Shake Shack Inc. 10-K

Item 8. Financial Statements and Supplementary Data. INDEX TO FINANCIAL STATEMENTS Page Management's Report 79 Report of Independent Registered Public Accounting Firm 80 Consolidated Balance Sheets 84 Consolidated Statements of Income (Loss) 85 Consolidated Statements of Comprehensive Income (Loss) 86 Consolidated Statements of Stockholders' Equity 87 Consolidated Statements of Cash Flows 88 Notes to Consolidated Financial Statements 89 Shake Shack Inc. Form 10-K | 78 MANAGEMENT'S REPORT Management's Annual Report on the Consolidated Financial Statements Management is responsible for the preparation, integrity and objectivity of the accompanying consolidated financial statements and related financial information. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and necessarily include certain amounts that are based on estimates and informed judgments. Our management also prepared the related financial information included in this Annual Report on Form 10-K and is responsible for its accuracy and consistency with the consolidated financial statements. Ernst & Young LLP, our independent registered public accounting firm, has audited the consolidated financial statements as of December 30, 2020, as stated in their report herein. Management's Report on Internal Control Over Financial Reporting Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f). Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the financial statements for external purposes in accordance with generally accepted accounting principles in the United States of America. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we assessed the effectiveness of our internal control over financial reporting as of December 30, 2020, based on the framework in Internal Control—Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Based on the results of our evaluation, management concluded that our internal control over financial reporting was effective as of December 30, 2020. Our independent registered public accounting firm, Ernst & Young LLP, has issued an attestation report on the effectiveness of our internal control over financial reporting as of December 30, 2020, as stated in their report herein. Randy Garutti Tara Comonte Chief Executive Officer and Director President and Chief Financial Officer (duly authorized and principal executive officer) (duly authorized and principal financial officer) Shake Shack Inc. Form 10-K | 79 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and the Board of Directors of Shake Shack Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Shake Shack Inc. (the Company) as of December 30, 2020 and December 25, 2019, the related consolidated statements of income (loss), comprehensive income (loss), stockholders' equity and cash flows for each of the three years in the period ended December 30, 2020, and the related notes and financial statement schedules listed in the Index at Item 15(a) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 30, 2020 and December 25, 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 30, 2020, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 30, 2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 26, 2021 expressed an unqualified opinion thereon. Adoption of ASU No. 2016-02 As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for the recognition, measurement, presentation and disclosure of leases effective December 27, 2018 due to the adoption of Accounting Standards Update (ASU) No. 2016-02, Leases (“ASC 842”) and the amendments in ASUs 2018-01, 2018-10, and 2018-11. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Shake Shack Inc. Form 10-K | 80 Measurement of deferred tax assets related to the Company’s investment in SSE Holdings LLC Description of the Matter As discussed in Notes 12 and 15 of the consolidated financial statements, the noncontrolling interest holders of SSE Holdings LLC (“LLC”) may redeem their equity interests in SSE Holdings LLC (“LLC interests”) for shares of the Company’s Class A common stock. For income tax purposes, these redemptions are treated as direct purchases of LLC equity and are recorded at their fair market value upon the date of the redemption. The resulting incremental tax basis in excess of the book basis arising from a redemption represents a deductible temporary difference for which a deferred tax asset is recorded. At December 30, 2020, the Company’s total deferred tax asset related to the basis difference in its investment in LLC was $139 million. The basis difference in the Company’s investment in LLC changes through redemptions of LLC interests and other qualifying transactions. Auditing management’s accounting for the basis differences in its investment in LLC is especially complex and challenging as the Company’s accounting requires timely identification of all historical basis differences and subsequent adjustments related to the redemptions, described above, and the related tax receivable agreement (“TRA”) payments to the LLC holders, discussed below. How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s process for determining the completeness and measurement of the Company’s basis differences in the investment in LLC. For example, we tested management’s review controls over the calculation of the change in tax basis resulting from the redemptions, including the determination of fair market value. In addition, we