equipment held and used, $383 was attributed to operating lease right-of-use assets, and $13 was attributed to finance lease right-of-use assets. The asset impairment charge iswas included in Impairment and loss on disposal of assets on the Condensed Consolidated StatementStatements of Income (Loss). The fair values of assets were determined using an income-based approach and are classified as Level 3 within the fair value hierarchy. Significant inputs include projections of future cash flows, discount rates, Shack sales and profitability. Thereprofitability.There were no impairment charges recognized during the thirteen weeks ended June 24, 2020.
NOTE 5: INVENTORIES
Inventories are stated at the lower of cost or net realizable value with cost determined on a first-in, first-out basis. We make adjustments to our inventory reserves for inventories that are deemed to be obsolete or slow moving. As of June 24, 2020 and December 25, 2019, no adjustment was deemed necessary to reduce inventory to net realizable value due to the rapid turnover and high utilization of inventory. Inventories as of June 24, 2020 and December 25, 2019 consisted of the following:
| | | | | | | | | | | |
| June 24 2020 | | December 25 2019 |
Food | $ | 1,498 | | | $ | 1,738 | |
Wine | 95 | | | 107 | |
Beer | 109 | | | 114 | |
Beverages | 211 | | | 233 | |
Retail merchandise | 18 | | | 29 | |
Paper goods | 415 | | | — | |
Inventories | $ | 2,346 | | | $ | 2,221 | |
| | | |
| | | |
NOTE 6: PROPERTY AND EQUIPMENT
Property and equipment as of June 24, 2020 and December 25, 2019 consisted of the following:
| | | | | | | | | | | |
| June 24 2020 | | December 25 2019 |
Leasehold improvements | $ | 321,137 | | | $ | 302,204 | |
| | | |
Equipment | 57,669 | | | 54,404 | |
Furniture and fixtures | 18,986 | | | 18,082 | |
Computer equipment and software | 25,544 | | | 24,226 | |
Financing equipment lease assets | 8,383 | | | 7,442 | |
Construction in progress | 32,293 | | | 30,290 | |
Property and equipment, gross | 464,012 | | | 436,648 | |
Less: accumulated depreciation | 141,850 | | | 121,786 | |
Property and equipment, net | $ | 322,162 | | | $ | 314,862 | |
14 | Shake Shack Inc. Form 10-Q | 13
NOTE 7:5: SUPPLEMENTAL BALANCE SHEET INFORMATION
The components of otherOther current liabilities as of June 24, 202030, 2021 and December 25, 201930, 2020 are as follows:
| | | June 24 2020 | | December 25 2019 | | June 30 2021 | | December 30 2020 |
Sales tax payable | Sales tax payable | $ | 2,426 | | | $ | 4,086 | | Sales tax payable | $ | 4,351 | | | $ | 4,285 | |
Current portion of liabilities under tax receivable agreement | — | | | 7,777 | | |
| Gift card liability | Gift card liability | 2,188 | | | 2,258 | | Gift card liability | 2,641 | | | 2,637 | |
| Current portion of financing equipment lease liabilities | Current portion of financing equipment lease liabilities | 1,802 | | | 1,873 | | Current portion of financing equipment lease liabilities | 2,553 | | | 1,998 | |
Other | Other | 4,984 | | | 3,505 | | Other | 4,354 | | | 5,280 | |
Other current liabilities | Other current liabilities | $ | 11,400 | | | $ | 19,499 | | Other current liabilities | $ | 13,899 | | | $ | 14,200 | |
The components of otherOther long-term liabilities as of June 24, 202030, 2021 and December 25, 201930, 2020 are as follows:
| | | June 24 2020 | | December 25 2019 | | June 30 2021 | | December 30 2020 |
Deferred licensing revenue | Deferred licensing revenue | $ | 11,221 | | | $ | 11,310 | | Deferred licensing revenue | $ | 12,704 | | | $ | 12,151 | |
Long-term portion of financing equipment lease liabilities | Long-term portion of financing equipment lease liabilities | 3,559 | | | 3,643 | | Long-term portion of financing equipment lease liabilities | 4,122 | | | 3,586 | |
Other(1) | Other(1) | 350 | | | 375 | | Other(1) | 6,868 | | | 8,723 | |
Other long-term liabilities | Other long-term liabilities | $ | 15,130 | | | $ | 15,328 | | Other long-term liabilities | $ | 23,694 | | | $ | 24,460 | |
(1)As of June 30, 2021, Other included $3,967 of deferred lease incentive liabilities related to leases with variable lease cost as well as $2,607 of deferred Social Security taxes associated with the Coronavirus Aid, Relief, and Economic Security Act. As of December 30, 2020, Other included $3,182 of deferred lease incentive liabilities related to leases with variable lease cost as well as $5,214 of deferred Social Security taxes associated with the Coronavirus Aid, Relief, and Economic Security Act.
NOTE 8:6: DEBT
Revolving Credit Facility
In August 2019, we terminated our previous revolving credit facility andthe Company entered into a new revolving credit facility agreement ("Revolving Credit Facility"), which permits borrowings up to $50,000, of which the entire amount is available immediately, with the ability to increase available borrowings up to an additional $100,000, to be made available subject to satisfaction of certain conditions. The Revolving Credit Facility will mature and all amounts outstanding will be due and payable in August 2024. The Revolving Credit Facility also permits the issuance of letters of credit upon our request of up to $15,000. Borrowings
In March 2020, the Company drew down the full $50,000 available under the Revolving Credit Facility will bearto enhance liquidity and financial flexibility given the uncertain market conditions created by the COVID-19 pandemic. This amount was paid in full, plus interest, in June 2020.
In May 2020, the Company entered into a first amendment to the Revolving Credit Facility ("First Amendment"), which, among other things, provided for modified financial covenant compliance requirements for a period of time. The First Amendment required the Company to maintain minimum liquidity of $25,000 through July 1, 2021 and outstanding borrowings during the applicable period covered by the First Amendment bore interest at either: (i) LIBORthe London Interbank Offered Rate ("LIBOR") plus a percentage ranging from 1.0% to 1.5%2.5% or (ii) the base rate plus a percentage ranging from 0.0% to 0.5%1.5%, in each case depending on ourthe Company's net lease adjusted leverage ratio. To
In March 2021, the extentCompany entered into a second amendment to the Revolving Credit Facility (“Second Amendment”). The Second Amendment modified the applicable covenants and restrictions in the Revolving Credit Facility to permit the incurrence of the Convertible Notes (as defined below), including obligations and transactions in connection therewith. In addition, the Second Amendment, among other things, (i) extended the period applicable to the increased interest rate margin as set forth in the First Amendment; (ii) shortened the maturity date of the Revolving Credit Facility from August 2024 to September 2022 and (iii) added
Shake Shack Inc. Form 10-Q | 14
mechanics relating to the transition from the use of LIBOR reference rate is no longer available,to the Secured Overnight Financing Rate ("SOFR") upon the discontinuance or unavailability of LIBOR.
Subsequently, and also in March 2021, the Company entered into a third amendment to the Revolving Credit Facility (“Third Amendment”) as Wells Fargo Bank resigned as administrative agent in consultation with us, will determine a replacement rate which will be generally in accordance with similar transactions in which it servesunder the Revolving Credit Facility and assigned its commitments thereunder to JPMorgan Bank, N.A. The Third Amendment appoints JPMorgan Bank, N.A. as administrative agent. agent under the Revolving Credit Facility. In addition, the Third Amendment, among other things, extends the maturity date of the Revolving Credit Facility from September 2022 to March 2026. As of June 30, 2021 and December 30, 2020, no amounts were outstanding under the Revolving Credit Facility.
The obligations under the Revolving Credit Facility are secured by a first-priority security interest in substantially all of the assets of SSE Holdings and the guarantors. The obligations under the Revolving Credit Facility are guaranteed by each of SSE Holdings' direct and indirect subsidiaries (with certain exceptions).
The Revolving Credit Facility requires usthe Company to comply with maximum net lease adjusted leverage and minimum fixed charge coverage ratios. We areThe Company is not subject to these coverage ratios for a period of time due to the FirstSecond Amendment to the Revolving Credit Facility described below.above. In addition, the Revolving Credit Facility contains other customary affirmative and negative covenants, including those which (subject to certain exceptions and dollar thresholds) limit ourthe Company's ability to incur debt; incur liens; make investments; engage in mergers, consolidations, liquidations or acquisitions; dispose of assets; make distributions on or repurchase equity securities; engage in transactions with affiliates; and prohibits us,the Company, with certain exceptions, from engaging in any line of business not related to ourits current line of business. As of June 24, 2020, we were30, 2021, the Company was in compliance with all covenants.
In May 2020, we entered into a first amendmentAs of June 30, 2021, the Revolving Credit Facility had unamortized deferred financing costs of $105, and was included in Other assets on the Condensed Consolidated Balance Sheets. Total interest expense related to the Revolving Credit Facility ("First Amendment"for the thirteen and twenty-six weeks ended June 30, 2021 was $37 and $405, respectively, and $442 and $554, respectively, for the thirteen and twenty-six weeks ended June 24, 2020. Interest expense for the twenty-six weeks ended June 30, 2021 primarily included the write-off of previously capitalized costs on the Revolving Credit Facility.
Convertible Notes
In March 2021, the Company issued $225,000 aggregate principal amount of 0% Convertible Senior Notes due 2028 (“Convertible Notes”) in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933. The Company granted an option to the initial purchasers to purchase up to an additional $25,000 aggregate principal amount of Convertible Notes to cover over-allotments, which was subsequently fully exercised during March 2021, resulting in a total issuance of $250,000 aggregate principal amount of Convertible Notes. The Convertible Notes will mature on March 1, 2028, unless earlier converted, redeemed or repurchased in certain circumstances. Upon conversion, the Company pays or delivers, as the case may be, cash, shares of Class A common stock or a combination of cash and shares of Class A common stock, at the Company's election.
The Convertible Notes are convertible at the option of the holders at any time prior to the close of business on the business day immediately preceding December 1, 2027, only under the following circumstances: (1) during any fiscal quarter commencing after the fiscal quarter ending on June 30, 2021 (and only during such fiscal quarter), which, among other things, providesif the last reported sale price of the Company's Class A common stock, par value $0.001 per share, for modified financial covenant compliance requirements forat least 20 trading days (whether or not consecutive) during a period of time. The First Amendment requires us30 consecutive trading days ending on, and including, the last trading day of the immediately preceding fiscal quarter is greater than or equal to maintain minimum liquidity130% of $25,000 through July 1, 2021 and outstanding borrowingsthe conversion price for the Convertible Notes on each applicable trading day; (2) during the applicablefive business day period covered byafter any ten consecutive trading day period (the “measurement period”) in which the trading price (as defined in the Indenture) per one thousand dollar principal amount of the Convertible Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of Class A common stock and the conversion rate for the Convertible Notes on each such trading day; (3) if the Company calls such Convertible Notes for redemption, at any time prior to the close of business on the scheduled trading day immediately preceding the redemption date, but only with respect to the Convertible Notes called (or deemed called) for redemption; and (4) upon the occurrence of specified corporate events as set forth in the Indenture. On or after December 1, 2027, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders of the Convertible Notes may convert all or any portion of their Convertible Notes at any time, regardless of the foregoing circumstances.
Shake Shack Inc. Form 10-Q | 15
The Convertible Notes had an initial conversion rate of 5.8679 shares of Class A common stock per one thousand dollar principal amount of Convertible Notes, which is equivalent to an initial conversion price of approximately $170.42 per share of Class A common stock.
Shake Shack may not redeem the First Amendment bearConvertible Notes prior to March 6, 2025. The Company may redeem for cash all or any portion of the Convertible Notes, at the Company's option, on or after March 6, 2025 if the last reported sale price of Class A common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which the Company provides notice of redemption at a redemption price equal to 100% of the principal amount of the Convertible Notes to be redeemed, plus accrued and unpaid special interest, at either: (i) LIBOR plus a percentage ranging from 1.0%if any, to, 2.5% or (ii)but excluding, the base rate plus a percentage ranging from 0.0% to 1.50%, in each case depending on our net lease adjusted leverage ratio.redemption date.
In addition, if Shake Shack undergoes a fundamental change (as defined in the indenture governing the Convertible Notes), subject to certain conditions, holders may require it to repurchase for cash all or any portion of their Convertible Notes at a repurchase price equal to 100% of the principal amount of the Convertible Notes to be repurchased, plus accrued and unpaid special interest, if any, to, but excluding, the fundamental change repurchase date. In addition, following certain corporate events that occur prior to the maturity date of the Convertible Notes or if the Company delivers a notice of redemption in respect of some or all of the Convertible Notes, the Company will, in certain circumstances, increase the conversion rate of the Convertible Notes for a holder who elects to convert the Convertible Notes in connection with such a corporate event or convert the Convertible Notes called (or deemed called) for redemption during the related redemption period, as the case may be.
Contemporaneously with the issuance of the Convertible Notes, Shake Shack Inc. entered into an intercompany note with SSE Holdings (“Intercompany Note”). SSE Holdings promises to pay Shake Shack Inc., for value received, the principal amount with interest of the Intercompany Note in March 2020, we drew down2028. Shake Shack Inc. will exercise its right to convert the full $50,000 available underIntercompany Note to maintain at all times a one-to-one ratio between the Revolving Credit Facility to enhance liquiditynumber of common units, directly or indirectly, held by Shake Shack Inc. and financial flexibility given the uncertain market conditions created byaggregate number of outstanding shares of common stock.
As of June 30, 2021, the COVID-19 pandemic. We repaid this amount in full, plusConvertible Notes had a gross principal balance of $250,000 and a balance of $243,019, net of unamortized discount and debt issuance costs of $6,981. As of June 30, 2021, the unamortized balance of discount and debt issuance costs was recorded as a contra-liability and netted with Long-term debt on the Condensed Consolidated Balance Sheets and was being amortized as interest in June 2020.
expense using the effective interest method. Total interest costs incurred were $442amortization expense was $257 and $554$343 respectively, for the thirteen and twenty-six weeks ended June 24, 2020, respectively,30, 2021 and $97was included in Interest expense in the Condensed Consolidated Statements of Income (Loss). In connection with the Convertible Notes, the Company also incurred consulting and $169advisory fees of $236 for the thirteen and twenty-six weeks ended June 26, 2019, respectively. NaN amounts were capitalized into property30, 2021 and equipment forwas included in General and administrative expense in the thirteenCondensed Consolidated Statements of Income (Loss).
At June 30, 2021, the fair value of the Convertible Notes was approximately $237,188, based on external pricing data, including available quoted market prices of these instruments, and twenty-six weeks ended June 24, 2020consideration of comparable debt instruments with similar interest rates and June 26, 2019.
Paycheck Protection Program
In April 2020, we entered intotrading frequency, among other factors, and is classified as a $10,000 note payable with J.P. Morgan pursuant toLevel 2 measurement within the Paycheck Protection Program (“PPP Loan”) under the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") and returned the entire outstanding balance plus interest in April 2020.fair value hierarchy.
NOTE 9:7: LEASES
Nature of Leases
We leaseShake Shack currently leases all of ourits domestic company-operatedCompany-operated Shacks, ourthe home office and certain equipment under various non-cancelable lease agreements that expire on various dates through 2035. We evaluate2038. The Company evaluates contracts entered into to determine whether the contract involves the use of property or equipment, which is either explicitly or implicitly identified in the contract. We evaluateThe Company evaluates whether we controlit controls the use of the asset, which is determined by assessing whether we obtain substantially all economic benefits from the use of the asset is obtained, and whether we havethe Company has the right to direct the use of the asset. If these criteria are met and we havethe Company has identified a lease, we account for the contract is accounted for under the requirements of Accounting Standards Codification Topic 842 ("ASC 842").842.
Upon the possession of a leased asset, we determinethe Company determines its classification as an operating or finance lease. OurThe real estate leases are classified as operating leases and most of ourthe equipment leases are classified as finance leases. Generally, ourthe real estate leases have initial terms ranging from 10 to 15 years and typically include 2 five-year renewal options. Renewal
Shake Shack Inc. Form 10-Q | 16
options are generally not recognized as part of the right-of-use assets and lease liabilities as it is not reasonably certain at commencement date that wethe Company would exercise the options to extend the lease. OurThe real estate leases typically provide for fixed minimum rent payments and/or contingent rent payments based upon sales in excess of specified thresholds. When the achievement of such sales thresholds isare deemed to be probable, contingent rent is accrued in proportion to the sales recognized during the period. For operating leases that includeFixed minimum rent holidays and rent escalation clauses, we recognize lease expensepayments are recognized on a straight-line basis over the lease term from the date we takethe Company takes possession of the leased property. Lease expense incurred before a Shack opens is recorded in pre-opening costs.Pre-opening costs on the Condensed Consolidated Statements of Income (Loss). Once a domestic company-operatedCompany-operated Shack opens, we record the straight-line lease expense and any contingent rent, if applicable, is recorded in occupancyOccupancy and related expenses on the Condensed Consolidated Statements of Income (Loss). Many of ourthe leases also require usthe Company to pay real estate taxes, common area maintenance costs and other occupancy costs which are included in occupancyOccupancy and related expenses on the Condensed Consolidated Statements of Income (Loss).
As there wereare no explicit rates provided in ourthe leases, we used ourthe Company uses its incremental borrowing rate in determining the present value of future lease payments. The discount rate used to measure the lease liability at the transition date wasis derived from the average of the yield curves obtained from using the notching method and the recovery rate method. The most significant assumption in calculating the incremental borrowing rate is ourthe Company's credit rating and is subject to judgment. We determined ourThe credit rating based onis determined by a comparison of the financial information of SSE Holdings to other public companies and then useduse their respective credit ratings to develop our own.the Company's rate.
We expendThe Company expends cash for leasehold improvements to build out and equip ourthe leased premises. Generally, a portion of the leasehold improvements and building costs are reimbursed by ourthe landlords as landlord incentives pursuant to agreed-upon terms in ourthe lease agreements. If obtained, landlord incentives usually take the form of cash, full or partial credits against our future minimum or contingent rents otherwise payable by us,the Company, or a combination thereof. In most cases, landlord incentives are received after we takethe Company takes possession of the property, as we meet required milestones are met during the construction of the property. We includeThe Company includes these
16 | Shake Shack Inc. Form 10-Q
amounts in the measurement of the initial operating lease liability, which are also reflected as a reduction to the initial measurement of the right-of-use asset.
A summary of finance and operating lease right-of-use assets and liabilities as of June 24, 202030, 2021 and December 25, 201930, 2020 is as follows:
| | | | | | | | | | | | | | |
| Classification | June 24 2020 | | December 25 2019 |
Finance leases | Property and equipment, net | $ | 5,248 | | | $ | 5,444 | |
Operating leases | Operating lease assets | 298,602 | | | 274,426 | |
Total right-of-use assets | | $ | 303,850 | | | $ | 279,870 | |
| | | | |
| | | | |
| | | | |
| | | | |
Finance leases: | | | | |
| Other current liabilities | $ | 1,802 | | | $ | 1,873 | |
| Other long-term liabilities | 3,559 | | | 3,643 | |
Operating leases: | | | | |
| Operating lease liabilities, current | 37,082 | | | 30,002 | |
| Long-term operating lease liabilities | 332,751 | | | 304,914 | |
Total lease liabilities | | $ | 375,194 | | | $ | 340,432 | |
The components of lease expense for the thirteen and twenty-six weeks ended June 24, 2020 and June 26, 2019 was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Thirteen Weeks Ended | | | | Twenty-Six Weeks Ended | | |
| | Classification | June 24 2020 | | June 26 2019 | | June 24 2020 | | June 26 2019 |
Finance lease cost: | | | | | | | | | |
| Amortization of right-of-use assets | Depreciation expense | $ | 602 | | | $ | 619 | | | $ | 1,179 | | | $ | 953 | |
| Interest on lease liabilities | Interest expense | 55 | | | 55 | | | 110 | | | 96 | |
Operating lease cost | | Occupancy and related expenses General and administrative expenses Pre-opening costs | 11,478 | | | 9,855 | | | 22,220 | | | 18,765 | |
Short-term lease cost | | Occupancy and related expenses | 69 | | | 17 | | | 193 | | | 34 | |
Variable lease cost | | Occupancy and related expenses General and administrative expenses Pre-opening costs | 4,087 | | | 3,836 | | | 7,817 | | | 7,298 | |
Total lease cost | | | $ | 16,291 | | | $ | 14,382 | | | $ | 31,519 | | | $ | 27,146 | |
| | | | | | | | | | | | | | |
| Classification | June 30 2021 | | December 30 2020 |
Finance leases | Property and equipment, net | $ | 6,479 | | | $ | 5,409 | |
Operating leases | Operating lease assets | 326,744 | | | 306,317 | |
Total right-of-use assets | | $ | 333,223 | | | $ | 311,726 | |
| | | | |
| | | | |
| | | | |
| | | | |
Finance leases: | | | | |
| Other current liabilities | $ | 2,553 | | | $ | 1,998 | |
| Other long-term liabilities | 4,122 | | | 3,586 | |
Operating leases: | | | | |
| Operating lease liabilities, current | 36,677 | | | 35,657 | |
| Long-term operating lease liabilities | 363,482 | | | 343,736 | |
Total lease liabilities | | $ | 406,834 | | | $ | 384,977 | |
Shake Shack Inc. Form 10-Q | 17
The components of lease expense for the thirteen and twenty-six weeks ended June 30, 2021 and June 24, 2020 was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Thirteen Weeks Ended | | Twenty-Six Weeks Ended |
| | Classification | June 30 2021 | | June 24 2020 | | June 30 2021 | | June 24 2020 |
Finance lease cost: | | | | | | | | |
| Amortization of right-of-use assets | Depreciation and amortization expense | $ | 675 | | | $ | 602 | | | $ | 1,288 | | | $ | 1,179 | |
| Interest on lease liabilities | Interest expense | 57 | | | 55 | | | 111 | | | 110 | |
Operating lease cost | Occupancy and related expenses Pre-opening costs General and administrative expenses | 12,386 | | | 11,478 | | | 24,716 | | | 22,220 | |
Short-term lease cost | Occupancy and related expenses | 67 | | | 69 | | | 149 | | | 193 | |
Variable lease cost | Occupancy and related expenses Pre-opening costs General and administrative expenses | 3,358 | | | 4,087 | | | 6,209 | | | 7,817 | |
Total lease cost | | $ | 16,543 | | | $ | 16,291 | | | $ | 32,473 | | | $ | 31,519 | |
As of June 24, 2020,30, 2021, future minimum lease payments for finance and operating leases consisted of the following:
| | | Finance Leases | | Operating Leases | | Finance Leases | | Operating Leases |
2020 | $ | 1,051 | | | $ | 21,424 | | |
2021 | 2021 | 1,765 | | | 47,721 | | 2021 | $ | 1,449 | | | $ | 21,836 | |
2022 | 2022 | 1,284 | | | 52,463 | | 2022 | 2,427 | | | 50,788 | |
2023 | 2023 | 823 | | | 52,737 | | 2023 | 1,537 | | | 58,678 | |
2024 | 2024 | 496 | | | 51,697 | | 2024 | 826 | | | 58,498 | |
2025 | | 2025 | 526 | | | 57,461 | |
Thereafter | Thereafter | 337 | | | 262,345 | | Thereafter | 379 | | | 271,963 | |
Total minimum payments | Total minimum payments | 5,756 | | | 488,387 | | Total minimum payments | 7,144 | | | 519,224 | |
Less: imputed interest | Less: imputed interest | 395 | | | 118,553 | | Less: imputed interest | 469 | | | 119,065 | |
Total lease liabilities | Total lease liabilities | $ | 5,361 | | | $ | 369,833 | | Total lease liabilities | $ | 6,675 | | | $ | 400,159 | |
As of June 24, 2020 we30, 2021 the Company had additional operating lease commitments of $53,952$51,706 for non-cancelable leases without a possession date, which will begin to commence in 2020.2021. These lease commitments are consistent with the leases that we have been executed thus far and include a number of real estate leases where we are involved in the construction and design.far.
