Shake Shack Inc. 10-K

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. This section and other parts of this Annual Report on Form 10-K (“Form 10-K”) contain forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995 ("PSLRA"), which are subject to known and unknown risks, uncertainties and other important factors that may cause actual results to be materially different from the statements made herein. All statements other than statements of historical fact are forward-looking statements. Forward-looking statements discuss our current expectations and projections relating to our financial position, results of operations, plans, objectives, future performance and business. You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as "aim," "anticipate," "believe," "estimate," "expect," "forecast," "future," "intend," "outlook," "potential," "project," "projection," "plan," "seek," "may," "could," "would," "will," "should," "can," "can have," "likely," the negatives thereof and other similar expressions. All forward-looking statements are expressly qualified in their entirety by these cautionary statements. You should evaluate all forward-looking statements made in this Form 10-K in the context of the risks and uncertainties disclosed in Part I, Item 1A of this Form 10-K under the heading "Risk Factors" and in this Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations". The forward-looking statements included in this Form 10-K are made only as of the date hereof. We undertake no obligation to publicly update any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law. If we do update one or more forward-looking statements, no inference should be made that we will make additional updates with respect to those or other forward-looking statements. Shake Shack Inc. Form 10-K | 53 OVERVIEW Shake Shack is a modern day "roadside" burger stand serving a classic American menu of premium burgers, chicken sandwiches, hot dogs, crinkle cut fries, shakes, frozen custard, beer and wine. Our fine dining heritage and commitment to community building, hospitality and the sourcing of premium ingredients is what we call "fine casual." Fine casual couples the ease, value and convenience of fast casual concepts with the high standards of excellence grounded in our fine dining heritage — thoughtful ingredient sourcing and preparation, hospitality and quality. Our mission is to Stand For Something Good in all aspects of our business, including the exceptional team we hire and train, the premium ingredients making up our menu, our community engagement and the design of our Shacks. Stand For Something Good is a call to action for all of our stakeholders — our team, guests, communities, suppliers and investors — and we actively invite them all to share in this philosophy with us. This commitment drives our integration into the local communities in which we operate and fosters a deep and lasting connection with our guests. Recent Development and Trends We experienced steady recovery in the business during the fourth quarter of 2020, all while continuing to support our Shack teams, our guests and the communities in which we operate during the COVID-19 global pandemic. COVID-19 was officially declared a global pandemic by the World Health Organization in March 2020. The virus has impacted all global economies, and particularly in the United States, it 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 all of our domestic Company-operated Shacks. With a prioritization on health and safety, we have steadily re-opened Shacks, where permitted, under modified operations to meet public health guidelines and evolving customer behaviors and expectations. Same-Shack sales improved across all regions on a sequential basis in the fourth quarter 2020 when compared to the third quarter 2020, with performance driven by increases in in-Shack dining in both urban and suburban Shacks, combined with high levels of digital sales. Most notably, same-Shack sales improved sequentially in each of the last nine months of fiscal 2020, and through fiscal January 2021. During the fourth quarter of fiscal 2020, same-Shack sales were down 17.4% compared to the same period last year, with urban Shacks down 31% and suburban Shacks approximately flat compared to the same period last year. Similar to prior years, in mid-December we increased menu prices approximately 2% on average across all Company-operated Shacks. Our fourth quarter 2020 same-Shack sales reflect sequential improvement from the prior quarter, during which same-Shack sales were down 31.7%, with urban Shacks down 43% and suburban Shacks down 16%. Subsequent to the fourth quarter of 2020, in fiscal January 2021, same-Shack sales were down 5%, with urban Shacks down 17% and suburban Shacks up 8% compared to the same period last year. In the beginning of fiscal February 2021, trends were impacted by cold weather and snowstorms across many parts of the country, causing more than 130 full or partial lost operating days from Shack closures. Through the first three weeks of fiscal February 2021, same-Shack sales were down 16%, with urban Shacks down 27% and suburban Shacks down 4% compared to the same period last year. As expected, urban locations are still acutely impacted by the pandemic and suburban locations are recovering to pre-COVID sales levels quicker. New York City, particularly Manhattan, continues to lag other regions and we expect this to be an ongoing trend until offices return and business and tourism traffic fully recovers. Two domestic Company-operated Shacks were temporarily closed as of the end of the fourth quarter 2020. Furthermore, as of the end of the fourth quarter 2020, approximately half of our domestic Company-operated Shacks had open dining rooms with varying capacity restrictions, with the majority of Shacks also utilizing outdoor patio space, whenever possible. During the fourth quarter of 2020, total digital sales, including orders placed on the Shake Shack app, website and third party delivery platforms, represented 59% of total Shack sales, with this trend continuing through the start of fiscal 2021, with digital sales mix at 64% in fiscal January 2021 and 63% during the first three weeks of fiscal February 2021. In fiscal 2021, through the first three weeks of fiscal February 2021, Company-owned app and web sales increased approximately 300% compared to the same period in the prior year. Furthermore, we added over 2 million first-time purchasers to our Company-owned app and web channels between mid-March 2020 and the end of fiscal January 2021. Shake Shack Inc. Form 10-K | 54 The following table presents fiscal monthly information about our current trends in Shack sales. Fiscal 2020 Fiscal 2021 First Quarter Second Quarter Third Quarter Fourth Quarter First Quarter (dollar amounts in thousands) Mar 25 Apr 22 May 20 Jun 24 Jul 22 Aug 19 Sep 23 Oct 21 Nov 18 Dec 30 (1) Jan 27 Feb 17 (2) Average weekly sales (3) $56 $32 $50 $52 $56 $59 $61 $62 $62 $62 $63 $60 Total year-over-year sales growth (decline) (11)% (56)% (32)% (32)% (23)% (20)% (10)% (5)% (3)% 18% (6)% (2)% Same-Shack sales % (4) (29)% (64)% (42)% (42)% (39)% (34)% (23)% (21)% (17)% (15)% (5)% (16)% (1) When excluding the impact of the 53rd week, total year-over-year sales were down 1%. (2) Represents the first three weeks of fiscal February 2021. (3) Average weekly sales is calculated by dividing total Shack sales by the number of operating weeks for all Shacks in operation during the period. For Shacks that are not open for the entire period, fractional adjustments are made to the number of operating weeks open such that it corresponds to the period of associated sales. (4) "Same-Shack sales" or “SSS” represents Shack sales for the comparable Shack base, which is defined as the number of domestic Company-operated Shacks open for 24 full fiscal months or longer. For days that Shacks were temporarily closed, the comparative 2019 period was also adjusted. For fiscal December, same-Shack sales excludes the impact of the sixth week and compares the five weeks from November 19, 2020 through December 23, 2020 to the five weeks from November 21, 2019 through December 25, 2019. Average weekly sales were $62,000 in the fourth quarter 2020, a 6.9% increase compared to the third quarter 2020. This improvement is in addition to typically lower seasonal average weekly sales during the fourth quarter of any given year, and it continued through fiscal January 2021 with average weekly sales of $63,000. During the first three weeks of fiscal February 2021 average weekly sales were $60,000, reflecting the impact of cold weather and snowstorms, which affected nearly all regions. Our licensed business has shown overall steady recovery, as noted herein, however the business does continue to be impacted by the pandemic. Our domestic licensed business still faces significant headwinds, with airport and stadium Shacks still either closed or at significantly reduced traffic. As of the end of fiscal 2020, 17 licensed Shacks remained temporarily closed. Furthermore, approximately half of our UK Shacks were closed as of the end of fiscal 2020, as the government maintained lockdowns to control the virus spread. The following table presents fiscal monthly information about our licensed sales trends. Fiscal 2020 Fiscal 2021 First Quarter Second Quarter Third Quarter Fourth Quarter First Quarter (dollar amounts in millions) Mar 25 Apr 22 May 20 Jun 24 Jul 22 Aug 19 Sep 23 Oct 21 Nov 18 Dec 30 (1) Jan 27 Feb 17 (2) Weekly licensed sales (3) $ 4.6 $ 2.0 $ 2.4 $ 3.5 $ 4.6 $ 5.4 $ 5.7 $ 5.9 $ 5.9 $ 6.4 $ 5.6 $ 6.0 Total year-over-year licensed sales growth (decline) 13 % (65) % (58) % (47) % (32) % (23) % (9) % (10) % (10) % 4 % (27) % (7) % Number of open licensed Shacks 96 56 59 91 98 104 105 107 106 106 107 108 (1) When excluding the impact of the 53rd week, total year-over-year licensed sales were down 15%. (2) Represents the first three weeks of fiscal February 