Shake Shack Inc. 10-Q

Item 1. Financial Statements (Unaudited). Page Condensed Consolidated Balance Sheets 3 Condensed Consolidated Statements of Income (Loss) 4 Condensed Consolidated Statements of Comprehensive Income (Loss) 5 Condensed Consolidated Statements of Stockholders' Equity 6 Condensed Consolidated Statements of Cash Flows 8 Notes to Condensed Consolidated Financial Statements 9 2 | Shake Shack Inc. Form 10-Q Table of Content SHAKE SHACK INC. CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (in thousands, except share and per share amounts) September 23 2020 December 25 2019 ASSETS Current assets: Cash and cash equivalents $ 174,883 $ 37,099 Marketable securities 16,879 36,508 Accounts receivable 7,729 9,970 Inventories 2,383 2,221 Prepaid expenses and other current assets 2,636 1,877 Total current assets 204,510 87,675 Property and equipment, net 326,526 314,862 Operating lease assets 305,133 274,426 Deferred income taxes, net 288,995 279,817 Other assets 12,038 11,488 TOTAL ASSETS $ 1,137,202 $ 968,268 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 22,354 $ 14,300 Accrued expenses 25,236 24,140 Accrued wages and related liabilities 9,237 11,451 Operating lease liabilities, current 34,859 30,002 Other current liabilities 12,580 19,499 Total current liabilities 104,266 99,392 Long-term operating lease liabilities 336,149 304,914 Liabilities under tax receivable agreement, net of current portion 228,197 226,649 Other long-term liabilities 21,828 15,328 Total liabilities 690,440 646,283 Commitments and contingencies (Note 15) Stockholders' equity: Preferred stock, no par value—10,000,000 shares authorized; none issued and outstanding as of September 23, 2020 and December 25, 2019. — — Class A common stock, $0.001 par value—200,000,000 shares authorized; 38,280,102 and 34,417,302 shares issued and outstanding as of September 23, 2020 and December 25, 2019, respectively. 38 35 Class B common stock, $0.001 par value—35,000,000 shares authorized; 3,112,002 and 3,145,197 shares issued and outstanding as of September 23, 2020 and December 25, 2019, respectively. 3 3 Additional paid-in capital 386,011 244,410 Retained earnings 31,637 54,367 Accumulated other comprehensive income 3 2 Total stockholders' equity attributable to Shake Shack Inc. 417,692 298,817 Non-controlling interests 29,070 23,168 Total equity 446,762 321,985 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,137,202 $ 968,268 See accompanying Notes to Condensed Consolidated Financial Statements. Shake Shack Inc. Form 10-Q | 3 Table of Content SHAKE SHACK INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS) (UNAUDITED) (in thousands, except per share amounts) Thirteen Weeks Ended Thirty-Nine Weeks Ended September 23 2020 September 25 2019 September 23 2020 September 25 2019 Shack sales $ 126,288 $ 152,366 $ 353,855 $ 428,811 Licensing revenue 4,113 5,396 11,502 14,273 TOTAL REVENUE 130,401 157,762 365,357 443,084 Shack-level operating expenses: Food and paper costs 37,903 44,159 107,494 125,049 Labor and related expenses 37,898 41,601 110,597 118,891 Other operating expenses 18,743 18,947 50,826 51,270 Occupancy and related expenses 13,093 12,537 37,974 35,309 General and administrative expenses 14,962 17,090 45,170 46,420 Depreciation expense 12,376 10,474 36,233 29,239 Pre-opening costs 1,822 4,487 5,799 10,678 Impairment and loss on disposal of assets 402 303 2,924 1,031 TOTAL EXPENSES 137,199 149,598 397,017 417,887 OPERATING INCOME (LOSS) ( 6,798 ) 8,164 ( 31,660 ) 25,197 Other income, net 34 248 335 1,259 Interest expense ( 143 ) ( 133 ) ( 697 ) ( 302 ) INCOME (LOSS) BEFORE INCOME TAXES ( 6,907 ) 8,279 ( 32,022 ) 26,154 Benefit from income taxes ( 797 ) ( 3,144 ) ( 6,802 ) ( 47 ) NET INCOME (LOSS) ( 6,110 ) 11,423 ( 25,220 ) 26,201 Less: net income (loss) attributable to non-controlling interests ( 551 ) 1,079 ( 2,490 ) 4,281 NET INCOME (LOSS) ATTRIBUTABLE TO SHAKE SHACK INC. $ ( 5,559 ) $ 10,344 $ ( 22,730 ) $ 21,920 Earnings (loss) per share of Class A common stock: Basic $ ( 0.15 ) $ 0.32 $ ( 0.62 ) $ 0.72 Diluted $ ( 0.15 ) $ 0.31 $ ( 0.62 ) $ 0.70 Weighted-average shares of Class A common stock outstanding: Basic 38,251 31,961 36,668 30,549 Diluted 38,251 32,916 36,668 31,441 See accompanying Notes to Condensed Consolidated Financial Statements. 4 | Shake Shack Inc. Form 10-Q Table of Content SHAKE SHACK INC. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED) (in thousands) Thirteen Weeks Ended Thirty-Nine Weeks Ended September 23 2020 September 25 2019 September 23 2020 September 25 2019 Net income (loss) $ ( 6,110 ) $ 11,423 $ ( 25,220 ) $ 26,201 Other comprehensive income, net of tax (1) : Change in foreign currency translation adjustment — — 1 — Net change — — 1 — OTHER COMPREHENSIVE INCOME — — 1 — COMPREHENSIVE INCOME (LOSS) ( 6,110 ) 11,423 ( 25,219 ) 26,201 Less: comprehensive income (loss) attributable to non-controlling interest ( 551 ) 1,079 ( 2,490 ) 4,281 COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO SHAKE SHACK INC. $ ( 5,559 ) $ 10,344 $ ( 22,729 ) $ 21,920 (1) Net of tax expense of $ 0 for the thirteen and thirty-nine weeks ended September 23, 2020 and September 25, 2019. See accompanying Notes to Condensed Consolidated Financial Statements. Shake Shack Inc. Form 10-Q | 5 Table of Content SHAKE SHACK INC. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED) (in thousands, except share amounts) For the Thirteen Weeks Ended September 23, 2020 and September 25, 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, JUNE 24, 2020 38,236,538 $ 38 3,117,002 $ 3 $ 384,338 $ 37,196 $ 3 $ 29,707 $ 451,285 Net loss ( 5,559 ) ( 551 ) ( 6,110 ) Other comprehensive income: Net change in foreign currency translation adjustment — — — Equity-based compensation 1,346 1,346 Activity under stock compensation plans 38,564 367 122 489 Redemption of LLC Interests 5,000 ( 5,000 ) 44 ( 44 ) — Establishment of liabilities under tax receivable agreement and related changes to deferred tax assets associated with increases in tax basis ( 84 ) ( 84 ) 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 ( 164 ) ( 164 ) BALANCE, SEPTEMBER 23, 2020 38,280,102 $ 38 3,112,002 $ 3 $ 386,011 $ 31,637 $ 3 $ 29,070 $ 446,762 BALANCE, JUNE 26, 2019 30,557,685 $ 31 6,731,209 $ 7 $ 208,866 $ 46,116 $ — $ 45,653 $ 300,673 Cumulative effect of accounting changes — — — Net income 10,344 1,079 11,423 Equity-based compensation 1,908 1,908 Activity under stock compensation plans 172,403 — 1,786 1,839 3,625 Redemption of LLC Interests 231,599 — ( 231,599 ) — 1,635 ( 1,635 ) — Effect of Gramercy Tavern Merger 2,690,263 3 ( 2,690,263 ) ( 3 ) 19,218 ( 19,218 ) Establishment of liabilities under tax receivable agreement and related changes to