What changed in this filing

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Item 1A. Risk Factors

2021-02-26 compared with 2020-02-24 · 289 added, 204 removed, 489 unchanged (50% of the section changed)

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These risks could cause our future results to differ materially from historical results and from guidance we may provide regarding our expectations of future financial performance.

Summary Risk Factors

Our business is subject to a number of risks, including risks that may prevent us from achieving our business objectives or may adversely affect our business, financial condition and results of operations.

These risks are discussed more fully below and include, but are not limited to the following:

Risks Related to Our Growth Strategies and Operations

▪ Pandemics or disease outbreaks, such as the recent outbreak of the COVID-19 pandemic, have disrupted, and may continue to disrupt our business, and have materially affected our operations, results of operations and our financial condition.

▪ Our long-term success is dependent on the selection, design and execution of appropriate business strategies.

▪ Our primary growth strategy is highly dependent on the availability of suitable locations and our ability to develop and open new Shacks on a timely basis and on terms attractive to us.

▪ Our plans to open new Shacks, the ongoing need for capital expenditures at our existing Shacks and our ongoing digital enhancements require us to spend capital.

▪ Our expansion into new domestic markets may present increased risks, which could affect our profitability.

▪ Our failure to manage our growth effectively could harm our business and operating results.

▪ New Shacks, once opened, may not be profitable, and may negatively affect Shack sales at our existing Shacks.

▪ If we are unable to maintain and grow Shack sales at our existing Shacks, our financial performance could be adversely affected.

▪ Our mission to Stand For Something Good subjects us to risks.

▪ We have a limited number of suppliers for our major products and rely on one national distribution company for the majority of our domestic distribution needs.

If our suppliers or distributor are unable to fulfill their obligations under our arrangements with them, we could encounter supply shortages and incur higher costs.

▪ Our marketing strategies and channels will evolve and our programs may or may not be successful.

▪ We rely on a limited number of licensees for the operation of our licensed Shacks, and we have limited control with respect to the operations of our licensed Shacks, which could have a negative impact on our reputation and business.

▪ If we fail to maintain our corporate culture, our relationships with our employees and guests could be negatively affected.

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Risks Related to Operating in the Restaurant Industry

• Incidents involving food safety and food-borne illnesses could adversely affect guests' perception of our brand, result in lower sales and increase operating costs.

• The digital and delivery business, and expansion thereof, is uncertain and subject to risk.

• Rising labor costs and difficulties recruiting and retaining the right team members could adversely affect our business.

• Increased food commodity and energy costs could decrease our Shack-level operating profit margins or cause us to limit or otherwise modify our menu, which could adversely affect our business.

• Shortages or interruptions in the supply or delivery of food products could adversely affect our operating results.

• We face significant competition for guests, and if we are unable to compete effectively, our business could be adversely affected.

• The increasing focus on environmental sustainability and social initiatives could increase our costs, harm our reputation and adversely impact our financial results.

• Our international licensed Shacks import many of our proprietary and other core ingredients from the United States and the United Kingdom.

If this international supply chain is interrupted, our international licensed operations could encounter supply shortages and incur higher costs.

• We are subject to risks associated with leasing property subject to long-term non-cancelable leases.

• Restaurant companies have been the target of class action lawsuits and other proceedings that are costly, divert management attention and, if successful, could result in our payment of substantial damages or settlement costs.

• Our business is subject to risks related to our sale of alcoholic beverages.

General Business and Economic Risks

• Damage to our reputation could negatively impact our business, financial condition and results of operations.

• Changes in economic conditions, both domestically and internationally, could materially affect our business, financial condition and results of operations.

• Because many of our domestic Company-operated Shacks are concentrated in local or regional areas, we are susceptible to economic and other trends and developments, including adverse weather conditions, in these areas.

• Security breaches of either confidential guest information in connection with, among other things, our electronic processing of credit and debit card transactions, kiosk ordering or mobile ordering app, or confidential employee information may adversely affect our business.

• If we are unable to maintain and update our information technology systems to meet the needs of our business, our business could be adversely impacted.

• If we experience a material failure or interruption in our systems, our business could be adversely impacted.

• Because a component of our strategy is to continue to grow our licensed business internationally, the risks of doing business internationally could lower our revenues, increase our costs, reduce our profits or disrupt our business.

• We may not be able to adequately protect our intellectual property, which, in turn, could harm the value of our brands and adversely affect our business.

• We depend on key members of our executive management team.

• Our insurance coverage and self-insurance reserves may not provide adequate levels of coverage against claims.

Regulatory and Legal Risks

• We are subject to many federal, state and local laws, as well as other statutory and regulatory requirements, with which compliance is both costly and complex.

Failure to comply with, or changes in these laws or requirements, could have an adverse impact on our business.

• Our ability to use our net operating loss carryforwards may be subject to limitation.

• Changes in effective tax rates or adverse outcomes resulting from examination of our income or other tax returns could adversely affect our results of operations and financial condition.

• If we fail to maintain effective internal controls over financial reporting, our ability to produce timely and accurate financial information or comply with Section 404 of the Sarbanes-Oxley Act of 2002 could be impaired, which could have a material adverse effect on our business and stock price.

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Risks Related to Our Organizational Structure

• Shake Shack has non-controlling interest holders, whose interests may differ from those of our public stockholders.

• Our organizational structure, including the Tax Receivable Agreement, confers certain benefits upon the non-controlling interest holders that will not benefit Class A common stockholders to the same extent as it will benefit the non-controlling interest holders.

• The non-controlling interest holders have the right to have their LLC Interests redeemed or exchanged into shares of Class A common stock, which may cause volatility in our stock price.

• We will continue to incur relatively outsized costs as a result of becoming a public company and in the administration of our complex organizational structure.

• Our anti-takeover provisions could prevent or delay a change in control of our Company, even if such change in control would be beneficial to our stockholders.

• The provision of our certificate of incorporation requiring exclusive venue in the Court of Chancery in the State of Delaware for certain types of lawsuits may have the effect of discouraging lawsuits against our directors and officers.

• We do not currently expect to pay any cash dividends.

Risks Related to Our Tax Receivable Agreement ("TRA")

• We are a holding company and our principal asset is our interest in SSE Holdings, and, accordingly, we will depend on distributions from SSE Holdings to pay our taxes and expenses, including payments under the TRA.

SSE Holdings' ability to make such distributions may be subject to various limitations and restrictions.

• In certain cases, payments under the TRA to the non-controlling interest holders may be accelerated or significantly exceed the actual benefits we realize in respect of the tax attributes subject to the TRA.

• We will not be reimbursed for any payments made to the non-controlling interest holders under the TRA in the event that any tax benefits are disallowed.

RISKS RELATED TO OUR GROWTH STRATEGIES AND OPERATIONS

Pandemics or disease outbreaks, such as the recent outbreak of the COVID-19 pandemic, have disrupted, and may continue to disrupt our business, and have materially affected our operations, results of operations and our financial condition.

Pandemics or disease outbreaks such as the COVID-19 pandemic have and may continue to impact customer traffic at our Shacks, may make it more difficult to staff our Shacks and, in more severe cases, may cause a temporary inability to obtain supplies and increase commodity costs.

COVID-19 was officially declared a global pandemic by the World Health Organization in March 2020, and the virus has impacted all global economies, and in the United States has resulted in varying levels of restrictions and shutdowns implemented by national, state, and local authorities.

In response to the outbreak, in March 2020, we closed all dining rooms and temporarily shifted to a “to-go” only operating model in our domestic Company-operated Shacks.

With a prioritization on health and safety, we have re-opened Shacks, where permitted, under modified operations to meet public health guidelines and evolving customer behaviors and expectations.

As of December 30, 2020, two domestic Company-operated Shacks and 17 licensed Shacks remain temporarily closed.

Approximately half of the Company's domestic Company-operated Shacks had open dining rooms with varying capacity restrictions.

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 Shacks, delays in our digital initiatives, or adverse impacts to 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

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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 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, limiting the spread of infections, and effectively rolling out vaccines, will impact our business operations.

Throughout the pandemic, states and local governments in the U.S.

and throughout the world have both removed or eased certain restrictions, and also reintroduced restrictions, on businesses, including restaurants, depending on the severity of local outbreaks.