2021. (3) Weekly licensed sales is an operating measure and consists of sales from domestic licensed Shacks and international licensed Shacks. We do not recognize the sales from licensed Shacks as revenue. Of these amounts, revenue is limited to licensing revenue based on a percentage of sales from domestic and international licensed Shacks, as well as certain up-front fees such as territory fees and opening fees. Shake Shack Inc. Form 10-K | 55 Development Highlights During fiscal 2020, we opened 20 new domestic Company-operated Shacks and 16 net new licensed Shacks. During fiscal 2021, we expect to open between 35 to 40 new domestic Company-operated Shacks and 15 to 20 new licensed Shacks. Below are Shacks opened during the fourth quarter of 2020. Location Type Opening Date Singapore — Suntec City International Licensed September 30 Murray, UT — Fashion Place Domestic Company-Operated October 1 Madison, WI — Hilldale Center Domestic Company-Operated October 5 Abu Dhabi, UAE — Dalma Mall International Licensed October 5 Pasadena, CA — Pasadena Domestic Company-Operated October 12 White Plains, NY — The Westchester Domestic Company-Operated October 26 Makati, Philippines — Greenbelt, Legazpi Village International Licensed October 29 Mexico City, Mexico — Terraza Coapa International Licensed November 5 Houston, TX — The Woodlands Domestic Company-Operated November 19 South Korea — Daejeon Dunsan International Licensed November 20 VivoCity, Singapore — VivoCity International Licensed December 1 Oakland, CA — Oakland Domestic Company-Operated December 8 Denver, CO — Cherry Creek Domestic Company-Operated December 10 Edgewater, CO — Edgewater Domestic Company-Operated December 19 Beijing China — Xidan International Licensed December 21 Liquidity Update In March 2020, we drew down the full $50.0 million available under the Revolving Credit Facility, of which the full amount was repaid, plus interest, in fiscal June 2020. In fiscal April 2020, we raised $135.9 million of proceeds, net of underwriting discounts and commissions, from the sale of 3,416,070 shares of our Class A common stock in an underwritten offering, and $9.8 million of proceeds, net of commissions, from the sale of 233,467 shares of our Class A common stock pursuant to an "at-the-market" equity offering program. See “Liquidity and Capital Resources” for more information. Financial Highlights for Fiscal 2020 • Total revenue for the fiscal year ended December 30, 2020 decreased 12.1% to $522.9 million versus the prior year. This decrease is inclusive of the favorable impact of the 53rd week in the fourth quarter 2020, which resulted in incremental revenue of $11.1 million. Excluding the 53rd week, total revenue in fiscal year 2020 decreased 13.9%. • Shack sales for the fiscal year ended December 30, 2020 decreased 11.9% to $506.3 million versus the prior year. This decrease is inclusive of the favorable impact of the 53rd week in the fourth quarter 2020, which resulted in incremental Shack sales of $10.7 million. Excluding the 53rd week, Shack sales in fiscal year 2020 decreased 13.7%. • Same-Shack sales 1 decreased 27.8%, for the fiscal year ended December 30, 2020 versus the prior year. • Licensed revenue for the fiscal year ended December 30, 2020 decreased 16.9% to $16.5 million versus the prior year. This decrease is inclusive of the favorable impact of the 53rd week in the fourth quarter 2020, which resulted in incremental licensed revenue of $0.4 million. Excluding the 53rd week, licensed revenue in fiscal year 2020 decreased 18.9%. • Shack system-wide sales decreased 13.0% to $778.9 million, versus the prior year. This decrease is inclusive of the favorable impact of the 53rd week in the fourth quarter 2020, which resulted in incremental Shack system-wide sales of $17.7 million. Excluding the 53rd week, Shack system-wide sales in the fiscal year 2020 decreased 15.0%. • Operating loss for the fiscal year ended December 30, 2020 was $43.9 million compared to operating income of $25.7 million versus the same period last year. This operating loss includes a non-cash impairment charge of $7.6 million related to two Shacks and the expansion space of the Company's home office . • Shack-level operating profit 2 , a non-GAAP measure, decreased 44.2% to $71.4 million, or 14.1% of Shack sales in fiscal year 2020, inclusive of a $0.9 million reduction in Occupancy and related expenses due to the closure of our Shack in Penn Station. • Net loss was $45.5 million and adjusted EBITDA 2 , a non-GAAP measure, was $22.7 million in fiscal year 2020, compared to net income of $24.1 million and adjusted EBITDA of $81.8 million in the same period last year. Shake Shack Inc. Form 10-K | 56 • Net loss attributable to Shake Shack Inc was $42.2 million and adjusted pro forma net loss 2 , a non-GAAP measure, was $22.3 million, or a loss of $0.56 per fully exchanged and diluted share in fiscal year 2020, compared to net income attributable to Shake Shack Inc. of $19.8 million, adjusted pro forma net income of $27.4 million, or $0.72 per fully exchanged and diluted share, in the same period last year. • We opened 36 net system-wide Shacks , comprised of 20 domestic company-operated Shacks and 16 net licensed Shacks. In the fourth quarter 2020, we were notified by our landlord of the early termination of our lease at Penn Station, NY. The termination was due to the landlord’s plans to redevelop the Long Island Rail Road Concourse following the successful completion of the East End Gateway and opening of the Moynihan Train Hall. This closure is effective as of fiscal February 2021. (1) Fiscal 2020 excludes the impact of the 53rd week. Same-Shack sales compares the 52 weeks from December 26, 2019 through December 23, 2020 to the 52 weeks from December 27, 2018 through December 25, 2019. In order to compare like-for-like periods for fiscal 2021, same-Shack sales will compare the 52 weeks from December 31, 2020 through December 29, 2021 to the 52 weeks from January 2, 2020 through December 30, 2020. (2) This represents a non-GAAP measure. Reconciliations to the most directly comparable financial measures presented in accordance with GAAP are set forth in the schedules within “Non-GAAP Financial Measures,” herein. See “Non-GAAP Financial Measures.” Shake Shack Inc. Form 10-K | 57 RESULTS OF OPERATIONS The following table summarizes our results of operations for fiscal 2020 and fiscal 2019: (dollar amounts in thousands) 2020 (1) 2019 Shack sales $ 506,339 96.8 % $ 574,625 96.7 % Licensing revenue 16,528 3.2 % 19,894 3.3 % TOTAL REVENUE 522,867 100.0 % 594,519 100.0 % Shack-level operating expenses (2) : Food and paper costs 153,335 30.3 % 168,176 29.3 % Labor and related expenses 156,814 31.0 % 160,811 28.0 % Other operating expenses 73,220 14.5 % 69,169 12.0 % Occupancy and related expenses 51,592 10.2 % 48,451 8.4 % General and administrative expenses 64,250 12.3 % 65,649 11.0 % Depreciation expense 48,801 9.3 % 40,392 6.8 % Pre-opening costs 8,580 1.6 % 14,834 2.5 % Impairment and loss on disposal of assets 10,151 1.9 % 1,352 0.2 % TOTAL EXPENSES 566,743 108.4 % 568,834 95.7 % OPERATING INCOME (LOSS) (43,876) (8.4) % 25,685 4.3 % Other income (expense), net (786) (0.2) % 2,263 0.4 % Interest expense (815) (0.2) % (434) (0.1) % INCOME (LOSS) BEFORE INCOME TAXES (45,477) (8.7) % 27,514 4.6 % Income tax expense 57 — % 3,386 0.6 % NET INCOME (LOSS) (45,534) (8.7) % 24,128 4.1 % Less: net income (loss) attributable to non-controlling interests (3,376) (0.6) % 4,301 0.7 % NET INCOME (LOSS) ATTRIBUTABLE TO SHAKE SHACK INC. $ (42,158) (8.1) % $ 19,827 3.3 % (1) We operate on a 52/53 week fiscal year that ends on the last Wednesday of the calendar year. Fiscal year 2020 was a 53-week year with the extra operating week (the " 53rd week ") falling in our fiscal fourth quarter. Fiscal 2019 contained 52 weeks. (2) As a percentage of Shack sales. Shake Shack Inc. Form 10-K | 58 Shack Sales Shack sales represent the aggregate sales of food, beverages and Shake Shack branded merchandise at our domestic Company-operated Shacks. Shack sales in any period are directly influenced by the number of operating weeks in such period, the number of open Shacks and same-Shack sales. Same-Shack sales means, for any reporting period, sales performance at our Company-operated domestic Shacks that have been open for at least 24 months. (dollar amounts in thousands) 2020 2019 Shack sales $ 506,339 $ 574,625 Percentage of total revenue 96.8 % 96.7 % Dollar change compared to prior year $ (68,286) Percentage change compared to prior year (11.9) % Shack Sales for the fiscal year ended December 30, 2020 decreased 11.9% to $506.3 million versus the prior year. This decrease is inclusive of the favorable impact of the 53rd week in the fourth quarter 2020, which resulted in incremental Shack sales of $10.7 million. Excluding the 53rd week, Shack sales in fiscal year 2020 decreased 13.7%. The decrease in Shack sales for fiscal 2020 was primarily due a decline in same-Shack sales due to the impact from the COVID-19 pandemic, partially offset by the opening of 20 new domestic Company-operated Shacks during fiscal 2020. Same-Shack sales improved across all regions on a sequential basis when compared to the third quarter, with performance driven by increases in in-Shack dining in both urban and suburban Shacks, combined with a high retention of digital sales. Most notably, same-Shack sales have improved sequentially over each of the last nine months of fiscal 2020. For fiscal 2020, same-Shack sales were down 27.8%, primarily driven by a 36.9% decrease in guest traffic partially offset by an increase in price mix of 9.1%. This increase in price mix was driven by an increase in average check, primarily from a higher digital sales mix combined with an overall increase in check, due to higher number of items per order since the start of the pandemic. For the purpose of calculating same-Shack sales growth for fiscal 2020, Shack sales for 114 Shacks were