deferred tax assets associated with increases in tax basis 705 705 Distribution to non-controlling interest owners ( 39 ) ( 39 ) BALANCE, SEPTEMBER 25, 2019 33,651,950 $ 34 3,809,347 $ 4 $ 234,118 $ 56,460 $ — $ 27,679 $ 318,295 6 | Shake Shack Inc. Form 10-Q Table of Content For the Thirty-Nine Weeks Ended September 23, 2020 and September 25, 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 ( 22,730 ) ( 2,490 ) ( 25,220 ) Other comprehensive income: Net change in foreign currency translation adjustment 1 — 1 Equity-based compensation 4,088 4,088 Activity under stock compensation plans 180,068 627 ( 167 ) 460 Redemption of LLC Interests 33,195 ( 33,195 ) 239 ( 239 ) — Establishment of liabilities under tax receivable agreement and related changes to deferred tax assets associated with increases in tax basis 929 929 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 ( 478 ) ( 478 ) BALANCE, SEPTEMBER 23, 2020 38,280,102 $ 38 3,112,002 $ 3 $ 386,011 $ 31,637 $ 3 $ 29,070 $ 446,762 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 21,920 4,281 26,201 Equity-based compensation 5,918 5,918 Activity under stock compensation plans 383,117 — 2,718 2,998 5,716 Redemption of LLC Interests 1,057,737 1 ( 1,057,737 ) ( 1 ) 7,115 ( 7,115 ) — Effect of Gramercy Tavern Merger 2,690,263 3 ( 2,690,263 ) ( 3 ) 19,218 ( 19,218 ) — Establishment of liabilities under tax receivable agreement and related changes to deferred tax assets associated with increases in tax basis 3,516 3,516 Distributions paid to non-controlling interest holders ( 1,706 ) ( 1,706 ) BALANCE, SEPTEMBER 25, 2019 33,651,950 $ 34 3,809,347 $ 4 $ 234,118 $ 56,460 $ — $ 27,679 $ 318,295 See accompanying Notes to Condensed Consolidated Financial Statements. Shake Shack Inc. Form 10-Q | 7 Table of Content SHAKE SHACK INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (in thousands) Thirty-Nine Weeks Ended September 23 2020 September 25 2019 OPERATING ACTIVITIES Net income (loss) (including amounts attributable to non-controlling interests) $ ( 25,220 ) $ 26,201 Adjustments to reconcile net income (loss) to net cash provided by operating activities Depreciation expense 36,233 29,239 Amortization of cloud computing asset 1,086 107 Non-cash operating lease cost 33,726 29,329 Equity-based compensation 4,058 5,751 Deferred income taxes 8,680 ( 1,152 ) Non-cash interest expense 48 85 Gain on sale of marketable securities ( 79 ) ( 22 ) Impairment and loss on disposal of assets 2,924 1,031 Unrealized (gain) loss on available-for-sale securities 22 ( 231 ) Other non-cash expense 906 2 Changes in operating assets and liabilities: Accounts receivable 2,241 8,320 Inventories ( 162 ) ( 33 ) Prepaid expenses and other current assets ( 759 ) 265 Other assets ( 2,111 ) ( 6,735 ) Accounts payable 4,349 4,038 Accrued expenses ( 13,361 ) 2,841 Accrued wages and related liabilities ( 2,214 ) ( 915 ) Other current liabilities 437 638 Long-term operating lease liabilities ( 25,298 ) ( 26,932 ) Other long-term liabilities 2,992 1,216 NET CASH PROVIDED BY OPERATING ACTIVITIES 28,498 73,043 INVESTING ACTIVITIES Purchases of property and equipment ( 47,002 ) ( 80,904 ) Purchases of marketable securities ( 314 ) ( 970 ) Sales of marketable securities 20,000 27,000 NET CASH USED IN INVESTING ACTIVITIES ( 27,316 ) ( 54,874 ) FINANCING ACTIVITIES Proceeds from revolving credit facility 50,000 — Payments on revolving credit facility ( 50,000 ) — Deferred financing costs ( 64 ) ( 286 ) Proceeds from issuance of Class A common stock sold in equity offerings, net of underwriting discounts, commissions and offering costs 144,997 — Payments on principal of finance leases ( 1,670 ) ( 1,433 ) Distributions paid to non-controlling interest holders ( 478 ) ( 1,706 ) Payments under tax receivable agreement ( 6,643 ) ( 707 ) Proceeds from stock option exercises 2,239 7,089 Employee withholding taxes related to net settled equity awards ( 1,779 ) ( 1,371 ) NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 136,602 1,586 NET INCREASE IN CASH AND CASH EQUIVALENTS 137,784 19,755 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 37,099 24,750 CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 174,883 $ 44,505 See accompanying Notes to Condensed Consolidated Financial Statements. 8 | Shake Shack Inc. Form 10-Q Table of Content SHAKE SHACK INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share amounts) Page Note 1 Nature of Operations 10 Note 2 Summary of Significant Accounting Policies 10 Note 3 Revenue 11 Note 4 Fair Value Measurements 12 Note 5 Inventories 14 Note 6 Property and Equipment 14 Note 7 Supplemental Balance Sheet Information 15 Note 8 Debt 15 Note 9 Leases 16 Note 10 Non-Controlling Interests 18 Note 11 Equity-Based Compensation 21 Note 12 Income Taxes 21 Note 13 Earnings (Loss) Per Share 24 Note 14 Supplemental Cash Flow Information 25 Note 15 Commitments and Contingencies 26 Note 16 Related Party Transactions 27 Shake Shack Inc. Form 10-Q | 9 Table of Content 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 are the sole managing member of SSE Holdings and, as sole managing member, we operate and control all of the business and affairs of SSE Holdings. As a result, we consolidate the financial results of SSE Holdings and report a non-controlling interest representing the economic interest in SSE Holdings held by the other members of SSE Holdings. As of September 23, 2020 we owned 92.5 % 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 operate and license Shake Shack restaurants ("Shacks"), which serve hamburgers, hot dogs, chicken, crinkle-cut fries, shakes, frozen custard, beer, wine and more. As of September 23, 2020, there were 298 Shacks in operation, system-wide, of which 175 were domestic Company-operated Shacks, 22 were domestic licensed Shacks and 101 were international licensed Shacks. As of September 23, 2020, 8 domestic Company-operated Shacks and 18 licensed Shacks were temporarily closed primarily due to COVID-19. 