A summary of lease terms and discount rates for finance and operating leases as of June 24, 202030, 2021 and December 25, 201930, 2020 is as follows:
| | | | June 24 2020 | | December 25 2019 | | | | June 30 2021 | | December 30 2020 | |
Weighted-average remaining lease term (years): | Weighted-average remaining lease term (years): | | | | Weighted-average remaining lease term (years): | | |
| | Finance leases | 5.1 | | 5.1 | | | Finance leases | 5.4 | | 5.2 | |
| | Operating leases | 10.1 | | 10.1 | | | Operating leases | 9.6 | | 9.7 | |
Weighted-average discount rate: | Weighted-average discount rate: | | | | | Weighted-average discount rate: | | | |
| | Finance leases | 3.6 | % | | 3.7 | % | | | Finance leases | 3.6 | % | | 3.6 | % | |
| | Operating leases | 4.0 | % | | 5.4 | % | | | Operating leases | 3.7 | % | | 4.2 | % | |
Shake Shack Inc. Form 10-Q | 18
Supplemental cash flow information related to leases for the twenty-six weeks ended June 24, 202030, 2021 and June 26, 201924, 2020 is as follows:
| | | Twenty-Six Weeks Ended | | | Twenty-Six Weeks Ended | |
| | | June 24 2020 | | June 26 2019 | | | | June 30 2021 | | June 24 2020 | |
Cash paid for amounts included in the measurement of lease liabilities: | Cash paid for amounts included in the measurement of lease liabilities: | | | | Cash paid for amounts included in the measurement of lease liabilities: | | |
| | Operating cash flows from finance leases | $ | 110 | | | $ | 148 | | | | Operating cash flows from finance leases | $ | 111 | | | $ | 110 | | |
| | Operating cash flows from operating leases | 15,799 | | | 27,238 | | | | Operating cash flows from operating leases | 23,367 | | | 15,799 | | |
| | Financing cash flows from finance leases | 1,150 | | | 1,433 | | | | Financing cash flows from finance leases | 1,272 | | | 1,150 | | |
Right-of-use assets obtained in exchange for lease obligations: | Right-of-use assets obtained in exchange for lease obligations: | | | | Right-of-use assets obtained in exchange for lease obligations: | | |
| | Finance leases | 1,020 | | | 1,927 | | | | Finance leases | 2,358 | | | 1,020 | | |
| | Operating leases | 30,982 | | | 65,773 | | | | Operating leases | 34,929 | | | 30,982 | | |
NOTE 10:8: NON-CONTROLLING INTERESTS
We areShake Shack is the sole managing member of SSE Holdings and, as a result, consolidateconsolidates the financial results of SSE Holdings. We reportThe Company reports a non-controlling interest representing the economic interest in SSE Holdings held by the other members of SSE Holdings. The Third Amended and Restated Limited Liability Company Agreement, as further amended, (the "LLC Agreement") of SSE Holdings provides that holders of LLC Interests may, from time to time, require SSE Holdings to redeem all or a portion of their LLC Interests for newly-issued shares of Class A common stock on a one-for-one basis. In connection with any redemption or
Shake Shack Inc. Form 10-Q | 18
exchange, wethe Company will receive a corresponding number of LLC Interests, increasing ourthe total ownership interest in SSE Holdings. Changes in ourthe ownership interest in SSE Holdings while we retain ourthe Company retains its controlling interest in SSE Holdings will be accounted for as equity transactions. As such, future redemptions or direct exchanges of LLC Interests in SSE Holdings by the other members of SSE Holdings will result in a change in ownership and reduce the amount recorded as non-controlling interest and increase additional paid-in capital.
On April 17, 2020, we announced an “at-the-market” equity offering program (the “ATM Program”), under which we may offer and sell shares of our Class A common stock having an aggregate price of up to $75,000 from time to time. On April 21, 2020, we completed the sale of 233,467 shares of our Class A common stock pursuant to the ATM Program and received $9,794 of proceeds, net of commissions. The proceeds were used to purchase newly-issued LLC Interests.
On April 21, 2020, we completed an underwritten offering of 3,416,070 shares of our Class A common stock, resulting in $135,857 of proceeds, net of underwriting discounts and commissions. The proceeds were used to purchase newly-issued LLC Interests.
The following table summarizes the ownership interest in SSE Holdings as of June 24, 202030, 2021 and December 25, 2019.30, 2020.
| | | June 24, 2020 | | | December 25, 2019 | | | June 30, 2021 | | December 30, 2020 |
| | LLC Interests | | Ownership% | | LLC Interests | | Ownership % | | LLC Interests | | Ownership % | | LLC Interests | | Ownership % |
Number of LLC Interests held by Shake Shack Inc. | Number of LLC Interests held by Shake Shack Inc. | 38,236,538 | | | 92.5 | % | | 34,417,302 | | | 91.6 | % | Number of LLC Interests held by Shake Shack Inc. | 39,134,356 | | | 93.1 | % | | 38,717,790 | | | 92.9 | % |
Number of LLC Interests held by non-controlling interest holders | Number of LLC Interests held by non-controlling interest holders | 3,117,002 | | | 7.5 | % | | 3,145,197 | | | 8.4 | % | Number of LLC Interests held by non-controlling interest holders | 2,921,587 | | | 6.9 | % | | 2,951,188 | | | 7.1 | % |
Total LLC Interests outstanding | Total LLC Interests outstanding | 41,353,540 | | | 100.0 | % | | 37,562,499 | | | 100.0 | % | Total LLC Interests outstanding | 42,055,943 | | | 100.0 | % | | 41,668,978 | | | 100.0 | % |
The weighted average ownership percentages for the applicable reporting periods are used to attribute netNet income (loss) and otherOther comprehensive income (loss) to Shake Shack Inc. and the non-controlling interest holders. The non-controlling interest holders' weighted average ownership percentage for the thirteen and twenty-six weeks ended June 24, 202030, 2021 was 7.7% and 8.0%, respectively.7.0%. The non-controlling interest holders' weighted average ownership percentage for the thirteen and twenty-six weeks ended June 26, 2019 was 19.0% and 19.7%, respectively.
The following table summarizes the effects of changes in ownership of SSE Holdings on our equity during the thirteen and twenty-six weeks ended June 24, 2020 was 7.7% and June 26, 2019.8.0%, respectively.
Shake Shack Inc. Form 10-Q | 19
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Thirteen Weeks Ended | | | | Twenty-Six Weeks Ended | | |
| | June 24 2020 | | June 26 2019 | | June 24 2020 | | June 26 2019 |
Net income (loss) attributable to Shake Shack Inc. | | $ | (16,211) | | | $ | 9,030 | | | $ | (17,171) | | | $ | 11,576 | |
| | | | | | | | |
| | | | | | | | |
Transfers (to) from non-controlling interests: | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Increase in additional paid-in capital as a result of the redemption of LLC Interests | — | | | 4,886 | | | 195 | | | 5,480 | |
| | | | | | | | |
| | | | | | | | |
| Increase (decrease) in additional paid-in capital as a result of activity under stock compensation plans and the related income tax effect | (164) | | | (43) | | | 260 | | | 932 | |
| Increase in additional paid-in-capital as a result of the issuance of Class A common stock sold in equity offerings | 135,718 | | | — | | | 135,718 | | | — | |
Total effect of changes in ownership interest on equity attributable to Shake Shack Inc. | | $ | 119,343 | | | $ | 13,873 | | | $ | 119,002 | | | $ | 17,988 | |
The following table summarizes the effects of changes in ownership of SSE Holdings on the Company's equity during the thirteen and twenty-six weeks ended June 30, 2021 and June 24, 2020. | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Thirteen Weeks Ended | | Twenty-Six Weeks Ended |
| June 30 2021 | | June 24 2020 | | June 30 2021 | | June 24 2020 |
Net income (loss) attributable to Shake Shack Inc. | $ | 1,944 | | | $ | (16,211) | | | $ | 3,253 | | | $ | (17,171) | |
| | | | | | | |
| | | | | | | | |
Transfers (to) from non-controlling interests: | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Increase (decrease) in additional paid-in capital as a result of the redemption of LLC Interests | (3) | | | 0 | | | 33 | | | 195 | |
| | | | | | | | |
| | | | | | | | |
| Increase (decrease) in additional paid-in capital as a result of activity under stock compensation plans and the related income tax effects | (788) | | | (164) | | | 2,571 | | | 260 | |
| Increase in additional paid-in-capital as a result of the issuance of Class A common stock sold in equity offerings | 0 | | | 135,718 | | | 0 | | | 135,718 | |
Total effect of changes in ownership interest on equity attributable to Shake Shack Inc. | $ | 1,153 | | | $ | 119,343 | | | $ | 5,857 | | | $ | 119,002 | |
The following table summarizes redemptions of LLC Interests activity during the thirteen and twenty-six weeks ended June 24, 202030, 2021 and June 26, 2019.24, 2020.
| | | Thirteen Weeks Ended | | | Twenty-Six Weeks Ended | | | Thirteen Weeks Ended | | Twenty-Six Weeks Ended |
| | | June 24 2020 | | June 26 2019 | | June 24 2020 | | June 26 2019 | | June 30 2021 | | June 24 2020 | | June 30 2021 | | June 24 2020 |
Redemption and acquisition of LLC Interests | Redemption and acquisition of LLC Interests | | | Redemption and acquisition of LLC Interests | |
| | Number of LLC Interests redeemed by non-controlling interest holders | — | | | 722,306 | | | 28,195 | | | 826,138 | | | Number of LLC Interests redeemed by non-controlling interest holders | 1 | | | 0 | | | 29,601 | | | 28,195 | |
| | | Number of LLC Interests received by Shake Shack Inc. | — | | | 722,306 | | | 28,195 | | | 826,138 | | | Number of LLC Interests received by Shake Shack Inc. | 1 | | | 0 | | | 29,601 | | | 28,195 | |
Issuance of Class A common stock | Issuance of Class A common stock | | | Issuance of Class A common stock | |
| | Shares of Class A common stock issued in connection with redemptions of LLC Interests | — | | | 722,306 | | | 28,195 | | | 826,138 | | | Shares of Class A common stock issued in connection with redemptions of LLC Interests | 1 | | | 0 | | | 29,601 | | | 28,195 | |
| Cancellation of Class B common stock | Cancellation of Class B common stock | | | Cancellation of Class B common stock | |
| | Shares of Class B common stock surrendered and canceled | — | | | 722,306 | | | 28,195 | | | 826,138 | | | Shares of Class B common stock surrendered and canceled | 1 | | | 0 | | | 29,601 | | | 28,195 | |
|
During the thirteen and twenty-six weeks ended June 24, 2020, we30, 2021 the Company received an aggregate of 63,60131,116 and 141,504386,965 LLC Interests, respectively, in connection with the activity under ourits stock compensation plan and 137,15163,601 and 210,714141,504 LLC Interests, respectively, during the thirteen and twenty-six weeks ended June 26, 2019.24, 2020.
NOTE 11:9: EQUITY-BASED COMPENSATION
A summary of equity-based compensation expense recognized during the thirteen and twenty-six weeks ended June 24, 202030, 2021 and June 26, 201924, 2020 is as follows:
| | | Thirteen Weeks Ended | | | Twenty-Six Weeks Ended | | | Thirteen Weeks Ended | | Twenty-Six Weeks Ended |
| | | June 24 2020 | | June 26 2019 | | June 24 2020 | | June 26 2019 | | | June 30 2021 | | June 24 2020 | | June 30 2021 | | June 24 2020 |
Stock options | Stock options | | $ | 26 | | | $ | 655 | | | $ | 287 | | | $ | 1,337 | | Stock options | $ | (17) | | | $ | 26 | | | $ | 3 | | | $ | 287 | |
Performance stock units | Performance stock units | | 363 | | | 1,007 | | | 776 | | | 1,719 | | Performance stock units | 783 | | | 363 | | | 1,197 | | | 776 | |
Restricted stock units | Restricted stock units | | 1,030 | | | 518 | | | 1,656 | | | 816 | | Restricted stock units | 1,192 | | | 1,030 | | | 2,439 | | | 1,656 | |
Equity-based compensation expense | Equity-based compensation expense | | $ | 1,419 | | | $ | 2,180 | | | $ | 2,719 | | | $ | 3,872 | | Equity-based compensation expense | $ | 1,958 | | | $ | 1,419 | | | $ | 3,639 | | | $ | 2,719 | |
| Total income tax benefit recognized related to equity-based compensation | Total income tax benefit recognized related to equity-based compensation | | $ | 39 | | | $ | 51 | | | $ | 75 | | | $ | 93 | | Total income tax benefit recognized related to equity-based compensation | $ | 63 | | | $ | 39 | | | $ | 130 | | | $ | 75 | |
20 | Shake Shack Inc. Form 10-Q
Equity-based compensation expense is included in generalGeneral and administrative expenses and laborLabor and related expenses on the Condensed Consolidated Statements of Income (Loss) during the thirteen and twenty-six weeks ended June 24, 202030, 2021 and June 26, 201924, 2020 as follows:
| | | Thirteen Weeks Ended | | | Twenty-Six Weeks Ended | | | Thirteen Weeks Ended | | Twenty-Six Weeks Ended |
| | | June 24 2020 | | June 26 2019 | | June 24 2020 | | June 26 2019 | | | June 30 2021 | | June 24 2020 | | June 30 2021 | | June 24 2020 |
General and administrative expenses | General and administrative expenses | | $ | 1,268 | | | $ | 2,084 | | | $ | 2,482 | | | $ | 3,726 | | General and administrative expenses | $ | 1,723 | | | $ | 1,268 | | | $ | 3,264 | | | $ | 2,482 | |
Labor and related expenses | Labor and related expenses | | 151 | | | 96 | | | 237 | | | 146 | | Labor and related expenses | 235 | | | 151 | | | 375 | | | 237 | |
Equity-based compensation expense | Equity-based compensation expense | | $ | 1,419 | | | $ | 2,180 | | | $ | 2,719 | | | $ | 3,872 | | Equity-based compensation expense | $ | 1,958 | | | $ | 1,419 | | | $ | 3,639 | | | $ | 2,719 | |
NOTE 12:10: INCOME TAXES
We areShake Shack is the sole managing member of SSE Holdings and, as a result, consolidateconsolidates the financial results of SSE Holdings. SSE Holdings is treated as a partnership for U.S. federal and most applicable state and local income tax purposes. As a partnership, SSE Holdings is not subject to U.S. federal and certain state and local income taxes. Any taxable income or loss generated by SSE Holdings is passed through to and included in the taxable income or loss of its members, including us,the Company, on a pro rata basis. We areThe Company is subject to U.S. federal income taxes, in addition to state and local income taxes with respect to ourits allocable share of any taxable income or loss of SSE Holdings, as well as any stand-alone income or loss generated by Shake Shack Inc. We areThe Company is also subject to withholding taxes in foreign jurisdictions.
Income Tax Expense
A reconciliation of income tax expense computed at the U.S. federal statutory income tax rate to the recognized income tax expense is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Thirteen Weeks Ended | | | | | | Twenty-Six Weeks Ended | | | | |
| June 24 2020 | | | June 26 2019 | | | June 24 2020 | | | June 26 2019 | |
Expected U.S. federal income taxes at statutory rate | $ | (5,065) | | 21.0 | % | | $ | 2,567 | | 21.0 | % | | $ | (5,274) | | 21.0 | % | | $ | 3,754 | | 21.0 | % |
State and local income taxes, net of federal benefit | (1,576) | | 6.5 | % | | 823 | | 6.7 | % | | (1,701) | | 6.8 | % | | 1,242 | | 6.9 | % |
Foreign withholding taxes | (325) | | 1.3 | % | | 627 | | 5.1 | % | | 210 | | (0.8) | % | | 969 | | 5.4 | % |
| | | | | | | | | | | |
Tax credits | (393) | | 1.6 | % | | (1,446) | | (11.7) | % | | (427) | | 1.7 | % | | (1,822) | | (10.2) | % |
| | | | | | | | | | | |
Non-controlling interest | 501 | | (2.0) | % | | (623) | | (5.1) | % | | 421 | | (1.7) | % | | (947) | | (5.3) | % |
Tax effect of change in basis related to the adoption of ASC 842 | — | | — | % | | — | | — | % | | — | | — | % | | 1,161 | | 6.5 | % |
Change in valuation allowance | 749 | | (3.1) | % | | (895) | | (7.3) | % | | 749 | | (3.0) | % | | (1,261) | | (7.1) | % |
Other | 17 | | — | % | | (3) | | 0.1 | % | | 17 | | (0.1) | % | | 1 | | — | % |
Income tax expense | $ | (6,092) | | 25.3 | % | | $ | 1,050 | | 8.6 | % | | $ | (6,005) | | 23.9 | % | | $ | 3,097 | | 17.3 | % |
OurThe effective income tax rates for the thirteen weeks ended June 30, 2021 and June 24, 2020 were 32.4% and June 26, 2019 were 25.3% and 8.6%, respectively. The increase was primarily driven by lowerhigher pre-tax book income resulting in income and higher foreign withholding taxes, partially offset by a loss, causing the tax credits to have an increasing effect on the tax rate, as well as the recognitionreduction of a valuation allowance against foreign tax credits that are not expected to be realized before the expiration of the carryforward period.allowance. Additionally, an increase in ourthe Company's ownership interest in SSE Holdings increases ourits share of the taxable income (loss) of SSE Holdings. OurThe weighted-average ownership interest in SSE Holdings was 92.3%93.0% and 81.0%92.3% for the thirteen weeks ended June 30, 2021 and June 24, 2020, and June 26, 2019, respectively.
OurThe effective income tax rates for the twenty-six weeks ended June 30, 2021 and June 24, 2020 were 135.4% and June 26, 2019 were 23.9% and 17.3%, respectively. The increase was primarily driven by lower pre-tax book income resulting in a loss, causing the tax credits to have an increasing effect on the tax rate, as well as the recognition of a valuation allowance against foreign tax credits that are not expected to be realized before the expiration of the carryforward period. These were partially offset by a reduction in the tax effect of changes related to the adoption of new accounting standards, for which there were none during the twenty-six weeks
Shake Shack Inc. Form 10-Q | 21
ended June 24, 2020. Additionally, as noted above, an increase in our ownership interest in SSE Holdings increases our share of the taxable income (loss) of SSE Holdings. OurCompany's weighted-average ownership interest in SSE Holdings was 92.0%93.0% and 80.3%92.0% for the twenty-six weeks ended June 24, 202030, 2021 and June 26, 2019,24, 2020, respectively.
Deferred Tax Assets and Liabilities
During the twenty-six weeks ended June 24, 2020, we30, 2021, the Company acquired an aggregate of 169,699416,566 LLC Interests in connection with the redemption of LLC Interests, and activity relating to ourits stock compensation plan, and in connection with the second quarter equity offering. Weplan. The Company recognized a deferred tax asset in the amount of $1,297$10,608 associated with the basis difference in ourits investment in SSE Holdings upon acquisition of these LLC Interests. As of June 24, 2020,30, 2021, the total deferred tax asset related to the basis difference in ourthe Company's investment in SSE Holdings was $172,350.$135,176. However, a portion of the total basis difference will only reverse upon the eventual sale of ourits interest in SSE Holdings, which we expectthe Company expects would result in a capital loss.As of June 24, 2020,30, 2021, the total valuation allowance established against the deferred tax asset to which this portion relates was $104.$1,470.
During the twenty-six weeks ended June 24, 2020, we30, 2021, the Company also recognized $88$300 of deferred tax assets related to additional tax basis increases generated from expected future payments under the Tax Receivable Agreement and related deductions for imputed interest on such payments. See "—TaxRefer to "Tax Receivable Agreement"Agreement," herein for moreadditional information.
We evaluateThe Company evaluates the realizability of ourits deferred tax assets on a quarterly basis and establishestablishes valuation allowances when it is more likely than not that all or a portion of a deferred tax asset may not be realized. As of June 24, 2020, we30, 2021, the Company concluded, based on the weight of all available positive and negative evidence, that all of ourits deferred tax assets (except for those deferred tax assets described above relating to basis differences that are expected to result in a capital loss upon the eventual sale of ourits interest in SSE Holdings, and New York City UBT credits and certain foreign tax credits) are more likely than not to be realized. As such, an0 additional valuation allowance of $749 was recognized on certain foreign tax credits not expected to be realized before the expiration of the carryforward period.recognized.
Uncertain Tax Positions
NaN uncertain tax positions existed as of June 24, 2020. Shake Shack Inc. was formed in September 2014 and did not engage in any operations prior to our initial public offering in FebruaryForm 10-Q | 21
Tax Receivable Agreement
Pursuant to ourthe Company's election under Section 754 of the Internal Revenue Code (the "Code"), we expectthe Company expects to obtain an increase in ourits share of the tax basis in the net assets of SSE Holdings when LLC Interests are redeemed or exchanged by the other members of SSE Holdings. We planThe Company plans to make an election under Section 754 of the Code for each taxable year in which a redemption or exchange of LLC Interest occurs. We intendThe Company intends to treat any redemptions and exchanges of LLC Interests as direct purchases of LLC Interests for U.S. federal income tax purposes. These increases in tax basis may reduce the amounts that we would otherwise paybe paid in the future to various tax authorities. They may also decrease gains (or increase losses) on future dispositions of certain capital assets to the extent tax basis is allocated to those capital assets.
On February 4, 2015, wethe Company entered into a tax receivable agreement with certain of the then-existing members of SSE Holdings (the "Tax Receivable Agreement") that provides for the payment by usthe Company of 85% of the amount of any tax benefits that weare actually realize,realized, or in some cases are deemed to realize, as a result of (i) increases in ourthe Company's share of the tax basis in the net assets of SSE Holdings resulting from any redemptions or exchanges of LLC Interests, (ii) tax basis increases attributable to payments made under the Tax Receivable Agreement, and (iii) deductions attributable to imputed interest pursuant to the Tax Receivable Agreement (the "TRA Payments"). We expectThe Company expects to benefit from the remaining 15% of any tax benefits that we may actually realize. The TRA Payments are not conditioned upon any continued ownership interest in SSE Holdings or us.the Company. The rights of each member of SSE Holdings that is a party to the Tax Receivable Agreement, are assignable to transferees of their respective LLC Interests.