included in the comparable Shack base at the end of fiscal 2020. Licensing Revenue Licensing revenue is comprised of license fees, opening fees for certain licensed Shacks and territory fees. License fees are calculated as a percentage of sales and territory fees are payments for the exclusive right to develop Shacks in a specific geographic area. (dollar amounts in thousands) 2020 2019 Licensing revenue $ 16,528 $ 19,894 Percentage of total revenue 3.2 % 3.3 % Dollar change compared to prior year $ (3,366) Percentage change compared to prior year (16.9) % Licensed revenue for the fiscal year ended December 30, 2020 decreased 16.9% to $16.5 million versus the prior year. This decrease is inclusive of the favorable impact of the 53rd week in the fourth quarter 2020, which resulted in incremental licensed revenue of $0.4 million. Excluding the 53rd week, licensed revenue in fiscal year 2020 decreased 18.9%. The decrease in licensing revenue for fiscal 2020 was primarily due to reduced sales related to the COVID-19 pandemic, partially offset by a net increase of 16 Shacks opened during fiscal 2020. Our licensed business has shown gradual improvement, however the business continues to be impacted by the pandemic. Our domestic licensed business still faces significant headwinds, with airport and stadium Shacks still either closed or operating at significantly reduced traffic. As of the end of fiscal 2020, 17 licensed Shacks remained temporarily closed. Furthermore, approximately half of the UK Shacks were closed as of the end of fiscal 2020, as the government maintained lockdowns to control the virus spread. Shake Shack Inc. Form 10-K | 59 Food and Paper Costs Food and paper costs include the direct costs associated with food, beverage and packaging of our menu items. The components of food and paper costs are variable by nature, changing with sales volume, and are impacted by menu mix and fluctuations in commodity costs, as well as geographic scale and proximity. (dollar amounts in thousands) 2020 2019 Food and paper costs $ 153,335 $ 168,176 Percentage of Shack sales 30.3 % 29.3 % Dollar change compared to prior year $ (14,841) Percentage change compared to prior year (8.8) % The decrease in Food and paper costs for fiscal 2020 was primarily due to a decline in sales volume related to the COVID-19 pandemic, partially offset by the opening of 20 new domestic Company-operated Shacks during fiscal 2020. As a percentage of Shack sales, the increase in Food and paper costs for fiscal 2020 was primarily due to higher paper and packaging costs, with all orders packaged as 'to go' orders since the start of the pandemic, and significant inflation in beef prices, partially offset by lower chicken costs. For a large part of the second quarter of fiscal 2020, we experienced significant inflation in beef, with costs nearly double that of last year for most of June. Beef prices returned to more normalized levels in the third quarter of fiscal 2020. Labor and Related Expenses Labor and related expenses include domestic Company-operated Shack-level hourly and management wages, bonuses, payroll taxes, equity-based compensation, workers' compensation expense and medical benefits. As we expect with other variable expense items, we expect labor costs to grow as our Shack sales grow. Factors that influence labor costs include minimum wage and payroll tax legislation, health care costs, size and location of the Shack and the performance of our domestic Company-operated Shacks. (dollar amounts in thousands) 2020 2019 Labor and related expenses $ 156,814 $ 160,811 Percentage of Shack sales 31.0 % 28.0 % Dollar change compared to prior year $ (3,997) Percentage change compared to prior year (2.5) % The decrease in labor and related expenses for fiscal 2020 was primarily due to reductions in staffing expenses across all Shacks associated with the impact of COVID-19. These decreases were partially offset by the opening of 20 new domestic Company-operated Shacks during fiscal 2020, and a number of incremental payroll costs to support our Shack employees. These incremental payroll costs were related to a temporary 10% premium pay raise to hourly employees through the end of August, guaranteed bonuses for Shack teams, and payments related to scheduling changes for hourly team members as teams navigated the challenging operating conditions caused by COVID-19. This investment in our teams had an incremental impact of close to $6 million on our results of operations during fiscal 2020. As a percentage of Shack sales, the increase in labor and related expenses for fiscal 2020 was primarily due to sales deleverage associated with the impact of COVID-19 and, to a lesser extent, increases in bonuses and starting wages, partially offset by the reduction of labor hours. Shake Shack Inc. Form 10-K | 60 Other Operating Expenses Other operating expenses consist of Shack-level marketing expenses, repairs and maintenance, utilities and other operating expenses incidental to operating our domestic Company-operated Shacks, such as non-perishable supplies, credit card fees and property insurance. (dollar amounts in thousands) 2020 2019 Other operating expenses $ 73,220 $ 69,169 Percentage of Shack sales 14.5 % 12.0 % Dollar change compared to prior year $ 4,051 Percentage change compared to prior year 5.9 % The increase in other operating expenses for fiscal 2020 was primarily due to higher delivery expense as a result of digital growth, as well as the opening of 20 new domestic Company-operated Shacks during fiscal 2020, partially offset by a reduction in expenses in our Shacks, including reduced maintenance expenses, as well as a reduction in credit card fees and other related expenses. As a percentage of Shack sales, the increase in other operating expenses for fiscal 2020 was primarily due to higher delivery commissions as a result of digital growth and sales deleverage associated with the impact of COVID-19, partially offset by lower maintenance expenses. Occupancy and Related Expenses Occupancy and related expenses consist of Shack-level occupancy expenses (including rent, common area expenses and certain local taxes), and exclude occupancy expenses associated with unopened Shacks, which are recorded separately in Pre-opening costs. (dollar amounts in thousands) 2020 2019 Occupancy and related expenses $ 51,592 $ 48,451 Percentage of Shack sales 10.2 % 8.4 % Dollar change compared to prior year $ 3,141 Percentage change compared to prior year 6.5 % The increase in Occupancy and related expenses for fiscal 2020 was primarily due to the opening of 20 new domestic Company-operated Shacks during the fiscal year, partially offset by lower variable rent expense associated with lower revenue, as well as the impact of a $0.9 million reduction in Occupancy and related expenses related to the impairment, and closing of our Penn Station Shack. In the fourth quarter 2020, we were notified by our landlord of its early termination of our lease at Penn Station, NY due to its plans to redevelop the Long Island Rail Road Concourse following the successful completion of the East End Gateway and opening of the Moynihan Train Hall. This closure was effective as of fiscal February 2021. As a percentage of Shack sales, the increase in Occupancy and related expenses for fiscal 2020 was primarily due to sales deleverage associated with the impact of COVID-19. General and Administrative Expenses General and administrative expenses consist of costs associated with corporate and administrative functions that support Shack development and operations, as well as equity-based compensation expense. Shake Shack Inc. Form 10-K | 61 (dollar amounts in thousands) 2020 2019 General and administrative expenses $ 64,250 $ 65,649 Percentage of total revenue 12.3 % 11.0 % Dollar change compared to prior year $ (1,399) Percentage change compared to prior year (2.1) % The decrease in general and administrative expenses for fiscal 2020 was primarily due to disciplined cost reduction across the majority of discretionary spend categories and reduced home office compensation expense, partially offset by increased technology expenses to support our digital initiatives. As a percentage of total revenue, the increase in general and administrative expenses for fiscal 2020 was primarily due to sales deleverage associated with the impact of COVID-19. Depreciation Expense Depreciation expense consists of the depreciation of fixed assets, including leasehold improvements and equipment. (dollar amounts in thousands) 2020 2019 Depreciation expense $ 48,801 $ 40,392 Percentage of total revenue 9.3 % 6.8 % Dollar change compared to prior year $ 8,409 Percentage change compared to prior year 20.8 % The increase in depreciation expense for fiscal 2020 was primarily due to incremental depreciation of capital expenditures related to the opening of 20 new domestic Company-operated Shacks during fiscal 2020 and increased technology investments to support our digital initiatives. As a percentage of total revenue, the increase in depreciation expense for fiscal 2020 was primarily due to sales deleverage associated with the impact of COVID-19. Pre-Opening Costs Pre-opening costs consist primarily of legal fees, rent, managers' salaries, training costs, employee payroll and related expenses, costs to relocate and compensate Shack management teams prior to an opening and wages, travel and lodging costs for our opening training team and other supporting team members. All such costs incurred prior to the opening of a domestic Company-operated Shack are expensed in the period in which the expense was incurred. Pre-opening costs can fluctuate significantly from period to period, based on the number and timing of domestic Company-operated Shack openings and the specific pre-opening costs incurred for each domestic Company-operated Shack. Additionally, domestic Company-operated Shack openings in new geographic market areas may initially experience