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 our Annual Report on Form 10-K for the fiscal year ended December 25, 2019 ("2019 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 2019 Form 10-K. In our opinion, all adjustments, which are normal and recurring in nature, necessary for a fair presentation of our 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 have the majority economic interest in SSE Holdings and, as the sole managing member, have 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 consolidate SSE Holdings. The assets and liabilities of SSE Holdings represent substantially all of our consolidated assets and liabilities with the exception of certain deferred taxes and liabilities under the Tax Receivable Agreement. As of September 23, 2020 and December 25, 2019, the net assets of SSE Holdings were $ 388,789 and $ 270,542 , respectively. The assets of SSE Holdings are subject to certain restrictions in SSE Holdings' revolving credit agreement. See Note 8, Debt, for more information. Fiscal Year We operate on a 52/53 week fiscal year ending on the last Wednesday in December. Fiscal 2020 contains 53 weeks and ends on December 30, 2020. Fiscal 2019 contained 52 weeks and ended on December 25, 2019. Unless otherwise stated, references to years in this report relate to fiscal years. Use of Estimates The preparation of these condensed consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the 10 | Shake Shack Inc. Form 10-Q Table of Content date of the financial statements, and the reported amounts of sales and expenses during the reporting period. Actual results could differ from those estimates. Recently Adopted Accounting Pronouncements We adopted the Accounting Standards Updates (“ASUs”) summarized below in fiscal 2020. Accounting Standards Update (“ASU”) Description Date Adopted Measurement of Credit Losses on Financial Instruments (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 our 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 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 the current guidance to promote consistency among reporting entities. The adoption of this standard is not expected to have a material impact on our consolidated financial statements. December 31, 2020 Early adoption is permitted. NOTE 3: REVENUE Revenue Recognition Revenue consists of Shack sales and licensing revenue. Generally, revenue is recognized as promised goods or services transfer to the guest or customer in an amount that reflects the consideration we expect to be entitled in exchange for those goods or services. 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 include 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 our 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 determine the transaction price for each contract, which is comprised of the initial territory fee, and an estimate of the total Shack opening fees we expect 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 expect 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 license granted to the Shack. Because we are transferring licenses to access our intellectual property during a contractual term, revenue is recognized on a straight-line Shake Shack Inc. Form 10-Q | 11 Table of Content basis over the license term. Generally, payment for the initial territory fee is received upon execution of the licensing agreement, and payment for the restaurant opening fees are received either in advance of or upon opening the related restaurant. 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 thirty-nine weeks ended September 23, 2020 and September 25, 2019, disaggregated by type is as follows: Thirteen Weeks Ended Thirty-Nine Weeks Ended September 23 2020 September 25 2019 September 23 2020 September 25 2019 Shack sales $ 126,288 $ 152,366 $ 353,855 $ 428,811 Licensing revenue: Sales-based royalties 3,867 5,293 10,943 13,938 Initial territory and opening fees 246 103 559 335 Total revenue $ 130,401 $ 157,762 $ 365,357 $ 443,084 The aggregate amount of the transaction price allocated to performance obligations that are unsatisfied (or partially unsatisfied) as of September 23, 2020 was $ 17,048 . We expect 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: September 23 2020 December 26 2019 Shack sales receivables $ 4,257 $ 4,265 Licensing receivables 2,755 4,510 Gift card liability 2,205 2,258 Deferred revenue, current 564 511 Deferred revenue, long-term 12,144 11,310 Revenue recognized during the thirteen and thirty-nine weeks ended September 23, 2020 and September 25, 2019 that was included in their respective liability balances at the beginning of the period is as follows: Thirteen Weeks Ended Thirty-Nine Weeks Ended September 23 2020 September 25 2019 September 23 2020 September 25 2019 Gift card liability $ 91 $ 84 $ 436 $ 467 Deferred revenue 234 86 539 305 NOTE 4: FAIR VALUE MEASUREMENTS Assets and Liabilities Measured at Fair Value on a Recurring Basis The following tables present information about our financial assets and liabilities measured at fair value on a recurring basis as of September 23, 2020 and December 25, 2019, and indicate the classification within the fair value hierarchy. Shake Shack Inc. Form 10-Q | 12 Table of Content Cash, Cash Equivalents and Marketable Securities The following tables summarize our cash, cash equivalents and marketable securities by significant investment categories as of September 23, 2020 and December 25, 2019: September 23, 2020 Cost Basis Gross Unrealized Gains Gross Unrealized Losses Fair Value Cash and Cash Equivalents Marketable Securities Cash $ 174,883 $ — $ — $ 174,883 $ 174,883 $ — Level 1: Money market funds — — — — — — Mutual funds 16,829 50 — 16,879 — 16,879 Total $ 191,712 $ 50 $ — $ 191,762 $ 174,883 $ 16,879 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 A summary of other income (loss) from equity securities recognized during the thirteen and thirty-nine weeks ended September 23, 2020 and September 25, 2019 is as follows: Thirteen Weeks Ended Thirty-Nine Weeks Ended September 23 2020 September 25 2019 September 23 2020 September 25 2019 Equity securities: Dividend income $ 40 $ 254 $ 290 $ 997 Realized gain (loss) on sale of investments — — 79 22 Unrealized gain (loss) on equity securities — — ( 22 ) 231 Total $ 40 $ 254 $ 347 $ 1,250 A summary of equity securities sold and gross realized gains and losses recognized during the thirteen and thirty-nine weeks ended September 23, 2020 and September 25, 2019 is as follows: Thirteen Weeks Ended Thirty-Nine Weeks Ended September 23 2020 September 25 2019 September 23 2020 September 25 2019 Equity securities: Gross proceeds from sales and redemptions $ — $ — $ 20,000 $ 27,000 Cost basis of sales and redemptions — — 19,921 26,978 Gross realized gains included in net income (loss) — — 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 September 23, 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 Table of Content Other Financial Instruments The carrying value of our other financial instruments, including accounts receivable, accounts payable, and accrued expenses as of September 23, 2020 and December 25, 2019 approximated their fair value due to the short-term nature of these financial instruments. Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis Assets and liabilities that are measured at fair value on a non-recurring basis include our long-lived assets, operating lease right-of-use assets and indefinite-lived intangible assets. During the thirty-nine weeks ended September 23, 2020, we 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 is included in Impairment and loss on disposal of assets on the Condensed Consolidated Statement 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. There were no impairment charges recognized during the thirteen weeks ended September 23, 2020, and the thirteen and thirty-nine weeks ended September 25, 2019. 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 September 23, 2020 and December 25, 2019, no adjustment was deemed necessary to reduce inventory to net realizable value. Inventories as of September 23, 2020 and December 25, 2019 consisted of the following: September 23 2020 December 25 2019 Food $ 1,477 $ 1,738 Wine 81 107 Beer 113 114 Beverages 209 233 Retail merchandise 76 29 Paper goods 427 — Inventories $ 2,383 $ 2,221 NOTE 6: PROPERTY AND EQUIPMENT Property and equipment as of September 23, 2020 and December 25, 2019 consisted of the following: September 23 2020 December 25 2019 Leasehold improvements $ 328,686 $ 302,204 Equipment 58,951 54,404 Furniture and fixtures 19,400 18,082 Computer equipment and software 27,160 24,226 Financing equipment lease assets 8,774 7,442 Construction in progress 37,560 30,290 Property and equipment, gross 480,531 436,648 Less: accumulated depreciation 154,005 121,786 Property and equipment, net $ 326,526 $ 314,862 14 | Shake Shack Inc. Form 10-Q Table of Content NOTE 7: SUPPLEMENTAL BALANCE SHEET INFORMATION The components of other current liabilities as of September 23, 2020 and December 25, 2019 are as follows: September 23 2020 December 25 2019 Sales tax payable $ 3,202 $ 4,086 Current portion of liabilities under tax receivable agreement — 7,777 Gift card liability 2,205 2,258 Current portion of financing equipment lease liabilities 1,740 1,873 Other 5,433 3,505 Other current liabilities $ 12,580 $ 19,499 The components of other long-term liabilities as of September 23, 2020 and December 25, 2019 are as follows: September 23 2020 December 25 2019 Deferred licensing revenue $ 12,144 $ 11,310 Long-term portion of financing equipment lease liabilities 3,492 3,643 Other (1) 6,192 375 Other long-term liabilities $ 21,828 $ 15,328 (1) As of September 23, 2020, Other included $ 3,388 of deferred lease incentive liabilities related to leases with variable lease cost as well as $ 2,461 of deferred social security taxes associated with the CARES Act. For further information relating to the CARES Act, see Note 12, Income Taxes. NOTE 8: DEBT Revolving Credit Facility In August 2019, we terminated our previous revolving credit facility and 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 under the Revolving Credit Facility will bear interest at either: (i) LIBOR plus a percentage ranging from 1.0 % to 1.5 % or (ii) the base rate plus a percentage ranging from 0.0 % to 0.5 %, in each case depending on our net lease adjusted leverage ratio. To the extent the LIBOR reference rate is no longer available, the administrative agent, in consultation with us, will determine a replacement rate which will be generally in accordance with similar transactions in which it serves as administrative agent. 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 First Amendment to the Revolving Credit Facility described below. 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 September 23, 2020, we were in compliance with all covenants. Shake Shack Inc. Form 10-Q | 15 Table of Content 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 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. In March 2020, we drew down the full $ 50,000 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. Total interest costs incurred were $ 143 and $ 697 for the thirteen and thirty-nine weeks ended September 23, 2020, respectively, and $ 133 and $ 302 for the thirteen and thirty-nine weeks ended September 25, 2019, respectively. Paycheck Protection Program In April 2020, we entered into a $ 10,000 note payable with J.P. Morgan pursuant to 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. NOTE 9: LEASES Nature of Leases We lease all of our domestic Company-operated Shacks, our home office and certain equipment under various non-cancelable lease agreements that expire on various dates through 2036. We evaluate 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 evaluate whether we control the use of the asset, which is determined by assessing whether we obtain substantially all economic benefits from the use of the asset, and whether we have the right to direct the use of the asset. If these criteria are met and we have identified a lease, we account for the contract under the requirements of Accounting Standards Codification Topic 842 ("ASC 842"). Upon the possession of a leased asset, we determine its classification as an operating or finance lease. Our real estate leases are classified as operating leases and most of our equipment leases are classified as finance leases. Generally, our real estate leases have initial terms ranging from 10 to 15 years and typically include two five-year renewal options. Renewal 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 we would exercise the options to extend the lease. Our 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 is deemed to be probable, contingent rent is accrued in proportion to the sales recognized during the period. For operating leases that include rent holidays and rent escalation clauses, we recognize lease expense on a straight-line basis over the lease term from the date we take possession of the leased property. Lease expense incurred before a Shack opens is recorded in Pre-opening costs on the Condensed Consolidated Statements of Income (Loss). Once a domestic Company-operated Shack opens, we record the straight-line lease expense and any contingent rent, if applicable, in occupancy and related expenses on the Condensed Consolidated Statements of Income (Loss). Many of our leases also require us to pay real estate taxes, common area maintenance costs and other occupancy costs which are included in Occupancy and related expenses on the Condensed Consolidated Statements of Income (Loss). As there were no explicit rates provided in our leases, we used our 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 was 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 our credit rating and is subject to judgment. We determined our credit rating based on a comparison of the financial information of SSE Holdings to other public companies and then used their respective credit ratings to develop our own. We expend cash for leasehold improvements to build out and equip our leased premises. Generally, a portion of the leasehold improvements and