During the twenty-six weeks ended June 24, 2020, we30, 2021, the Company acquired an aggregate of 28,19529,601 LLC Interests in connection with the redemption of LLC Interests, which resulted in an increase in the tax basis of ourits investment in SSE Holdings subject to the
22 | Shake Shack Inc. Form 10-Q
provisions of the Tax Receivable Agreement. WeThe Company recognized an additional liability in the amount of $313$1,094 for the TRA Payments due to the redeeming members, representing 85% of the aggregate tax benefits we expectthe Company expects to realize from the tax basis increases related to the redemption of LLC Interests, after concluding it was probable that such TRA Payments would be paid based on our estimates of future taxable income. During the twenty-six weeks ended June 30, 2021, the Company made 0 payments to the parties to the Tax Receivable Agreement. During the twenty-six weeks ended June 24, 2020, and June 26, 2019, payments of $6,643, and $707, inclusive of interest, were made to the parties to the Tax Receivable Agreement, respectively.Agreement. As of June 24, 2020,30, 2021, the total amount of TRA Payments due under the Tax Receivable Agreement, was $228,096, of which $0 was included in other current liabilities on the Condensed Consolidated Balance Sheet. See$234,049. Refer to Note 1513, Commitments and Contingencies, for moreadditional information relating to ourthe liabilities under the Tax Receivable Agreement.
CARES Act
On March 27, 2020, the U.S. government enacted the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) to provide certain relief as a result of the COVID-19 pandemic. The CARES Act provides tax relief, along with other stimulus measures, including a retroactive technical correction of prior tax legislation for tax depreciation of certain qualified improvement property, among other changes.
We are currently estimating the amount of accelerated tax depreciation deductions as a result of the technical amendments made by the CARES Act to qualified improvement property. During the thirteen weeks ended June 24, 2020, we recognized accelerated tax depreciation deductions of $171 related to assets placed in service in fiscal 2020, and are recorded as components within our deferred income taxes, net on the Condensed Consolidated Balance Sheets. The impact of assets placed into service during fiscal 2018 and fiscal 2019 will be reflected in our third quarter provision. In addition, subsequent to the second quarter of 2020, we began deferring the employer-paid portion of social security taxes as permitted by the CARES Act.
NOTE 13:11: EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share of Class A common stock is computed by dividing net income (loss) attributable to Shake Shack Inc. by the weighted-average number of shares of Class A common stock outstanding during the period. Diluted earnings (loss) (loss) per share of Class A common stock is computed by dividing net income (loss) attributable to Shake Shack Inc. by the weighted-average number of shares of Class A common stock outstanding adjusted to give effect to potentially dilutive securities.
The following table sets forth reconciliations of the numerators and denominators used to compute basic and diluted earnings (loss) (loss) per share of Class A common stock (in thousands, except per share amounts) for the thirteen and twenty-six weeks ended June 24, 202030, 2021 and June 26, 2019.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Thirteen Weeks Ended | | | | Twenty-Six Weeks Ended | | |
| | | June 24 2020 | | June 26 2019 | | June 24 2020 | | June 26 2019 |
Numerator: | | | | | | | | | |
| Net income (loss) | | $ | (18,031) | | | $ | 11,171 | | | $ | (19,110) | | | $ | 14,778 | |
| Less: net income (loss) attributable to non-controlling interests | | (1,820) | | | 2,141 | | | (1,939) | | | 3,202 | |
| Net income (loss) attributable to Shake Shack Inc. | | $ | (16,211) | | | $ | 9,030 | | | $ | (17,171) | | | $ | 11,576 | |
Denominator: | | | | | | | | | |
| Weighted-average shares of Class A common stock outstanding—basic | | 37,309 | | | 30,122 | | | 35,876 | | | 29,842 | |
| Effect of dilutive securities: | | | | | | | | |
| | Stock options | — | | | 775 | | | — | | | 753 | |
| | Performance stock units | — | | | 68 | | | — | | | 72 | |
| | Restricted stock units | — | | | 50 | | | — | | | 36 | |
| Weighted-average shares of Class A common stock outstanding—diluted | | 37,309 | | | 31,015 | | | 35,876 | | | 30,703 | |
| | | | | | | | | |
Earnings (loss) per share of Class A common stock—basic | | | $ | (0.43) | | | $ | 0.30 | | | $ | (0.48) | | | $ | 0.39 | |
Earnings (loss) per share of Class A common stock—diluted | | | $ | (0.43) | | | $ | 0.29 | | | $ | (0.48) | | | $ | 0.38 | |
24, 2020.22 | Shake Shack Inc. Form 10-Q | 23
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Thirteen Weeks Ended | | Twenty-Six Weeks Ended |
| | | June 30 2021 | | June 24 2020 | | June 30 2021 | | June 24 2020 |
Numerator: | | | | | | | |
| Net income (loss) attributable to Shake Shack Inc.—basic | $ | 1,944 | | | $ | (16,211) | | | $ | 3,253 | | | $ | (17,171) | |
| Reallocation of net income (loss) attributable to non-controlling interests from the assumed conversion of Class B shares | 121 | | | 0 | | | (613) | | | 0 | |
| Net income (loss) attributable to Shake Shack Inc.—diluted | $ | 2,065 | | | $ | (16,211) | | | $ | 2,640 | | | $ | (17,171) | |
Denominator: | | | | | | | |
| Weighted-average shares of Class A common stock outstanding—basic | 39,114 | | | 37,309 | | | 39,031 | | | 35,876 | |
| Effect of dilutive securities: | | | | | | | |
| | Stock options | 133 | | | 0 | | | 182 | | | 0 | |
| | Performance stock units | 35 | | | 0 | | | 44 | | | 0 | |
| | Restricted stock units | 118 | | | 0 | | | 141 | | | 0 | |
| | Convertible Notes | 1,467 | | | 0 | | | 959 | | | 0 | |
| | Shares of Class B common stock | 2,922 | | | 0 | | | 2,932 | | | 0 | |
| Weighted-average shares of Class A common stock outstanding—diluted | 43,789 | | | 37,309 | | | 43,289 | | | 35,876 | |
| | | | | | | | | |
Earnings (loss) per share of Class A common stock—basic | $ | 0.05 | | | $ | (0.43) | | | $ | 0.08 | | | $ | (0.48) | |
Earnings (loss) per share of Class A common stock—diluted | $ | 0.05 | | | $ | (0.43) | | | $ | 0.06 | | | $ | (0.48) | |
Shares of our Class B common stock do not share in the earnings or losses of Shake Shack and are therefore not participating securities. As such, separate presentation of basic and diluted earnings (loss) per share of Class B common stock under the two-class method has not been presented. However, shares of Class B common stock outstanding for the period are considered potentially dilutive shares of Class A common stock under application of the if-converted method and are included in the computation of diluted earnings (loss) per share, except when the effect would be antidilutive.
The following table presents potentially dilutive securities, as of the end of the period, excluded from the computations of diluted earnings (loss) per share of Class A common stock for the thirteen and twenty-six weeks ended June 24, 202030, 2021 and June 26, 2019.24, 2020.
| | | Thirteen Weeks Ended | | Twenty-Six Weeks Ended | | | Thirteen Weeks Ended | | Twenty-Six Weeks Ended |
| | | June 24 2020 | | June 26 2019 | | June 24 2020 | | June 26 2019 | | | June 30 2021 | | June 24 2020 | | | June 30 2021 | | June 24 2020 | |
Stock options | Stock options | | 813,488 | | (1) | — | | | 813,488 | | (1) | — | | | Stock options | 0 | | | 813,488 | | (2) | | 0 | | | 813,488 | | (2) |
Performance stock units | Performance stock units | | 143,534 | | (1) | 68,914 | | (2) | 143,534 | | (1) | 68,914 | | (2) | Performance stock units | 46,768 | | (1) | 143,534 | | (2) | | 46,768 | | (1) | 143,534 | | (2) |
Restricted stock units | Restricted stock units | | 265,293 | | (1) | — | | | 265,293 | | (1) | — | | | Restricted stock units | 0 | | | 265,293 | | (2) | | 0 | | | 265,293 | | (2) |
Shares of Class B common stock | Shares of Class B common stock | | 3,117,002 | | (3) | 6,731,209 | | (3) | 3,117,002 | | (3) | 6,731,209 | | (3) | Shares of Class B common stock | 0 | | | 3,117,002 | | (2) | | 0 | | | 3,117,002 | | (2) |
(1) Represents numberNumber of instrumentssecurities outstanding at the end of the period that were excluded from the computation of diluted earnings per share of Class A common stock because the effect would have been anti-dilutive.
(2) Excluded from the computation of diluted earnings(loss) per share of Class A common stock because the performance conditions associated with these awards were not met assuming the end of the reporting period was the end of the performance period.
(3) Shares(2)Number of our Class B common stocksecurities outstanding as ofat the end of the period are considered potentially dilutive shares of Class A common stock. Amounts have beenthat were excluded from the computationscomputation of diluted earnings (loss) per share of Class A common stock because the effect would have been anti-dilutive under the if-converted and two-class methods.anti-dilutive.
Shake Shack Inc. Form 10-Q | 23
NOTE 14:12: SUPPLEMENTAL CASH FLOW INFORMATION
The following table sets forth supplemental cash flow information for the twenty-six weeks ended June 24, 202030, 2021 and June 26, 2019:24, 2020:
| | | | | | | | | | | | | | |
| | Twenty-Six Weeks Ended | | |
| | June 24 2020 | | June 26 2019 |
Cash paid for: | | | | |
| Income taxes, net of refunds | $ | 775 | | | $ | 1,554 | |
| Interest, net of amounts capitalized | 491 | | | 143 | |
Non-cash investing activities: | | | | |
| Accrued purchases of property and equipment | 5,405 | | | 14,072 | |
| | | | |
| | | | |
| Capitalized equity-based compensation | 22 | | | 55 | |
| | | | |
Non-cash financing activities: | | | | |
| | | | |
| Class A common stock issued in connection with the redemption of LLC Interests | — | | | 1 | |
| | | | |
| Cancellation of Class B common stock in connection with the redemption of LLC Interests | — | | | (1) | |
| | | | |
| Establishment of liabilities under tax receivable agreement | 313 | | | 14,395 | |
| | | | |
| | | | |
24 | Shake Shack Inc. Form 10-Q | | | | | | | | | | | | | | |
| | Twenty-Six Weeks Ended |
| | June 30 2021 | | June 24 2020 |
Cash paid for: | | | |
| Income taxes, net of refunds | $ | 1,188 | | | $ | 775 | |
| Interest, net of amounts capitalized | 143 | | | 491 | |
Non-cash investing activities: | | | |
| Accrued purchases of property and equipment | 13,627 | | | 5,405 | |
| | | | |
| | | | |
| Capitalized equity-based compensation | 29 | | | 22 | |
| | | | |
Non-cash financing activities: | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| Revolving Credit Facility amendment-related accrual | 81 | | | 0 | |
| Convertible Notes issuance-related accrual | 388 | | | 0 | |
| Establishment of liabilities under tax receivable agreement | 1,094 | | | 313 | |
| | | | |
| | | | |
NOTE 15:13: COMMITMENTS AND CONTINGENCIES
Lease Commitments
We areThe Company is obligated under various operating leases for Shacks and ourthe home office space, expiring in various years through 2035.2038. Under certain of these leases, we arethe Company is liable for contingent rent based on a percentage of sales in excess of specified thresholds and are typically responsible for ourits proportionate share of real estate taxes, common area maintenance chargescosts and utilities. Seeother occupancy costs. Refer to Note 9, Leases.7, Leases, for additional information.
As security under the terms of one of ourthe leases, we arethe Company is obligated under a letter of credit totaling $130 as of June 24, 2020,30, 2021, which expires in February 2026. Additionally, in September 2017, wethe Company entered into a letter of credit in conjunction with ourthe new home office lease in the amount of $603, which expires in August 20202021 and renews automatically for one-year periods through January 31, 2034.
Purchase Commitments
Purchase obligations include legally binding contracts, including commitments for the purchase, construction or remodeling of real estate and facilities, firm minimum commitments for inventory purchases, equipment purchases, marketing-related contracts, software acquisition/license commitments and service contracts. These obligations are generally short-term in nature and are recorded as liabilities when the related goods are received or services rendered. WeThe Company also enterenters into long-term, exclusive contracts with certain vendors to supply us with food, beverages and paper goods, obligating usthe Company to purchase specified quantities.
Legal Contingencies
In March 2020, a claim was filed against Shake Shack alleging certain violations of the Fair Labor Standards Act. At a mediation between the parties, the Company agreed to settle the matter with the plaintiff and other employees who elect to participate in the settlement for $619. As of June 30, 2021, a remaining accrual of $24 was recorded in Accrued expenses in the Condensed Consolidated Balance Sheets related to this matter.
In February 2018, a claim was filed against Shake Shack in California state court alleging certain violations of the California Labor Code. At a mediation between the parties, wethe Company agreed to settle the matter with the plaintiff and all other
24 | Shake Shack Inc. Form 10-Q
California employees who elect to participate in the settlement for $1,200. As of June 24, 2020, an accrual in the amount of $1,200 was recordedThe Company accrued for this matter during the thirteen weeks ended September 26, 2018, and related expenses.paid in full as of June 30, 2021.
We areThe Company is subject to various legal proceedings, claims and liabilities, such as employment-related claims and slip and fall cases, which arise in the ordinary course of business and are generally covered by insurance. As of June 24, 2020,30, 2021, the amount of the ultimate liability with respect to these matters was not material.
Liabilities under Tax Receivable Agreement
As described in Note 12, we are10, Income Taxes, the Company is a party to the Tax Receivable Agreement under which we areit is contractually committed to pay certain of the members of SSE Holdings 85% of the amount of any tax benefits that weare actually realize,realized, or in some cases are deemed to realize, as a result of certain transactions. We areThe Company is not obligated to make any payments under the Tax Receivable Agreement until the tax benefits associated with the transactions that gave rise to the payments are realized. Amounts payable under the Tax Receivable Agreement are contingent upon, among other things, (i) generation of future taxable income over the term of the Tax Receivable Agreement and (ii) future changes in tax laws. If we dothe Company does not generate sufficient taxable income in the aggregate over the term of the Tax Receivable Agreement to utilize the tax benefits, then weit would not be required to make the related TRA Payments. During the twenty-six weeks ended June 30, 2021 and June 24, 2020, and June 26, 2019, wethe Company recognized liabilities totaling $313$1,094 and $1,636,$313, respectively, relating to ourthe obligations under the Tax Receivable Agreement, after concluding that it was probable that weit would have sufficient future taxable income over the term of the Tax Receivable Agreement to utilize the related tax benefits. As of June 24, 202030, 2021 and December 25, 2019, our30, 2020, the total obligations under the Tax Receivable Agreement were $228,096$234,049 and $234,426,$232,954, respectively. There were no transactions subject to the Tax Receivable Agreement for which wethe Company did not recognize the related liability, as wethe Company concluded that weit would have sufficient future taxable income to utilize all of the related tax benefits.
Shake Shack Inc. Form 10-Q | 25
NOTE 16:14: RELATED PARTY TRANSACTIONS
Union Square Hospitality Group
The Chairman of ourthe Board of Directors serves as the Chief Executive Officer of Union Square Hospitality Group, LLC. As a result, Union Square Hospitality Group, LLC and its subsidiaries, set forth below, are considered related parties.
Hudson Yards Sports and Entertainment
In fiscal 2011, weShake Shack entered into a Master License Agreement (as amended, "MLA") with Hudson Yards Sports and Entertainment LLC ("HYSE") to operate Shake Shack branded limited menu concession stands in sports and entertainment venues within the United States. In February 2019, the agreement was assigned to Hudson Yards Catering ("HYC"), the parent of HYSE. The agreement expires in January 2027 and includes 5 consecutive five-year renewal options at HYC's option. As consideration for these rights, HYC pays usthe Company a license fee based on a percentage of net food sales, as defined in the MLA. HYC also pays us a percentage of profits on sales of branded beverages, as defined in the MLA.
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Thirteen Weeks Ended | | | | Twenty-Six Weeks Ended | | |
| Classification | | June 24 2020 | | June 26 2019 | | June 24 2020 | | June 26 2019 |
| | | | | | | | | |
Amounts received from HYC | Licensing revenue | | $ | 12 | | | $ | 85 | | | $ | 34 | | | $ | 151 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Thirteen Weeks Ended | | Twenty-Six Weeks Ended |
| Classification | | June 30 2021 | | June 24 2020 | | June 30 2021 | | June 24 2020 |
| | | | | | | | | |
Amounts received from HYC | Licensing revenue | | $ | 58 | | | $ | 12 | | | $ | 58 | | | $ | 34 | |
| | | | | | | | | | | | | | | | | |
| Classification | | June 24 2020 | | December 25 2019 |
| | | | | |
Amounts due from HYC | Accounts Receivable | | $ | 28 | | | $ | 47 | |
| | | | | | | | | | | | | | | | | |
| Classification | | June 30 2021 | | December 30 2020 |
| | | | | |
Amounts due from HYC | Accounts Receivable | | $ | 0 | | | $ | 8 | |
Shake Shack Inc. Form 10-Q | 25
Madison Square Park Conservancy
The Chairman of ourthe Board of Directors serves as a director of the Madison Square Park Conservancy ("MSP Conservancy"), with which we haveShake Shack has a license agreement and paypays license fees to operate ourthe Madison Square Park Shack. NaN amounts were due to MSP Conservancy as of both June 30, 2021 and December 30, 2020.
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Thirteen Weeks Ended | | | | Twenty-Six Weeks Ended | | |
| Classification | | June 24 2020 | | June 26 2019 | | June 24 2020 | | June 26 2019 |
Amounts paid to MSP Conservancy | Occupancy and related expenses | | $ | — | | | $ | 276 | | | $ | 219 | | | $ | 554 | |
| | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Classification | | | | | | June 24 2020 | | December 25 2019 |
Amounts due to MSP Conservancy | Accrued expenses | | | | | | $ | 282 | | | $ | 53 | |
| | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Thirteen Weeks Ended | | Twenty-Six Weeks Ended |
| Classification | | June 30 2021 | | June 24 2020 | | June 30 2021 | | June 24 2020 |
Amounts paid to MSP Conservancy | Occupancy and related expenses | | $ | 216 | | | $ | 0 | | | $ | 431 | | | $ | 219 | |
| | | | | | | | | |
Olo, Inc.
The Chairman of ourthe Board of Directors serves as a director of Olo, Inc. (formerly known as "Mobo Systems, Inc."), a platform we usethe Company uses in connection with ourits mobile ordering application. NaN amounts were due to Olo, Inc. as of both June 24, 202030, 2021 and December 25, 2019, respectively.30, 2020.
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Thirteen Weeks Ended | | | | Twenty-Six Weeks Ended | | |
| Classification | | June 24 2020 | | June 26 2019 | | June 24 2020 | | June 26 2019 |
Amounts paid to Olo | Other operating expenses | | $ | 42 | | | $ | 40 | | | $ | 94 | | | $ | 78 | |
| | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Thirteen Weeks Ended | | Twenty-Six Weeks Ended |
| Classification | | June 30 2021 | | June 24 2020 | | June 30 2021 | | June 24 2020 |
Amounts paid to Olo, Inc. | Other operating expenses | | $ | 63 | | | $ | 42 | | | $ | 210 | | | $ | 94 | |
| | | | | | | | | |
Square, Inc.
OurThe Company's Chief Executive Officer is a member of the Board of Directors of Square, Inc. ("Square"). WeThe Company currently useuses certain point-of-sale applications, payment processing services, hardware and other enterprise platform services in connection with the processing of a limited amount of sales at certain locations, sales for certain off-site events and in connection with its kiosk technology.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Thirteen Weeks Ended | | Twenty-Six Weeks Ended |
| Classification | | June 30 2021 | | June 24 2020 | | June 30 2021 | | June 24 2020 |
Amounts paid to Square | Other operating expenses | | $ | 754 | | | $ | 218 | | | $ | 1,216 | | | $ | 789 | |
| | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Classification | | June 30 2021 | | December 30 2020 |
Amounts due to Square | Accounts Payable | | $ | 21 | | | $ | — | |
| | | | | |
USHG Acquisition Corp.
The Company's Chief Executive Officer has been appointed to the Board of Directors of USHG Acquisition Corp. in which the Chairman of the Board of Directors serves as the chairman of the board of directors of USHG Acquisition Corp. USHG Acquisition Corp. is a newly organized blank check company incorporated for the purpose of effecting a merger, share exchange, asset acquisition, share purchase, reorganization or similar business combination with one or more businesses or entities. No amounts were due to or due from USHG Acquisition Corp as of both June 30, 2021 and December 30, 2020.
Tax Receivable Agreement
The Company entered into a Tax Receivable Agreement that provides for the payment by the Company of 85% of the amount of any tax benefits that are actually realized, or in some cases are deemed to realize, as a result of certain transactions. Refer to Note 10, Income Taxes, for additional information.
Shake Shack Inc. Form 10-Q | 26
processing of a limited amount of sales at certain of our locations, sales for certain off-site events and in connection with our kiosk technology. NaN amounts were due to Square as of June 24, 2020 and December 25, 2019, respectively. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Thirteen Weeks Ended | | Twenty-Six Weeks Ended |
| Classification | | June 30 2021 | | June 24 2020 | | June 30 2021 | | June 24 2020 |
Amounts paid to members (inclusive of interest) | Other current liabilities | | $ | 0 | | | $ | 74 | | | $ | 0 | | | $ | 6,643 | |
| | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Thirteen Weeks Ended | | | | Twenty-Six Weeks Ended | | |
| Classification | | June 24 2020 | | June 26 2019 | | June 24 2020 | | June 26 2019 |
Amounts paid to Square | Other operating expenses | | $ | 218 | | | $ | 442 | | | $ | 789 | | | $ | 708 | |
| | | | | | | | | |
Tax Receivable Agreement
As described in Note 12, we entered into a tax receivable agreement with certain members of SSE Holdings that provides for the payment by us of 85% of the amount of tax benefits, if any, that Shake Shack actually realizes or in some cases is deemed to realize as a result of certain transactions.
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Thirteen Weeks Ended | | | | Twenty-Six Weeks Ended | | |
| Classification | | June 24 2020 | | June 26 2019 | | June 24 2020 | | June 26 2019 |
Amounts paid to members (inclusive of interest) | Other current liabilities | | $ | 74 | | | $ | — | | | $ | 6,643 | | | $ | 707 | |
| | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Classification | | | | | June 24 2020 | | December 25 2019 |
Amounts due under the Tax Receivable Agreement | Other current liabilities Liabilities under tax receivable agreement, net of current portion | | | | | $ | 228,096 | | | $ | 234,426 | |
| | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Classification | | June 30 2021 | | December 30 2020 |
Amounts due under the Tax Receivable Agreement | Other current liabilities Liabilities under tax receivable agreement, net of current portion | | $ | 234,049 | | | $ | 232,954 | |
| | | | | |
Distributions to Members of SSE Holdings
Under the terms of the SSE Holdings LLC Agreement, SSE Holdings is obligated to make tax distributions to its members. NaN tax distributions were payable to non-controlling interest holders as of June 24, 202030, 2021 and December 25, 2019,30, 2020, respectively.