higher pre-opening costs than our established geographic market areas, such as the New York City metropolitan area, where we have greater economies of scale and incur lower travel and lodging costs for our training team. (dollar amounts in thousands) 2020 2019 Pre-opening costs $ 8,580 $ 14,834 Percentage of total revenue 1.6 % 2.5 % Dollar change compared to prior year $ (6,254) Percentage change compared to prior year (42.2) % The decrease in pre-opening costs for fiscal 2020 was due to the lower number of new domestic Company-operated Shacks opened during fiscal 2020 compared to fiscal 2019. Shake Shack Inc. Form 10-K | 62 Impairment and Loss on Disposal of Assets Impairment and loss on disposal of assets include impairment charges related to our long-lived assets, which includes property and equipment, as well as operating and finance lease assets. Additionally, impairment and loss on disposal of assets includes the net book value of assets that have been retired and consists primarily of furniture, equipment and fixtures that were replaced in the normal course of business. (dollar amounts in thousands) 2020 2019 Impairment and loss on disposal of assets $ 10,151 $ 1,352 Percentage of total revenue 1.9 % 0.2 % Dollar change compared to prior year $ 8,799 Percentage change compared to prior year 650.8 % The increase in impairment and loss on disposal of assets in fiscal 2020 was primarily due to asset impairment charges on operating lease assets and property and equipment of $7.6 million recorded during fiscal 2020, primarily relating to unused home office expansion space as well as the impairment of two Shacks — including the termination of our Penn Station Shack lease — and to a lesser extent, the number of maturing Shacks in our base. Other Income (Expense), Net Other income (expense), net consists of adjustments to liabilities under our tax receivable agreement, dividend income, interest income and net unrealized and realized gains and losses from the sale of marketable securities. (dollar amounts in thousands) 2020 2019 Other income (expense), net $ (786) $ 2,263 Percentage of total revenue (0.2) % 0.4 % Dollar change compared to prior year $ (3,049) Percentage change compared to prior year (134.7) % The decrease in other income (expense), net for fiscal 2020 was primarily due to a decrease in dividend income, the absence of other income related to the adjustment of liabilities under the Tax Receivable Agreement in fiscal 2019, as well as unrealized losses related to our investments in marketable securities. Interest Expense Interest expense primarily consists of interest and fees on our Revolving Credit Facility, imputed interest related to our financing equipment leases, amortization of deferred financing costs, and interest on the current portion of our liabilities under the Tax Receivable Agreement. (dollar amounts in thousands) 2020 2019 Interest expense $ (815) $ (434) Percentage of total revenue (0.2) % (0.1) % Dollar change compared to prior year $ (381) Percentage change compared to prior year 87.8 % The increase in interest expense for fiscal 2020 was primarily due to an increase in interest and fees associated with our Revolving Credit Facility in the current fiscal year. Shake Shack Inc. Form 10-K | 63 Income Tax Expense We are the sole managing member of SSE Holdings, and as a result, consolidate the financial results of SSE Holdings. SSE Holdings is treated as a partnership for U.S. federal and most applicable state and local income tax purposes. As a partnership, SSE Holdings is not subject to U.S. federal and certain state and local income taxes. Any taxable income or loss generated by SSE Holdings is passed through to and included in the taxable income or loss of its members, including us, on a pro rata basis. We are subject to U.S. federal income taxes, in addition to state and local income taxes with respect to our allocable share of any taxable income or loss of SSE Holdings, as well as any stand-alone income or loss generated by Shake Shack Inc. We are also subject to withholding taxes in foreign jurisdictions. (dollar amounts in thousands) 2020 2019 Income tax expense $ 57 $ 3,386 Percentage of total revenue — % 0.6 % Dollar change compared to prior year $ (3,329) Percentage change compared to prior year (98.3) % Our effective income tax rates for fiscal 2020 and fiscal 2019 were (0.1)% and 12.3%, respectively. The decrease in our effective income tax rate from fiscal 2019 to fiscal 2020 was primarily driven by lower tax rates for foreign and state taxes mainly in connection with lower pre-tax book income and remeasurement of deferred tax assets, partially offset by lower tax credits and an increase in valuation allowance. Net Income (Loss) Attributable to Non-controlling Interests We are the sole managing member of SSE Holdings and have the sole voting power in, and control the management of, SSE Holdings. Accordingly, we consolidate the financial results of SSE Holdings and report a non-controlling interest on our Consolidated Statements of Income (Loss), representing the portion of net income (loss) attributable to the other members of SSE Holdings. The Third Amended and Restated Limited Liability Company Agreement of SSE Holdings provides that holders of LLC Interests may, from time to time, require SSE Holdings to redeem all or a portion of their LLC Interests for newly-issued shares of Class A common stock on a one-for-one basis. In connection with any redemption or exchange, we will receive a corresponding number of LLC Interests, increasing our total ownership interest in SSE Holdings. The weighted average ownership percentages for the applicable reporting periods are used to attribute net income (loss) and other comprehensive income to Shake Shack Inc. and the non-controlling interest holders. (dollar amounts in thousands) 2020 2019 Net income (loss) attributable to non-controlling interests $ (3,376) $ 4,301 Percentage of total revenue (0.6) % 0.7 % Dollar change compared to prior year $ (7,677) Percentage change compared to prior year (178.5) % The decrease in net income (loss) attributable to non-controlling interests for fiscal 2020 was primarily due to lower pre-tax book income resulting in a net loss during fiscal 2020, and a decrease in the non-controlling interest holders' weighted average ownership, which was 7.7% and 15.9% for fiscal 2020 and fiscal 2019, respectively. Fiscal 2019 Compared to Fiscal 2018 The comparison of fiscal 2019 to fiscal 2018 has been omitted from this Form 10-K, but can be referenced in our Form 10-K for the fiscal year ended December 25, 2019, filed on February 24, 2020. Shake Shack Inc. Form 10-K | 64 NON-GAAP FINANCIAL MEASURES To supplement the consolidated financial statements, which are prepared and presented in accordance with U.S. generally accepted accounting principles (“GAAP”), we use the following non-GAAP financial measures: Shack-level operating profit, Shack-level operating profit margin, EBITDA, adjusted EBITDA, adjusted EBITDA margin, adjusted pro forma net income (loss), adjusted pro forma earnings (loss) per fully exchanged and diluted share and adjusted pro forma effective tax rate (collectively the "non-GAAP financial measures"). Shack-Level Operating Profit We define Shack-level operating profit as Shack sales less Shack-level operating expenses including Food and paper costs, Labor and related expenses, Other operating expenses and Occupancy and related expenses. How This Measure Is Useful When used in conjunction with GAAP financial measures, Shack-level operating profit and Shack-level operating profit margin are supplemental measures of operating performance that we believe are useful measures to evaluate the performance and profitability of our Shacks. Additionally, Shack-level operating profit and Shack-level operating profit margin are key metrics used internally by our management to develop internal budgets and forecasts, as well as assess the performance of our Shacks relative to budget and against prior periods. It is also used to evaluate employee compensation as it serves as a metric in certain of our performance-based employee bonus arrangements. We believe presentation of Shack-level operating profit and Shack-level operating profit margin provides investors with a supplemental view of our operating performance that can provide meaningful insights to the underlying operating performance of our Shacks, as these measures depict the operating results that are directly impacted by our Shacks and exclude items that may not be indicative of, or are unrelated to, the ongoing operations of our Shacks. It may also assist investors to evaluate our performance relative to peers of various sizes and maturities and provides greater transparency with respect to how our management evaluates our business, as well as our financial and operational decision-making. Limitations of the Usefulness of this Measure Shack-level operating profit and Shack-level operating profit margin may differ from similarly titled measures used by other companies due to different methods of calculation. Presentation of Shack-level operating profit and Shack-level operating profit margin is not intended to be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP. Shack-level operating profit excludes certain costs, such as General and administrative expenses and Pre-opening costs, which are considered normal, recurring cash operating expenses and are essential to support the operation and development of our Shacks. Therefore, this measure may not provide a complete understanding of the operating results of our Company as a whole and Shack-level operating profit and Shack-level operating profit margin should be reviewed in conjunction with our GAAP financial results. A reconciliation of Shack-level operating profit to Operating income, the most directly comparable GAAP financial measure, is as follows. Shake Shack Inc. Form 10-K | 65 (dollar amounts in thousands) 2020 (1) 