building costs are reimbursed by our landlords as landlord incentives pursuant to agreed-upon terms in our lease agreements. If obtained, landlord incentives usually take the form of cash, full or partial credits against our future minimum 16 | Shake Shack Inc. Form 10-Q Table of Content or contingent rents otherwise payable by us, or a combination thereof. In most cases, landlord incentives are received after we take possession of the property, as we meet required milestones during the construction of the property. We include these amounts in the measurement of the initial operating lease liability, which are also reflected as a reduction to the initial measurement of the right-of-use asset. A summary of finance and operating lease right-of-use assets and liabilities as of September 23, 2020 and December 25, 2019 is as follows: Classification September 23 2020 December 25 2019 Finance leases Property and equipment, net $ 5,109 $ 5,444 Operating leases Operating lease assets 305,133 274,426 Total right-of-use assets $ 310,242 $ 279,870 Finance leases: Other current liabilities $ 1,740 $ 1,873 Other long-term liabilities 3,493 3,643 Operating leases: Operating lease liabilities, current 34,859 30,002 Long-term operating lease liabilities 336,149 304,914 Total lease liabilities $ 376,241 $ 340,432 The components of lease expense for the thirteen and thirty-nine weeks ended September 23, 2020 and September 25, 2019 was as follows: Thirteen Weeks Ended Thirty-Nine Weeks Ended Classification September 23 2020 September 25 2019 September 23 2020 September 25 2019 Finance lease cost: Amortization of right-of-use assets Depreciation expense $ 531 $ 538 $ 1,710 $ 1,491 Interest on lease liabilities Interest expense 51 52 161 148 Operating lease cost Occupancy and related expenses General and administrative expenses Pre-opening costs 11,506 10,564 33,726 29,329 Short-term lease cost Occupancy and related expenses 138 279 331 313 Variable lease cost Other operating expenses Occupancy and related expenses General and administrative expenses Pre-opening costs 3,267 4,338 9,413 11,636 Total lease cost $ 15,493 $ 15,771 $ 45,341 $ 42,917 Shake Shack Inc. Form 10-Q | 17 Table of Content As of September 23, 2020, future minimum lease payments for finance and operating leases consisted of the following: Finance Leases Operating Leases 2020 $ 527 $ 16,785 2021 1,890 46,943 2022 1,400 53,151 2023 896 53,705 2024 541 52,785 Thereafter 406 268,128 Total minimum payments 5,660 491,497 Less: imputed interest 427 120,489 Total lease liabilities $ 5,233 $ 371,008 As of September 23, 2020 we had additional operating lease commitments of $ 45,605 for non-cancelable leases without a possession date, which will begin to commence in 2020. These lease commitments are consistent with the leases that we have executed thus far. A summary of lease terms and discount rates for finance and operating leases as of September 23, 2020 and December 25, 2019 is as follows: September 23 2020 December 25 2019 Weighted-average remaining lease term (years): Finance leases 5.3 5.1 Operating leases 9.8 10.1 Weighted-average discount rate: Finance leases 3.6 % 3.7 % Operating leases 3.8 % 5.4 % Supplemental cash flow information related to leases for the thirty-nine weeks ended September 23, 2020 and September 25, 2019 is as follows: Thirty-Nine Weeks Ended September 23 2020 September 25 2019 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from finance leases 161 $ 148 Operating cash flows from operating leases 29,449 27,238 Financing cash flows from finance leases 1,670 1,433 Right-of-use assets obtained in exchange for lease obligations: Finance leases 1,411 1,927 Operating leases 42,502 65,773 NOTE 10: NON-CONTROLLING INTERESTS We are the sole managing member of SSE Holdings and, as a result, consolidate the financial results of SSE Holdings. We report 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 Table of Content exchange, we will receive a corresponding number of LLC Interests, increasing our total ownership interest in SSE Holdings. Changes in our ownership interest in SSE Holdings while we retain our 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 September 23, 2020 and December 25, 2019. September 23, 2020 December 25, 2019 LLC Interests Ownership% LLC Interests Ownership % Number of LLC Interests held by Shake Shack Inc. 38,280,102 92.5 % 34,417,302 91.6 % Number of LLC Interests held by non-controlling interest holders 3,112,002 7.5 % 3,145,197 8.4 % Total LLC Interests outstanding 41,392,104 100.0 % 37,562,499 100.0 % The weighted average ownership percentages for the applicable reporting periods are used to attribute net income (loss) and other 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 thirty-nine weeks ended September 23, 2020 was 7.5 % and 7.9 %, respectively. The non-controlling interest holders' weighted average ownership percentage for the thirteen and thirty-nine weeks ended September 25, 2019 was 14.4 % and 17.9 %, respectively. Shake Shack Inc. Form 10-Q | 19 Table of Content The following table summarizes the effects of changes in ownership of SSE Holdings on our equity during the thirteen and thirty-nine weeks ended September 23, 2020 and September 25, 2019. Thirteen Weeks Ended Thirty-Nine Weeks Ended September 23 2020 September 25 2019 September 23 2020 September 25 2019 Net income (loss) attributable to Shake Shack Inc. $ ( 5,559 ) $ 10,344 $ ( 22,730 ) $ 21,920 Transfers (to) from non-controlling interests: Increase in additional paid-in capital as a result of the redemption of LLC Interests 44 1,634 239 7,115 Increase in additional paid-in-capital as a result of the GTC Merger — 19,218 — 19,218 Increase (decrease) in additional paid-in capital as a result of activity under stock compensation plans and the related income tax effect 367 1,789 627 2,718 Increase in additional paid-in-capital as a result of the issuance of Class A common stock sold in equity offerings — — 135,718 — Total effect of changes in ownership interest on equity attributable to Shake Shack Inc. $ ( 5,148 ) $ 32,985 $ 113,854 $ 50,971 The following table summarizes redemptions of LLC Interests activity during the thirteen and thirty-nine weeks ended September 23, 2020 and September 25, 2019. Thirteen Weeks Ended Thirty-Nine Weeks Ended September 23 2020 September 25 2019 September 23 2020 September 25 2019 Redemption and acquisition of LLC Interests Number of LLC Interests redeemed by non-controlling interest holders 5,000 231,599 33,195 1,057,737 Number of LLC Interests acquired in connection with the Gramercy Tavern Merger — 2,690,263 — 2,690,263 Number of LLC Interests received by Shake Shack Inc. 5,000 231,599 33,195 1,057,737 Issuance of Class A