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Thirteen Weeks Ended | | | | Twenty-Six Weeks Ended | | |
| Classification | | June 24 2020 | | June 26 2019 | | June 24 2020 | | June 26 2019 |
Amounts paid to non-controlling interest holders | Net income attributable to non-controlling interests | | $ | 9 | | | $ | 1,558 | | | $ | 314 | | | $ | 1,667 | |
| | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Thirteen Weeks Ended | | Twenty-Six Weeks Ended |
| Classification | | June 30 2021 | | June 24 2020 | | June 30 2021 | | June 24 2020 |
Amounts paid to non-controlling interest holders | Non-controlling interests | | $ | 239 | | | $ | 9 | | | $ | 706 | | | $ | 314 | |
| | | | | | | | | |
Shake Shack Inc. Form 10-Q | 27
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
This section and other parts of this Quarterly Report on Form 10-Q ("Form 10-Q") 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.different from the statements made herein. All statements other than statements of historical fact are forward-looking statements. Forward-looking statements providediscuss our current expectations and projections relating to our financial position, results of operations, plans, objectives, future events based on certain assumptionsperformance and include any statementbusiness. You can identify forward-looking statements by the fact that doesthey do not directly relate strictly to any historical or current fact, such as our expected financial outlook for fiscal 2020, our expected operating performance for fiscal 2020, expected Shack construction and openings, expected same-Shack sales growth and trends in our business, includingfacts. These statements relating to the effects of COVID-19 and our mitigation efforts. Forward-looking statements can also be identified bymay include words such as "aim," "anticipate," "believe," "estimate," "expect," "forecast," "future," "intend," "outlook," "plan," "potential," "predict,"project," "project,"projection," "plan," "seek," "may," "can,"could," "would," "will," "would,"should," "could,"can," "should,"can have," "likely," the negatives thereof and other similar expressions. Forward-looking statements are not guarantees of future performance and actual results may differ significantly from the results discussed in the forward-looking statements. All forward-looking statements are expressly qualified in their entirety by these cautionary statements. Factors that might cause such differences include, but are not limited to, those discussedYou should evaluate all forward-looking statements made in Part I, Item 1Athis 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 25, 201930, 2020 ("20192020 Form 10-K") and Part II, Item 1A. The forward-looking statements included in this Form 10-Q are made only as of this Quarterly Report on Form 10-Q. the date hereof. We undertake 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.
The following discussion should be read in conjunction with our 20192020 Form 10-K and the condensed consolidated financial statements and notes thereto included in Part I, Item 1 of this Form 10-Q. All information presented herein is based on our fiscal calendar. Unless otherwise stated, references to particular years, quarters, months or periods refer to our fiscal years and the associated quarters, months and periods of those fiscal years. We undertake no obligation to revise or update any forward-looking statements for any reason, except as required by law.
OVERVIEW
Shake Shack is a modern day "roadside" burger stand serving a classic American menu of premium burgers, chicken sandwiches, hot dogs, crinkle cutcrinkle-cut fries, shakes, frozen custard, beer and wine. As of June 24, 2020,30, 2021, there were 292339 Shacks in operation system-wide, of which 171200 were domestic company-operatedCompany-operated Shacks, 2223 were domestic licensed Shacks and 99116 were international licensed Shacks.
COVID-19 UpdateShake Shack Inc. Form 10-Q | 27
Recent Developments and Trends
We have experienced gradual improvementcontinued positive momentum in the business during the second quarter of 2020,2021, while continuing to support our Shack teams, our guests and third quarter to date. The speedthe communities in which we operate, as we navigate the COVID-19 pandemic. We remain focused on the recovery of both sales and profitability across our Shack base and growth over the long term. Our strategic plan centers on the evolution of our recovery has differed depending onShack formats through physical and digital transformation with the locationobjective of delivering a seamless, elevated guest experience.
Same-Shack sales grew 52.7% year-on-year in the second quarter of 2021, compared to up 5.7% in the first quarter of 2021. Sales improved across all regions, and was led by strength of in-Shack dining as well as healthy retention of our digital sales. Although suburban Shacks are performing closer to pre-pandemic levels than urban, we saw encouraging momentum across urban Shacks throughout the second quarter. We also reached a milestone in our urban recovery, with those Shacks concentrated in urban areas, such as New York City, most impacted by the COVID-19 outbreak. Urban Shacks represent approximately halfreopening of the Union Station, DC and Grand Central Station, NYC Shacks in late June and early July, respectively. In the comparable base, yet accounted for approximately 60% of ourSoutheast region, notably Texas, same-Shack sales priorare now above pre-pandemic levels; these markets continue to represent growth opportunities for the COVID-19 outbreak. business across a variety of formats.
Average weekly sales were $72,000 in the second quarter of 2021, marking the highest level since the pandemic started, and up from $64,000 in the first quarter of 2021. Average weekly sales grew each month of the second quarter of 2021 and were $74,000 in fiscal June.
During the second quarter of 2020, same-Shack2021, total digital sales, including orders placed on the Shake Shack app, website and third-party delivery platforms, represented 47% of Shack sales. Even as the mix shifted with the return of in-Shack dining, retention of digital sales was approximately 80% in our urban Shacks were down 57% and suburban Shacks were down 38%fiscal June when compared to fiscal January when digital sales peaked, with the Company-owned app channel performing higher than our digital average. During the second quarter of 2021 our new purchasers in Company-owned app and web channels grew 16.7% versus the first quarter of 2021, to 2.8 million total new purchasers since mid-March of 2020; continued investment across these channels is helping bring in new guests, even as in-Shack dining returns. We look forward to continuing to build on this strong foundation by offering our guests new and innovative ways to elevate their dining experience.
Licensing revenue for the second quarter of 2021 was $6.0 million, reflecting an increase of 164.2% versus the same period last year. Subsequent toImprovement was driven domestically by the second quarterreturn of 2020, in fiscal July 2020, same-Shack sales for our urban Shacks were down 50%air travel across airports and suburban Shacks were down 24% compared togradual lifting of capacity restrictions at major US stadiums; internationally, improvement was seen across the same period last year. As of July 22, approximately 95% of domestic company-operated Shacks were open.regions where COVID-related restrictions have been eased.
As in-Shack ordering has increased over recent weeks, digital sales mix has continued to shift. During the second quarter total digital sales represented 75% of total Shack sales and more than doubled compared to the first quarter of 2020. Our native web and app channels more than tripled compared to the same period last year, and when combined, continued to be the fastest growing channels throughout Q2 and into July. For fiscal July, digital sales represented 62% of total Shack sales, retaining over 90% of the digital sales that were achieved during fiscal May even as in-Shack sales have gradually returned. In addition, we have welcomed over 800,000 first time purchasers via our own digital channels since early March, which is nearly four times higher than in the same period last year. We expect digital channels to remain a significant component of sales and ongoing growth.
28 | Shake Shack Inc. Form 10-Q
The following table presents fiscal monthly information about our current trends in Shack sales.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| First Quarter | | Second Quarter | | | | | | Third Quarter |
| | | | | | | | | |
(dollar amounts in thousands) | March 25 | | April 22 | | May 20 | | June 24 | | July 22 |
Average weekly sales* | $ | 56 | | | $ | 32 | | | $ | 50 | | | $ | 52 | | | $ | 56 | |
Total year-over-year sales growth (decline) | (11) | % | | (56) | % | | (32) | % | | (32) | % | | (23) | % |
Same-Shack sales % | (29) | % | | (64) | % | | (42) | % | | (42) | % | | (39) | % |
*Average weekly sales is calculated by dividing total Shack sales by the number of operating weeks for all Shacks in operation during the period. For Shacks that are not open for the entire period, fractional adjustments are made to the number of operating weeks open such that it corresponds to the period of associated sales.
Our licensed business has shown gradual improvement across all regions as approximately 80% of licensed Shacks have reopened. All Shacks in Hong Kong, mainland China, Japan and Korea (with the exception of the Incheon Airport Shack) are now open although in most cases with limited hours and smaller capacity dining rooms. In the Middle East, the majority of Shacks have re-opened primarily for take-out and delivery with dining rooms slowly starting to open across the region. Approximately half the Shacks in the United Kingdom are fully reopened. Nearly all domestic stadium and event venues remain closed. Half of all airport locations are open but operating at severely reduced sales levels while air travel remains at a fraction of its volume prior to the COVID-19 outbreak. As an example of the dynamic and quickly evolving environment, the Shack located in Terminal 3 of the LAX airport will not reopen, as the airport has chosen to take this time to tear down and replace the terminal entirely.
The following table presents fiscal monthly information about our licensed sales trends.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| First Quarter | | Second Quarter | | | | | | Third Quarter |
| | | | | | | | | |
(dollar amounts in millions) | March 25 | | April 22 | | May 20 | | June 24 | | July 22 |
Weekly licensed sales(1) | $ | 4.6 | | | $ | 2.0 | | | $ | 2.4 | | | $ | 3.5 | | | $ | 4.6 | |
Total year-over-year licensed sales growth (decline) | 13 | % | | (65) | % | | (58) | % | | (47) | % | | (32) | % |
Number of open licensed Shacks | 96 | | | 56 | | | 59 | | | 91 | | | 98 | |
* Weekly licensed sales is an operating measure and consists of sales from domestic licensed Shacks and international licensed Shacks. We do not recognize the sales from licensed Shacks as revenue. Of these amounts, revenue is limited to licensing revenue based on a percentage of sales from domestic and international licensed Shacks, as well as certain up-front fees such as territory fees and opening fees.
Development Highlights
During the second quarter ended June 24, 2020,of 2021, we opened foureight new domestic Company-operated Shacks, withone new locationsdomestic licensed Shack and nine new international licensed Shacks. There were no permanent Shack closures in Topanga, Sacramento, Charlotte and St. Louis. With gradual sales recovery, primarily across most markets outside of New York City, we have restarted new Shack development. We expect to open between 6 and 11 additional domestic company-operated Shacks, back weighted towards the end of this year, for a total of 15 to 20 for the full year. However, given the ongoing uncertainties around construction, local government restrictions, and the broader operating environment during COVID-19, this number may be subject to change as target dates potentially shift.
During the second quarter endedof 2021.
| | | | | | | | | | | | | | |
Location | | Type | | Opening Date |
Bronx, NY — Bay Plaza | | Domestic Company-operated | | 4/1/2021 |
Seoul, South Korea — Nowon | | International Licensed | | 4/2/2021 |
Los Angeles, CA — Dodger Stadium | | Domestic Licensed | | 4/9/2021 |
Mexico City, Mexico — Roma Cibeles | | International Licensed | | 4/14/2021 |
Beaverton, OR — Cedar Hills | | Domestic Company-operated | | 4/16/2021 |
Macao, China — The Londoner | | International Licensed | | 4/17/2021 |
Santa Monica, CA — Santa Monica | | Domestic Company-operated | | 4/18/2021 |
Los Angeles, CA — Bunker Hill | | Domestic Company-operated | | 4/19/2021 |
Fishers, IN — Fishers | | Domestic Company-operated | | 4/22/2021 |
Beijing, China — China World | | International Licensed | | 4/26/2021 |
Singapore, Singapore — Great World | | International Licensed | | 4/28/2021 |
Shenzhen, China — MixC | | International Licensed | | 5/20/2021 |
Kuwait City, Kuwait — 360 Mall | | International Licensed | | 6/1/2021 |
Istanbul, Turkey — Istanbul Airport | | International Licensed | | 6/4/2021 |
Tampa, FL — Midtown Tampa | | Domestic Company-operated | | 6/7/2021 |
Seoul, South Korea — Coex Mall | | International Licensed | | 6/9/2021 |
San Francisco, CA — San Francisco Centre | | Domestic Company-operated | | 6/28/2021 |
Franklin, TN — Franklin | | Domestic Company-operated | | 6/28/2021 |
Financial Highlights for the Second Quarter 2021
▪Total revenue in the second quarter of 2021 increased 104.2% to $187.5 million versus the same period last year.
▪Shack sales in the second quarter of 2021 increased 102.7% to $181.5 million versus the same period last year.
▪Same-Shack sales(1) improved to up 52.7% in the second quarter of 2021 versus the same period last year.
▪Licensed revenue in the second quarter of 2021 increased 164.2% to $6.0 million versus the same period last year.
▪Shack system-wide sales in the second quarter of 2021 increased 127.7% to $281.9 million, versus the same period last year.
▪Operating income in the second quarter of 2021 was $3.3 million compared to an operating loss of $24.1 million in the same period last year.
▪Shack-level operating profit(2) increased 1,699.7% in the second quarter of 2021 versus the same period last year, to $34.8 million, or 19.2% of Shack sales.
▪Net income was $2.1 million and adjusted EBITDA2 was $20.6 million in the second quarter of 2021, compared to a net loss of $18.0 million and adjusted EBITDA of $(8.8) million in the same period last year.
▪Net income attributable to Shake Shack Inc. was $1.9 million and adjusted pro forma net income2 was $2.4 million, or $0.05 per fully exchanged and diluted share in the second quarter of 2021, compared to net loss attributable to Shake Shack Inc. of $16.2 million and adjusted pro forma net loss of $18.3 million, or $(0.45) per fully exchanged and diluted share, in the same period last year.
▪Net system-wide Shack openings, comprised of eight net domestic Company-operated Shacks and ten net licensed Shacks.
▪Cash and cash equivalents and marketable securities on hand was $420.2 million as of June 24, 2020, we opened one new international licensed Shack in China at the Shanghai Hongqiao International Airport. In fiscal June, we expanded our partnership with licensee Maxim’s Caterers Limited which targets a development agreement of 15 Shacks in South China by 2030, including locations in Shenzhen, Guangzhou and more. Through this expanded partnership, this agreement increases development targets for mainland China to 55 Shacks by 2030, of which five Shacks are open today.30, 2021.
Shake Shack Inc. Form 10-Q | 29
Financial Highlights(1)In order to compare like-for-like periods for fiscal 2021, same-Shack sales will compare the Second Quarter52 weeks from December 31, 2020 comparedthrough December 29, 2021 to the Second Quarter 2019: 52 weeks from January 2, 2020 through December 30, 2020. For Q2 2021, same-Shack sales compares the thirteen weeks from April 1, 2021 through June 30, 2021 to the thirteen weeks from April 2, 2020 through July 1, 2020.
▪(2)Total revenue decreased 39.9% to $91.8 million.
▪Shack sales decreased 39.5% to $89.5 million.
▪Same-Shack sales decreased 49.0%.
▪Licensed revenue decreased 53.1% to $2.3 million.
▪Shack system-wide sales decreased 45.2% to $123.8 million.
▪Operating loss of $24.1 million compared to operating income of $11.9 million in the prior year second quarter.
▪Shack-level operating profit*,This represents a non-GAAP measure, decreased 94.7%measure. Reconciliations to $1.9 million, or 2.2% of Shack sales.
▪Net loss was $18.0 million and adjusted EBITDA*, a non-GAAP measure, was a loss of $8.8 million, compared to net income of $11.2 million and adjusted EBITDA of $25.9 million in the prior year second quarter.
▪Net loss attributable to Shake Shack Inc. was $16.2 million and adjusted pro forma net loss*, a non-GAAP measure, was $18.3 million, or a loss of $0.45 per fully exchanged and diluted share, compared to net income attributable to Shake Shack Inc. of $9.0 million, adjusted pro forma net income of $10.2 million, or $0.27 per fully exchanged and diluted share, in the prior year second quarter.
▪Five system-wide Shack openings, comprised of four domestic company-operated Shacks and one licensed Shack.
▪As of June 24, 2020, we had $190.8 million in cash and marketable securities on hand.
* Shack-level operating profit, adjusted EBITDA and adjusted pro forma net income (loss) are non-GAAP measures. Reconciliations of Shack-level operating profit to operating income (loss) and adjusted EBITDA to net income (loss), the most directly comparable financial measures presented in accordance with GAAP are set forth in the schedules within “Non-GAAP Financial Measures,” herein.
FISCAL 2020 OUTLOOK
Given the substantial uncertainty and subsequent material economic impact caused by the COVID-19 pandemic, we have withdrawn our guidance for the fiscal year ending December 30, 2020.
30 | Shake Shack Inc. Form 10-Q
RESULTS OF OPERATIONS
The following table summarizes our results of operations for the thirteen and twenty-six weeks ended June 24, 202030, 2021 and June 26, 2019:24, 2020:
| | | Thirteen Weeks Ended | | | Twenty-Six Weeks Ended | | | Thirteen Weeks Ended | | Twenty-Six Weeks Ended |
(dollar amounts in thousands) | (dollar amounts in thousands) | | June 24 2020 | | June 26 2019 | | June 24 2020 | | June 26 2019 | | (dollar amounts in thousands) | June 30 2021 | June 24 2020 | June 30 2021 | June 24 2020 |
Shack sales | Shack sales | | $ | 89,519 | | 97.5 | % | | $ | 147,876 | | 96.8 | % | | $ | 227,567 | | 96.9 | % | | $ | 276,445 | | 96.9 | % | Shack sales | $ | 181,470 | | 96.8 | % | | $ | 89,519 | | 97.5 | % | | $ | 332,138 | | 96.9 | % | | $ | 227,567 | | 96.9 | % |
Licensing revenue | Licensing revenue | | 2,267 | | 2.5 | % | | 4,837 | | 3.2 | % | | 7,389 | | 3.1 | % | | 8,877 | | 3.1 | % | Licensing revenue | 5,990 | | 3.2 | % | | 2,267 | | 2.5 | % | | 10,604 | | 3.1 | % | | 7,389 | | 3.1 | % |
TOTAL REVENUE | TOTAL REVENUE | | 91,786 | | 100.0 | % | | 152,713 | | 100.0 | % | | 234,956 | | 100.0 | % | | 285,322 | | 100.0 | % | TOTAL REVENUE | 187,460 | | 100.0 | % | | 91,786 | | 100.0 | % | | 342,742 | | 100.0 | % | | 234,956 | | 100.0 | % |
Shack-level operating expenses(1): | Shack-level operating expenses(1): | | | Shack-level operating expenses(1): | |
| | Food and paper costs | | 30,027 | | 33.5 | % | | 42,899 | | 29.0 | % | | 69,591 | | 30.6 | % | | 80,890 | | 29.3 | % | | Food and paper costs | 54,917 | | 30.3 | % | | 30,027 | | 33.5 | % | | 99,547 | | 30.0 | % | | 69,591 | | 30.6 | % |
| | Labor and related expenses | | 30,933 | | 34.6 | % | | 40,197 | | 27.2 | % | | 72,699 | | 31.9 | % | | 77,290 | | 28.0 | % | | Labor and related expenses | 52,631 | | 29.0 | % | | 30,933 | | 34.6 | % | | 99,013 | | 29.8 | % | | 72,699 | | 31.9 | % |
| | Other operating expenses | | 14,304 | | 16.0 | % | | 16,755 | | 11.3 | % | | 32,083 | | 14.1 | % | | 32,323 | | 11.7 | % | | Other operating expenses | 24,275 | | 13.4 | % | | 14,304 | | 16.0 | % | | 47,419 | | 14.3 | % | | 32,083 | | 14.1 | % |
| | Occupancy and related expenses | | 12,323 | | 13.8 | % | | 11,873 | | 8.0 | % | | 24,881 | | 10.9 | % | | 22,772 | | 8.2 | % | | Occupancy and related expenses | 14,876 | | 8.2 | % | | 12,323 | | 13.8 | % | | 28,787 | | 8.7 | % | | 24,881 | | 10.9 | % |
General and administrative expenses | General and administrative expenses | | 14,017 | | 15.3 | % | | 15,393 | | 10.1 | % | | 30,208 | | 12.9 | % | | 29,330 | | 10.3 | % | General and administrative expenses | 20,366 | | 10.9 | % | | 14,017 | | 15.3 | % | | 39,931 | | 11.7 | % | | 30,208 | | 12.9 | % |
Depreciation expense | | 12,089 | | 13.2 | % | | 9,799 | | 6.4 | % | | 23,857 | | 10.2 | % | | 18,765 | | 6.6 | % | |
Depreciation and amortization expense | | Depreciation and amortization expense | 14,472 | | 7.7 | % | | 12,089 | | 13.2 | % | | 28,198 | | 8.2 | % | | 23,857 | | 10.2 | % |
Pre-opening costs | Pre-opening costs | | 1,734 | | 1.9 | % | | 3,549 | | 2.3 | % | | 3,977 | | 1.7 | % | | 6,191 | | 2.2 | % | Pre-opening costs | 2,258 | | 1.2 | % | | 1,734 | | 1.9 | % | | 5,834 | | 1.7 | % | | 3,977 | | 1.7 | % |
Impairment and loss on disposal of assets | Impairment and loss on disposal of assets | | 434 | | 0.5 | % | | 377 | | 0.2 | % | | 2,522 | | 1.1 | % | | 728 | | 0.3 | % | Impairment and loss on disposal of assets | 358 | | 0.2 | % | | 434 | | 0.5 | % | | 727 | | 0.2 | % | | 2,522 | | 1.1 | % |
TOTAL EXPENSES | TOTAL EXPENSES | | 115,861 | | 126.2 | % | | 140,842 | | 92.2 | % | | 259,818 | | 110.6 | % | | 268,289 | | 94.0 | % | TOTAL EXPENSES | 184,153 | | 98.2 | % | | 115,861 | | 126.2 | % | | 349,456 | | 102.0 | % | | 259,818 | | 110.6 | % |
OPERATING INCOME (LOSS) | OPERATING INCOME (LOSS) | | (24,075) | | (26.2) | % | | 11,871 | | 7.8 | % | | (24,862) | | (10.6) | % | | 17,033 | | 6.0 | % | OPERATING INCOME (LOSS) | 3,307 | | 1.8 | % | | (24,075) | | (26.2) | % | | (6,714) | | (2.0) | % | | (24,862) | | (10.6) | % |
Other income, net | Other income, net | | 394 | | 0.4 | % | | 447 | | 0.3 | % | | 301 | | 0.1 | % | | 1,011 | | 0.4 | % | Other income, net | 108 | | 0.1 | % | | 394 | | 0.4 | % | | 139 | | — | % | | 301 | | 0.1 | % |
Interest expense | Interest expense | | (442) | | (0.5) | % | | (97) | | (0.1) | % | | (554) | | (0.2) | % | | (169) | | (0.1) | % | Interest expense | (359) | | (0.2) | % | | (442) | | (0.5) | % | | (874) | | (0.3) | % | | (554) | | (0.2) | % |
INCOME (LOSS) BEFORE INCOME TAXES | INCOME (LOSS) BEFORE INCOME TAXES | | (24,123) | | (26.3) | % | | 12,221 | | 8.0 | % | | (25,115) | | (10.7) | % | | 17,875 | | 6.3 | % | INCOME (LOSS) BEFORE INCOME TAXES | 3,056 | | 1.6 | % | | (24,123) | | (26.3) | % | | (7,449) | | (2.2) | % | | (25,115) | | (10.7) | % |
Income tax expense (benefit) | Income tax expense (benefit) | | (6,092) | | (6.6) | % | | 1,050 | | 0.7 | % | | (6,005) | | (2.6) | % | | 3,097 | | 1.1 | % | Income tax expense (benefit) | 991 | | 0.5 | % | | (6,092) | | (6.6) | % | | (10,089) | | (2.9) | % | | (6,005) | | (2.6) | % |
NET INCOME (LOSS) | NET INCOME (LOSS) | | (18,031) | | (19.6) | % | | 11,171 | | 7.3 | % | | (19,110) | | (8.1) | % | | 14,778 | | 5.2 | % | NET INCOME (LOSS) | 2,065 | | 1.1 | % | | (18,031) | | (19.6) | % | | 2,640 | | 0.8 | % | | (19,110) | | (8.1) | % |
Less: net income (loss) attributable to non-controlling interests | | (1,820) | | (2.0) | % | | 2,141 | | 1.4 | % | | (1,939) | | (0.8) | % | | 3,202 | | 1.1 | % | |
Less: Net income (loss) attributable to non-controlling interests | | Less: Net income (loss) attributable to non-controlling interests | 121 | | 0.1 | % | | (1,820) | | (2.0) | % | | (613) | | (0.2) | % | | (1,939) | | (0.8) | % |
NET INCOME (LOSS) ATTRIBUTABLE TO SHAKE SHACK INC. | NET INCOME (LOSS) ATTRIBUTABLE TO SHAKE SHACK INC. | | $ | (16,211) | | (17.7) | % | | $ | 9,030 | | 5.9 | % | | $ | (17,171) | | (7.3) | % | | $ | 11,576 | | 4.1 | % | NET INCOME (LOSS) ATTRIBUTABLE TO SHAKE SHACK INC. | $ | 1,944 | | 1.0 | % | | $ | (16,211) | | (17.7) | % | | $ | 3,253 | | 0.9 | % | | $ | (17,171) | | (7.3) | % |
(1)As a percentage of Shack sales.