2019 2018 2017 2016 Operating income (loss) (2) $ (43,876) $ 25,685 $ 31,711 $ 33,813 $ 27,805 Less: Licensing revenue 16,528 19,894 13,721 12,422 9,125 Add: General and administrative expenses 64,250 65,649 52,720 39,003 30,556 Depreciation expense 48,801 40,392 29,000 21,704 14,502 Pre-opening costs 8,580 14,834 12,279 9,603 9,520 Impairment and loss on disposal of assets (3) 10,151 1,352 917 608 34 Shack-level operating profit $ 71,378 $ 128,018 $ 112,906 $ 92,309 $ 73,292 Total revenue $ 522,867 $ 594,519 $ 459,310 $ 358,810 $ 268,475 Less: Licensing revenue 16,528 19,894 13,721 12,422 9,125 Shack sales $ 506,339 $ 574,625 $ 445,589 $ 346,388 $ 259,350 Shack-level operating profit margin (4) 14.1 % 22.3 % 25.3 % 26.6 % 28.3 % (1) We operate on a 52/53 week fiscal year that ends on the last Wednesday of the calendar year. Fiscal year 2020 was a 53-week year with the extra operating week (the " 53rd week ") falling in our fiscal fourth quarter 2020. Fiscal 2019, fiscal 2018, fiscal 2017 and fiscal 2016 each contained 52 weeks. (2) For fiscal 2020, Operating income (loss) included a $0.9 million reduction in Occupancy and related expenses due to the closure of our Shack in Penn Station. (3) For fiscal year 2020, this amount includes a non-cash impairment charge of $7.6 million related to two Shacks and our home office. (4) As a percentage of Shack sales. EBITDA and Adjusted EBITDA EBITDA is defined as Net income (loss) before Interest expense (net of interest income), Income tax expense (benefit) and Depreciation and amortization expense. Adjusted EBITDA is defined as EBITDA (as defined above) excluding equity-based compensation expense, deferred lease costs, Impairment and loss on disposal of assets, amortization of cloud-based software implementation costs, as well as certain non-recurring items that we don't believe directly reflect our core operations and may not be indicative of our recurring business operations. How These Measures Are Useful When used in conjunction with GAAP financial measures, EBITDA and adjusted EBITDA are supplemental measures of operating performance that we believe are useful measures to facilitate comparisons to historical performance and competitors' operating results. Adjusted EBITDA is a key metric used internally by our management to develop internal budgets and forecasts and also serves as a metric in our performance-based equity incentive programs and certain of our bonus arrangements. We believe presentation of EBITDA and adjusted EBITDA provides investors with a supplemental view of our operating performance that facilitates analysis and comparisons of our ongoing business operations because they exclude items that may not be indicative of our ongoing operating performance. Limitations of the Usefulness of These Measures EBITDA and adjusted EBITDA may differ from similarly titled measures used by other companies due to different methods of calculation. Presentation of EBITDA and adjusted EBITDA is not intended to be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP. EBITDA and adjusted EBITDA exclude certain normal recurring expenses. Therefore, these measures may not provide a complete understanding of our performance and should be reviewed in conjunction with our GAAP financial measures. A reconciliation of EBITDA and adjusted EBITDA to Net income (loss), the most directly comparable GAAP measure, is as follows. Shake Shack Inc. Form 10-K | 66 (in thousands) 2020 (1) 2019 2018 2017 2016 Net income (loss) $ (45,534) $ 24,128 $ 21,948 $ 8,884 $ 22,146 Depreciation expense 48,801 40,392 29,000 21,704 14,502 Interest expense, net 815 434 2,407 1,565 285 Income tax expense 57 3,386 8,862 151,409 6,350 EBITDA 4,139 68,340 62,217 183,562 43,283 Equity-based compensation 5,560 7,600 6,067 5,623 5,354 Amortization of cloud-based software implementation costs (2) 1,444 312 — — — Deferred lease costs (3) 92 2,608 876 983 2,251 Impairment and loss on disposal of assets (4) 10,151 1,352 917 608 34 Other (income) loss related to adjustment of liabilities under tax receivable agreement 1,147 (808) (78) (1,362) (688) Other income related to adjustment of liabilities under tax receivable agreement resulting from the enactment of the TCJA — — — (125,859) — Executive transition costs (5) 150 126 340 664 — Project Concrete (6) (229) 2,111 1,292 181 — Costs related to relocation of home office (7) — — 1,019 264 — Hong Kong office (8) — 199 — — — Legal Settlement (9) — — 1,200 — — Other (10) 285 — — — — ADJUSTED EBITDA 22,739 $ 81,840 $ 73,850 $ 64,664 $ 50,234 Adjusted EBITDA margin (11) 4.3 % 13.8 % 16.1 % 18.0 % 18.7 % (1) We operate on a 52/53 week fiscal year that ends on the last Wednesday of the calendar year. Fiscal year 2020 was a 53-week year with the extra operating week (the " 53rd week ") falling in our fiscal fourth quarter 2020. Fiscal 2019, fiscal 2018, fiscal 2017 and fiscal 2016 each contained 52 weeks. (2) Represents amortization of capitalized implementation costs related to cloud-based software arrangements that are included within General and administrative expenses. (3) Reflects the extent to which lease expense is greater than or less than contractual fixed base rent. As a result of adoption of the new lease accounting standard on December 27, 2018, these lease costs may also include certain additional lease components, such as common area maintenance costs and property taxes, that were previously not included in lease expense for prior periods. For fiscal 2020, this amount included a $0.9 million reduction in Occupancy and related expenses due to the closing of our Shack in Penn Station . (4) For fiscal year 2020, this amount includes a non-cash impairment charge of $7.6 million related to two Shacks and our home office. (5) Represents fees paid in connection with the search and hiring of certain executive and key management positions. (6) Represents consulting and advisory fees related to our enterprise-wide system upgrade initiative called Project Concrete. (7) Represents costs incurred in connection with our relocation to a new home office. (8) Represents costs associated with establishing our first international office in Hong Kong. (9) Expense incurred to establish an accrual related to the settlement of a legal matter. (10) Represents incremental expenses incurred related to an inventory adjustment and certain employee-related expenses. (11) Calculated as a percentage of total revenue, which was $522.9 million, $594.5 million, $459.3 million, $358.8 million, and $268.5 million for fiscal 2020, fiscal 2019, fiscal 2018, fiscal 2017, and fiscal 2016, respectively. Shake Shack Inc. Form 10-K | 67 Adjusted Pro Forma Net Income (Loss) and Adjusted Pro Forma Earnings (Loss) Per Fully Exchanged and Diluted Share Adjusted pro forma net income (loss) represents net income (loss) attributable to Shake Shack Inc. assuming the full exchange of all outstanding SSE Holdings, LLC membership interests ("LLC Interests") for shares of Class A common stock, adjusted for certain non-recurring items that we do not believe are directly related to our core operations and may not be indicative of our recurring business operations. Adjusted pro forma earnings (loss) per fully exchanged and diluted share is calculated by dividing adjusted pro forma net income (loss) by the weighted-average shares of Class A common stock outstanding, assuming the full exchange of all outstanding LLC Interests, after giving effect to the dilutive effect of outstanding equity-based awards. How These Measures Are Useful When used in conjunction with GAAP financial measures, adjusted pro forma net income (loss) and adjusted pro forma earnings (loss) per fully exchanged and diluted share are supplemental measures of operating performance that we believe are useful measures to evaluate our performance period over period and relative to our competitors. By assuming the full exchange of all outstanding LLC Interests, we believe these measures facilitate comparisons with other companies that have different organizational and tax structures, as well as comparisons period over period because it eliminates the effect of any changes in net income (loss) attributable to Shake Shack Inc. driven by increases in our ownership of SSE Holdings, which are unrelated to our operating performance, and excludes items that are non-recurring or may not be indicative of our ongoing operating performance. Limitations of the Usefulness of These Measures Adjusted pro forma net income (loss) and adjusted pro forma earnings (loss) per fully exchanged and diluted share may differ from similarly titled measures used by other companies due to different methods of calculation. Presentation of adjusted pro forma net income (loss) and adjusted pro forma earnings (loss) per fully exchanged and diluted share should not be considered alternatives to net income (loss) and earnings (loss) per share, as determined under GAAP. While these measures are useful in evaluating our performance, they do not account for the earnings attributable to the non-controlling interest holders and therefore do not provide a complete understanding of the net income (loss) attributable to Shake Shack Inc. Adjusted pro forma net income (loss) and adjusted pro forma earnings (loss) per fully exchanged and diluted share should be evaluated in conjunction with our GAAP financial results. A reconciliation of adjusted pro forma net income (loss) to net income (loss) attributable to Shake Shack Inc., the most directly comparable GAAP measure, and the computation of adjusted pro forma earnings (loss) per fully exchanged and diluted share are set forth below. Shake Shack Inc. Form 10-K | 68 (in thousands, except per share amounts) 2020 (1) 2019 2018 2017 2016 Numerator: Net income (loss) attributable to Shake Shack Inc. $ (42,158) $ 19,827 $ 15,179 $ (320) $ 12,446 Adjustments: Reallocation of net income (loss) attributable to non-controlling interests from the assumed exchange of LLC Interests (2) $ (3,376) 4,301 6,769 9,204 9,700 Executive transition costs (3) 150 126 340 664 — Project Concrete (4) (229) 2,111 1,292 181 — Costs related to relocation of home office (5) — — 1,019 264 — Other (income) loss related to the adjustment of liabilities under tax receivable agreement 1,147 (808) (78) (1,362) (688) Other income related to the remeasurement of liabilities under tax receivable agreement resulting from the enactment of the TCJA — — — (125,859) — Remeasurement of deferred tax assets — — 3,794 138,636 (1,526) Hong Kong office (6) — 199 — — — Legal settlement (7) — — 1,200 — — Asset impairment charge (8) 7,644 — — — — Reduction in Occupancy and related expenses due to Shack closure (9) (897) — — — — Tax effect of change in tax basis related to the adoption of new accounting standards (10) — 1,161 (311) — — Income tax (expense) benefit (11) 15,089 446 (2,290) (377) (3,164) Other (12) 285 — — — — Adjusted pro forma net income (loss) $ (22,345) $ 27,363 $ 26,914 $ 21,031 $ 16,768 Denominator: Weighted-average shares of Class A common stock outstanding—diluted 37,129 32,251 29,179 25,876 23,449 Adjustments: Assumed exchange of LLC Interests for shares of Class A common stock (2) 3,096 5,921 8,663 10,773 13,360 Dilutive effect of stock options — — — 555 — Adjusted pro forma fully exchanged weighted-average shares of Class A common stock outstanding—diluted 40,225 38,172 37,842 37,204 36,809 Adjusted pro forma earnings (loss) per fully exchanged share—diluted $ (0.56) $ 0.72 $ 0.71 $ 0.57 $ 0.46 2020 (1) 2019 2018 2017 2016 Earnings (loss) per share of Class A common stock - diluted $ (1.14) $ 0.61 $ 0.52 $ (0.01) $ 0.53 Assumed exchange of LLC Interests for shares of Class A common stock (2) 0.01 0.02 0.06 0.26 0.07 Non-GAAP adjustments (13) 0.57 0.09 0.13 0.33 (0.14) Dilutive impact of stock options — — — (0.01) — Adjusted pro forma earnings (loss) per fully exchanged share—diluted $ (0.56) $ 0.72 $ 0.71 $ 0.57 $ 0.46 (1) We operate on a 52/53 week fiscal year that ends on the last Wednesday of the calendar year. Fiscal year 2020 was a 53-week year with the extra operating week (the " 53rd week ") falling in our fiscal fourth quarter 2020. Fiscal 2019, fiscal 2018, fiscal 2017 and fiscal 2016 each contained 52 weeks. (2) Assumes the exchange of all outstanding LLC Interests for shares of Class A common stock, resulting in the elimination of the non-controlling interest and recognition of the net income (loss) attributable to non-controlling interests. (3) Represents costs incurred in connection with our executive search, including fees paid to an executive recruiting firm. (4) Represents consulting and advisory fees related to our enterprise-wide system upgrade initiative called Project Concrete. (5) Represents costs incurred in connection with our relocation to a new home office. Shake Shack Inc. Form 10-K | 69 (6) Represents costs associated with establishing our first international office in Hong Kong. (7) Expense incurred to establish an accrual related to the settlement of a legal matter. (8) For fiscal year 2020, this amount includes a non-cash impairment charge of $7.6 million related to two Shacks and our home office. (9) For fiscal year 2020, this amount included a reduction of $0.9 million in Occupancy and related expenses due to the closure of our Shack in Penn Station. (10) Represents the tax effect of change in tax basis related to the adoption of the new lease accounting standard in fiscal 2019 and the adoption of the new revenue recognition standard in fiscal 2018. (11) For fiscal 2020, fiscal 2019, fiscal 2018, fiscal 2017 and fiscal 2016, amounts represent the tax effect of the aforementioned adjustments and pro forma adjustments to reflect corporate income taxes at assumed effective tax rates of 40.2%, 6.1%, 22.2%, 38.5% and 39.7%, respectively, which include provisions for U.S. federal income taxes, certain LLC entity-level taxes and foreign withholding taxes, assuming the highest statutory rates apportioned to each applicable state, local and foreign jurisdiction. (12) Represents incremental expenses incurred related to an inventory adjustment and certain employee-related expenses. (13) Represents the per share impact of non-GAAP adjustments for each period. Refer to the reconciliation of Adjusted Pro Forma Net Income (Loss) above for further details. Shake Shack Inc. Form 10-K | 70 LIQUIDITY AND CAPITAL RESOURCES Sources and Uses of Cash Our primary sources of liquidity are cash from operations, cash and cash equivalents on hand, short-term investments and availability under our Revolving Credit Facility. As of December 30, 2020, we maintained a cash and cash equivalents balance of $146.9 million and a short-term investments balance of $36.9 million within Marketable securities. On June 8, 2018, we filed a Registration Statement on Form S-3 with the SEC which permits us to issue a combination of securities described in the prospectus in one or more offerings from time to time. To date, we have not experienced difficulty accessing the capital markets; however, future volatility in the capital markets may affect our ability to access those markets or increase the costs associated with issuing debt or equity instruments. Our primary requirements for liquidity are to fund our working capital needs, operating and finance lease obligations, capital expenditures and general corporate needs. Our requirements for working capital are generally not significant because our guests pay for their food and beverage purchases in cash or on debit or credit cards at the time of the sale and we are able to sell many of our inventory items before payment is due to the supplier of such items. Our ongoing capital expenditures are principally related to opening new Shacks, existing Shack capital investments (both for remodels and maintenance), as well as investments in our digital and corporate infrastructure. In addition, we are obligated to make payments to certain members of SSE Holdings under the Tax Receivable Agreement. As of December 30, 2020, such obligations totaled $233.0 million. Amounts payable under the Tax Receivable Agreement are contingent upon, among other things, (i) generation of future taxable income over the term of the Tax Receivable Agreement and (ii) future changes in tax laws. If we do not generate sufficient taxable income in the aggregate over the term of the Tax Receivable Agreement to utilize the tax benefits, then we would not be required to make the related TRA Payments. Although the amount of any payments that must be made under the Tax Receivable Agreement may be significant, the timing of these payments will vary and will generally be limited to one payment per member per year. The amount of such payments are also limited to the extent we utilize the related deferred tax assets. The payments that we are required to make will generally reduce the amount of overall cash flow that might have otherwise been available to us or to SSE Holdings, but we expect the cash tax savings we will realize from the utilization of the related deferred tax assets to fund the required payments. COVID-19 Update In response to the uncertain market conditions resulting from the COVID-19 pandemic, we have taken the following actions in fiscal 2020. • On April 17, 2020, we announced an ATM Program, under which we may offer and sell shares of our Class A common stock having an aggregate price of up to $75.0 million from time to time. On April 21, 2020, we completed the sale of 233,467 shares of our Class A common stock pursuant to the ATM Program and received $9.8 million of proceeds, net of commissions. The proceeds were used to purchase newly-issued LLC Interests. • On April 21, 2020, we completed an underwritten offering of 3,416,070 shares of our Class A common stock, resulting in $135.9 million of proceeds, net of underwriting discounts and commissions. The proceeds were used to purchase newly-issued LLC Interests. • In May 2020, we entered into an amendment to our Revolving Credit Facility that provides for a number of enhanced modifications to reflect the current and ongoing impact from COVID-19. In March 2020, we drew down the full $50.0 million available under the Revolving Credit Facility to enhance liquidity and financial flexibility given the uncertain market conditions created by the COVID-19 pandemic. We repaid this amount in full, plus interest, in June 2020. As of December 30, 2020, we were in compliance with all covenants. Shake Shack Inc. Form 10-K | 71 We believe our existing cash and cash equivalents and marketable securities balances, combined with the actions we have taken in response to COVID-19, will be sufficient to fund our operating and finance lease obligations, capital expenditures, Tax Receivable Agreement obligations and working capital needs for at least the next 12 months and the foreseeable future. Summary of Cash Flows The following table and discussion presents, for the periods indicated, a summary of our key cash flows from operating, investing and financing activities. (in thousands) 2020 1 2019 Net cash provided by operating activities $ 37,350 $ 89,857 Net cash used in investing activities (69,397) (80,686) Net cash provided by financing activities 141,821 3,178 Increase in cash and cash equivalents 109,774 12,349 Cash and cash equivalents at beginning of period 37,099 24,750 Cash and cash equivalents at end of period $ 146,873 $ 37,099 (1) We operate on a 52/53 week fiscal year that ends on the last Wednesday of the calendar year. Fiscal year 2020 was a 53-week year with the extra operating week (the " 53rd week ") falling in our fiscal fourth quarter. Fiscal 2019 contained 52 weeks. Operating Activities For fiscal 2020, net cash provided by operating activities was $37.4 million compared to $89.9 million for fiscal 2019, a decrease of $52.5 million. The decrease was primarily due to a decline in net income of $69.7 million, and change in operating assets and liabilities of $11.2 