While we cannot predict the duration or scope of the COVID-19 pandemic, it has negatively impacted our business and such impact has been and is expected to continue to be material to our financial results, condition and outlook.

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Our long-term success is dependent on the selection, design and execution of appropriate business strategies.

We operate in a highly competitive and ever-changing environment.

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Our current strategies include:

opening new domestic company-operated Shacks;

innovating our digital products and capabilities;

growing same-Shack sales;

thoughtfully increasing our licensed Shacks, both domestically and abroad;

capitalizing on our outsized brand awareness.

▪ Enhancing our omnichannel guest experience.

This will occur through the accelerated innovation of new digital tools (e.g., new digitally-enabled ordering experiences, the introduction of a new digital payments platform and our testing of delivery through our Company-owned app, to support a broader rollout in 2021) and the continued integration of our data platforms enabling segmentation and targeted marketing strategies.

▪ Global unit expansion and the expansion of Shack formats to incorporate increased convenience and frequency.

This will include the pursuit of top-tier real estate in both urban and suburban markets that can incorporate diverse formats, including new Shack Track and drive-thru formats, as well as our focus on increasing our licensed Shack presence, both domestically and abroad, particularly in China.

▪ Menu innovation, with a focus on LTOs, collaborations and the expansion of existing menu categories.

We may experience challenges in achieving the goals we have set and we may be unsuccessful in executing on our strategies once identified.

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▪ the proximity of potential sites to an existing Shack, and the impact of cannibalization on future growth;

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▪ anticipated commercial, residential and infrastructure development near our new Shacks;

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Our growth strategy, and the substantial investment associated with the development of each new domestic Company-operated Shack, may cause our operating results to fluctuate and be unpredictable or adversely affect our profits.

In addition, as has happened when other restaurant concepts have tried to expand, we may find that our concept has limited appeal in new markets or we may experience a decline in the popularity of our concept in the markets in which we operate.

In addition, as has happened when other restaurant concepts have tried to expand, we may find that our concept has limited appeal in new markets or we may experience a decline in the

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popularity of our concept in the markets in which we operate.

If we are unable to expand in existing markets or penetrate new markets, our ability to increase our revenues and profitability may be materially harmed or we may face losses.

Our plans to open new Shacks, the ongoing need for capital expenditures at our existing Shacks and our ongoing digital enhancements require us to spend capital.

Our growth strategy depends on opening new Shacks and innovation of new digital tools, which will require us to use cash flows from operations.

We cannot assure that cash flows from operations will be sufficient to allow us to implement our growth strategy.

If these funds are not allocated efficiently among our various projects, or if any of these initiatives prove to be unsuccessful, we may experience reduced profitability and we could be required to delay a project or delay, significantly curtail or eliminate planned Shack openings, which could have a material adverse effect on our business, financial condition and results of operations.

In addition, as our Shacks and digital infrastructure mature, our business will require maintenance, investment, renovation and improvement expenditures to remain competitive and maintain the value of our brand standard.

This creates an ongoing need for cash, and, to the extent we cannot fund capital expenditures from cash flows from operations, funds will need to be borrowed or otherwise obtained.

If the costs of funding new Shacks or renovations or enhancements to existing Shacks exceed budgeted amounts, and/or the time for building or renovation is longer than anticipated, our profits could be reduced.

Additionally, recent inflation of material and labor costs have resulted in higher construction costs.

If we cannot access the capital we need, we may not be able to execute our growth strategy, take advantage of future opportunities or respond to competitive pressures.

Our expansion into new domestic markets may present increased risks, which could affect our profitability.

We plan to open domestic Company-operated Shacks in markets where we have little or no operating experience.

Shacks we open in new markets may take longer to reach expected Shack sales and profit levels on a consistent basis, are likely to be less profitable on average than our current base of Shacks and may have higher construction, occupancy or operating costs than Shacks we open in existing markets.

Shacks we open in new markets may take longer to reach expected Shack sales and profit levels on a consistent basis, may be less profitable on average than our current base of Shacks and may have higher construction, occupancy or operating costs than Shacks we open in existing markets.

New markets may have competitive conditions, consumer tastes and discretionary spending patterns that are more difficult to predict or satisfy than our existing markets.

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We may also incur higher costs from entering new markets if, for example, we assign area directors to manage comparatively fewer Shacks than we assign in more developed markets.

Also, until we attain a critical mass in a market, the Shacks we do open will incur higher food distribution costs and reduced operating leverage.

Also, until we attain a critical mass in a market, the Shacks we do open may incur higher food distribution costs and reduced operating leverage.

As a result, these new Shacks may be less successful or may achieve target Shack-level operating profit margins at a slower rate, if ever.

If we do not successfully execute our plans to enter new markets, our business, financial condition or results of operations could be adversely affected.

In addition, we plan to continue to expand into new international markets, which can pose similar and additional challenges in opening new Shacks.

In addition, we plan to continue to expand our international presence, which can pose similar and additional challenges in opening new Shacks.

Our failure to manage our growth effectively could harm our business and operating results.

Our growth plan includes opening a significant number of new Shacks.

Our growth plan includes opening a large number of new Shacks.

Our existing personnel, management systems, financial and management controls and information systems may not be adequate to support our planned expansion.

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If we experience a decline in financial performance, we may decrease the number of or discontinue Shack openings, or we may decide to close Shacks that we are unable to operate in a profitable manner.

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New Shacks, once opened, may not be profitable, and may negatively affect Shack sales at our existing Shacks.

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Any new Shacks we open may not be profitable or achieve operating results similar to those of our existing Shacks, which could adversely affect our business, financial condition or results of operations.

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The opening of a new Shack in or near markets in which we already have Shacks could adversely affect the Shack sales of those existing Shacks.

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We pride ourselves on sourcing premium ingredients from like-minded producers — all natural proteins, vegetarian fed, humanely raised and source verified, with no hormones or antibiotics.

We are dedicated to using sustainable materials and equipment whenever possible, such as handmade tabletops constructed from reclaimed bowling alleys, as well as being committed to achieving ethical and humane practices for the animals in our supply chain .

We are dedicated to using sustainable materials and equipment whenever possible, and distinctive furniture and fixtures that advance our sustainability initiatives, as well as being committed to achieving ethical and humane practices for the animals in our supply chain.

We also strive to be the best employer and a good citizen in each community we call home.

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Additionally, the supply for high quality ingredients may be limited and it may take us longer to identify and secure relationships with suppliers that are able to meet our quality standards and have sufficient quantities to support our growing business.

If we are unable to obtain a sufficient and consistent supply for our ingredients on a cost-effective basis, our food costs could increase or we may experience supply interruptions which could have an adverse effect on our operating margins.

Additionally, some of our competitors have recently announced initiatives to offer better quality ingredients, such as antibiotic-free meat.

If we are unable to obtain a sufficient

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and consistent supply for our ingredients on a cost-effective basis, our food costs could increase or we may experience supply interruptions which could have an adverse effect on our operating margins.

Additionally, some of our competitors have announced initiatives to offer better quality ingredients, such as antibiotic-free meat.

If this trend continues, it could further limit our supply for certain ingredients and we may lose our competitive advantage as it will be more difficult to differentiate ourselves.

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Any adverse publicity that results from such criticism could damage our brand and adversely affect customer traffic.

We believe that our Stand For Something Good philosophy has been a major contributing factor in our past success because we believe consumers are increasingly more focused on where their food comes from and how it is made, and that consumers want to associate themselves with brands whose ethos matches that of their own.

We believe that our Stand For Something Good philosophy has been a major contributing factor in our past success because we believe consumers are increasingly focused on where their food comes from and how it is made, and that consumers want to associate themselves with brands whose ethos matches that of their own.

However, if these trends change we may no longer be able to successfully compete with other restaurants who share different values than us.

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If we fail to maintain our corporate culture, our relationships with our employees and guests could be negatively affected.

We take great pride in our culture and believe that it is an extremely important factor in our success.

We believe that our culture of Enlightened Hospitality and our mission to Stand For Something Good creates a truly differentiated experience for our guests and is one of the reasons guests choose to dine with us and employees choose us as a place of employment.