common stock Shares of Class A common stock issued in connection with redemptions of LLC Interests 5,000 231,599 33,195 1,057,737 Shares of Class A common stock issued in connection with the Gramercy Tavern Merger — 2,690,263 — 2,690,263 Cancellation of Class B common stock Shares of Class B common stock surrendered and canceled 5,000 231,599 33,195 1,057,737 Shares of Class B common stock surrendered and canceled in connection with the Gramercy Tavern Merger — 2,690,263 — 2,690,263 During the thirteen and thirty-nine weeks ended September 23, 2020, we received an aggregate of 38,564 and 180,068 LLC Interests, respectively, in connection with the activity under our stock compensation plan and 172,403 and 383,117 LLC Interests, respectively, during the thirteen and thirty-nine weeks ended September 25, 2019. Pursuant to a Stockholders Agreement, dated as of February 4, 2015, as amended, by and among Daniel H. Meyer, the Daniel H. Meyer 2012 Gift Trust dtd 10/31/12 (the "Gift Trust"), other affiliates (collectively, the "Meyer Stockholders") and other parties thereto, the Meyer Stockholders had the right to cause all of the shares of Gramercy Tavern Corp. ("GTC") to be exchanged for shares of our Class A common stock pursuant to a tax-free reorganization. In August 2019, the Meyer Stockholders exercised their right with respect to GTC (the "GTC Merger"). To effect the GTC Merger, a newly-formed wholly-owned subsidiary of Shake Shack Inc. merged with and into GTC, with GTC as the surviving entity, which was then merged with and into Shake Shack Inc. Prior to the GTC Merger, GTC owned 2,690,263 LLC Interests and an equivalent number of shares of our Class B common stock. The stockholders of GTC, received on a one-for-one basis, 2,690,263 shares of Class A common stock based upon the amount of shares of GTC held by the stockholders; all of the shares of Class B common stock held by GTC were cancelled; and all of the LLC Interests held by GTC were transferred to us. 20 | Shake Shack Inc. Form 10-Q Table of Content NOTE 11: EQUITY-BASED COMPENSATION A summary of equity-based compensation expense recognized during the thirteen and thirty-nine weeks ended September 23, 2020 and September 25, 2019 is as follows: Thirteen Weeks Ended Thirty-Nine Weeks Ended September 23 2020 September 25 2019 September 23 2020 September 25 2019 Stock options $ 14 $ 637 $ 301 $ 1,974 Performance stock units 233 720 1,009 2,439 Restricted stock units 1,092 522 2,748 1,338 Equity-based compensation expense $ 1,339 $ 1,879 $ 4,058 $ 5,751 Total income tax benefit recognized related to equity-based compensation $ 60 $ 48 $ 135 $ 141 Equity-based compensation expense is included in general and administrative expenses and labor and related expenses on the Condensed Consolidated Statements of Income (Loss) during the thirteen and thirty-nine weeks ended September 23, 2020 and September 25, 2019 as follows: Thirteen Weeks Ended Thirty-Nine Weeks Ended September 23 2020 September 25 2019 September 23 2020 September 25 2019 General and administrative expenses $ 1,199 $ 1,795 $ 3,681 $ 5,521 Labor and related expenses 140 84 377 230 Equity-based compensation expense $ 1,339 $ 1,879 $ 4,058 $ 5,751 NOTE 12: INCOME TAXES We are the sole managing member of SSE Holdings and, as a result, consolidate 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 our 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 are also subject to withholding taxes in foreign jurisdictions. Shake Shack Inc. Form 10-Q | 21 Table of Content Income Tax Expense (Benefit) A reconciliation of income tax expense (benefit) computed at the U.S. federal statutory income tax rate to the recognized income tax expense (benefit) is as follows: Thirteen Weeks Ended Thirty-Nine Weeks Ended September 23 2020 September 25 2019 September 23 2020 September 25 2019 Expected U.S. federal income taxes at statutory rate $ ( 1,450 ) 21.0 % $ 1,738 21.0 % $ ( 6,725 ) 21.0 % $ 5,492 21.0 % State and local income taxes, net of federal benefit ( 492 ) 7.1 % 505 6.1 % ( 2,192 ) 6.8 % 1,746 6.7 % Foreign withholding taxes 504 ( 7.3 ) % 655 7.9 % 712 ( 2.2 ) % 1,624 6.2 % Tax credits ( 701 ) 10.1 % ( 2,874 ) ( 34.7 ) % ( 1,128 ) 3.5 % ( 4,697 ) ( 18.0 ) % Return to provision adjustment 132 ( 1.9 ) % ( 153 ) ( 1.8 ) % 132 ( 0.4 ) % ( 153 ) ( 0.6 ) % Non-controlling interest ( 11 ) 0.2 % ( 346 ) ( 4.2 ) % 411 ( 1.3 ) % ( 1,291 ) ( 4.9 ) % Tax effect of change in basis related to the adoption of ASC 842 — — % — — % — — % 1,161 4.4 % Change in valuation allowance 1,221 ( 17.7 ) % ( 2,587 ) ( 31.2 ) % 1,971 ( 6.2 ) % ( 3,847 ) ( 14.7 ) % Other — — % ( 82 ) ( 1.0 ) % 17 — % ( 82 ) ( 0.3 ) % Income tax benefit $ ( 797 ) 11.5 % $ ( 3,144 ) ( 38.0 ) % $ ( 6,802 ) 21.2 % $ ( 47 ) ( 0.2 ) % Our effective income tax rates for the thirteen weeks ended September 23, 2020 and September 25, 2019 were 11.5 % and ( 38.0 )%, 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. 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 92.5 % and 85.6 % for the thirteen weeks ended September 23, 2020 and September 25, 2019, respectively. Our effective income tax rates for the thirty-nine weeks ended September 23, 2020 and September 25, 2019 were 21.2 % and ( 0.2 )%, 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 thirty-nine weeks ended September 23, 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 92.1 % and 82.1 % for the thirty-nine weeks ended September 23, 2020 and September 25, 2019, respectively. Deferred Tax Assets and Liabilities During the thirty-nine weeks ended September 23, 2020, we acquired an aggregate of 213,263 LLC Interests in connection with the redemption of LLC Interests, activity relating to our stock compensation plan, and in connection with the second quarter equity offering. We recognized a deferred tax asset in the amount of $ 1,562 associated with the basis difference in our investment in SSE Holdings upon acquisition of these LLC Interests. As of September 23, 2020, the total deferred tax asset related to the basis difference in our investment in SSE Holdings was $ 175,320 . However, a portion of the total basis difference will only reverse upon the eventual sale of our interest in SSE Holdings, which we expect would result in a capital loss. During the thirty-nine weeks ended September 23, 2020, we also recognized $ 116 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 "Tax Receivable Agreement," herein for more information. We evaluate the realizability of our deferred tax assets on a quarterly basis and establish valuation allowances when it is more likely than not that all or a portion of a deferred tax asset may not be realized. As of September 23, 2020, we concluded, based on the weight of all