million, partially offset by the impact of non-cash charges of $28.4 million. The $11.2 million change in our operating asset and liability balances was primarily driven by Accounts receivable being a source of cash of $1.0 million in fiscal 2020, driven by timing of cash receipts of open receivables, as compared to a source of cash of $10.7 million in fiscal 2019; Accrued expenses being a source of cash of $2.2 million in fiscal 2020, primarily driven by higher accruals associated with incremental payroll costs for our hourly team members, and to a lesser extent, the timing of accruals, compared to a source of cash of $9.9 million in fiscal 2019; partially offset by Other assets being a use of cash of $2.9 million in fiscal 2020, driven by increased assets relating to cloud-software investments, compared to a use of cash of $8.2 million in fiscal 2019. Investing Activities For fiscal 2020, net cash used in investing activities was $69.4 million compared to $80.7 million for fiscal 2019, a decrease of $11.3 million. This decrease was primarily due to a decrease of $37.5 million in capital expenditures in fiscal 2020, partially offset by increased purchases of marketable securities of $19.2 million. Financing Activities For fiscal 2020, net cash provided by financing activities was $141.8 million compared to $3.2 million for fiscal 2019, an increase of $138.6 million. This increase was primarily due to $145.0 million in net cash proceeds from the issuance of Class A common stock, partially offset by increased payments made under the Tax Receivable Agreement. Cash Flows - Fiscal 2019 Compared to Fiscal 2018 The comparison of fiscal 2019 to fiscal 2018 has been omitted from this Form 10-K, but can be referenced in our Form 10-K for the fiscal year ended December 25, 2019, filed on February 24, 2020. Revolving Credit Facility In August 2019, we terminated our previous revolving credit facility and entered into a new revolving credit facility agreement ("Revolving Credit Facility"), which permits borrowings up to $50.0 million, of which the entire amount is available immediately, with the ability to increase available borrowings up to an additional $100.0 million, to be made available subject to satisfaction of Shake Shack Inc. Form 10-K | 72 certain conditions. The Revolving Credit Facility will mature and all amounts outstanding will be due and payable in August 2024. The Revolving Credit Facility also permits the issuance of letters of credit upon our request of up to $15.0 million. Borrowings under the Revolving Credit Facility will bear interest at either: (i) LIBOR plus a percentage ranging from 1.0% to 1.5% or (ii) the base rate plus a percentage ranging from 0.0% to 0.5%, in each case depending on our net lease adjusted leverage ratio. To the extent the LIBOR reference rate is no longer available, the administrative agent, in consultation with us, will determine a replacement rate which will be generally in accordance with similar transactions in which it serves as administrative agent. The obligations under the Revolving Credit Facility are secured by a first-priority security interest in substantially all of the assets of SSE Holdings and the guarantors. The obligations under the Revolving Credit Facility are guaranteed by each of SSE Holdings' direct and indirect subsidiaries (with certain exceptions). The Revolving Credit Facility requires us to comply with maximum net lease adjusted leverage and minimum fixed charge coverage ratios. We are not subject to these coverage ratios for a period of time due to the First Amendment to the Revolving Credit Facility described below. In addition, the Revolving Credit Facility contains other customary affirmative and negative covenants, including those which (subject to certain exceptions and dollar thresholds) limit our ability to incur debt; incur liens; make investments; engage in mergers, consolidations, liquidations or acquisitions; dispose of assets; make distributions on or repurchase equity securities; engage in transactions with affiliates; and prohibits us, with certain exceptions, from engaging in any line of business not related to our current line of business. As of December 30, 2020 we were in compliance with all covenants. In May 2020, we entered into a first amendment to the Revolving Credit Facility ("First Amendment"), which, among other things, provides for modified financial covenant compliance requirements for a period of time. The First Amendment requires us to maintain minimum liquidity of $25.0 million through July 1, 2021 and outstanding borrowings during the applicable period covered by the First Amendment bear interest at either: (i) LIBOR plus a percentage ranging from 1.0% to 2.5% or (ii) the base rate plus a percentage ranging from 0.0% to 1.5%, in each case depending on our net lease adjusted leverage ratio. In March 2020, we drew down the full $50.0 million available under the Revolving Credit Facility to enhance liquidity and financial flexibility given the uncertain market conditions created by the COVID-19 pandemic. We repaid this amount in full, plus interest, in June 2020. CONTRACTUAL OBLIGATIONS The following table sets forth certain contractual obligations as of December 30, 2020 and the timing and effect that such commitments are expected to have on our liquidity and capital requirements in future periods. (in thousands) Total Less than 1 Year 1-3 Years 3-5 Years More Than 5 Years Operating lease obligations (1) $ 496,307 $ 45,961 $ 108,169 $ 107,446 $ 234,731 Financing lease obligations (1) 5,983 2,169 2,711 931 172 Liabilities under tax receivable agreement (2) 232,954 — 52,809 28,382 151,763 Purchase obligations 106,299 58,919 18,292 5,510 23,578 TOTAL $ 841,543 $ 107,049 $ 181,981 $ 142,269 $ 410,244 (1) See Note 10, Leases, to the consolidated financial statements included in Item 8 for further discussion of our operating and financing leases. (2) See Notes 15, Income Taxes, and Note 18, Commitments and Contingencies, to the consolidated financial statements for further discussion of our Tax Receivable Agreement and related liabilities. Purchase obligations include all legally binding contracts, including commitments for the purchase, construction or remodeling of real estate and facilities, firm minimum commitments for inventory purchases, future minimum lease payments under non-cancelable operating leases without a possession date, equipment purchases, marketing-related contracts, software acquisition/license commitments and service contracts. Shake Shack Inc. Form 10-K | 73 Liabilities under Tax Receivable Agreement include amounts to be paid to the non-controlling interest holders, estimated over the next five years, assuming we will have sufficient taxable income over the term of the Tax Receivable Agreement to utilize the related tax benefits. The above table excludes non-cash obligations for deferred lease costs and deferred property incentives. In addition, other unrecorded obligations that have been excluded from the contractual obligations table include contingent rent payments, property taxes, insurance payments and common area maintenance costs. OFF-BALANCE SHEET ARRANGEMENTS Except for operating leases entered into in the normal course of business where we have not yet taken physical possession of the leased property, certain letters of credit entered into as security under the terms of several of our leases and the unrecorded contractual obligations set forth above, we did not have any off-balance sheet arrangements as of December 30, 2020. CRITICAL ACCOUNTING POLICIES AND ESTIMATES The preparation of financial statements and related disclosures in conformity with U.S. generally accepted accounting principles (“GAAP”) requires that we make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and disclose contingent assets and liabilities. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. The critical accounting policies and estimates described below are those that materially affect or have the greatest potential impact on our consolidated financial statements, and involve difficult, subjective or complex judgments made by management. Because of the uncertainty inherent in these matters, actual results may differ from those estimates we use in applying our critical accounting policies and estimates. The following discussion should be read in conjunction with the consolidated financial statements included in Part II, Item 8 of this Form 10-K. Valuation of Long-Lived Assets We assess potential impairments to our long-lived assets, which includes property and equipment and operating lease assets, whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of an asset is measured by a comparison of the carrying amount of an asset group to the estimated undiscounted future cash flows expected to be generated by the asset. The evaluation is performed at the lowest level of identifiable cash flows, which is primarily at the individual Shack level. Significant judgment is involved in determining the assumptions used in estimating future cash flows, including projected sales growth and operating margins. If the carrying amount of the asset group exceeds its estimated undiscounted future cash flows, an impairment charge is recognized as the amount by which the carrying amount of the asset exceeds the fair value of the asset, considering external market participant assumptions. Since the determination of future cash flows is an estimate of future performance, there may be future impairments in the event that future cash flows do not meet expectations. Leases On December 27, 2018 we adopted ASU 2016-02, Leases (Topic 842) , using a modified retrospective approach. Refer to Note 10, Leases, for further details. We currently lease all of our domestic Company-operated Shacks, our home office, and certain equipment under various non-cancelable lease agreements that expire on various dates through 2037. Upon the possession of a leased asset, we determine