If we are unable to maintain our culture, especially as we continue to rapidly grow and expand in new markets, our reputation may be damaged, we may lose the trust of our guests, employee morale may be diminished and we may experience difficulty recruiting and retaining qualified employees.

Any of these factors could have a material adverse effect on our business, financial condition and results of operations.

We have a limited number of suppliers for our major products and rely on one distribution company for the majority of our domestic distribution needs.

We have a limited number of suppliers for our major products and rely on one national distribution company for the majority of our domestic distribution needs.

If our suppliers or distributor are unable to fulfill their obligations under our arrangements with them, we could encounter supply shortages and incur higher costs.

We have a limited number of suppliers for our major ingredients, including beef patties, chicken, potato buns, custard, portobello mushrooms and cheese sauce.

In fiscal 2019 , we purchased all of our (i) ground beef patties from eight suppliers, with approximately 50% of our ground beef patties supplied by one supplier;

In fiscal 2020, we purchased all of our (i) ground beef patties from seven suppliers, with approximately 44% of our ground beef patties supplied by one supplier;

(ii) chicken breast from one supplier;

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We contract with one distributor, which we refer to as our "broadline" distributor, to provide virtually all of our food distribution services in the United States.

As of December 25, 2019 , approximately 84% of our core food and beverage ingredients and 100% of our paper goods and chemicals, collectively representing 45% of our purchases, were processed through our broadline distributor for distribution and delivery to each Shack.

As of December 30, 2020, approximately 84% of certain food and beverage ingredients, including chicken, fries and custard, collectively representing 45% of our purchases, were processed through our broadline distributor for distribution and delivery to each Shack.

As of December 30, 2020, we utilized 20 affiliated distribution centers and each distribution center carries two to three weeks of inventory for our core ingredients.

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If our suppliers or distributors are unable to fulfill their obligations under their contracts or we are unable to identify alternative sources, we could encounter supply shortages and incur higher costs, each of which could have a material adverse effect on our results of operations.

Our plans to open new Shacks, and the ongoing need for capital expenditures at our existing Shacks, require us to spend capital.

Our growth strategy depends on opening new Shacks, which will require us to use cash flows from oper ations.

We cannot assure that cash flows from operations will be sufficient to allow us to implement our growth strategy.

If these funds are not allocated efficiently a mong our various projects, or if any of these initiatives prove to be unsuccessful, we may experience reduced profitability and we could be required to delay, significantly curtail or eliminate planned Shack openings, which could have a material adverse effect on our business, financial condition and results of operations.

In addition, as our Shacks mature, our business will require capital expenditures for the maintenance, renovation and improvement of existing Shacks to remain competitive and maintain the value of our brand standard.

This creates an ongoing need for cash, and, to the extent we cannot fund capital expenditures from cash flows from operations, funds will need to be borrowed or otherwise obtained.

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Additionally, recent inflation of material and labor costs have resulted in higher construction costs.

If we cannot access the capital we need, we may not be able to execute our growth strategy, take advantage of future opportunities or respond to competitive pressures.

Our marketing strategies and channels will evolve and our programs may or may not be successful.

Shake Shack is a small, but growing brand.

We incur costs and expend other resources in our marketing efforts to attract and retain guests.

Shake Shack is a growing brand, and we incur costs and expend other resources in our marketing efforts to attract and retain guests.

Our strategy includes public relations, digital and social media, promotions and in-store messaging, which require less marketing spend as compared to traditional marketing programs.

Currently, the amount of discounted promotions and advertising we do is not significant.

As the number of Shacks increases, and as we expand into new markets, we expect to increase our investment in advertising and consider additional promotional activities.

As the number of Shacks increases, and as we expand into new markets, we expect to increase our investment in advertising and promotional activities, including targeted marketing offers to unique guest segments and incentivizing and rewarding loyal guests.

Accordingly, in the future, we will incur greater marketing expenditures, resulting in greater financial risk and a greater impact on our financial results.

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We provide training to these licensees to integrate them into our operating strategy and culture.

However, since we do not have day-to-day control over all of these Shacks, we cannot give assurance that there will not be differences in product and service quality, operations, labor law enforcement or marketing or that there will be adherence to all of our guidelines and applicable laws at these Shacks.

However, since we do not have day-to-day control over all of these Shacks, we cannot give assurance that there will not be differences in product and service quality, operations, labor law enforcement, marketing or that there will be adherence to all of our guidelines and applicable laws at these Shacks.

In addition, if our licensees fail to make investments necessary to maintain or improve their Shacks, guest preference for the Shake Shack brand could suffer.

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Licensees may not be able to negotiate acceptable lease or purchase terms for the sites, obtain the necessary permits and governmental approvals or meet construction schedules.

Additionally, financing from

Additionally, financing from banks and other financial institutions may not always be available to licensees to construct and open new Shacks.

Any of these problems could slow our growth from licensing operations and reduce our licensing revenues.

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banks and other financial institutions may not always be available to licensees to construct and open new Shacks.

Any of these problems could slow our growth from licensing operations and reduce our licensing revenues.

If we fail to maintain our corporate culture, our relationships with our employees and guests could be negatively affected.

We take great pride in our culture and believe that it is an extremely important factor in our success.

Any of these factors could have a material adverse effect on our business, financial condition and results of operations.

RISKS RELATED TO OPERATING IN THE RESTAURANT INDUSTRY

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Any failure by our suppliers, or their suppliers, could cause our ingredients to be contaminated, which may be difficult to detect before the food is served.

Additionally, the risk of food-borne illness may also increase whenever our food is served outside of our control, such as by third-party delivery s ervices.

We are further exposed to this risk from our sales through unaffiliated third-party delivery services, as well as through any third-party delivery partners we have used.

Additionally, the risk of food-borne illness may also increase whenever our food is served outside of our control, such as by third-party delivery services.

We are further exposed to this risk from our sales through unaffiliated third-party delivery services, as well as through any third-party delivery partners we use.

Regardless of the source or cause, any report of food-borne illnesses or food safety issues, whether or not accurate, at one or more of our Shacks, including Shacks operated by our licensees, could adversely affect our brand and reputation, which in turn could result in reduced guest traffic and lower sales.

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The digital and delivery business, and expansion thereof, is uncertain and subject to risk.

Digital innovation and growth remains a key focus for us.

We continue to execute upon our digital strategy, including the enhancement of our omnichannel guest experience through the accelerated innovation of new digital tools, and the continued integration of our data platforms enabling segmentation and targeted marketing strategies.

Furthermore, we have expanded our reach with third-party delivery partners, and have begun testing delivery through our Company-owned app at several locations in the Miami area to support a broader rollout in 2021.

We believe these digital investments to be a critical differentiator for our business, creating the opportunity to drive greater engagement and frequency with both new and existing guests.

As the digital space around us continues to evolve, our technology needs to evolve concurrently to stay competitive with the industry.

If we do not maintain and innovate our digital systems that are competitive with the industry, our digital business may be adversely affected and could damage our sales.

We rely on third-parties for our ordering and payment platforms relating to our mobile app and kiosks.

Such services performed by these third-parties could be damaged or interrupted by technological issues, which could then result in a loss of sales for a period of time.

Information processed by these third-parties could also be impacted by cyber-attacks, which could not only negatively impact our sales, but also harm our brand image.

Recognizing the rise in delivery services offered throughout the restaurant industry, we understand the importance of providing such services to meet our guests wherever and whenever they want.

We have invested in marketing to promote our delivery partnerships, which could negatively impact our profitability if the business does not continue to expand.

We rely on third-parties to fulfill delivery orders timely and in a fashion that will satisfy our guests.

Errors in providing adequate delivery services may result in guest dissatisfaction, which could also result in loss of guest retention, loss in sales and damage to our brand image.

Additionally, as with any third-party handling food, such delivery services increase the risk of food tampering while in transit.

We developed sealed packaging to provide some deterrence against such potential food tampering.

We are also subject to risk if there is a shortage of delivery drivers, which could result in a failure to meet our guests' expectations.

Third-party delivery services within the restaurant industry is a competitive environment and includes a number of players competing for market share.

If our third-party delivery partners fail to effectively compete with other third-party delivery providers in the sector, our delivery business may suffer resulting in a loss of sales.