available positive and negative evidence, that all of our deferred tax assets (except for those deferred tax assets related to New York City UBT and certain foreign tax credits) are more likely than not to be realized. As such, an 22 | Shake Shack Inc. Form 10-Q Table of Content additional valuation allowance of $ 1,221 was recognized on certain foreign tax credits not expected to be realized before the expiration of the carryforward period. Uncertain Tax Positions No uncertain tax positions existed as of September 23, 2020. Shake Shack Inc. was formed in September 2014 and did not engage in any operations prior to our initial public offering in February of 2015 and related organizational transactions. Shake Shack Inc. first filed tax returns for tax year 2014, which is the first tax year subject to examination by taxing authorities for U.S. federal and state income tax purposes. Additionally, although SSE Holdings is treated as a partnership for U.S. federal and state income taxes purposes, it is still required to file an annual U.S. Return of Partnership Income, which is subject to examination by the Internal Revenue Service ("IRS"). The statute of limitations has expired for tax years through 2015 for SSE Holdings. Tax Receivable Agreement Pursuant to our election under Section 754 of the Internal Revenue Code (the "Code"), we expect to obtain an increase in our 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 plan 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 intend 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 pay 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, we 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 us of 85 % of the amount of any tax benefits that we actually realize, or in some cases are deemed to realize, as a result of (i) increases in our 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 expect 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 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 thirty-nine weeks ended September 23, 2020, we acquired an aggregate of 33,195 LLC Interests in connection with the redemption of LLC Interests, which resulted in an increase in the tax basis of our investment in SSE Holdings subject to the provisions of the Tax Receivable Agreement. We recognized an additional liability in the amount of $ 414 for the TRA Payments due to the redeeming members, representing 85 % of the aggregate tax benefits we expect 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 thirty-nine weeks ended September 23, 2020 and September 25, 2019, payments of $ 6,643 and $ 707 , inclusive of interest, were made to the parties to the Tax Receivable Agreement, respectively. As of September 23, 2020, the total amount of TRA Payments due under the Tax Receivable Agreement, was $ 228,197 , of which no amount was included in other current liabilities on the Condensed Consolidated Balance Sheet. See Note 15, Commitments and Contingencies, for more information relating to our 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 thirty-nine weeks ended September 23, 2020, we recognized accelerated tax depreciation deductions of $ 446 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. 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. Shake Shack Inc. Form 10-Q | 23 Table of Content NOTE 13: 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) 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) per share of Class A common stock for the thirteen and thirty-nine weeks ended September 23, 2020 and September 25, 2019. Thirteen Weeks Ended Thirty-Nine Weeks Ended September 23 2020 September 25 2019 September 23 2020 September 25 2019 Numerator: Net income (loss) $ ( 6,110 ) $ 11,423 $ ( 25,220 ) $ 26,201 Less: net income (loss) attributable to non-controlling interests ( 551 ) 1,079 ( 2,490 ) 4,281 Net income (loss) attributable to Shake Shack Inc. $ ( 5,559 ) $ 10,344 $ ( 22,730 ) $ 21,920 Denominator: Weighted-average shares of Class A common stock outstanding—basic 38,251 31,961 36,668 30,549 Effect of dilutive securities: Stock options — 824 — 777 Performance stock units — 50 — 64 Restricted stock units — 81 — 51 Weighted-average shares of Class A common stock outstanding—diluted 38,251 32,916 36,668 31,441 Earnings (loss) per share of Class A common stock—basic $ ( 0.15 ) $ 0.32 $ ( 0.62 ) $ 0.72 Earnings (loss) per share of Class A common stock—diluted $ ( 0.15 ) $ 0.31 $ ( 0.62 ) $ 0.70 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. 24 | Shake Shack Inc. Form 10-Q Table of Content 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 thirty-nine weeks ended September 23, 2020 and September 25, 2019. Thirteen Weeks Ended Thirty-Nine Weeks Ended September 23 2020 September 25 2019 September 23 2020 September 25 2019 Stock options 764,902 (1) — 764,902 (1) — Performance stock units 139,081 (1) 66,101 (2) 139,081 (1) 66,101 (2) Restricted stock units 262,232 (1) — 262,232 (1) — Shares of Class B common stock 3,112,002 (3) 3,809,347 (3) 3,112,002 (3) 3,809,347 (3) (1) Represents number of instruments 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 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 of our Class B common stock outstanding as of the end of the period are considered potentially dilutive shares of Class A common stock. Amounts have been excluded from the computations of diluted earnings per share of Class A common stock because the effect would have been anti-dilutive under the if-converted and two-class methods. NOTE 14: SUPPLEMENTAL CASH FLOW INFORMATION The following table sets forth supplemental cash flow information for the thirty-nine weeks ended September 23, 2020 and September 25, 2019: Thirty-Nine Weeks Ended September 23 2020 September 25 2019 Cash paid for: Income taxes, net of refunds $ 1,270 $ 2,483 Interest, net of amounts capitalized 584 157 Non-cash investing activities: Accrued purchases of property and equipment 9,544 17,394 Capitalized equity-based compensation 29 79 Non-cash financing activities: Class A common stock issued in connection with the redemption of LLC Interests — 1 Class A common stock issued in connection with the GTC merger — 3 Cancellation of Class B common stock in connection with the redemption of LLC Interests — ( 1 ) Cancellation of Class B common stock in connection with the GTC Merger — (3) Establishment of liabilities under tax receivable agreement 414 20,027 Shake Shack Inc. Form 10-Q | 25 Table of Content NOTE 15: COMMITMENTS AND CONTINGENCIES Lease Commitments We are obligated under various operating leases for Shacks and our home office space, expiring in various years through 2036. Under certain of these leases, we are liable for contingent rent based on a percentage of sales in