Shack Sales
Shack sales represent the aggregate sales of food, beverages and Shake Shack branded merchandise at our domestic company-operatedCompany-operated Shacks. Shack sales in any period are directly influenced by the number of operating weeks in such period, the number of open Shacks and same-Shack sales. Same-Shack sales means, for any reporting period, sales for the comparable Shack base, which we define as the number of domestic company-operatedCompany-operated Shacks open for 24 months or longer.
| | | Thirteen Weeks Ended | | | Twenty-Six Weeks Ended | | | Thirteen Weeks Ended | | Twenty-Six Weeks Ended |
(dollar amounts in thousands) | (dollar amounts in thousands) | | June 24 2020 | | June 26 2019 | | June 24 2020 | | June 26 2019 | (dollar amounts in thousands) | June 30 2021 | | June 24 2020 | | June 30 2021 | | June 24 2020 |
Shack sales | Shack sales | | $ | 89,519 | | | $ | 147,876 | | | $ | 227,567 | | | $ | 276,445 | | Shack sales | $ | 181,470 | | | $ | 89,519 | | | $ | 332,138 | | | $ | 227,567 | |
| | Percentage of total revenue | | 97.5 | % | | 96.8 | % | | 96.9 | % | | 96.9 | % | | Percentage of total revenue | 96.8 | % | | 97.5 | % | | 96.9 | % | | 96.9 | % |
| | Dollar change compared to prior year | | $ | (58,357) | | | $ | (48,878) | | | | Dollar change compared to prior year | $ | 91,951 | | | $ | 104,571 | | |
| | Percentage change compared to prior year | | (39.5) | % | | (17.7) | % | | | Percentage change compared to prior year | 102.7 | % | | 46.0 | % | |
The decreaseincreases in Shack sales for the thirteen and twenty-six weeks ended June 24, 2020 was30, 2021 were primarily due to lost sales related to the impactcontinued momentum associated with the recovery from the COVID-19 pandemic, Furthermore, Shack sales were negatively impacted by an estimated $3.2 million duein addition to nationwide protests and resulting curfews causing temporary Shack closures and reduced operating hours during the twoopening of 29 net new domestic
Shake Shack Inc. Form 10-Q | 31
week period from May 28th through June 10th. These decreases were partially offset by the opening of 31 new domestic company-operatedCompany-operated Shacks between June 26, 201924, 2020 and June 24, 2020.
Same-Shack30, 2021. Digital sales decreased 49.0% infor the second quarter of 2020thirteen and 31.3% in the twenty-six weeks ended June 24, 2020, driven by30, 2021 increased 27.4% and 89.3% respectively, compared to the adverse impact of reduced traffic resulting fromsame period last year.
Same-Shack sales for the COVID-19 pandemic,thirteen weeks ended June 30, 2021 increased 52.7% compared to the same period last year, with urban Shacks located in typically dense urban locations acutely impacted by the outbreak.increasing 53.8% and suburban Shacks increasing 51.8%. The decreaseincrease in same-Shack sales for the second quarter 2021 was driven by a 60.1% decrease in traffic partially offset by an61.5% increase in price mixguest traffic due to the return of 11.1%. This increase in price mix was driven by a 28% increase to total average check as a result of the significant shift into digital channels over the last few months, which have historically carried a higher average check than in-Shack. The decrease in same-Shackin-Shack dining. Same-Shack sales for the twenty-six weeks ended June 24, 2020 was30, 2021 increased 26.4% compared to the same period last year, primarily driven by 38.0% decreasea 16.1% increase in guest traffic partially offset byand an increase in price mix of 6.7%10.3%. In the second quarter of 2020, same-Shack sales improved from a 64% decline in fiscal April 2020, to a 42% decline in each of fiscal May and June 2020. As noted herein, fiscal June Shack sales were negatively impacted by nationwide protest activity and resulting curfews. After adjusting for the impact of the protests, same-Shack sales showed sequential improvement, with a 39% decline in fiscal June 2020.
For the purpose of calculating same-Shack sales growth for the thirteen weeks ended June 30, 2021, Shack sales for 95130 Shacks were included in the comparable Shack base.
Average weeklybase, and for the twenty-six weeks ended June 30, 2021, Shack sales for domestic company-operated132 Shacks decreased to $45,000 forwere included in the second quarter of 2020 compared to $85,000 for the same quarter last year, due to the impact of COVID-19. Average weekly sales have, however, experienced steady increases from $32,000 in fiscal April 2020, to $52,000 in fiscal June 2020 and $56,000 for fiscal July, representing an increase of 2.3 times the low point of the COVID-19 outbreak.comparable Shack base.
Licensing Revenue
Licensing revenue is comprised of license fees, opening fees for certain licensed Shacks and territory fees. License fees are calculated as a percentage of sales and territory fees are payments for the exclusive right to develop Shacks in a specific geographic area.
| | | Thirteen Weeks Ended | | | Twenty-Six Weeks Ended | | | Thirteen Weeks Ended | | Twenty-Six Weeks Ended |
(dollar amounts in thousands) | (dollar amounts in thousands) | | June 24 2020 | | June 26 2019 | | June 24 2020 | | June 26 2019 | (dollar amounts in thousands) | June 30 2021 | | June 24 2020 | | June 30 2021 | | June 24 2020 |
Licensing revenue | Licensing revenue | | $ | 2,267 | | | $ | 4,837 | | | $ | 7,389 | | | $ | 8,877 | | Licensing revenue | $ | 5,990 | | | $ | 2,267 | | | $ | 10,604 | | | $ | 7,389 | |
| | Percentage of total revenue | | 2.5 | % | | 3.2 | % | | 3.1 | % | | 3.1 | % | | Percentage of total revenue | 3.2 | % | | 2.5 | % | | 3.1 | % | | 3.1 | % |
| | Dollar change compared to prior year | | $ | (2,570) | | | $ | (1,488) | | | | Dollar change compared to prior year | $ | 3,723 | | | $ | 3,215 | | |
| | Percentage change compared to prior year | | (53.1) | % | | (16.8) | % | | | Percentage change compared to prior year | 164.2 | % | | 43.5 | % | |
The decreasesincreases in licensingLicensing revenue for the thirteen and twenty-six weeks ended June 24, 202030, 2021 were primarily due to lost sales related to the COVID-19 pandemic, partially offset by a net increase of 2418 Shacks that opened between June 26, 201924, 2020 and June 24, 2020. Licensing revenue showed gradual30, 2021 as well as increased strength across regions where COVID related restrictions have been eased. Our licensed business continues to show improvement with a 65% decline in fiscal April 2020, a 47% decline in fiscal June 2020, and a 32% decline in fiscal July 2020.despite challenges that still remain due to the COVID-19 pandemic. As of the end of the second quarter 2021, eight licensed Shacks were temporarily closed due to the COVID-19 pandemic.
Food and Paper Costs
Food and paper costs include the direct costs associated with food, beverage and packaging of our menu items. The components of food and paper costs are variable by nature, changing with sales volume, and are impacted by menu mix and fluctuations in commodity costs, as well as geographic scale and proximity.
| | | Thirteen Weeks Ended | | | Twenty-Six Weeks Ended | | | Thirteen Weeks Ended | | Twenty-Six Weeks Ended |
(dollar amounts in thousands) | (dollar amounts in thousands) | | June 24 2020 | | June 26 2019 | | June 24 2020 | | June 26 2019 | (dollar amounts in thousands) | June 30 2021 | | June 24 2020 | | June 30 2021 | | June 24 2020 |
Food and paper costs | Food and paper costs | | $ | 30,027 | | | $ | 42,899 | | | $ | 69,591 | | | $ | 80,890 | | Food and paper costs | $ | 54,917 | | | $ | 30,027 | | | $ | 99,547 | | | $ | 69,591 | |
| | Percentage of Shack sales | | 33.5 | % | | 29.0 | % | | 30.6 | % | | 29.3 | % | | Percentage of Shack sales | 30.3 | % | | 33.5 | % | | 30.0 | % | | 30.6 | % |
| | Dollar change compared to prior year | | $ | (12,872) | | | $ | (11,299) | | | | Dollar change compared to prior year | $ | 24,890 | | | $ | 29,956 | | |
| | Percentage change compared to prior year | | (30.0) | % | | (14.0) | % | | | Percentage change compared to prior year | 82.9 | % | | 43.0 | % | |
The decreasesincreases in foodFood and paper costs for the second quarter ofthirteen and twenty-six weeks ended June 24, 202030, 2021 were primarily due to a decline inincreased sales volume related toassociated with continued recovery from the COVID-19 pandemic partially offset byand the opening of 3129 net new domestic company-operatedCompany-operated Shacks between June 26, 201924, 2020 and June 24, 2020.30, 2021.
As a percentage of Shack sales, the decreases in Food and paper costs for the thirteen and twenty-six weeks ended June 30, 2021 were primarily due to lower beef prices and paper and packaging prices, compared to the same period last year.
32 | Shake Shack Inc. Form 10-Q
As a percentage of Shack sales, the increase in food and paper costs for the thirteen and twenty-six weeks ended June 24, 2020 was primarily due to sales deleverage resulting from the impact of COVID-19, significant inflation in beef prices, increased paper and packaging costs, a number of incremental payroll costs and higher delivery commissions. For the large part of the second quarter of 2020, we experienced significant inflation in beef, with cost nearly double that of last year for most of June. Beef prices have since returned to more normalized levels, however this increase negatively impacted Food and Paper costs by approximately $2.5 million. Furthermore, the Company had significantly higher paper and packaging costs, with all orders packaged in sealed bags, impacting Food and Paper costs by approximately $1.4 million. For the twenty-six weeks ended June 24, 2020, as a percentage of Shack sales, the increase in food and paper costs were due to sales deleverage resulting from the COVID-19 pandemic, lower chicken costs primarily from lapping the promotional launch of Chick'n Bites, which carried higher costs, and was partially offset by significant inflation in beef prices, higher paper and packaging costs and a non-recurring inventory adjustment, as described in the "Non-GAAP Financial Measures" section, herein.
Labor and Related Expenses
Labor and related expenses include domestic company-operatedCompany-operated Shack-level hourly and management wages, bonuses, payroll taxes, equity-based compensation, workers' compensation expense and medical benefits. As we expect with other variable expense items, we expect labor costs toshould grow as our Shack sales grow. Factors that influence labor costs include minimum wage and payroll tax legislation, health care costs, size and location of the Shack and the performance of our domestic company-operatedCompany-operated Shacks.
| | | Thirteen Weeks Ended | | | Twenty-Six Weeks Ended | | | Thirteen Weeks Ended | | Twenty-Six Weeks Ended |
(dollar amounts in thousands) | (dollar amounts in thousands) | | June 24 2020 | | June 26 2019 | | June 24 2020 | | June 26 2019 | (dollar amounts in thousands) | June 30 2021 | | June 24 2020 | | June 30 2021 | | June 24 2020 |
Labor and related expenses | Labor and related expenses | | $ | 30,933 | | | $ | 40,197 | | | $ | 72,699 | | | $ | 77,290 | | Labor and related expenses | $ | 52,631 | | | $ | 30,933 | | | $ | 99,013 | | | $ | 72,699 | |
| | Percentage of Shack sales | | 34.6 | % | | 27.2 | % | | 31.9 | % | | 28.0 | % | | Percentage of Shack sales | 29.0 | % | | 34.6 | % | | 29.8 | % | | 31.9 | % |
| | Dollar change compared to prior year | | $ | (9,264) | | | $ | (4,591) | | | | Dollar change compared to prior year | $ | 21,698 | | | $ | 26,314 | | |
| | Percentage change compared to prior year | | (23.0) | % | | (5.9) | % | | | Percentage change compared to prior year | 70.1 | % | | 36.2 | % | |
The decreasesincreases in laborLabor and related expenses for the thirteen and twenty-six weeks ended June 24, 202030, 2021 were primarily due to significant reductionsincreases in staffing expensesShack team costs across all Shacks associated with the impact of COVID-19. These decreases were partially offset byrecovery from COVID-19, as well as the opening of 3129 net new domestic company-operatedCompany-operated Shacks between June 26, 2019 and June 24, 2020 and incremental payroll costs of $2.4 million as a result of a temporary 10% premium pay raise to hourly employees, guaranteed bonuses for Shack managers, and payments related to scheduling changes for hourly team members as teams navigated the challenging operating conditions caused by COVID-19, during the second quarter of 2020.June 30, 2021.
As a percentage of Shack sales, the increasedecreases in laborLabor and related expenses for the thirteen and twenty-six weeks ended June 24, 2020 was30, 2021 were primarily due to greater sales deleverageleverage associated with the impact ofrecovery from COVID-19, and, to a lesser extent, increases in starting wages, partially offset by the reduction of labor hours.increased headcount.
Other Operating Expenses
Other operating expenses consist of Shack-level marketing expenses, repairs and maintenance, utilities and other operating expenses incidental to operating our domestic company-operatedCompany-operated Shacks, such as non-perishable supplies, credit card fees and property insurance.
| | | Thirteen Weeks Ended | | | Twenty-Six Weeks Ended | | | Thirteen Weeks Ended | | Twenty-Six Weeks Ended |
(dollar amounts in thousands) | (dollar amounts in thousands) | | June 24 2020 | | June 26 2019 | | June 24 2020 | | June 26 2019 | (dollar amounts in thousands) | June 30 2021 | | June 24 2020 | | June 30 2021 | | June 24 2020 |
Other operating expenses | Other operating expenses | | $ | 14,304 | | | $ | 16,755 | | | $ | 32,083 | | | $ | 32,323 | | Other operating expenses | $ | 24,275 | | | $ | 14,304 | | | $ | 47,419 | | | $ | 32,083 | |
| | Percentage of Shack sales | | 16.0 | % | | 11.3 | % | | 14.1 | % | | 11.7 | % | | Percentage of Shack sales | 13.4 | % | | 16.0 | % | | 14.3 | % | | 14.1 | % |
| | Dollar change compared to prior year | | $ | (2,451) | | | $ | (240) | | | | Dollar change compared to prior year | $ | 9,971 | | | $ | 15,336 | | |
| | Percentage change compared to prior year | | (14.6) | % | | (0.7) | % | | | Percentage change compared to prior year | 69.7 | % | | 47.8 | % | |
The decreasesincreases in otherOther operating expenses for the thirteen and twenty-six weeks ended June 24, 202030, 2021 were primarily due to higher delivery and transaction costs associated with the reduction in expensescontinued momentum of digital sales and an increase of in-Shack dining across all Shacks, associated with the impact of COVID-19, partially offset byas well as the opening of 3129 net new domestic company-operatedCompany-operated Shacks between June 26, 2019 and June 24, 2020 and higher delivery expenseJune 30, 2021.
As a percentage of Shack sales, the decrease in Other operating expenses for the thirteen weeks ended June 30, 2021 was primarily due to sales leverage associated with increased penetration ofthe recovery from COVID-19 as higher in-Shack sales growth outpaced delivery sales duringcompared to the quarter.
Shake Shack Inc. Form 10-Q | 33
same period last year. As a percentage of Shack sales, the increase in otherOther operating expenses for the thirteen and twenty-six weeks ended June 24, 202030, 2021 was primarily duerelated to higher delivery commission associated with increasedcommissions as customers continue to take advantage of our multiple delivery salesofferings compared to the prior year period as well as higher costs for gloves and sales deleverage associated with the impact of COVID-19, as described herein.other disposables.
Occupancy and Related Expenses
Occupancy and related expenses consist of Shack-level occupancy expenses (including rent, common area expenses and certain local taxes), and exclude occupancy expenses associated with unopened Shacks, which are recorded separately in pre-opening costs.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Thirteen Weeks Ended | | | | Twenty-Six Weeks Ended | | |
(dollar amounts in thousands) | | | June 24 2020 | | June 26 2019 | | June 24 2020 | | June 26 2019 |
Occupancy and related expenses | | | $ | 12,323 | | | $ | 11,873 | | | $ | 24,881 | | | $ | 22,772 | |
| Percentage of Shack sales | | 13.8 | % | | 8.0 | % | | 10.9 | % | | 8.2 | % |
| Dollar change compared to prior year | | $ | 450 | | | | | $ | 2,109 | | | |
| Percentage change compared to prior year | | 3.8 | % | | | | 9.3 | % | | |
Shake Shack Inc. Form 10-Q | 33
This | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Thirteen Weeks Ended | | Twenty-Six Weeks Ended |
(dollar amounts in thousands) | June 30 2021 | | June 24 2020 | | June 30 2021 | | June 24 2020 |
Occupancy and related expenses | $ | 14,876 | | | $ | 12,323 | | | $ | 28,787 | | | $ | 24,881 | |
| Percentage of Shack sales | 8.2 | % | | 13.8 | % | | 8.7 | % | | 10.9 | % |
| Dollar change compared to prior year | $ | 2,553 | | | | | $ | 3,906 | | | |
| Percentage change compared to prior year | 20.7 | % | | | | 15.7 | % | | |
The increases in occupancyOccupancy and related expenses for the thirteen and twenty-six weeks ended June 24, 202030, 2021 were primarily due to the opening of 3129 net new domestic company-operatedCompany-operated Shacks between June 26, 201924, 2020 and June 24, 2020.30, 2021.
As a percentage of Shack sales, the increasedecreases in occupancyOccupancy and related expenses for the thirteen and twenty-six weeks ended June 24, 2020 was30, 2021 were primarily due to sales deleverageleverage associated with the impact of COVID-19.continued recovery from the COVID-19 pandemic.
General and Administrative Expenses
General and administrative expenses consist of costs associated with corporate and administrative functions that support Shack development and operations, as well as equity-based compensation expense.
| | | Thirteen Weeks Ended | | | Twenty-Six Weeks Ended | | | Thirteen Weeks Ended | | Twenty-Six Weeks Ended |
(dollar amounts in thousands) | (dollar amounts in thousands) | | June 24 2020 | | June 26 2019 | | June 24 2020 | | June 26 2019 | (dollar amounts in thousands) | June 30 2021 | | June 24 2020 | | June 30 2021 | | June 24 2020 |
General and administrative expenses | General and administrative expenses | | $ | 14,017 | | | $ | 15,393 | | | $ | 30,208 | | | $ | 29,330 | | General and administrative expenses | $ | 20,366 | | | $ | 14,017 | | | $ | 39,931 | | | $ | 30,208 | |
| | Percentage of total revenue | | 15.3 | % | | 10.1 | % | | 12.9 | % | | 10.3 | % | | Percentage of total revenue | 10.9 | % | | 15.3 | % | | 11.7 | % | | 12.9 | % |
| | Dollar change compared to prior year | | $ | (1,376) | | | $ | 878 | | | | Dollar change compared to prior year | $ | 6,349 | | | $ | 9,723 | | |
| | Percentage change compared to prior year | | (8.9) | % | | 3.0 | % | | | Percentage change compared to prior year | 45.3 | % | | 32.2 | % | |
The decreaseincreases in generalGeneral and administrative expenses for the thirteen and twenty-six weeks ended June 24, 202030, 2021 were primarily due to reduced staffing levels,an increase in wages and cuts across the majority of discretionary spend categories, partially offset by increased technology expenseother team costs to support further digital enhancements,the continued recovery from the COVID-19 pandemic, as well as higher professional fees of approximately $0.3 million related to the April equity offering and the implementation of the CARES Act, with additional costs expectedan increase in the third quarter of 2020.marketing expenses.As a percentage of total revenue, the increasesdecreases in generalGeneral and administrative expenses for the thirteen and twenty-six weeks ended June 24, 202030, 2021 were primarily due to sales deleverageleverage associated with the impact of COVID-19.continued recovery from the COVID-19 pandemic.
Depreciation and Amortization Expense
Depreciation and amortization expense consists of the depreciation of fixed assets, including leasehold improvements and equipment.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Thirteen Weeks Ended | | | | Twenty-Six Weeks Ended | | |
(dollar amounts in thousands) | | | June 24 2020 | | June 26 2019 | | June 24 2020 | | June 26 2019 |
Depreciation expense | | | $ | 12,089 | | | $ | 9,799 | | | $ | 23,857 | | | $ | 18,765 | |
| Percentage of total revenue | | 13.2 | % | | 6.4 | % | | 10.2 | % | | 6.6 | % |
| Dollar change compared to prior year | | $ | 2,290 | | | | | $ | 5,092 | | | |
| Percentage change compared to prior year | | 23.4 | % | | | | 27.1 | % | | |
34 | Shake Shack Inc. Form 10-Q
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Thirteen Weeks Ended | | Twenty-Six Weeks Ended |
(dollar amounts in thousands) | June 30 2021 | | June 24 2020 | | June 30 2021 | | June 24 2020 |
Depreciation and amortization expense | $ | 14,472 | | | $ | 12,089 | | | $ | 28,198 | | | $ | 23,857 | |
| Percentage of total revenue | 7.7 | % | | 13.2 | % | | 8.2 | % | | 10.2 | % |
| Dollar change compared to prior year | $ | 2,383 | | | | | $ | 4,341 | | | |
| Percentage change compared to prior year | 19.7 | % | | | | 18.2 | % | | |
The increases in depreciationDepreciation and amortization expense for the thirteen and twenty-six weeks ended June 24, 202030, 2021 were primarilypredominantly due to incremental depreciation of capital expenditures related to the opening of 3129 net new domestic company-operatedCompany-operated Shacks between June 26, 201924, 2020 and June 24, 2020.30, 2021.