If any third-party delivery provider we partner with experiences damage to their brand image, we may also see ramifications due to our partnership with them.

Additionally, some of our competitors have greater financial resources to spend on marketing and advertising around their digital and delivery campaigns than we are able to at this time.

Should our competitors increase their spend in these areas, or if our advertising and promotions be less effective than our competitors, there could be an adverse impact on our business in this space.

As delivery, as well as the partnerships we have made in connection with delivery, is still a growing business for us, it is difficult for us to anticipate its impact to our sales as well as the challenges we may face in the future.

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Rising labor costs and difficulties recruiting and retaining the right team members could adversely affect our business.

As our culture remains an important factor to our success, it in part depends on our ability to attract, motivate and retain a sufficient number of qualified managers and team members to meet the needs of our existing Shacks and to staff new Shacks.

We aim to hire people who have integrity, who are warm, friendly, motivated, caring, self-aware and intellectually curious—what we call "51%'ers." 51%'ers are excited and committed to championship performance, remarkable and enriching hospitality, embodying our culture, and actively growing themselves and the brand.

We aim to hire people who have integrity, who are warm, friendly, motivated, caring, self-aware and intellectually curious — what we call "51%'ers." 51%'ers are excited and committed to high performance, remarkable and enriching hospitality, embodying our culture, and actively growing themselves and the brand.

In many markets, competition for qualified individuals is intense and we may be unable to identify and attract a sufficient number of individuals to meet our growing needs, especially in markets where our brand is less established.

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Our commitment to taking care of our team may cause us to incur higher labor costs compared to other restaurant companies.

Additionally, several states in which we operate have enacted minimum wage increases and it is possible that other states or the federal government could also enact minimum wage increases.

Such increases will cause an increase to our labor and related expenses and cause our Shack-level operating profit margins to decline.

As more minimum wage increases or other legislation relating to employee benefits are enacted or changed, such as the Affordable Care Act, we may be required to implement additional pay increases or offer additional benefits in the future in order to continue to attract and retain the most qualified people, which may put further pressure on our operating margins by increasing costs.

Additionally, several states in which we operate have enacted minimum wage increases and it is possible that other states or the federal government could also enact minimum wage increases, scheduling and benefit changes, increased health care and workers' compensation insurance costs and benefits and costs related to the COVID-19 pandemic.

Such increases have and may continue to cause an increase to our labor and related expenses and cause our Shack-level operating profit margins to decline.

As more minimum wage increases or other legislation relating to employee benefits are enacted or changed, such as the Affordable Care Act, we may be required to implement additional pay increases or provide additional benefits in the future in order to continue to attract and retain the most qualified people, which may put further pressure on our operating margins by increasing costs.

Overall, we expect wages at all levels to continue to increase in the near and short term and we expect these rising wages to add pressure to our operating profit.

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Prices may be affected due to market changes, increased competition, the general risk of inflation, shortages or interruptions in supply due to weather, disease or other conditions beyond our control, or other reasons.

For example, in 2019 there were recalls for romaine lettuce, and although we do not serve romaine lettuce, we nonetheless experienced a slight financial impact due to higher demand and price of other types of lettuce we do serve on our burgers and sandwiches.

Another example is the African Swine Fever in China, and possible spread to other Asian country, in which we have seen the impact of increases on exports.

For example, in previous years, there were recalls for romaine lettuce, and although we do not serve romaine lettuce, we nonetheless experienced a slight financial impact due to higher demand and price of other types of lettuce we do serve on our burgers and sandwiches.

Similarly, beef supply shortages during the second quarter of 2020 - largely due to the COVID-19 pandemic - resulted in significant inflation in beef, with cost nearly double that of the same period in the prior year.

Other events could increase commodity prices or cause shortages that could affect the cost and quality of the items we buy or require us to further raise prices or limit our menu options.

Furthermore, increasing weather volatility or other long-term changes in global weather patterns, including any changes associated with global climate change, could have a significant impact on the price or availability of some of our ingredients.

These events, combined with other more general economic and demographic conditions, could impact our pricing and negatively affect our Shack sales and Shack-level operating profit margins.

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We may decide to enter into certain forward pricing arrangements with our suppliers, which could result in fixed or formula-based pricing with respect to certain food products.

However, these arrangements generally are relatively short in duration and may provide only limited protection from price changes.

In addition, the use of these arrangements may limit our ability to benefit from favorable price movements.

Our profitability is also adversely affected by increases in the price of utilities, such as natural gas, electric and water, whether as a result of inflation, shortages or interruptions in supply, or otherwise.

Our ability to respond to increased costs by increasing prices or by implementing alternative processes or products will depend on our ability to anticipate and react to such increases and other

However, these arrangements generally are relatively short in duration and may

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more general economic and demographic conditions, as well as the responses of our competitors and guests.

provide only limited protection from price changes.

In addition, the use of these arrangements may limit our ability to benefit from favorable price movements.

Our ability to respond to increased costs by increasing prices or by implementing alternative processes or products will depend on our ability to anticipate and react to such increases and other more general economic and demographic conditions, as well as the responses of our competitors and guests.

All of these things may be difficult to predict and beyond our control.

In this manner, increased costs could adversely affect our results of operations.

The digital and delivery business, and expansion thereof, is uncertain and subject to risk.

Digital innovation and growth remains a focus for us.

We have executed upon our digital strategy over the past few years, including the development and launch of our app, along with further enhancements made to it subsequently;

creating a kiosk format and rolling it out across the country to approximately 60 Shacks to date;

and using various third-party delivery partners, including our partnership with Grubhub.

As the digital space around us continues to evolve, our technology needs to evolve concurrently to stay competitive with the industry.

If we do not maintain digital systems that are competitive with the industry, our digital business may be adversely affected and could damage our sales.

We rely on third-parties for our ordering and payment platforms relating to our mobile app and kiosks.

Such services performed by these third-parties could be damaged or interrupted by technological issues, which could then result in a loss of sales for a period of time.

Information processed by these third-parties could also be impacted by cyber-attacks, which could not only negatively impact our sales, but also harm our brand image.

Recognizing the rise in delivery services offered throughout the restaurant industry, we understand the importance of providing such services to meet our guests wherever and whenever they want.

We have invested in marketing to promote our delivery partnership, which could negatively impact our profitability if the business does not continue to expand.

We rely on third-parties, including Grubhub, to fulfill delivery orders timely and in a fashion that will satisfy our guests.

Errors in providing adequate delivery services may result in guest dissatisfaction, which could also result in loss of guest retention, loss in sales and damage to our brand image.

Additionally, as with any third-party handling food, such delivery services increase the risk of food tampering while in transit.

In 2019 we developed sealed packaging to provide some deterrence against such potential food tampering.

We are also subject to risk if there is a shortage of delivery drivers, which could result in a failure to meet our guests' expectations.

Third-party delivery services within the restaurant industry is a competitive environment and includes a number of players competing for market share.

If our third-party delivery partners fail to effectively compete with other third-party delivery providers in the sector, our delivery business may suffer resulting in a loss of sales.

If any third-party delivery provider we partner with experiences damage to their brand image, we may also see ramifications due to our partnership with them.

Additionally, some of our competitors have greater financial resources to spend on marketing and advertising around their digital and delivery campaigns than we are able to at this time.

As delivery, as well as the partnerships we have made in connection with delivery, is still a new concept for us, it is difficult for us to anticipate its impact to our sales as well as the challenges we may face in the future.

Shortages or interruptions in the supply or delivery of food products could adversely affect our operating results.

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In addition, our second largest regional grinder can, in an emergency, supply us in the event of a disruption of operations at one of our beef grinders through our broadline distributor's network, but there would be a delay in availability due to production and shipping.

We currently have eight approved raw beef suppliers and eight approved beef processors in the United States.

We currently have seven approved raw beef suppliers and eight approved beef processors in the United States.

If there is a supply issue with all U.S.

raw beef, we have seven approved raw beef suppliers and eight approved beef processors in other countries.

raw beef, we have eight approved raw beef suppliers and seven approved beef processors in other countries.

The risks to using international suppliers are shipping lead time, shipping costs, potential import duties and U.S.

It is unknown at this time how long it would take and at what cost the raw material would be to import from any such other country, but the delay and cost would likely be adverse to our business.