its classification as an operating or financing lease. All of our real estate leases are classified as operating leases and most of our equipment leases are classified as finance leases. Shake Shack Inc. Form 10-K | 74 We make judgments regarding the probable term for each lease, which can impact the classification and accounting for a lease as financing or operating, as well as the amount of straight-lined rent expense in a particular period. Generally, our real estate leases have initial terms ranging from 10 to 15 years and typically include two five-year renewal options. Renewal options are typically not included in the lease term as it is not reasonably certain at commencement date that we would exercise the options to extend the lease. Our real estate leases typically provide for fixed minimum rent payments and/or contingent rent payments based upon sales in excess of specified thresholds. When the achievement of such sales thresholds are deemed to be probable, contingent rent is accrued in proportion to the sales recognized during the period. Fixed minimum rent payments are recognized on a straight-line basis over the lease term starting on the date we take possession of the leased property. Lease expense incurred before a Shack opens is recorded in Pre-opening costs. Once a Shack opens, we record the straight-line lease expense and any contingent rent, if applicable, in Occupancy and related expenses on the Consolidated Statements of Income (Loss). Many of our leases also require us to pay real estate taxes, common area maintenance costs and other occupancy costs which are included in Occupancy and related expenses on the Consolidated Statements of Income (Loss). We calculate operating lease assets and lease liabilities as the present value of fixed lease payments over the reasonably certain lease term beginning at the commencement date. We measure the lease liability by discounting the future fixed contractual payments included in the lease agreement, using our incremental borrowing rate (“IBR”). There are no explicit rates provided in our leases. The IBR is derived from the average of the yield curves obtained from using the notching method and the recovery rate method. The most significant assumption in calculating the incremental borrowing rate is our credit rating. We determined our credit rating based on a comparison of the financial information of SSE Holdings to other public companies and then used their respective credit ratings to develop our own. For operating leases, fixed lease payments are recognized as operating lease cost on a straight-line basis over the lease term. For finance leases and impaired operating leases, the asset is depreciated on a straight-line basis over the remaining lease term, along with recognition of interest expense associated with accretion of the lease liability. For leases with a lease term of 12 months or less ("short-term lease"), any fixed lease payments are recognized on a straight-line basis over such term, and are not recognized on the Consolidated Balance Sheets. Variable lease cost for both operating and finance leases, if any, is recognized as incurred. We expend cash for leasehold improvements to build out and equip our leased premises. Generally, a portion of the leasehold improvements and building costs are reimbursed by our landlords as landlord incentives pursuant to agreed-upon terms in our lease agreements. If obtained, landlord incentives usually take the form of up-front cash, full or partial credits against our future minimum or contingent rents otherwise payable by us, or a combination thereof. In most cases, landlord incentives are received after we take possession of the property, as we meet required milestones during the construction of the property. We include these amounts in the measurement of the initial operating lease liability, which are also reflected as a reduction to the initial measurement of the right-of-use asset. Self-Insurance Liabilities We are self-insured for our employee medical and dental plans and we recognize a liability that represents our estimated cost of claims incurred but not reported as of the balance sheet date. Our estimated liability is based on a number of assumptions and factors, which requires significant judgment including historical claims experience, severity factors, litigation costs, inflation and other actuarial assumptions. Our history of claims experience is short and our significant growth rate could affect the accuracy of our estimates. If a greater amount of claims are reported, or if medical costs increase beyond our expectations, our liabilities may not be sufficient and we could recognize additional expense. Equity-Based Compensation Equity-based compensation expense is measured based on the grant-date fair value of those awards. For awards with graded-vesting features and service conditions only, compensation expense is recognized on a straight-line basis over the total requisite service period for the entire award. For awards with graded-vesting features and a combination of service and performance conditions, compensation expense is recognized using a graded-vesting attribution method over the vesting period based on the most probable outcome of the performance conditions. Actual distributed shares are calculated upon conclusion of the service and performance periods. For stock option awards, the grant-date fair value of the awards is determined using the Black-Scholes Shake Shack Inc. Form 10-K | 75 option pricing model and involves several assumptions, including the expected term of the option, expected volatility and risk-free interest rate. We have limited historical data of our own to utilize in determining our assumptions. As such, for stock options granted in fiscal 2020 and 2019, we based our volatility assumption on a combined weighted average of our own historical data and that of a selected peer group. The weighted-average volatility used in determining the grant date fair value of awards granted in fiscal 2020 and fiscal 2019 was 42.3% and 42.2%, respectively. Forfeitures are recognized as they occur for all equity awards. Income Taxes We record valuation allowances against our deferred tax assets when it is more likely than not that all or a portion of a deferred tax asset will not be realized. In making such determination, we consider all available evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and results of operation. We routinely evaluate the realizability of our deferred tax assets by assessing the likelihood that our deferred tax assets will be recovered based on all available positive and negative evidence. Estimating future taxable income is inherently uncertain and requires judgment. In projecting future taxable income, we consider our historical results and incorporate certain assumptions, including projected Shack openings, revenue growth, and operating margins, among others. As of December 30, 2020, we had $287.0 million of deferred tax assets, net of valuation allowances. We expect to realize future tax benefits related to the utilization of these assets. If we determine in the future that we will not be able to fully utilize all or part of these deferred tax assets, we would record a valuation allowance through earnings in the period the determination was made, which would have an adverse effect on our results of operations and earnings in future periods. Liabilities Under Tax Receivable Agreement As described in Note 15 to the consolidated financial statements included in Item 8, we are a party to the Tax Receivable Agreement under which we are contractually committed to pay the non-controlling interest holders 85% of the amount of any tax benefits that we actually realize, or in some cases are deemed to realize, as a result of certain transactions. Amounts payable under the Tax Receivable Agreement are contingent upon, among other things, (i) generation of future taxable income over the term of the Tax Receivable Agreement and (ii) future changes in tax laws. If we do not generate sufficient taxable income in the aggregate over the term of the Tax Receivable Agreement to utilize the tax benefits, then we would not be required to make the related TRA Payments. Therefore, we would only recognize a liability for TRA Payments if we determine it is probable that we will generate sufficient future taxable income over the term of the Tax Receivable Agreement to utilize the related tax benefits. Estimating future taxable income is inherently uncertain and requires judgment. In projecting future taxable income, we consider our historical results and incorporate certain assumptions, including projected Shack openings, revenue growth, and operating margins, among others. As of December 30, 2020, we recognized $233.0 million of liabilities relating to our obligations under the Tax Receivable Agreement, after concluding that it was probable that we would have sufficient future taxable income to utilize the related tax benefits. There were no transactions subject to the Tax Receivable Agreement for which we did not recognize the related liability, as we concluded that we would have sufficient future taxable income to utilize all of the related tax benefits generated by all transactions that occurred in fiscal 2020. If we determine in the future that we will not be able to fully utilize all or part of the related tax benefits, we would de-recognize the portion of the liability related the benefits not expected to be utilized. Additionally, we estimate the amount of TRA Payments expected to be paid within the next 12 months and classify this amount as current on our Consolidated Balance Sheets. This determination is based on our estimate of taxable income for the next fiscal year. To the extent our estimate differs from actual results, we may be required to reclassify portions of our liabilities under the Tax Receivable Agreement between current and non-current. Shake Shack Inc. Form 10-K | 76