As a percentage of total revenue, the increasesdecreases in depreciationDepreciation and amortization expense for the thirteen and twenty-six weeks ended June 24, 202030, 2021 were primarily due to sales deleverageleverage associated with the impact of COVID-19.recovery from the COVID-19 pandemic.
Pre-Opening Costs
Pre-opening costs consist primarily of legal fees, rent, managers' salaries, training costs, employee payroll and related expenses, costs to relocate and compensate Shack management teams prior to an opening and wages, travel and lodging costs for our
34 | Shake Shack Inc. Form 10-Q
opening training team and other supporting team members. All such costs incurred prior to the opening of a domestic company-operatedCompany-operated Shack are expensed in the period in which the expense was incurred. Pre-opening costs can fluctuate significantly from period to period, based on the number and timing of domestic company-operatedCompany-operated Shack openings and the specific pre-opening costs incurred for each domestic company-operatedCompany-operated Shack. Additionally, domestic company-operatedCompany-operated Shack openings in new geographic market areas may initially experience higher pre-opening costs than our established geographic market areas, such as the New York City metropolitan area, where we have greater economies of scale and incur lower travel and lodging costs for our training team.
| | | Thirteen Weeks Ended | | | Twenty-Six Weeks Ended | | | Thirteen Weeks Ended | | Twenty-Six Weeks Ended |
(dollar amounts in thousands) | (dollar amounts in thousands) | | June 24 2020 | | June 26 2019 | | June 24 2020 | | June 26 2019 | (dollar amounts in thousands) | June 30 2021 | | June 24 2020 | | June 30 2021 | | June 24 2020 |
Pre-opening costs | Pre-opening costs | | $ | 1,734 | | | $ | 3,549 | | | $ | 3,977 | | | $ | 6,191 | | Pre-opening costs | $ | 2,258 | | | $ | 1,734 | | | $ | 5,834 | | | $ | 3,977 | |
| | Percentage of total revenue | | 1.9 | % | | 2.3 | % | | 1.7 | % | | 2.2 | % | | Percentage of total revenue | 1.2 | % | | 1.9 | % | | 1.7 | % | | 1.7 | % |
| | Dollar change compared to prior year | | $ | (1,815) | | | $ | (2,214) | | | | Dollar change compared to prior year | $ | 524 | | | $ | 1,857 | | |
| | Percentage change compared to prior year | | (51.1) | % | | (35.8) | % | | | Percentage change compared to prior year | 30.2 | % | | 46.7 | % | |
The decreasesincreases in pre-openingPre-opening costs for the thirteen and twenty-six weeks ended June 24, 202030, 2021 were due to the lowerhigher number of new domestic company-operatedCompany-operated Shacks opened during the current period compared to the prior-year period.period, as well as those expected to open.
Impairment and Loss on Disposal of Property and EquipmentAssets
Impairment and loss on disposal of assets include impairment charges related to our long-lived assets, which includes property and equipment, as well as operating and finance lease assets. Additionally, impairment and loss on disposal of assets includes the net book value of assets that have been retired and consists primarily of furniture, equipment and fixtures that were replaced in the normal course of business.
| | | Thirteen Weeks Ended | | | Twenty-Six Weeks Ended | | | Thirteen Weeks Ended | | Twenty-Six Weeks Ended |
(dollar amounts in thousands) | (dollar amounts in thousands) | | June 24 2020 | | June 26 2019 | | June 24 2020 | | June 26 2019 | (dollar amounts in thousands) | June 30 2021 | | June 24 2020 | | June 30 2021 | | June 24 2020 |
Impairment and loss on disposal of property and equipment | | $ | 434 | | | $ | 377 | | | $ | 2,522 | | | $ | 728 | | |
Impairment and loss on disposal of assets | | Impairment and loss on disposal of assets | $ | 358 | | | $ | 434 | | | $ | 727 | | | $ | 2,522 | |
| | Percentage of total revenue | | 0.5 | % | | 0.2 | % | | 1.1 | % | | 0.3 | % | | Percentage of total revenue | 0.2 | % | | 0.5 | % | | 0.2 | % | | 1.1 | % |
| | Dollar change compared to prior year | | $ | 57 | | | $ | 1,794 | | | | Dollar change compared to prior year | $ | (76) | | | $ | (1,795) | | |
| | Percentage change compared to prior year | | 15.1 | % | | 246.4 | % | | | Percentage change compared to prior year | (17.5) | % | | (71.2) | % | |
The increasedecrease in impairmentImpairment and loss on disposal of property and equipmentassets for the thirteen and twenty-six weeks ended June 24, 202030, 2021 was primarily due to the number of Shacks maturing in our base and renovations.base. For the twenty-six weeks ended June 24, 2020,30, 2021, the increasedecrease was alsoprimarily due to an asset impairment charge of $1.1 million inrecorded during the current period.first quarter of 2020.
Other Income, Net
Other income, net consists of interest income, dividend income and net unrealized and realized gains and losses from marketable securities.
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| | | Thirteen Weeks Ended | | Twenty-Six Weeks Ended |
(dollar amounts in thousands) | June 30 2021 | | June 24 2020 | | June 30 2021 | | June 24 2020 |
Other income, net | $ | 108 | | | $ | 394 | | | $ | 139 | | | $ | 301 | |
| Percentage of total revenue | 0.1 | % | | 0.4 | % | | — | % | | 0.1 | % |
| Dollar change compared to prior year | $ | (286) | | | | | $ | (162) | | | |
| Percentage change compared to prior year | (72.6) | % | | | | (53.8) | % | | |
The decrease in Other income, net for the sale ofthirteen weeks ended June 30, 2021 was primarily due to a decrease in unrealized gains related to our investments in marketable securities partially offset by an increase in dividend income. The decrease in Other income, net for the twenty-six weeks ended June 30, 2021 was primarily due to a decrease in dividend income and an increase in unrealized losses related to our investments in marketable securities.
Shake Shack Inc. Form 10-Q | 35
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| | | Thirteen Weeks Ended | | | | Twenty-Six Weeks Ended | | |
(dollar amounts in thousands) | | | June 24 2020 | | June 26 2019 | | June 24 2020 | | June 26 2019 |
Other income, net | | | $ | 394 | | | $ | 447 | | | $ | 301 | | | $ | 1,011 | |
| Percentage of total revenue | | 0.4 | % | | 0.3 | % | | 0.1 | % | | 0.4 | % |
| Dollar change compared to prior year | | $ | (53) | | | | | $ | (710) | | | |
| Percentage change compared to prior year | | (11.9) | % | | | | (70.2) | % | | |
The decrease in other income, net for the thirteen weeks ended June 24, 2020 was primarily due to a decrease in dividend income partially offset by unrealized gains related to our investments in marketable securities. For the twenty-six weeks ended June 24, 2020, the decrease was primarily due to a decrease in dividend income and unrealized losses related to our investments in marketable securities.
Interest Expense
Interest expense primarily consists of interest on the current portion of our liabilities under the Tax Receivable Agreement, imputed interest related to our financing equipment leases, amortization of deferred financing costs, imputed interest on deferred compensation, imputed interest on our deemed landlord financing liability, and interest and fees on our Revolving Credit Facility.
| | | Thirteen Weeks Ended | | | Twenty-Six Weeks Ended | | | Thirteen Weeks Ended | | Twenty-Six Weeks Ended |
(dollar amounts in thousands) | (dollar amounts in thousands) | | June 24 2020 | | June 26 2019 | | June 24 2020 | | June 26 2019 | (dollar amounts in thousands) | June 30 2021 | | June 24 2020 | | June 30 2021 | | June 24 2020 |
Interest expense | Interest expense | | $ | (442) | | | $ | (97) | | | $ | (554) | | | $ | (169) | | Interest expense | $ | (359) | | | $ | (442) | | | $ | (874) | | | $ | (554) | |
| | Percentage of total revenue | | (0.5) | % | | (0.1) | % | | (0.2) | % | | (0.1) | % | | Percentage of total revenue | (0.2) | % | | (0.5) | % | | (0.3) | % | | (0.2) | % |
| | Dollar change compared to prior year | | $ | (345) | | | $ | (385) | | | | Dollar change compared to prior year | $ | 83 | | | $ | (320) | | |
| | Percentage change compared to prior year | | 355.7 | % | | 227.8 | % | | | Percentage change compared to prior year | (18.8) | % | | 57.8 | % | |
The increasesdecrease in interestInterest expense for the thirteen and twenty-six weeks ended June 24, 202030, 2021 was primarily due to an increasea decrease in interest charges and fees associated with our Revolving Credit Facility in the current year.period.
The increase in Interest expense for the twenty-six weeks ended June 30, 2021 was primarily due to the write-off of previously capitalized costs of $0.3 million associated with the amendment of our Revolving Credit Facility in March 2021. Refer to Note 6, Debt, in the accompanying Condensed Consolidated Financial Statements, for additional information.
Income Tax Expense (Benefit)
We are the sole managing member of SSE Holdings whichand, as a result, consolidates the financial results of SSE Holdings. SSE Holdings is treated as a partnership for U.S. federal and most applicable state and local income tax purposes. As a partnership, SSE Holdings is not subject to U.S. federal and certain state and local income taxes. Any taxable income or loss generated by SSE Holdings is passed through to and included in the taxable income or loss of its members, including us, on a pro rata basis. We are subject to U.S. federal income taxes, in addition to state and local income taxes with respect to ourits allocable share of any taxable income or loss of SSE Holdings, as well as any stand-alone income or loss generated by SSE Holdings.us. We are also subject to withholding taxes in foreign jurisdictions.
| | | Thirteen Weeks Ended | | | Twenty-Six Weeks Ended | | | Thirteen Weeks Ended | | Twenty-Six Weeks Ended |
(dollar amounts in thousands) | (dollar amounts in thousands) | | June 24 2020 | | June 26 2019 | | June 24 2020 | | June 26 2019 | (dollar amounts in thousands) | June 30 2021 | | June 24 2020 | | June 30 2021 | | June 24 2020 |
Income tax expense | | $ | (6,092) | | | $ | 1,050 | | | $ | (6,005) | | | $ | 3,097 | | |
Income tax expense (benefit) | | Income tax expense (benefit) | $ | 991 | | | $ | (6,092) | | | $ | (10,089) | | | $ | (6,005) | |
| | Percentage of total revenue | | (6.6) | % | | 0.7 | % | | (2.6) | % | | 1.1 | % | | Percentage of total revenue | 0.5 | % | | (6.6) | % | | (2.9) | % | | (2.6) | % |
| | Dollar change compared to prior year | | $ | (7,142) | | | $ | (9,102) | | | | Dollar change compared to prior year | $ | 7,083 | | | $ | (4,084) | | |
| | Percentage change compared to prior year | | (680.2) | % | | (293.9) | % | | | Percentage change compared to prior year | (116.3) | % | | 68.0 | % | |
Our effective income tax rates for the thirteen weeks ended June 30, 2021 and June 24, 2020 were 32.4% and June 26, 2019 were 25.3% and 8.6%, respectively. The increase was primarily driven by lowerhigher pre-tax book income resulting in income and higher foreign withholding taxes, partially offset by a loss, causing the tax credits to have an increasing effect on the tax rate, as well as the recognitionreduction of a valuation allowance against foreign tax credits that are not expected to be realized before the expiration of the carryforward period.allowance. Additionally, an increase in our ownership interest in SSE Holdings increases our share of the taxable income (loss) of SSE Holdings. Our weighted-average ownership interest in SSE Holdings was 92.3%93.0% and 81.0%92.3% for the thirteen weeks ended June 24, 202030, 2021 and June 26, 2019,24, 2020, respectively.
Our effective income tax rates for the twenty-six weeks ended June 30, 2021 and June 24, 2020 were 135.4% and 23.9%, respectively. Our weighted-average ownership interest in SSE Holdings was 93.0% and 92.0% for the twenty-six weeks ended June 30, 2021 and June 26, 2019 were 23.9% and 17.3%,24, 2020, respectively. The increase was primarily driven by lower pre-tax book income resulting in a loss, causing the tax credits to have an increasing effect on the tax rate, as well as the recognition of a valuation allowance against foreign tax credits that are not
36 | Shake Shack Inc. Form 10-Q
expected to be realized before the expiration of the carryforward period. These were partially offset by a reduction in the tax effect of changes related to the adoption of new accounting standards, for which there were none during the twenty-six weeks ended June 24, 2020. Additionally, as noted above, an increase in our ownership interest in SSE Holdings increases our share of the taxable income (loss) of SSE Holdings. Our weighted-average ownership interest in SSE Holdings was 92.0% and 80.3% for the twenty-six weeks ended June 24, 2020 and June 26, 2019, respectively.
Net Income (Loss) Attributable to Non-Controlling Interests
We are the sole managing member of SSE Holdings and have the sole voting power in, and control the management of, SSE Holdings. Accordingly, we consolidate the financial results of SSE Holdings and report a non-controlling interest on our Condensed Consolidated Statements of Income (Loss), representing the portion of net income (loss) attributable to the other members of SSE Holdings. The Third Amended and Restated Limited Liability Company Agreement of SSE Holdings provides that holders of LLC Interests may, from time to time, require SSE Holdings to redeem all or a portion of their LLC Interests for newly-issued shares of Class A common stock on a one-for-one basis. In connection with any redemption or exchange, we will receive a corresponding number of LLC Interests, increasing our total ownership interest in SSE Holdings. The weighted average ownership percentages for the applicable reporting periods are used to attribute net income (loss) and other comprehensive income to Shake Shack Inc. and the non-controlling interest holders.
| | | Thirteen Weeks Ended | | | Twenty-Six Weeks Ended | | | Thirteen Weeks Ended | | Twenty-Six Weeks Ended |
(dollar amounts in thousands) | (dollar amounts in thousands) | | June 24 2020 | | June 26 2019 | | June 24 2020 | | June 26 2019 | (dollar amounts in thousands) | June 30 2021 | | June 24 2020 | | June 30 2021 | | June 24 2020 |
Net income (loss) attributable to non-controlling interests | Net income (loss) attributable to non-controlling interests | | $ | (1,820) | | | $ | 2,141 | | | $ | (1,939) | | | $ | 3,202 | | Net income (loss) attributable to non-controlling interests | $ | 121 | | | $ | (1,820) | | | $ | (613) | | | $ | (1,939) | |
| | Percentage of total revenue | | (2.0) | % | | 1.4 | % | | (0.8) | % | | 1.1 | % | | Percentage of total revenue | 0.1 | % | | (2.0) | % | | (0.2) | % | | (0.8) | % |
| | Dollar change compared to prior year | | $ | (3,961) | | | $ | (5,141) | | | | Dollar change compared to prior year | $ | 1,941 | | | $ | 1,326 | | |
| | Percentage change compared to prior year | | (185.0) | % | | (160.6) | % | | | Percentage change compared to prior year | (106.6) | % | | (68.4) | % | |
The decreasesincrease in netNet income (loss) attributable to non-controlling interests for the thirteen weeks ended June 30, 2021 was primarily due to an increase in net results causing a profit for the period, partially offset by a decrease in the non-controlling interest holders' weighted average ownership, which was 7.0% and 7.7% for the thirteen weeks ended June 30, 2021 and June 24, 2020, respectively.The increase in Net income (loss) attributable to non-controlling interests for the twenty-six weeks ended June 24, 2020 were30, 2021 was primarily due to a declinean increase in net results causing awhich moderated the loss for the period, and a decrease in the non-controlling interest holders' weighted average ownership, which was 7.7%7.0% and 19.0% for the thirteen weeks ended June 24, 2020 and June 26, 2019, respectively, and 8.0% and 19.7% for the twenty-six weeks ended June 24, 202030, 2021 and June 26, 2019,24, 2020, respectively.
NON-GAAP FINANCIAL MEASURES
To supplement the condensed consolidated financial statements, which are prepared and presented in accordance with U.S.accounting principles generally accepted accounting principles (“GAAP”in the United States of America ("GAAP"), we use the following non-GAAP financial measures: Shack-level operating profit, Shack-level operating profit margin, EBITDA, adjusted EBITDA, adjusted EBITDA margin, adjusted pro forma net income (loss) and adjusted pro forma earnings (loss) per fully exchanged and diluted share (collectively the "non-GAAP financial measures").
Shake Shack Inc. Form 10-Q | 37
Shack-Level Operating Profit
Shack-level operating profit is defined as Shack sales less Shack-level operating expenses including foodFood and paper costs, laborLabor and related expenses, otherOther operating expenses and occupancyOccupancy and related expenses.
How This Measure Is Useful
When used in conjunction with GAAP financial measures, Shack-level operating profit and Shack-level operating profit margin are supplemental measures of operating performance that we believe are useful measures to evaluate the performance and profitability of our Shacks. Additionally, Shack-level operating profit and Shack-level operating profit margin are key metrics used internally by our management to develop our internal budgets and forecasts, as well as assess the performance of our Shacks relative to budget and against prior periods. It is also used to evaluate employee compensation as it serves as a metric in certain of our performance-based employee bonus arrangements. We believe presentation of Shack-level operating profit and Shack-level operating profit margin provides investors with a supplemental view of our operating performance that can provide meaningful insights to the underlying operating performance of ourthe Shacks, as these measures depict the operating results that are directly impacted by ourthe Shacks and exclude items that may not be indicative of, or are unrelated to, the ongoing operations of ourthe Shacks. It may also assist investors to evaluate ourthe Company's performance relative to peers of various sizes and maturities and provides greater transparency with respect to how our management evaluates our business, as well as ourthe financial and operational decision-making.
Limitations of the Usefulness of this Measure
Shack-level operating profit and Shack-level operating profit margin may differ from similarly titled measures used by other companies due to different methods of calculation. Presentation of Shack-level operating profit and Shack-level operating profit margin is not intended to be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP. Shack-level operating profit excludes certain costs, such as generalGeneral and administrative expenses and pre-openingPre-opening costs, which are considered normal, recurring cash operating expenses and are essential to support the operation and development of ourthe Company's Shacks. Therefore, this measure may not provide a complete understanding of the Company's operating results of our company as a whole and Shack-level operating profit and Shack-level operating profit margin should be reviewed in conjunction with ourthe Company's GAAP financial results. A reconciliation of Shack-level operating profit to operatingOperating income (loss), the most directly comparable GAAP financial measure, is as follows.set forth below.
| | | Thirteen Weeks Ended | | | Twenty-Six Weeks Ended | | | Thirteen Weeks Ended | | Twenty-Six Weeks Ended |
(dollar amounts in thousands) | (dollar amounts in thousands) | | June 24 2020 | | June 26 2019 | | June 24 2020 | | June 26 2019 | (dollar amounts in thousands) | June 30 2021 | | June 24 2020 | | June 30 2021 | | June 24 2020 |
Operating income (loss) | Operating income (loss) | | $ | (24,075) | | | $ | 11,871 | | | $ | (24,862) | | | $ | 17,033 | | Operating income (loss) | $ | 3,307 | | | $ | (24,075) | | | $ | (6,714) | | | $ | (24,862) | |
Less: | Less: | | | Less: | |
| | Licensing revenue | 2,267 | | | 4,837 | | | 7,389 | | | 8,877 | | | Licensing revenue | 5,990 | | | 2,267 | | | 10,604 | | | 7,389 | |
Add: | Add: | | | Add: | |
| | General and administrative expenses | 14,017 | | | 15,393 | | | 30,208 | | | 29,330 | | | General and administrative expenses | 20,366 | | | 14,017 | | | 39,931 | | | 30,208 | |
| | Depreciation expense | 12,089 | | | 9,799 | | | 23,857 | | | 18,765 | | | Depreciation and amortization expense | 14,472 | | | 12,089 | | | 28,198 | | | 23,857 | |
| | Pre-opening costs | 1,734 | | | 3,549 | | | 3,977 | | | 6,191 | | | Pre-opening costs | 2,258 | | | 1,734 | | | 5,834 | | | 3,977 | |
| | Loss on disposal of property and equipment | 434 | | | 377 | | | 2,522 | | | 728 | | | Impairment and loss on disposal of assets(1) | 358 | | | 434 | | | 727 | | | 2,522 | |
Shack-level operating profit | Shack-level operating profit | | $ | 1,932 | | | $ | 36,152 | | | $ | 28,313 | | | $ | 63,170 | | Shack-level operating profit | $ | 34,771 | | | $ | 1,932 | | | $ | 57,372 | | | $ | 28,313 | |
| Total revenue | Total revenue | | $ | 91,786 | | | $ | 152,713 | | | $ | 234,956 | | | $ | 285,322 | | Total revenue | $ | 187,460 | | | $ | 91,786 | | | $ | 342,742 | | | $ | 234,956 | |
Less: licensing revenue | | 2,267 | | | 4,837 | | | 7,389 | | | 8,877 | | |
Less: Licensing revenue | | Less: Licensing revenue | 5,990 | | | 2,267 | | | 10,604 | | | 7,389 | |
Shack sales | Shack sales | | $ | 89,519 | | | $ | 147,876 | | | $ | 227,567 | | | $ | 276,445 | | Shack sales | $ | 181,470 | | | $ | 89,519 | | | $ | 332,138 | | | $ | 227,567 | |
| Shack-level operating profit margin(2) | Shack-level operating profit margin(2) | | 2.2 | % | | 24.4 | % | | 12.4 | % | | 22.9 | % | Shack-level operating profit margin(2) | 19.2 | % | | 2.2 | % | | 17.3 | % | | 12.4 | % |
(1)For the twenty-six weeks ended June 24, 2020, amount includes a non-cash impairment charge of $1.1 million related to one Shack.
(2)As a percentage of Shack sales.
38 | Shake Shack Inc. Form 10-Q
EBITDA and Adjusted EBITDA
EBITDA is defined as netNet income (loss) before interest expense (net of interest income), incomeIncome tax expense (benefit) and depreciationDepreciation and amortization expense. Adjusted EBITDA is defined as EBITDA (as defined above) excluding equity-based compensation expense, deferred lease cost, lossescosts, Impairment and loss on the disposal of property and equipment,assets, amortization of cloud-based software implementation costs, as well as certain non-recurring items that we don'tdo not believe directly reflect ourthe core operations and may not be indicative of our recurring business operations.
How These Measures Are Useful
When used in conjunction with GAAP financial measures, EBITDA and adjusted EBITDA are supplemental measures of operating performance that we believe are useful measures to facilitate comparisons to historical performance and competitors' operating results. Adjusted EBITDA is a key metric used internally by our management to develop internal budgets and forecasts and also serves as a metric in our performance-based equity incentive programs and certain of our bonus arrangements. We believe presentation of EBITDA and adjusted EBITDA provides investors with a supplemental view of our operating performance that facilitates analysis and comparisons of ourits ongoing business operations because they exclude items that may not be indicative of the our ongoing operating performance.