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We face significant competition for guests, and if we are unable to compete effectively, our business could be adversely affected.

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Many of our competitors emphasize low cost "value meal" menu options or other programs that provide price discounts on their menu offerings, a strategy we do not pursue.

We also face increasing competitive pressures from some of our competitors who have recently announced initiatives to offer better quality ingredients, such as antibiotic-free meat.

We also face increasing competitive pressures from some of our competitors who have announced initiatives to offer better quality ingredients, such as antibiotic-free meat.

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Changes in consumer tastes, nutritional and dietary trends, traffic patterns and the type, number, and location of competing restaurants often affect the restaurant business.

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We cannot make any assurances regarding our ability to effectively respond to changes in consumer health perceptions or our ability to adapt our menu offerings to trends in eating habits.

Additionally, as we continue to innovate upon our digital strategy and offer more ways to order through digital channels, such as the app, web ordering, kiosk and delivery, we compete with other competitors who currently, or are beginning to, offer the same options as well as new and improved technologies.

Additionally, as we continue to innovate upon our digital strategy and offer more ways to reach our guests through digital channels, such as the app, web ordering, kiosk and delivery, and new Shack Track formats, we compete with other competitors who currently, or are beginning to, offer the same options as well as new and improved technologies.

With the introduction of these digital channels, there is also an increased opportunity for customer credit card fraud to occur, which could result in increased credit card fees for us.

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With respect to the restaurant industry, concerns have been expressed regarding energy management, water management, food and packaging waste management, food safety, nutritional content, labor practices and supply chain and management food sourcing.

We are experiencing increased pressure to make commitments relating to sustainability matters that affect companies in our industry, including the design and implementation of specific risk mitigation strategic initiatives relating to sustainability.

We experience pressure to make commitments relating to sustainability matters that affect companies in our industry, including the design and implementation of specific risk mitigation strategic initiatives relating to sustainability.

If we are not effective in addressing environmental, social and other sustainability matters affecting our industry, or setting and meeting relevant sustainability goals, our brand image may suffer.

In addition, we may experience increased costs in order to execute upon our sustainability goals and measure achievement of those goals, which could have an adverse impact on our business and financial condition.

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Our international licensed Shacks import many of our proprietary and other core ingredients from the United States, the United Kingdom and the European Union.

Our international licensed Shacks import many of our proprietary and other core ingredients from the United States and the United Kingdom.

If this international supply chain is interrupted, our international licensed operations could encounter supply shortages and incur higher costs.

Our international licensed Shacks import many of our proprietary ingredients from the United States, United Kingdom and the European Union ("EU").

For example, our proprietary blend of beef patties and/or raw materials for beef patties originate from the United States and the EU as well as Australia.

In addition, outside of Japan, Korea and Turkey our potato buns supplied internationally are exclusively from the United States, and other key items, such as crinkle cut fries, originate within the United States or the EU.

Our international licensed Shacks import many of our proprietary ingredients from the United States and the United Kingdom.

For example, our mushrooms originate from the United States and United Kingdom.

In addition, outside of Turkey, Japan, South Korea and China, our custard supplies are from the United States and United Kingdom.

In addition, our proprietary blend of beef patties and/or raw materials for beef patties primarily originate from the United States, Australia and Uruguay.

While we have established secondary supply solutions for some of these ingredients, we have not acquired secondary supplies for all of them.

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If our international licensed Shacks are unable to obtain our proprietary ingredients in the necessary amounts in a timely fashion as a result of logistics issues, sanctions or other challenges, it could harm its business and adversely affect the licensing revenue we receive, adversely impacting our business and results of operations.

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We are subject to risks associated with leasing property subject to long-term non-cancelable leases.

We do not own any real property and all of our domestic Company-operated Shacks are located on leased premises.

The leases for our Shacks generally have initial terms ranging from 10 to 15 years and typically provide for two five-year renewal options as well as for rent escalations.

The leases for our Shacks generally have initial terms ranging from 10 to 15 years and typically include two five-year renewal options.

However, the license agreement for our Madison Square Park Shack can be terminated by the New York City Commissioner of Parks for any reason on 25 days' written notice.

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Similar lawsuits have been instituted from time to time alleging violations of various federal and state wage and hour laws regarding, among other things, employee meal deductions, overtime eligibility of assistant managers and failure to pay for all hours worked.

In fiscal 2018 we were the subject of such an employment-related claim and there can be no assurance that we will not be named in any such lawsuit in the future or that we would not be required to pay substantial expenses and/or damages.

Occasionally, our guests file complaints or lawsuits against us alleging that we are responsible for some illness or injury they suffered at or after a visit to one of our Shacks, including actions seeking damages resulting from food-borne illness or accidents in our Shacks.

We are also subject to a variety of other claims from third parties arising in the ordinary course of our business, including

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contract claims.

We are also subject to a variety of other claims from third parties arising in the ordinary course of our business, including contract claims.

The restaurant industry has also been subject to a growing number of claims that the menus and actions of restaurant chains have led to the obesity of certain of their customers.

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We are also subject in certain states to "dram shop" statutes, which generally provide a person injured by an intoxicated person the right to recover damages from an establishment that wrongfully served alcoholic beverages to the intoxicated person.

We carry liquor liability coverage as part of our existing comprehensive general liability insurance.

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carry liquor liability coverage as part of our existing comprehensive general liability insurance.

Recent litigation against restaurant chains has resulted in significant judgments and settlements under dram shop statutes.

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A judgment significantly in excess of our insurance coverage or not covered by insurance could have a material adverse effect on our business, results of operations or financial condition.

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GENERAL BUSINESS AND ECONOMIC RISKS

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▪ government or industry findings concerning our Shacks, restaurants operated by other food service providers or others across the food industry supply chain.

Also, there has been a marked increase in the use of social media platforms and similar devices, including weblogs (blogs), social media websites and other forms of internet-based communications that provide individuals with access to a broad audience of consumers and other interested persons.

Also, there has been a marked increase in the use of social media platforms and similar devices that provide individuals with access to a broad audience of consumers and other interested persons.

The availability of information on social media platforms is virtually immediate as is its impact.

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Ultimately, the risks associated with any such negative publicity or incorrect information cannot be completely eliminated or mitigated and may materially harm our reputation, business, financial condition and results of operations.

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Changes in economic conditions, both domestically and internationally, could materially affect our business, financial condition and results of operations.

The restaurant industry depends on consumer discretionary spending.

During the economic downturn that began in 2008, disruptions in the overall economy, including the impact of the housing crisis, high unemployment and financial market volatility and unpredictability, caused a related reduction in consumer confidence, which negatively affected the restaurant industry.

The restaurant industry depends on consumer discretionary spending, and any economic downturn or disruptions in the overall economy, including political unrest and protests, the impact of a housing crisis, high unemployment and financial market volatility and unpredictability, may cause a related reduction in consumer confidence, which negatively affects the restaurant industry.

These factors, as well as national, regional and local regulatory and economic conditions, gasoline prices, energy and other utility costs, inclement weather, conditions in the residential real estate and mortgage markets, health care costs, access to credit, disposable consumer income and consumer confidence, affect discretionary consumer spending.

Additionally, because some of our Shacks are located in or near retail malls, general declines in mall traffic experienced by the retail industry in general could negatively affect us.

Furthermore, with some of our Shacks located in or near retail malls, general declines in mall traffic experienced by the retail industry over the last few years in general may negatively affect us.

In poor economic conditions, guest traffic could be adversely impacted if our guests choose to dine out less frequently or reduce the amount they spend on meals while dining out.

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Prolonged negative trends in sales could cause us and our licensees to, among other things, reduce the number and frequency of new Shack openings, close Shacks or delay remodeling of our existing Shacks or recognize asset impairment charges.

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Because many of our domestic Company-operated Shacks are concentrated in local or regional areas, we are susceptible to economic and other trends and developments, including adverse weather conditions, in these areas.

Our financial performance is highly dependent on Shacks located in the Northeast and the New York City metropolitan area, which comprised approximately 44% (or 72 out of 163 ) of our total domestic company-operated Shacks as of December 25, 2019 .

As a result, adverse economic conditions in any of these areas could have a material adverse effect on our overall results of operations.