excess of specified thresholds and are typically responsible for our proportionate share of real estate taxes, common area maintenance charges and utilities. See Note 9, Leases. As security under the terms of one of our leases, we are obligated under a letter of credit totaling $ 130 as of September 23, 2020, which expires in February 2026. Additionally, in September 2017, we entered into a letter of credit in conjunction with our new home office lease in the amount of $ 603 , which expires in August 2021 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. We also enter into long-term, exclusive contracts with certain vendors to supply us with food, beverages and paper goods, obligating us to purchase specified quantities. Legal Contingencies 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, we agreed to settle the matter with the plaintiff and all other California employees who elect to participate in the settlement for $ 1,200 . As of September 23, 2020, an accrual in the amount of $ 1,180 was recorded for this matter and related expenses. We are 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 September 23, 2020, the amount of the ultimate liability with respect to these matters was not material. Liabilities under Tax Receivable Agreement As described in Note 12, Income Taxes, we are a party to the Tax Receivable Agreement under which we are contractually committed to pay certain of the members of SSE Holdings 85 % of the amount of any tax benefits that we actually realize, or in some cases are deemed to realize, as a result of certain transactions. We are 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 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. During the thirty-nine weeks ended September 23, 2020 and September 25, 2019, we recognized liabilities totaling $ 414 and $ 20,027 , respectively, relating to our obligations under the Tax Receivable Agreement, after concluding that it was probable that we would have sufficient future taxable income over the term of the Tax Receivable Agreement to utilize the related tax benefits. As of September 23, 2020 and December 25, 2019, our total obligations under the Tax Receivable Agreement were $ 228,197 and $ 234,426 , respectively. There were no transactions subject to the Tax Receivable Agreement for which we did not recognize the related liability, as we concluded that we would have sufficient future taxable income to utilize all of the related tax benefits. 26 | Shake Shack Inc. Form 10-Q Table of Content NOTE 16: RELATED PARTY TRANSACTIONS Union Square Hospitality Group The Chairman of our 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, we 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 five consecutive five-year renewal options at HYC's option. As consideration for these rights, HYC pays us 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 Thirty-Nine Weeks Ended Classification September 23 2020 September 25 2019 September 23 2020 September 25 2019 Amounts received from HYC Licensing revenue $ 26 $ 250 $ 60 $ 401 Classification September 23 2020 December 25 2019 Amounts due from HYC Accounts Receivable $ 9 $ 47 Madison Square Park Conservancy The Chairman of our Board of Directors serves as a director of the Madison Square Park Conservancy ("MSP Conservancy"), with which we have a license agreement and pay license fees to operate our Madison Square Park Shack. Thirteen Weeks Ended Thirty-Nine Weeks Ended Classification September 23 2020 September 25 2019 September 23 2020 September 25 2019 Amounts paid to MSP Conservancy Occupancy and related expenses $ 173 $ 138 $ 392 $ 692 Classification September 23 2020 December 25 2019 Amounts due to MSP Conservancy Accrued expenses $ 249 $ 53 Share Our Strength The Chairman of our Board of Directors serves as a director of Share Our Strength, for which Shake Shack holds the "Great American Shake Sale" to raise money and awareness for childhood hunger. During the Great American Shake Sale, we encourage guests to donate money to Share Our Strength's No Kid Hungry campaign in exchange for a coupon for a free shake. All of the guest donations we collect go directly to Share Our Strength. Amounts raised through donations during the thirteen weeks ended September 25, 2019, were payable to Share Our Strength as of September 25, 2019. Thirteen Weeks Ended Thirty-Nine Weeks Ended Classification September 23 2020 September 25 2019 September 23 2020 September 25 2019 Amounts raised through donations — $ — $ 190 $ — $ 190 Costs incurred for free shakes redeemed General and administrative expenses $ — $ 30 $ — $ 30 Shake Shack Inc. Form 10-Q | 27 Table of Content Olo, Inc. The Chairman of our Board of Directors serves as a director of Olo, Inc. (formerly known as "Mobo Systems, Inc."), a platform we use in connection with our mobile ordering application. No amounts were due to Olo as of September 23, 2020 and December 25, 2019, respectively. Thirteen Weeks Ended Thirty-Nine Weeks Ended Classification September 23 2020 September 25 2019 September 23 2020 September 25 2019 Amounts paid to Olo Other operating expenses $ 75 $ 44 $ 169 $ 122 Square, Inc. Our Chief Executive Officer is a member of the Board of Directors of Square, Inc. ("Square"). We currently use 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 of our locations, sales for certain off-site events and in connection with our kiosk technology. No amounts were due to Square as of September 23, 2020 and December 25, 2019, respectively. Thirteen Weeks Ended Thirty-Nine Weeks Ended Classification September 23 2020 September 25 2019 September 23 2020 September 25 2019 Amounts paid to Square Other operating expenses $ 419 $ 487 $ 1,208 $ 1,195 Tax Receivable Agreement As described in Note 12, Income Taxes, 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 Thirty-Nine Weeks Ended Classification September 23 2020 September 25 2019 September 23 2020 September 25 2019 Amounts paid to members (inclusive of interest) Other current liabilities $ — $ — $ 6,643 $ 707 Classification September 23 2020 December 25 2019 Amounts due under the Tax Receivable Agreement Other current liabilities Liabilities under tax receivable agreement, net of current portion $ 228,197 $ 234,426 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. No tax distributions were payable to non-controlling interest holders as of September 23, 2020 and December 25, 2019, respectively. Thirteen Weeks Ended Thirty-Nine Weeks Ended Classification September 23 2020 September 25 2019 September 23 2020 September 25 2019 Amounts paid to non-controlling interest holders Net income attributable to non-controlling interests $ 164 $ 39 $ 478 $ 1,706 Shake Shack Inc. Form 10-Q | 28 Table of Content