Limitations of the Usefulness of These Measures
EBITDA and adjusted EBITDA may differ from similarly titled measures used by other companies due to different methods of calculation. Presentation of EBITDA and adjusted EBITDA is not intended to be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP. EBITDA and adjusted EBITDA exclude certain normal recurring expenses. Therefore, these measures may not provide a complete understanding of our performance and should be reviewed in conjunction with ourthe GAAP financial measures. A reconciliation of EBITDA and adjusted EBITDA to netNet income (loss), the most directly comparable GAAP measure, is as follows.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Thirteen Weeks Ended | | | | Twenty-Six Weeks Ended | | |
(in thousands) | | June 24 2020 | | June 26 2019 | | June 24 2020 | | June 26 2019 |
Net income (loss) | | $ | (18,031) | | | $ | 11,171 | | | $ | (19,110) | | | $ | 14,778 | |
Depreciation expense | | 12,089 | | | 9,799 | | | 23,857 | | | 18,765 | |
Interest expense, net | | 442 | | | 97 | | | 554 | | | 169 | |
Income tax expense | | (6,092) | | | 1,050 | | | (6,005) | | | 3,097 | |
EBITDA | | (11,592) | | | 22,117 | | | (704) | | | 36,809 | |
| | | | | | | | |
Equity-based compensation | | 1,419 | | | 2,235 | | | 2,719 | | | 3,955 | |
Amortization of cloud-based software implementation costs(1) | | 368 | | | — | | | 628 | | | — | |
Deferred lease costs(2) | | 479 | | | 715 | | | 149 | | | 1,300 | |
Impairment and loss on disposal of property and equipment(3) | | 434 | | | 377 | | | 2,522 | | | 728 | |
Other income related to adjustment of liabilities under tax receivable agreement | | — | | | — | | | — | | | (14) | |
Executive transition costs(4) | | 34 | | | 88 | | | 68 | | | 126 | |
Project Concrete(5) | | 24 | | | 213 | | | (237) | | | 685 | |
| | | | | | | | |
Hong Kong office(6) | | — | | | 171 | | | — | | | 171 | |
| | | | | | | | |
Other(7) | | — | | | — | | | 285 | | | — | |
| | | | | | | | |
| | | | | | | | |
Adjusted EBITDA | | $ | (8,834) | | | $ | 25,916 | | | $ | 5,430 | | | $ | 43,760 | |
| | | | | | | | |
Adjusted EBITDA margin(8) | | (9.6) | % | | 17.0 | % | | 2.3 | % | | 15.3 | % |
Shake Shack Inc. Form 10-Q | 39
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Thirteen Weeks Ended | | Twenty-Six Weeks Ended |
(dollar amounts in thousands) | June 30 2021 | | June 24 2020 | | June 30 2021 | | June 24 2020 |
Net income (loss) | $ | 2,065 | | | $ | (18,031) | | | $ | 2,640 | | | $ | (19,110) | |
Depreciation and amortization expense | 14,472 | | | 12,089 | | | 28,198 | | | 23,857 | |
Interest expense, net | 359 | | | 442 | | | 874 | | | 554 | |
Income tax expense (benefit) | 991 | | | (6,092) | | | (10,089) | | | (6,005) | |
EBITDA | 17,887 | | | (11,592) | | | 21,623 | | | (704) | |
| | | | | | | | |
Equity-based compensation | 1,958 | | | 1,419 | | | 3,639 | | | 2,719 | |
Amortization of cloud-based software implementation costs(1) | 314 | | | 368 | | | 627 | | | 628 | |
Deferred lease costs(2) | (75) | | | 479 | | | 129 | | | 149 | |
Impairment and loss on disposal of assets(3) | 358 | | | 434 | | | 727 | | | 2,522 | |
Debt offering related costs(4) | — | | | — | | | 236 | | | — | |
Legal settlement(5) | 24 | | | — | | | 619 | | | — | |
| | | | | | | |
Executive transition costs(6) | 179 | | | 34 | | | 179 | | | 68 | |
Project Concrete(7) | — | | | 24 | | | — | | | (237) | |
| | | | | | | |
| | | | | | | |
Other(8) | — | | | — | | | — | | | 285 | |
| | | | | | | |
| | | | | | | |
Adjusted EBITDA | $ | 20,645 | | | $ | (8,834) | | | $ | 27,779 | | | $ | 5,430 | |
| | | | | | | | |
Adjusted EBITDA margin(9) | 11.0 | % | | (9.6) | % | | 8.1 | % | | 2.3 | % |
(1)Represents amortization of capitalized implementation costs related to cloud-based software arrangements that are included within generalGeneral and administrative expenses.
(2)Reflects the extent to which lease expense is greater than or less than contractual fixed base rent.
(3)Includes losses on disposals of property and equipment in the normal course of business. For the twenty-six weeks ended June 24, 2020, this amount includes a non-cash impairment charge of $1.1 million related to one Shack.
(4)Costs incurred in connection with the Company’s Convertible Notes, issued in March 2021, including consulting and advisory fees. Refer to Note 6, Debt, in the accompanying Condensed Consolidated Financial Statements, for additional information.
(5)Expense incurred to establish an accrual related to the settlement of a legal matter. Refer to Note 13, Commitments and Contingencies, in the accompanying Condensed Consolidated Financial Statements, for additional information.
(6)Represents fees paid in connection with the search and hiring of certain executive and key management positions.
(5) (7)Represents consulting and advisory fees related to the ourCompany's enterprise-wide system upgrade initiative called Project Concrete.
(6) Represents costs associated with establishing our first international office in Hong Kong.
(7) (8)Represents incremental expenses incurred related to an inventory adjustment and certain employee-related expenses.
(8) (9)Calculated as a percentage of total revenue, which was $187,460 and $342,742 for the thirteen and twenty-six weeks ended June 30, 2021, respectively, and $91,786 and $234,956 for the thirteen and twenty-six weeks ended June 24, 2020, respectively, and $152,713 and $285,322 for the thirteen and twenty-six weeks ended June 26, 2019, respectively.
Adjusted Pro Forma Net Income (Loss) and Adjusted Pro Forma Earnings (Loss) Per(loss) Fully Exchanged and Diluted Share
Adjusted pro forma net income (loss) represents netNet income (loss) attributable to Shake Shack Inc. assuming the full exchange of all outstanding SSE Holdings, LLC membership interests ("LLC Interests") for shares of Class A common stock, adjusted for certain non-recurring items that we do not believe are directly related to our core operations and may not be indicative of our recurring business operations. Adjusted pro forma earnings (loss) per fully exchanged and diluted share is calculated by dividing adjusted pro forma net income (loss) by the weighted-average shares of Class A common stock outstanding, assuming the full exchange of all outstanding LLC Interests, after giving effect to the dilutive effect of outstanding equity-based awards.
How These Measures Are Useful
When used in conjunction with GAAP financial measures, adjusted pro forma net income (loss) and adjusted pro forma earnings (loss) per fully exchanged and diluted share are supplemental measures of operating performance that we believe are useful measures to evaluate our performance period over period and relative to our competitors. By assuming the full exchange of all outstanding LLC Interests, we believe these measures facilitate comparisons with other companies that have different organizational and tax structures, as well as comparisons period over period because it eliminates the effect of any changes in netNet income (loss) attributable to Shake Shack Inc. driven by increases in our ownership of SSE Holdings, which are unrelated to
40 | Shake Shack Inc. Form 10-Q
our operating performance, and excludes items that are non-recurring or may not be indicative of our ongoing operating performance.
Limitations of the Usefulness of These Measures
Adjusted pro forma net income (loss) and adjusted pro forma earnings (loss) per fully exchanged and diluted share may differ from similarly titled measures used by other companies due to different methods of calculation. Presentation of adjusted pro forma net income (loss) and adjusted pro forma earnings (loss) per fully exchanged and diluted share should not be considered alternatives to netNet income (loss) and earnings (loss) per share, as determined under GAAP. While these measures are useful in evaluating our performance, it does not account for the earnings attributable to the non-controlling interest holders and therefore does not provide a complete understanding of the netNet income (loss) attributable to Shake Shack Inc. Adjusted pro forma net income (loss) and adjusted pro forma earnings (loss) per fully exchanged and diluted share should be evaluated in conjunction with our GAAP financial results. A reconciliation of adjusted pro forma net income (loss) to netNet income (loss) attributable to Shake Shack Inc., the most directly comparable GAAP measure, and the computation of adjusted pro forma earnings (loss) per fully exchanged and diluted share are set forth below.
40 | Shake Shack Inc. Form 10-Q | 41
| | | Thirteen Weeks Ended | | | Twenty-Six Weeks Ended | | | Thirteen Weeks Ended | | Twenty-Six Weeks Ended |
(in thousands, except per share amounts) | (in thousands, except per share amounts) | | June 24 2020 | | June 26 2019 | | June 24 2020 | | June 26 2019 | (in thousands, except per share amounts) | June 30 2021 | | June 24 2020 | | June 30 2021 | | June 24 2020 |
Numerator: | Numerator: | | | Numerator: | |
| | | Net income (loss) attributable to Shake Shack Inc. | $ | 1,944 | | | $ | (16,211) | | | $ | 3,253 | | | $ | (17,171) | |
| | | Adjustments: | |
| | Net income (loss) attributable to Shake Shack Inc. | | $ | (16,211) | | | $ | 9,030 | | | $ | (17,171) | | | $ | 11,576 | | | Reallocation of Net income (loss) attributable to non-controlling interests from the assumed exchange of LLC Interests(1) | 121 | | | (1,820) | | | (613) | | | (1,939) | |
| | Adjustments: | | | | Executive transition costs(2) | 179 | | | 34 | | | 179 | | | 68 | |
| | Reallocation of net income attributable to non-controlling interests from the assumed exchange of LLC Interests(1) | (1,820) | | | 2,141 | | | (1,939) | | | 3,202 | | | Project Concrete(3) | — | | | 24 | | | — | | | (237) | |
| | Executive transition costs(2) | 34 | | | 88 | | | 68 | | | 126 | | |
| | Project Concrete(3) | 24 | | | 213 | | | (237) | | | 685 | | |
| | | Legal settlement(4) | 24 | | | — | | | 619 | | | — | |
| | Hong Kong office(4) | — | | | 171 | | | — | | | 171 | | | Debt offering related costs(5) | — | | | — | | | 236 | | | — | |
| | | Revolving Credit Facility amendments related costs(6) | — | | | — | | | 323 | | | — | |
| | Other(5) | — | | | — | | | 285 | | | — | | |
| | | Other income related to adjustment of liabilities under tax receivable agreement | — | | | — | | | — | | | (14) | | |
| | Tax effect of change in tax basis related to the adoption of new accounting standards(6) | — | | | — | | | — | | | 1,161 | | | Income tax (expense) benefit(7) | 112 | | | (286) | | | 136 | | | 1,533 | |
| | Income tax expense(7) | (286) | | | (1,397) | | | 1,533 | | | (1,712) | | | Other(8) | — | | | — | | | — | | | 285 | |
| | Adjusted pro forma net income (loss) | | $ | (18,259) | | | $ | 10,246 | | | $ | (17,461) | | | $ | 15,195 | | | Adjusted pro forma net income (loss) | $ | 2,380 | | | $ | (18,259) | | | $ | 4,133 | | | $ | (17,461) | |
| Denominator: | Denominator: | | | Denominator: | |
| | Weighted-average shares of Class A common stock outstanding—diluted | | 37,309 | | | 31,015 | | | 35,876 | | | 30,703 | | | Weighted-average shares of Class A common stock outstanding—diluted | 43,789 | | | 37,309 | | | 43,289 | | | 35,876 | |
| | Adjustments: | | | | | | | Adjustments: | |
| | Assumed exchange of LLC Interests for shares of Class A common stock(1) | 3,117 | | | 7,088 | | | 3,131 | | | 7,314 | | | Assumed exchange of LLC Interests for shares of Class A common stock(1) | — | | | 3,117 | | | — | | | 3,131 | |
| | Adjusted pro forma fully exchanged weighted-average shares of Class A common stock outstanding—diluted | | 40,426 | | | 38,103 | | | 39,007 | | | 38,017 | | | Adjusted pro forma fully exchanged weighted-average shares of Class A common stock outstanding—diluted | 43,789 | | | 40,426 | | | 43,289 | | | 39,007 | |
| Adjusted pro forma earnings (loss) per fully exchanged share—diluted | Adjusted pro forma earnings (loss) per fully exchanged share—diluted | | $ | (0.45) | | | $ | 0.27 | | | $ | (0.45) | | | $ | 0.40 | | Adjusted pro forma earnings (loss) per fully exchanged share—diluted | $ | 0.05 | | | $ | (0.45) | | | $ | 0.10 | | | $ | (0.45) | |
| | | Thirteen Weeks Ended | | | Twenty-Six Weeks Ended | | | Thirteen Weeks Ended | | Twenty-Six Weeks Ended |
| | | June 24 2020 | | June 26 2019 | | June 24 2020 | | June 26 2019 | | June 30 2021 | | June 24 2020 | | June 30 2021 | | June 24 2020 |
Earnings (loss) per share of Class A common stock - diluted | Earnings (loss) per share of Class A common stock - diluted | | $ | (0.43) | | | $ | 0.29 | | | $ | (0.48) | | | $ | 0.38 | | Earnings (loss) per share of Class A common stock - diluted | $ | 0.05 | | | $ | (0.43) | | | $ | 0.06 | | | $ | (0.48) | |
| | Assumed exchange of LLC Interests for shares of Class A common stock(1) | | (0.01) | | | — | | | (0.01) | | | 0.01 | | | Assumed exchange of LLC Interests for shares of Class A common stock(1) | — | | | (0.01) | | | — | | | (0.01) | |
| | Non-GAAP adjustments(8) | | (0.01) | | | (0.02) | | | 0.04 | | | 0.01 | | | Non-GAAP adjustments(9) | — | | | (0.01) | | | 0.04 | | | 0.04 | |
Adjusted pro forma earnings (loss) per fully exchanged share—diluted | Adjusted pro forma earnings (loss) per fully exchanged share—diluted | | $ | (0.45) | | | $ | 0.27 | | | $ | (0.45) | | | $ | 0.40 | | Adjusted pro forma earnings (loss) per fully exchanged share—diluted | $ | 0.05 | | | $ | (0.45) | | | $ | 0.10 | | | $ | (0.45) | |
(1)Assumes the exchange of all outstanding LLC Interests for shares of Class A common stock, resulting in the elimination of the non-controlling interest and recognition of the net income (loss) attributable to non-controlling interests. Refer to Note 11, Earnings (Loss) per Share, in the accompanying Condensed Consolidated Financial Statements, for additional information.
(2)Represents costs incurred in connection with our executive search, including fees paid to an executive recruiting firm.
(3)Represents consulting and advisory fees related to our enterprise-wide system upgrade initiative called Project Concrete.
(4) Represents costs associated with establishing our first international office in Hong Kong.
(5) Represents incremental expensesExpense incurred related to establish an inventory adjustment and certain employee-related expenses.
(6) Represents tax effect of change in tax basisaccrual related to the adoptionsettlement of a legal matter. Refer to Note 13, Commitments and Contingencies, in the new lease accounting standard accompanying Condensed Consolidated Financial Statements, for additional information.
(5)Costs incurred in connection with the thirteenCompany’s Convertible Notes, issued in March 2021, including consulting and twenty-six weeks ended June 26, 2019.advisory fees. Refer to Note 6, Debt, in the accompanying Condensed Consolidated Financial Statements, for additional information.
(6)Expense incurred in connection with the Company's amendments on the Revolving Credit Facility, including the write-off of previously capitalized costs on the Revolving Credit Facility. Refer to Note 6, Debt, in the accompanying Condensed Consolidated Financial Statements, for additional information.
(7)Represents the tax effect of the aforementioned adjustments and pro forma adjustments to reflect corporate income taxes at assumed effective tax rates of 24.1%27.0% and 30.2%167.8% for the thirteen and twenty-six weeks ended June 24, 2020,30, 2021, respectively, and 19.3%24.1% and 19.4%30.2% for the thirteen and twenty-six weeks ended June 26, 2019,24, 2020, respectively. Amounts include provisions for U.S. federal income taxes, certain LLC entity-level taxes and foreign withholding taxes, assuming the highest statutory rates apportioned to each applicable state, local and foreign jurisdiction. Additionally, the thirteen and twenty-six weeks endedJune 24, 2020 includes the establishment of a valuation allowance.
(8)Represents incremental expenses incurred related to an inventory adjustment and certain employee-related expenses.
(9)Represents the per share impact of non-GAAP adjustments for each period. Refer to the reconciliation of Adjusted Pro Forma Net Income (Loss) above, for further details.additional information.
42 | Shake Shack Inc. Form 10-Q | 41
LIQUIDITY AND CAPITAL RESOURCES
Sources and Uses of Cash
Our primary sources of liquidity are cash from operations, cash and cash equivalents on hand, short-term investments and availability under our Revolving Credit Facility. In March 2021, we issued 0% Convertible Senior Notes (“Convertible Notes”), and received $243.8 million of proceeds, net of discounts. Refer to Note 6, Debt, in the accompanying Condensed Consolidated Financial Statements, for additional information.
As of June 24, 2020,30, 2021, we maintained a cashCash and cash equivalents balance of $174.0$340.1 million and a short-term investments balance of $16.8 million.$80.1 million within Marketable securities.
On June 8, 2018,7, 2021, we filed a Registration Statement on Form S-3 with the SEC which permits us to issue a combination of securities described in the prospectus in one or more offerings from time to time. To date, we have not experienced difficulty accessing the capital markets; however, future volatility in the capital markets may affect our ability to access those markets or increase the costs associated with issuing debt or equity instruments.
Our primary requirements for liquidity are to fund our working capital needs, operating and finance lease obligations, capital expenditures and general corporate needs. Our requirements for working capital are generally 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 new Shacks, existing Shack capital investments (both for remodels and maintenance), as well as investments in our corporate and digital infrastructure.
In addition, we are obligated to make payments to certain members of SSE Holdings under the Tax Receivable Agreement. As of June 24, 2020,30, 2021, such obligations totaled $228.1$234.0 million. Amounts payable under the Tax Receivable Agreement are contingent upon, among other things, (i) generation of future taxable income over the term of the Tax Receivable Agreement and (ii) future changes in tax laws. If we do not generate sufficient taxable income in the aggregate over the term of the Tax Receivable Agreement to utilize the tax benefits, then we would not be required to make the related TRA Payments. Although the amount of any payments that must be made under the Tax Receivable Agreement may be significant, the timing of these payments will vary and will generally be limited to one payment per member per year. The amount of such payments are also limited to the extent we utilize the related deferred tax assets. 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 or to SSE Holdings, but we expect the cash tax savings we will realize from the utilization of the related deferred tax assets to fund the required payments.
COVID-19 Pandemic
In response to the uncertain market conditions resulting from the onset of the COVID-19 pandemic, we have takentook the following actions.actions in fiscal 2020.
•On April 17, 2020, we announced an ATM Program,"at-the-market" equity offering program (the "ATM Program"), under which we may offer and sell shares of our Class A common stock having an aggregate price of up to $75.0 million from time to time. On April 21, 2020, we completed the sale of 233,467 shares of our Class A common stock pursuant to the ATM Program and received $9.8 million of proceeds, net of commissions. The proceeds were used to purchase newly-issued LLC Interests.
•On April 21, 2020, we completed an underwritten offering of 3,416,070 shares of our Class A common stock, resulting in $135.9 million of proceeds, net of underwriting discounts and commissions. The proceeds were used to purchase newly-issued LLC Interests.
•In May 2020, we entered into an amendment to our Revolving Credit Facility that providesprovided for a number of enhanced modifications to reflect the current and ongoing impact from COVID-19. Our Revolving Credit Facility was further amended in March 2021, resulting in a modification of the applicable covenants and restrictions in the Credit Agreement to permit the incurrence of the Convertible Notes, including obligations and transactions in connection therewith. Refer to Note 6, Debt, in the accompanying condensed consolidated financial statements, for additional information.
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•In March 2020, we drew down the full $50,000$50.0 million available under the Revolving Credit Facility to enhance liquidity and financial flexibility given the uncertain market conditions created by the COVID-19 pandemic. We repaid this amount in full, plus interest, in June 2020. As of June 24, 2020,March 31, 2021, we were in compliance with all covenants.
We believe our existing cash and marketable securities balances combined with the actions we have taken in response to COVID-19, will be sufficient to fund our operating and finance lease obligations, capital expenditures, tax receivable agreementTax Receivable Agreement obligations and working capital needs for at least the next 12 months and the foreseeable future.
42 | Shake Shack Inc. Form 10-Q
Summary of Cash Flows
The following table presents a summary of our cash flows from operating, investing and financing activities.
| | | | | | | | | | | |
| Twenty-Six Weeks Ended | | |
(in thousands) | June 24 2020 | | June 26 2019 |
Net cash provided by operating activities | $ | 17,993 | | | $ | 35,891 | |
Net cash used in investing activities | (17,905) | | | (29,713) | |
Net cash provided by (used in) financing activities | 136,797 | | | (1,195) | |
Increase in cash | 136,885 | | | 4,983 | |
Cash at beginning of period | 37,099 | | | 24,750 | |
Cash at end of period | $ | 173,984 | | | $ | 29,733 | |
| | | | | | | | | | | |
| Twenty-Six Weeks Ended |
(in thousands) | June 30 2021 | | June 24 2020 |
Net cash provided by operating activities | $ | 37,005 | | | $ | 17,993 | |
Net cash used in investing activities | (87,969) | | | (17,905) | |
Net cash provided by financing activities | 244,194 | | | 136,797 | |
Increase in Cash and cash equivalents | 193,230 | | | 136,885 | |
Cash and cash equivalents at beginning of period | 146,873 | | | 37,099 | |
Cash and cash equivalents at end of period | $ | 340,103 | | | $ | 173,984 | |
Operating Activities
For the twenty-six weeks ended June 24, 202030, 2021 net cash provided by operating activities was $18.0$37.0 million compared to $35.9$18.0 million for the twenty-six weeks ended June 26, 2019,24, 2020, an increase of $19.0 million. The increase was primarily due to an increase in net income of $21.7 million and the impact of non-cash charges of $0.9 million partially offset by a decreasechange in operating assets and liabilities of $17.9$(3.6) million. This decreaseThe $(3.6) million change in our operating asset and liability balances was primarily driven by a decreasean increase in Shack-level operating profit due to the impactand timing of COVID-19, as well asrent payments, partially offset by higher generalaccrued wages and administrative costs including higher annual bonus payments.timing of cash receipts of receivables.
Investing Activities
For the twenty-six weeks ended June 24, 202030, 2021 net cash used in investing activities was $17.9$88.0 million compared to $29.7$17.9 million used in investing activities for the twenty-six weeks ended June 26, 2019, a decrease24, 2020, an increase of $11.8$70.1 million. This decreaseincrease was primarily due to increased purchases of marketable securities of $47.0 million, a decrease of $18.4 million in capital expenditures, as well as a decrease of $7.0$16.0 million of proceeds from sales of marketable securities.securities and an increase of $7.1 million in capital expenditures to support our real estate development and digital initiatives.