Since our founding, we have built some of the industry's favorite community gathering places.

As a result, so much of our real estate footprint has been centered in urban, office, travel and dynamic traffic-driving sales environments.

Our urban Shacks, make up approximately half of the units in our same-Shack sales base, and have historically accounted for approximately 60% of our same-Shack sales base sales prior to the COVID-19 pandemic.

Additionally, our financial performance is highly dependent on Shacks located in the Northeast and the New York City metropolitan area, which comprise approximately 40% (or 74 out of 183) of our total domestic Company-operated Shacks as of December 30, 2020.

As a result, adverse economic conditions in any of these markets or regions could have a material adverse effect on our overall results of operations.

In addition, given our geographic concentrations, negative publicity regarding any of our Shacks in these areas could have a material adverse effect on our business and operations, as could other regional occurrences such as local strikes, terrorist attacks, increases in energy prices, inclement weather or natural or man-made disasters.

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Additionally, the techniques and sophistication used to conduct cyber-attacks and breaches of information technology systems, as well as the sources and targets of these attacks, change frequently and are often not recognized until such attacks are launched or have been in place for a period of time.

While we continue to make significant investment in physical and technological security measures, employee training, and third party services, designed to anticipate cyber-attacks and prevent breaches, our information technology networks and infrastructure or those of our third party vendors and other service providers could be vulnerable to damage, disruptions, shutdowns, or breaches of confidential information due to criminal conduct, employee error or malfeasance, utility failures, natural disasters or other catastrophic events.

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catastrophic events.

Due to these scenarios we cannot provide assurance that we will be successful in preventing such breaches or data loss.

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If we are unable to maintain and update our information technology systems to meet the needs of our business, our business could be adversely impacted.

We rely heavily on information systems, including point-of-sale processing in our Shacks, for management of our supply chain, accounting, payment of obligations, collection of cash, credit and debit card transactions, mobile ordering, kiosk ordering and other processes and procedures.

We rely heavily on information systems, including point-of-sale processing in our Shacks, for management of our supply chain, accounting, payment of obligations, collection of cash, credit and debit card transactions, digital ordering and other processes and procedures.

As a rapidly growing business, our current information technology infrastructure may not be adequately suited to handle the increasing volume of data and additional information needs of our organization.

If we are unable to successfully

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upgrade our information systems to meet the growing needs of our business or are delayed in doing so, whether through our enterprise-wide finance initiative Project Concrete or other future ones, our growth could be adversely affected.

If we are unable to successfully upgrade our information systems to meet the growing needs of our business or are delayed in doing so, whether through our enterprise-wide finance initiative Project Concrete or other future ones, our growth could be adversely affected.

Additionally, as technology systems continue to evolve and as consumers adopt new technologies, we may need to enhance our systems or modify our strategies in order to remain relevant in our industry and to our guests.

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In addition, remediation of such problems could result in significant, unplanned capital investments.

Additionally, as we continue to evolve our digital platforms and enhance our internal systems, we place increasing reliance on third-parties to provide infrastructure and other support services.

Additionally, as we continue to evolve and innovate our digital platforms and enhance our internal systems, we place increasing reliance on third-parties to provide infrastructure and other support services.

We may be adversely affected if any of our third-party service providers experience any interruptions in their systems, which then could potentially impact the services we receive from them and cause a material failure or interruption in our own systems.

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Because a component of our strategy is to continue to grow our licensed business internationally, the risks of doing business internationally could lower our revenues, increase our costs, reduce our profits or disrupt our business.

Ninety of our 112 licensed Shacks as of December 25, 2019 are located outside the United States and we expect to continue to expand our licensed Shacks internationally.

106 of our 128 licensed Shacks as of December 30, 2020 are located outside the United States and we expect to continue to expand our licensed Shacks internationally.

As a result, we are and will be, on an increasing basis, subject to the risks of doing business outside the United States, including:

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▪ increase in an anti-American sentiment and the identification of the licensed brand as an American brand;

the effect of disruptions caused by severe weather, natural disasters, outbreak of disease or other events that make travel to a particular region, as well as domestic visits, less attractive or more difficult;

▪ the effect of disruptions caused by severe outbreak of disease, weather, natural disasters or other events that make travel to a particular region, as well as domestic visits, less attractive or more difficult;

▪ political and economic instability.

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Our international licensed Shacks operate in several volatile regions that are subject to geopolitical and socio-political factors that pose risk to our business operations.

In the past, our licensee has been negatively impacted by currency devaluation in Russia and Turkey and we have seen a reduction in licensing revenue from our those respective Shacks.

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In the past, certain licensees have been negatively impacted by currency devaluation, and we have seen a reduction in licensing revenue from those respective Shacks.

In 2019, we closed all of our Shacks operating in Russia.

Also, the economy of any region in which our Shacks are located may be adversely affected to a greater degree than that of other areas of the country or the world by certain developments affecting industries concentrated in that region or country.

For example, our Shacks that opened this year in Hong Kong this year have suffered from political unrest due to protesting in the area, and as such, have had to close in certain instances.

For example, our Shacks that recently opened in Hong Kong have suffered from political unrest due to protesting in the area, and as such, have had to close in certain instances.

Such closures result in a loss of sales for the respective time period.

Additionally, in January 2020 the World Health Organization declared that the coronavirus outbreak became a global health emergency, first beginning in China and subsequently spreading to other areas.

Such a health outbreak could slow traffic in the impacted regions, as well as abroad and domestically, and could result in a loss of sales.

Additionally, a health outbreak, such as the COVID-19 pandemic could slow traffic in the impacted regions, as well as abroad and domestically, and could result in a loss of sales.

While these factors and the impact of these factors are difficult to predict, any one or more of them could lower our revenues, increase our costs, reduce our profits or disrupt our business, and, as our international licensed operations increase, these risks will become more pronounced.

We depend on key members of our executive management team.

We depend on the leadership and experience of key members of our executive management team.

The loss of the services of any of our executive management team members could have a material adverse effect on our business and prospects, as we may not be able to find suitable individuals to replace such personnel on a timely basis or without incurring increased costs, or at all.

We do not maintain key person life insurance policies on any of our executive officers.

We believe that our future success will depend on our continued ability to attract and retain highly skilled and qualified personnel.

There is a high level of competition for experienced, successful personnel in our industry.

Our inability to meet our executive staffing requirements in the future could impair our growth and harm our business.

We may not be able to adequately protect our intellectual property, which, in turn, could harm the value of our brands and adversely affect our business.

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Additionally, we may be prohibited from entering into certain new markets due to restrictions surrounding competitors' trademarks.

The steps we have taken to protect our intellectual property in the United States and in foreign countries may not be adequate.

The steps we have taken to protect our intellectual

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property in the United States and in foreign countries may not be adequate.

In addition, the laws of some foreign countries do not protect intellectual property to the same extent as the laws of the United States.

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If a court finds that we infringe a third party's intellectual property, we may be required to pay damages and/or be subject to an injunction.

With respect to any third party intellectual property that we use or wish to use in our business (whether or not asserted against us in litigation), we may not be able

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to enter into licensing or other arrangements with the owner of such intellectual property at a reasonable cost or on reasonable terms.

With respect to any third party intellectual property that we use or wish to use in our business (whether or not asserted against us in litigation), we may not be able to enter into licensing or other arrangements with the owner of such intellectual property at a reasonable cost or on reasonable terms.

We depend on key members of our executive management team.

We depend on the leadership and experience of key members of our executive management team.

We do not maintain key person life insurance policies on any of our executive officers.

We believe that our future success will depend on our continued ability to attract and retain highly skilled and qualified personnel.

There is a high level of competition for experienced, successful personnel in our industry.

Our inability to meet our executive staffing requirements in the future could impair our growth and harm our business.

Our insurance coverage and self-insurance reserves may not provide adequate levels of coverage against claims.

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We are subject to extensive federal, state, local and foreign laws and regulations, as well as other statutory and regulatory requirements, including those related to:

nutritional content labeling and disclosure requirements;

food safety regulations;

local licensure, building and zoning regulations;

employment regulations;

the Affordable Care Act;

the Americans with Disabilities Act ("ADA") and similar state laws;

privacy and cybersecurity;

laws and regulations related to our licensed operations;

Foreign Corrupt Practices Act and other similar anti-bribery and anti-kickback laws;

The impact of current laws and regulations, the effect of future changes in laws or regulations that impose additional requirements and the consequences of litigation relating to current or future laws and regulations, uncertainty around future changes in laws made by new regulatory administrations or our inability to respond effectively to significant regulatory or public policy issues, could increase our compliance and other costs of doing business and, therefore, have an adverse effect on our results of operations.

Failure to comply with the laws and regulatory requirements of federal, state and local authorities could result in, among other things, revocation of required licenses, administrative enforcement actions, fines and civil and criminal liability.

In addition, certain laws, including the ADA, could require us to expend significant funds to make modifications to our Shacks if we failed to comply with applicable standards.

Compliance with all of these laws and regulations can be costly and can increase our exposure to litigation or governmental investigations or proceedings.

Nutritional Content Labeling and Disclosure Requirements

In recent years, there has been an increased legislative, regulatory and consumer focus on the food industry including nutritional and advertising practices.

These changes have resulted in, and may continue to result in, the enactment of laws and regulations that impact the ingredients and nutritional content of our menu offerings, or laws and regulations requiring us to disclose the nutritional content of our food offerings.

For example, a number of states, counties and cities have enacted menu labeling laws requiring multi-unit restaurant operators to disclose certain nutritional information to customers, or have enacted legislation restricting the use of

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certain types of ingredients in restaurants.

Furthermore, the Patient Protection and Affordable Care Act of 2010 (the "PPACA") establishes a uniform, federal requirement for certain restaurants to post certain nutritional information on their menus.

Specifically, the PPACA amended the Federal Food, Drug and Cosmetic Act to require certain chain restaurants to publish the total number of calories of standard menu items on menus and menu boards, along with a statement that puts this calorie information in the context of a total daily calorie intake.

These new labeling laws may also change consumer buying habits in a way that adversely impacts our sales.

▪ Nutritional content labeling and disclosure requirements - There has been increased legislative, regulatory and consumer focus on the food industry including nutritional and advertising practices.

These labeling laws may change consumer buying habits in a way that adversely impacts our sales.

Additionally, an unfavorable report on, or reaction to, our menu ingredients, the size of our portions or the nutritional content of our menu items could negatively influence the demand for our offerings.

Food Safety Regulations

There is also a potential for increased regulation of certain food establishments in the United States, where compliance with a Hazard Analysis and Critical Control Points ("HACCP") approach may now be required.

▪ Food safety regulations - There is a potential for increased regulation of certain food establishments in the United States, where compliance with a Hazard Analysis and Critical Control Points ("HACCP") approach may be required.

HACCP refers to a management system in which food safety is addressed through the analysis and control of potential hazards from production, procurement and handling, to manufacturing, distribution and consumption of the finished product.

Many states have required restaurants to develop and implement HACCP Systems, and the United States government continues to expand the sectors of the food industry that must adopt and implement HACCP programs.

For example, the Food Safety Modernization Act ("FSMA") granted the FDA new authority regarding the safety of the entire food system, including through increased inspections and mandatory food recalls.

Although restaurants are specifically exempted from or not directly implicated by some of these new requirements, we anticipate that the new requirements may impact our industry.

Additionally, our suppliers may initiate or otherwise be subject to food recalls that may impact the availability of certain products, result in adverse publicity or require us to take actions that could be costly for us or otherwise impact our business.

Local Licensure, Building and Zoning Regulations

The development and operation of Shacks depend, to a significant extent, on the selection of suitable sites, which are subject to zoning, land use, environmental, traffic and other regulations and requirements.

▪ Local licensure, building and zoning regulations - The development and operation of Shacks depend, to a significant extent, on the selection of suitable sites, which are subject to zoning, land use, environmental, traffic and other regulations and requirements.

We are also subject to licensing and regulation by state and local authorities relating to health, sanitation, safety and fire standards.

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Difficulties or failure to maintain or obtain the required licenses, permits and approvals could adversely affect our existing Shacks and delay or result in our decision to cancel the opening of new Shacks, which would adversely affect our business.

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Employment Regulations

We are subject to various federal and state laws governing our employment practices, including laws relating to minimum wage requirements, employee classifications as exempt or non-exempt, payroll and unemployment tax laws, requirements to provide meal and rest periods or other benefits, family leave mandates, requirements regarding working conditions and accommodations to certain employees, citizenship and work authorization requirements, insurance and workers' compensation rules, scheduling notification requirements and anti-discrimination laws.

▪ Employment regulations - We are subject to various federal and state laws governing our employment practices, including laws relating to minimum wage requirements, employee classifications as exempt or non-exempt, payroll and unemployment tax laws, requirements to provide meal and rest periods or other benefits, family leave mandates, requirements regarding working conditions and accommodations to certain employees, citizenship and work authorization requirements, insurance and workers' compensation rules, scheduling notification requirements and anti-discrimination laws.

Compliance with these regulations is costly and requires significant resources.

For example, the Fair Workweek legislation was implemented in New York City, which requires fast food employers to provide employees with specified notice in scheduling changes and pay premiums for changes made to employees' schedules, amongst other requirements.

Similar legislation may be enacted in other jurisdictions we operate as well, including Philadelphia and Chicago in fiscal 2020, and in turn, could result in increased costs.

For example, the Fair Workweek legislation implemented in New York City requires fast food employers to provide employees with specified notice in scheduling changes and pay premiums for changes made to employees' schedules, among other requirements.

Similar legislation may be enacted in other jurisdictions in which we operate as well, and in turn, could result in increased costs.

Additionally, we may suffer losses from or incur significant costs to defend claims alleging non-compliance.

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Further, if we enter into a new market with unionized construction companies, or the construction companies in our current markets become unionized, construction and build out costs for new Shacks in such markets could materially increase.

The Affordable Care Act

Under the PPACA, we are required to provide affordable coverage, as defined in the PPACA, to substantially all full-time employees, or otherwise be subject to potential excise tax penalties based on the affordability criteria in the PPACA.

▪ The Affordable Care Act - We are required to provide affordable coverage to substantially all full-time employees, or otherwise be subject to potential excise tax penalties based on the affordability criteria in the Act.

Additionally, some states and localities have passed state and local laws mandating the provision of certain levels of health benefits by some employers.

Increased health care and insurance costs, as well as the potential increase in participation by our employees who previously had not participated in our medical plan coverage, could have a material adverse effect on our business, financial condition and results of operations.

Americans with Disabilities Act and Similar State Laws

We are subject to the ADA and similar state laws, which, among other things, prohibits discrimination in employment and public accommodations on the basis of disability.

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▪ The Americans with Disabilities Act ("ADA") and similar state laws - We are subject to the ADA and similar state laws, which, among other things, prohibits discrimination in employment and public accommodations on the basis of disability.

Under the ADA, our Shacks are required to meet federally mandated requirements for the disabled and we could be required to incur expenses to modify our Shacks to provide service to, or make reasonable accommodations for the employment of, disabled persons.

The expenses associated with these modifications, or any damages, legal fees and costs associated with resolving ADA-related complaints could be material.

Privacy and Cybersecurity

Our business requires the collection, transmission and retention of large volumes of guest and employee data, including credit and debit card numbers and other personally identifiable information, in various information technology systems that we maintain and in those maintained by third parties with whom we contract to provide services.

▪ Privacy and cybersecurity - Our business requires the collection, transmission and retention of large volumes of guest and employee data, including credit and debit card numbers and other personally identifiable information.

The collection and use of such information is regulated at the federal and state levels, as well as by the European Union (EU).

Regulatory requirements, both domestic and abroad, have been changing and increasing regulation relating to the privacy, security and protection of data.

For example, the California Consumer Privacy Act was passed in June 2018, becoming effective January 2020, and requires businesses to provide California residents with certain rights regarding their personal information.

Regulatory requirements, both domestic and abroad, have been changing with increasing regulation relating to the privacy, security and protection of data.

Such regulatory requirements may become more prevalent in other states and jurisdictions as well.

It is our responsibility to ensure we are complying with these laws by taking the appropriate measures as well as monitoring our practices as these laws continue to evolve.