Financing Activities
For the twenty-six weeks ended June 24, 202030, 2021 net cash provided by financing activities was $136.8$244.2 million compared to net cash used in financing activities of $1.2$136.8 million for the twenty-six weeks ended June 26, 2019,24, 2020, an increase of $138.0$107.4 million. This increase iswas primarily due to $243.8 million in net cash proceeds from the issuance of the Convertible Notes, net of discount, decreased payments made under the Tax Receivable Agreement, and increased proceeds from stock option exercises, partially offset by $145.7 million in net cash proceeds from the issuance of Class A common stock partially offset by increased payments made underduring the Tax Receivable Agreement and distributions to our non-controlling interest holders.twenty-six weeks ended June 24, 2020.
Revolving Credit Facility
In August 2019, we terminated our previous revolving credit facility and entered into a new Revolving Credit Facility, agreement, which permits borrowings up to $50.0 million, of which the entire amount is available immediately, with the ability to increase available borrowings up to an additional $100.0 million, to be made available subject to satisfaction of certain conditions. The Revolving Credit Facility will mature and all amounts outstanding will be due and payable in August 2024. The Revolving Credit Facility also permits the issuance of letters of credit upon our request of up to $15.0 million. Borrowings
In March 2020, we drew down the full $50.0 million available under the Revolving Credit facility will bearFacility to enhance liquidity and financial flexibility given the uncertain market conditions created by the COVID-19 pandemic. We repaid this amount in full, plus interest, in June 2020.
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In May 2020, we entered into a First Amendment, which, among other things, provided for modified financial covenant compliance requirements for a period of time. The First Amendment required us to maintain minimum liquidity of $25.0 million through July 1, 2021 and outstanding borrowings during the applicable period covered by the First Amendment bore interest at either: (i) LIBOR plus a percentage ranging from 1.0% to 1.5%2.5% or (ii) the base rate plus a percentage ranging from 0.0% to 0.5%1.5%, in each case depending on our net lease adjusted leverage ratio. To
In March 2021, we entered into a Second Amendment. The Second Amendment modified the extentapplicable covenants and restrictions in the Credit Agreement to permit the incurrence of the Convertible Notes (as defined below), including obligations and transactions in connection therewith. In addition, the Second Amendment, among other things, (i) extended the period applicable to the increased interest rate margin as set forth in the First Amendment; (ii) shortened the maturity date of the Revolving Credit Facility from August 2024 to September 2022 and (iii) added mechanics relating to the transition from the use of LIBOR reference rate is no longer available,to SOFR upon the discontinuance or unavailability of LIBOR.
Subsequently, and also in March 2021, we entered into a Third Amendment with JPMorgan Chase Bank, N.A. (as successor agent to Wells Fargo Bank, National Association), as administrative agent, and the lenders party thereto. In addition, in consultation with us, will determine a replacement rate which will be generally in accordance with similar transactions in which it servesMarch 2021, Wells Fargo Bank resigned as administrative agent. agent under the Revolving Credit Facility and assigned its commitments thereunder to JPMorgan Bank, N.A. The Third Amendment appoints JPMorgan Bank, N.A. as administrative agent under the Revolving Credit Facility. In addition, the Third Amendment, among other things, extends the maturity date of the Revolving Credit Facility from September 2022 to March 2026. As of June 30, 2021 and December 30, 2020, no amounts were outstanding under the Revolving Credit Facility.
The obligations under the Revolving Credit Facility are secured by a first-priority security interest in substantially all of the assets of SSE Holdings and the guarantors. The obligations under the Revolving Credit Facility are guaranteed by each of SSE Holdings' direct and indirect subsidiaries (with certain exceptions).
The Revolving Credit Facility requires us to comply with maximum net lease adjusted leverage and minimum fixed charge coverage ratios. We are not subject to these coverage ratios for a period of time due to the FirstSecond Amendment to the Revolving Credit Facility described below.above. In addition, the Revolving Credit Facility contains other customary affirmative and negative covenants, including those which (subject to certain exceptions and dollar thresholds) limit our ability to incur debt; incur liens; make investments; engage in mergers, consolidations, liquidations or acquisitions; dispose of assets; make distributions on or repurchase equity securities; engage in transactions with affiliates; and prohibits us, with certain exceptions, from engaging in any line of business not related to our current line of business. As of June 24, 2020,30, 2021, we were in compliance with all covenants.
As of June 30, 2021, the Revolving Credit Facility had unamortized deferred financing costs of $0.1 million, and was included in Other assets on the Condensed Consolidated Balance Sheets. During the thirteen and twenty-six weeks ended June 30, 2021, total interest expense related to the Revolving Credit Facility were $0.04 million and $0.4 million, respectively and $0.4 million and $0.6 million, respectively, during thirteen and twenty-six weeks ended June 24, 2020. Total interest expense for the twenty-six weeks ended June 30, 2021 primarily included write-off of previously capitalized costs on the Revolving Credit Facility.
Convertible Notes
In March 2021, we issued $225.0 million aggregate principal amount of 0% Convertible Senior Notes due 2028 in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933. We granted an option to the initial purchasers to purchase up to an additional $25.0 million aggregate principal amount of Convertible Notes to cover over-allotments, which was subsequently fully exercised during March 2021, resulting in a total issuance of $250.0 million aggregate principal amount of Convertible Notes. The Convertible Notes will mature on March 1, 2028, unless earlier converted, redeemed or repurchased in certain circumstances. Upon conversion, we pay or deliver, as the case may be, cash, shares of Class A common stock or a combination of cash and shares of Class A common stock, at our election.
The Convertible Notes are convertible at the option of the holders at any time prior to the close of business on the business day immediately preceding December 1, 2027, only under the following circumstances: (1) during any fiscal quarter commencing after the fiscal quarter ending on June 30, 2021 (and only during such fiscal quarter), if the last reported sale price of our Class A common stock, par value $0.001 per share, for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding fiscal quarter is greater than or equal to 130% of the conversion price for the Convertible Notes on each applicable trading day; (2) during the five business day period after any ten consecutive trading day period in which the trading price (as defined in the Indenture) per one thousand dollar principal amount of the Convertible Notes for each trading day of the measurement period was less than 98% of the
Shake Shack Inc. Form 10-Q | 4345
Inproduct of the last reported sale price of Class A common stock and the conversion rate for the Convertible Notes on each such trading day; (3) if we call such Convertible Notes for redemption, at any time prior to the close of business on the scheduled trading day immediately preceding the redemption date, but only with respect to the Convertible Notes called (or deemed called) for redemption; and (4) upon the occurrence of specified corporate events as set forth in the Indenture. On or after December 1, 2027, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders of the Convertible Notes may convert all or any portion of their Convertible Notes at any time, regardless of the foregoing circumstances.
The Convertible Notes had an initial conversion rate of 5.8679 shares of Class A common stock per one thousand dollar principal amount of Convertible Notes, which is equivalent to an initial conversion price of approximately $170.42 per share of Class A common stock.
We may not redeem the Convertible Notes prior to March 2020,6, 2025. We may redeem for cash all or any portion of the Convertible Notes, at our option, on or after March 6, 2025 if the last reported sale price of Class A common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which we drew downprovide notice of redemption at a redemption price equal to 100% of the full $50.0 million available underprincipal amount of the Revolving Credit FacilityConvertible Notes to enhance liquiditybe redeemed, plus accrued and financial flexibility givenunpaid special interest, if any, to, but excluding, the uncertain market conditions created by the COVID-19 pandemic. We repaid the full amount we drew down plus interest in June 2020.redemption date.
In May 2020,addition, if we undergo a fundamental change (as defined in the indenture governing the Convertible Notes), subject to certain conditions, holders may require us to repurchase for cash all or any portion of their Convertible Notes at a repurchase price equal to 100% of the principal amount of the Convertible Notes to be repurchased, plus accrued and unpaid special interest, if any, to, but excluding, the fundamental change repurchase date. In addition, following certain corporate events that occur prior to the maturity date of the Convertible Notes or if we deliver a notice of redemption in respect of some or all of the Convertible Notes, we will, in certain circumstances, increase the conversion rate of the Convertible Notes for a holder who elects to convert our Convertible Notes in connection with such a corporate event or convert our Convertible Notes called (or deemed called) for redemption during the related redemption period, as the case may be.
Contemporaneously with the issuance of the Convertible Notes, Shake Shack Inc. entered into an Intercompany Note with SSE Holdings, LLC. SSE Holdings promises to pay Shake Shack Inc., for value received, the principal amount with interest of the Intercompany Note in March 2028. Shake Shack Inc. will exercise its right to convert the Intercompany Note to maintain at all times a First Amendment toone-to-one ratio between the Revolving Credit Facility, which,number of common units, directly or indirectly, by Shake Shack Inc and the aggregate number of outstanding shares of common stock.
As of June 30, 2021, the Convertible Notes had a gross principal balance of $250.0 million and a balance of $243.0 million, net of unamortized discount and debt issuance costs of $7.0 million. As of June 30, 2021, the unamortized balance of discount and debt issuance costs was recorded as a contra-liability and netted with Long-term debt on the Condensed Consolidated Balance Sheets and was being amortized as interest expense using the effective interest method. Total amortization expense was $0.2 million and $0.3 million respectively, for thirteen and twenty-six weeks ended June 30, 2021 and was included in Interest expense in the Condensed Consolidated Statements of Income (Loss). In connection with the Convertible Notes, the Company also incurred consulting and advisory fees of $0.2 million for the twenty-six weeks ended June 30, 2021 and was included in General and administrative expense in the Condensed Consolidated Statements of Income (Loss).
At June 30, 2021, the fair value of the Convertible Notes was approximately $237.2 million, based on external pricing data, including available quoted market prices of these instruments, and consideration of comparable debt instruments with similar interest rates and trading frequency, among other things, provides for modified financial covenant compliance requirements forfactors, and is classified as a period of time. The First Amendment requires us to maintain minimum liquidity of $25.0 million through July 1, 2021 and outstanding borrowings duringLevel 2 measurement within the applicable period covered by the First Amendment bear interest at either: (i) LIBOR plus a percentage ranging from 1.0% to 2.5% or (ii) the base rate plus a percentage ranging from 0.0% to 1.50%, in each case depending on our net lease adjusted leverage ratio.fair value hierarchy.
CONTRACTUAL OBLIGATIONS
There have been no material changes to the contractual obligations as disclosed in our Annual Report on Form 10-K for the fiscal year ended December 25, 2019,30, 2020, other than those made in the ordinary course of business.
46 | Shake Shack Inc. Form 10-Q
OFF-BALANCE SHEET ARRANGEMENTS
There have been no material changes to our off-balance sheet arrangements as disclosed in our Annual Report on Form 10-K for the fiscal year ended December 25, 2019.30, 2020.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our consolidated financial condition and results of operations is based upon the accompanying condensed consolidated financial statements and notes thereto, which have been prepared in accordance with GAAP. The preparation of the condensed consolidated financial statements requires us to make estimates, judgments and assumptions, which we believe to be reasonable, based on the information available. These estimates and assumptions affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. Variances in the estimates or assumptions used to actual experience could yield materially different accounting results. On an ongoing basis, we evaluate the continued appropriateness of our accounting policies and resulting estimates to make adjustments we consider appropriate under the facts and circumstances. There have been no significant changes to our critical accounting policies as disclosed in our Annual Report on Form 10-K for the fiscal year ended December 25, 2019.30, 2020.
Recently Issued Accounting Pronouncements
See "Note 2:Refer to Note 2, Summary of Significant Accounting Policies—Recently Issued Accounting Pronouncements”Policies under Part I, Item 1 of this Form 10-Q.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
There have been no material changes to our exposure to market risks as described in Part II, Item 7A of our Annual Report on Form 10-K for the fiscal year ended December 25, 2019.30, 2020.
Item 4. Controls and Procedures.
44 | Shake Shack Inc. Form 10-Q
DISCLOSURE CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of such date. Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There were no changes to our internal control over financial reporting that occurred during the quarter ended June 24, 202030, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II – OTHER INFORMATION
Item 1. Legal Proceedings.
The information required by this Item is incorporated by reference to Part I, Item 1, Note 15:13, Commitments and Contingencies—Legal Contingencies.
Item 1A. Risk Factors.
The following additional risk factors should be read in conjunction withThere have been no material changes to the risk factors disclosed in ourthe Company's Annual Report on Form 10-K for the fiscal year ended December 25, 2019, which are modified and updated by the risk factors set forth below.
Pandemics or disease outbreaks, such as the recent outbreak of the novel coronavirus (COVID-19 virus), have disrupted, and may continue to disrupt, our business, and have materially affected our operations and results of operations.
Pandemics or disease outbreaks such as the COVID-19 virus have and may continue to impact customer traffic at our restaurants, may make it more difficult to staff our restaurants and, in more severe cases, may cause a temporary inability to obtain supplies and increase commodity costs. In recent months, we were forced to temporarily close many of our restaurants and shifted to a “to-go” and curbside operating model in our domestic company-operated Shacks, and only recently have resumed limited sit-down dining in some areas. We have also modified hours or reductions in on-site staff, resulting in cancelled shifts for some of our employees. COVID-19 may also materially adversely affect our ability to implement our growth plans, including delays in construction of new restaurants or adversely impact our overall ability to successfully execute our plans to enter into new markets. These changes have negatively impacted our results of operations, and these and any additional changes may materially adversely affect our business or results of operations in the future, and may impact our liquidity or financial condition, particularly if these changes are in place for a significant amount of time.
In addition, our operations have been further disrupted when employees or employees of our business partners are suspected of having COVID-19 or other illnesses since this has required us or our business partners to quarantine some or all such employees and close and disinfect our impacted restaurant facilities. If a significant percentage of our workforce or the workforce of our business partners are unable to work, including because of illness or travel or government restrictions in connection with pandemics or disease outbreaks, our operations may be negatively impacted, potentially materially adversely affecting our business, liquidity, financial condition or results of operations. In addition, we are required by local and state regulations to report employees who have contacted or been exposed to the virus.
Furthermore, such viruses may be transmitted through human contact and airborne delivery, and the risk of contracting viruses could continue to cause employees or guests to avoid gathering in public places, which has had, and could further have, adverse effects on our restaurant guest traffic or the ability to adequately staff restaurants. We have been adversely affected when government authorities have imposed and continue to impose restrictions on public gatherings, human interactions, operations of restaurants or mandatory closures, seek voluntary closures, restrict hours of operations or impose curfews, restrict the import or export of products or if suppliers issue mass recalls of products. Additional regulation or requirements with respect to the compensation of our employees could also have an adverse effect on our business. Even if such measures are not implemented and a virus or other disease does not spread significantly within a specific area, the perceived risk of infection or health risk in such area may adversely affect our business, liquidity, financial condition and results of operations. Additionally, different jurisdictions have seen varying levels of outbreaks or resurgences in outbreaks, and corresponding differences in government responses, which may make it difficult for us to plan or forecast an appropriate response.
The COVID-19 pandemic and mitigation measures have also had an adverse impact on global economic conditions, which have had an adverse effect on our business and financial condition. The Company’s sales and operating results may be affected by
46 | Shake Shack Inc. Form 10-Q
uncertain or changing economic and market conditions arising in connection with and in response to the COVID-19 pandemic, including prolonged periods of high unemployment, inflation, deflation, prolonged weak consumer demand, a decrease in consumer discretionary spending, political instability or other changes. The significance of the operational and financial impact to the Company will depend on how long and widespread the disruptions caused by COVID-19, and the corresponding response to contain the virus and treat those affected by it, prove to be.
The ability of local and international authorities in containing COVID-19 and limiting the spread of infections will impact our business operations. The U.S. and other countries may fail to fully contain COVID-19 or suffer a resurgence in COVID-19, which could have an adverse effect on our business and results of operations. While some state and local governments in the U.S. have started to remove or ease restrictions on certain businesses, including restaurants, there is no guarantee on when other jurisdictions will change their current policies, and jurisdictions that have reduced restrictions may reintroduce restrictions, as some have in those areas where there have been increased outbreak.
Our ability to use our net operating loss carryforwards may be subject to limitation.
As of December 25, 2019, our federal and state net operating loss (“NOL”) carryforwards, for income tax purposes were $104.8 million and $67.4 million, respectively. If not utilized, $53.0 million of our federal NOLs can be carried forward indefinitely, and the remainder will begin to expire in 2035. If not utilized, $6.2 million of our state NOL carryforwards can be carried forward indefinitely, and the remainder will begin to expire in 2023. Federal NOLs incurred in taxable years beginning after December 31, 2017 can be carried forward indefinitely, but the deductibility of federal NOLs in taxable years beginning after December 31, 2020, is subject to certain limitations.
In addition, under Section 382 of the Internal Revenue Code (“IRC”) of 1986, as amended, and corresponding provisions of state law, if a corporation undergoes an “ownership change,” its ability to use its pre-change NOLs to offset its post-change income may be limited. A Section 382 “ownership change” generally occurs if one or more stockholders or groups of stockholders who own at least 5% of our stock increase their ownership by more than 50 percentage points over their lowest ownership percentage within a rolling three-year period. Similar rules may apply under state tax laws. In connection with the equity offering we conducted a Section 382 study to determine whether the use of our NOLs is limited. While we did not experience an ownership change related to the equity offering in April 2020, we did experience an ownership change in the second quarter of 2018.An ownership change under Section 382 of the IRC establishes an annual limitation to the amount of NOL carryforwards we could utilize to offset our taxable income in a single year. We are in the process of finalizing our analysis, we do not expect that the change in ownership that occurred in 2018 will limit our ability to utilize the NOLs before the expiration of the NOL carryforward period.We may experience ownership changes in the future, including as a result of this offering or subsequent changes in our stock ownership, some of which are outside our control. This could limit the amount of NOLs that we can utilize annually to offset future taxable income or tax liabilities. Subsequent statutory or regulatory changes in respect of the utilization of NOLs for federal or state purposes, such as suspensions on the use of NOLs or limitations on the deductibility of NOLs carried forward, or other unforeseen reasons, may result in our existing NOLs expiring or otherwise being unavailable to offset future income tax liabilities.
If we are unable to maintain compliance with the covenants contained in our current credit facility, we may be unable to make additional borrowings on any undrawn amounts and may be required to repay our then outstanding debt under the facility. In addition, global economic conditions may make it more difficult to access new credit facilities.
Our liquidity position is, in part, dependent upon our ability to borrow under our current credit facility. As disclosed in Part I, Item 1, Note 8: Debt, in August 2019, we entered into a credit facility with Wells Fargo Bank, National Association (“Wells Fargo”), providing for a $50.0 million senior secured Revolving Credit Facility with the ability to increase available borrowings under the credit facility by up to an additional $100.0 million through incremental term and/or revolving credit commitments, subject to the satisfaction of certain conditions set forth in the facility. We are required to comply with maximum net lease adjusted leverage and minimum fixed charge coverage ratios, in addition to other customary affirmative and negative covenants, including those which (subject to certain exceptions and dollar thresholds) limit our ability to incur debt; incur liens; make investments; engage in mergers, consolidations, liquidations or acquisitions; dispose of assets; make distributions on or repurchase equity securities; engage in transactions with affiliates; and prohibits us, with certain exceptions, from engaging in any line of business not related to our current line of business. In May 2020, we entered into a first amendment to the Revolving Credit Facility (“First Amendment”), which, among other things, provides for modified financial covenant compliance requirements for a period of time. The First Amendment requires us to maintain minimum liquidity of $25,000 through July 1, 2021 and outstanding borrowings during the applicable period covered by the First Amendment bear interest at either: (i) LIBOR plus a percentage ranging from
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1.0% to 2.5% or (ii) the base rate plus a percentage ranging from 0.0% to 1.50%, in each case depending on our net lease adjusted leverage ratio. As of June 24, 2020, we were in compliance with all covenants, however, a failure to comply with the financial covenants under our credit facility would give rise to an event of default under the term of the credit facility, allowing the lenders to refuse to lend additional available amounts to us and giving them the right to terminate the facility and accelerate repayment of any outstanding debt under the credit facility. As a result, we may need to access other capital to address our liquidity needs rather than relying on our credit facility. Our cash resources and liquidity would be substantially impaired by an acceleration of the debt under our credit facility.30, 2020.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
None.
48 | Shake Shack Inc. Form 10-Q
Item 6. Exhibits.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Exhibit Number | | | | Incorporated by Reference | | | | | | Filed Herewith |
| | Exhibit Description | | Form | | Exhibit | | Filing Date | | |
| | | | 8-K | | 3.1 | | 2/10/2015 | | |
| | | | 8-K | | 3.1 | | 10/4/2019 | | |
| | | | S-1/A | | 4.1 | | 1/28/2015 | | |
| | | | | | | | | | # |
| | | | 8-K | | 1.1 | | 4/17/2020 | | |
| | | | 8-K | | 1.1 | | 4/21/2020 | | |
| | | | 10-Q | | 10.3 | | 5/4/2020 | | |
| | | | 8-K | | 1.1 | | 6/18/2020 | | |
| | | | | | | | | | * |
| | | | | | | | | | * |
| | | | | | | | | | # |
101.INS | | XBRL Instance Document - the instance document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document | | | | | | | | * |
101.SCH | | XBRL Taxonomy Extension Schema Document | | | | | | | | * |
101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document | | | | | | | | * |
101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document | | | | | | | | * |
101.LAB | | XBRL Taxonomy Extension Label Linkbase Document | | | | | | | | * |
101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document | | | | | | | | * |
104 | | Cover Page Interactive Data File - the cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | | | | | | | | * |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Exhibit Number | | | | Incorporated by Reference | | Filed Herewith |
| Exhibit Description | | Form | | Exhibit | | Filing Date | |
| | | | 8-K | | 3.1 | | 2/10/2015 | | |
| | | | 8-K | | 3.1 | | 10/4/2019 | | |
| | | | S-1/A | | 4.1 | | 1/28/2015 | | |
| | | | 8-K | | 10.1 | | 6/9/2021 | | |
| | | | | | | | | | * |
| | | | | | | | | | * |
| | | | | | | | | | # |
101.INS | | XBRL Instance Document - the instance document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document | | | | | | | | * |
101.SCH | | XBRL Taxonomy Extension Schema Document | | | | | | | | * |
101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document | | | | | | | | * |
101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document | | | | | | | | * |
101.LAB | | XBRL Taxonomy Extension Label Linkbase Document | | | | | | | | * |
101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document | | | | | | | | * |
104 | | Cover Page Interactive Data File - the cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | | | | | | | | * |
# Furnished herewith.
Shake Shack Inc. Form 10-Q | 49
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | | | | | | |
| Shake Shack Inc. | |
| (Registrant) | |
| | |
Date: July 31, 2020August 6, 2021 | By: | /s/ Randy Garutti |
| | Randy Garutti |
| | Chief Executive Officer (Principal Executive Officer and Duly Authorized Officer) |
| | |
Date: July 31, 2020August 6, 2021 | By: | /s/ Tara ComonteKatherine I. Fogertey |
| | Tara ComonteKatherine I. Fogertey |
| | President and Chief Financial Officer (Principal Financial Officer and Duly Authorized Officer) |
50 | Shake Shack Inc. Form 10-Q