As our environment continues to evolve in this digital age and reliance upon new technologies, for example, cloud computing and our digital methods of ordering, become more prevalent, it is imperative we secure the private and sensitive information we collect.

As our environment continues to evolve in this digital age and reliance upon new technologies become more prevalent, it is imperative we secure the private and sensitive information we collect.

Failure to do so, whether through fault of our own information systems or those of outsourced third party providers, could not only cause us to fail to comply with these laws and regulations, but also could cause us to face litigation and penalties that could adversely affect our business, financial condition and results of operations.

Our brand's reputation and our image as an employer could also be harmed by these types of security breaches or regulatory violations.

Shake Shack Inc.

Form 10-K | 39

Laws and Regulations Relating to Our Licensed Operations

Our licensing operations are subject to laws enacted by a number of states, rules and regulations promulgated by the U.S.

▪ Laws and regulations related to our licensed operations - Our licensing operations are subject to laws enacted by a number of states, rules and regulations promulgated by the U.S.

Federal Trade Commission and certain rules and requirements regulating licensing activities in foreign countries.

Failure to comply with new or existing licensing laws, rules and regulations in any jurisdiction or to obtain required government approvals could negatively affect our licensing sales and our relationships with our licensees.

Foreign Corrupt Practices Act and Similar Anti-Bribery and Anti-Kickback Laws

A significant portion of our licensed operations are located outside the United States.

Foreign Corrupt Practices Act and other similar anti-bribery and anti-kickback laws - A significant portion of our licensed operations are located outside the United States.

Foreign Corrupt Practices Act, and other similar anti-bribery and anti-kickback laws and regulations, generally prohibit companies and their intermediaries from making improper payments to non-U.S.

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Such violations, or allegations of such violations, could disrupt our business and result in a material adverse effect on our financial condition, results of operations and cash flows.

In addition, certain laws, including the ADA, could require us to expend significant funds to make modifications to our Shacks if we failed to comply with applicable standards.

Compliance with all of these laws and regulations can be costly and can increase our exposure to litigation or governmental investigations or proceedings.

Shake Shack Inc.

Form 10-K | 40

Our ability to use our net operating loss carryforwards may be subject to limitation.

As of December 30, 2020, our federal and state net operating loss (“NOL”) carryforwards, for income tax purposes were $313.9 million and $183.8 million, respectively.

If not utilized, $262.1 million of our federal NOLs can be carried forward indefinitely, and the remainder will begin to expire in 2035.

If not utilized, $40.7 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, as described in "Part I.

Business," herein, 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.

The change in ownership that occurred in 2018 will not 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.

Changes in effective tax rates or adverse outcomes resulting from examination of our income or other tax returns could adversely affect our results of operations and financial condition.

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▪ expected timing and amount of the release of any tax valuation allowance;

tax effects of stock-based compensation;

changes in tax laws, regulations or interpretations thereof, including the Tax Cuts and Jobs Act that was enacted in December 2017;

▪ tax effects of equity-based compensation;

▪ changes in tax laws, regulations or interpretations thereof;

▪ future earnings being lower than anticipated in jurisdictions where we have lower statutory tax rates and higher than anticipated earnings in jurisdictions where we have higher statutory tax rates.

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federal income tax purposes and thus would be subject to entity-level tax on its taxable income, which could have a material adverse effect on our results of operations, financial position and cash flows.

Shake Shack Inc.

Form 10-K | 41

If we fail to maintain effective internal controls over financial reporting, our ability to produce timely and accurate financial information or comply with Section 404 of the Sarbanes-Oxley Act of 2002 could be impaired, which could have a material adverse effect on our business and stock price.

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We are required to have our independent registered public accounting firm provide an attestation report on the effectiveness of our internal control over financial reporting.

In order to maintain and improve the effectiveness of our disclosure controls and procedures and internal control over financial reporting, we have expended, and anticipate that we will continue to expend, significant resources, including accounting-related costs and

Shake Shack Inc.

Form 10-K | 40

significant management oversight.

We expect that the requirements of these rules and regulations will continue to increase our legal, accounting and financial compliance costs, make some activities more difficult, time consuming and costly, and place significant strain on our personnel, systems and resources.

Any failure to develop or maintain effective controls, or any difficulties encountered in their implementation or improvement, could harm our operating results or cause us to fail to meet our reporting obligations and may result in a restatement of our financial statements for prior periods.

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In addition, if we are unable to continue to meet these requirements, we may not be able to remain listed on the New York Stock Exchange.

Shake Shack Inc.

Form 10-K | 41

RISKS RELATED TO OUR ORGANIZATIONAL STRUCTURE

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In addition, certain of the non-controlling interest holders are in the business of making or advising on investments in companies and may hold, and may from time to time in the future acquire interests in or provide advice to businesses that directly or indirectly compete with certain portions of our business or the business of our suppliers.

Our amended and restated certificate of incorporation provides that, to the fullest extent permitted by law, none of the non-controlling interest holders or any director who is not employed by us or his or her affiliates has any duty to refrain from engaging in a corporate opportunity in the same or similar lines of business as us.

Shake Shack Inc.

Form 10-K | 42

similar lines of business as us.

The non-controlling interest holders may also pursue acquisitions that may be complementary to our business, and, as a result, those acquisition opportunities may not be available to us.

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The actual amount and timing of any payments under the Tax Receivable Agreement, will vary depending upon a number of factors, including the timing of redemptions or exchanges by the holders of LLC Interests, the amount of gain recognized by such holders of LLC Interests, the amount and timing of the taxable income we generate in the future, and the federal tax rates then applicable.

Shake Shack Inc.

Form 10-K | 42

The non-controlling interest holders have the right to have their LLC Interests redeemed or exchanged into shares of Class A common stock, which may cause volatility in our stock price.

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Furthermore, if we are unable to continue to satisfy our obligations as a public company, we would be subject to delisting of our common stock, fines, sanctions and other regulatory action and potentially civil litigation.

Shake Shack Inc.

Form 10-K | 43

Our organizational structure, including our Tax Receivable Agreement, is very complex and we require the expertise of various tax, legal and accounting advisers to ensure compliance with applicable laws and regulations.

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In addition, because our Board of Directors is responsible for appointing the members of our management team, these provisions could in turn affect any attempt by our stockholders to replace current members of our management team.

Shake Shack Inc.

Form 10-K | 43

In addition, the Delaware General Corporation Law (the "DGCL"), to which we are subject, prohibits us, except under specified circumstances, from engaging in any mergers, significant sales of stock or assets or business combinations with any stockholder or group of stockholders who owns at least 15% of our common stock.

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Although we believe this provision benefits us by providing increased consistency in the application of Delaware law in the types of lawsuits to which it applies, the provision may have the effect of discouraging lawsuits against our directors and officers.

Shake Shack Inc.

Form 10-K | 44

We do not currently expect to pay any cash dividends.

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However, SSE Holdings' ability to make such distributions may be subject to various limitations and restrictions, such as restrictions on distributions that would either violate any contract or agreement to which SSE Holdings is then a party, including debt agreements, or any applicable law, or that would have the effect of rendering SSE Holdings insolvent.

If we do not have sufficient funds to pay our tax and other liabilities or to fund our operations, we may have to borrow funds, which could materially adversely affect our liquidity and financial condition and subject us to various restrictions imposed by any such

Shake Shack Inc.

Form 10-K | 44

To the extent that we are unable to make payments under the Tax Receivable Agreement for any reason, such payments generally will be deferred and will accrue interest until paid;

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In addition, if SSE Holdings does not have sufficient funds to make distributions, our ability to declare and pay cash dividends will also be restricted or impaired.

Shake Shack Inc.

Form 10-K | 45

In certain cases, payments under the Tax Receivable Agreement to the non-controlling interest holders may be accelerated or significantly exceed the actual benefits we realize in respect of the tax attributes subject to the Tax Receivable Agreement.

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There can be no assurance that we will be able to fund or finance our obligations under the Tax Receivable Agreement.

Furthermore, any increases in the federal corporate tax rate may result in an increase in our Tax Receivable Agreement liability, including a gross up of our deferred tax balances.

We will not be reimbursed for any payments made to the non-controlling interest holders under the Tax Receivable Agreement in the event that any tax benefits are disallowed.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 1A. Risk Factors