tested controls over management’s communication of redemptions to the Company’s stock transfer agent as detailed in redemption notices provided by the LLC holder. To test the completeness and accuracy of the deferred tax asset related to the basis difference in the investment in the LLC, we performed audit procedures that included, among others, on a sample basis, testing redemptions of LLC interests by inspection of redemption notices, inquiry with legal counsel to verify the completeness of the redemption notices in the period, and external confirmation of LLC’s and the Company’s shares issued and outstanding with the stock transfer agent. Further, to test the measurement of the deferred tax asset, for a selection of redemptions, we recalculated the change in tax basis resulting from the redemptions, including the determination of fair value. Measurement of the Tax Receivable Agreement liability Description of the Matter As discussed in Note 15 of the consolidated financial statements, the Company has a Tax Receivable Agreement (“TRA”) with certain current and historical holders of LLC interests, which is a contractual commitment to distribute 85% of any tax benefits (“TRA Payment”), realized or deemed to be realized by the Company to the parties to the TRA. The TRA payments are contingent upon, among other things, the generation of future taxable income over the term of the TRA and future changes in tax laws. At December 30, 2020, the Company’s liability due to the holders of LLC interests under the TRA (“TRA liability”), was $233 million. Auditing management’s accounting for the TRA liability is especially complex and judgmental as the Company’s calculation of the TRA liability requires estimates of its future qualified taxable income over the term of the TRA as a basis to determine if the related tax benefits are expected to be realized. Significant changes in estimates could have a material effect on the Company’s results of operations. Shake Shack Inc. Form 10-K | 81 How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s process for determining the measurement of the Company’s TRA obligation. Such controls include management review controls over the computation of the TRA liability, which is based on several inputs including the Company’s share of the tax basis in the LLC, as discussed above, as well as the estimate of future qualified taxable income over the term of the TRA. We also tested management review control over the calculation of the TRA liability in accordance with the terms set out in the TRA. We tested the measurement of the Company’s TRA liability by performing procedures on the redemptions, as described above, and recalculating the Company’s share of the tax basis in the net assets of LLC, as discussed above. To test the Company’s position that there is sufficient future taxable income to realize the tax benefits related to the redemptions discussed above, we evaluated the assumptions used by management to develop the projections of future taxable income. For example, we compared management’s projections of future taxable income with the actual results of prior periods, as well as management’s consideration of current industry and economic trends. We also assessed the historical accuracy of management’s projections and reconciled the projections of future taxable income with other forecasted financial information prepared by the Company. We also recalculated the TRA liability and verified the calculation of the TRA liability was in accordance with the terms set out in the TRA. Lease accounting, including impairment of right-of-use assets Description of the Matter As discussed in Note 10 of the consolidated financial statements, domestic Company-operated Shacks are located on leased premises and the related equipment are leased assets on the premises. As of December 30, 2020, the Company’s right-of-use assets and lease liability is $312 million and $385 million, respectively. Auditing management’s accounting and presentation for leases was especially complex and challenging as the Company’s accounting for the right-of-use asset, and the lease liability involved the compilation and review of the details associated with the population of non-uniform leases as well as the determination of the incremental borrowing rate and the evaluation of impairment of the right-of-use assets. How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s process for determining the classification, valuation and completeness of the right-of-use asset and the lease liability. Such controls include management’s review of the completeness of the population of leases, including lease modifications, verification of the accuracy of the computation of the right-of-use asset and lease liability, including the determination of the incremental borrowing rate, and the evaluation of impairment of the right-of-use assets. We tested the completeness of the lease population through the evidence obtained from inquiries of Company personnel and an assessment of leases on a location-by-location basis based upon our knowledge of the Company’s openings of new Shake Shack restaurants and the related equipment leased for each location. For a sample of leases, we tested the accuracy of the data used in the calculation of the right-of-use asset and the lease liability by agreeing the underlying inputs, such as possession date, lease term and payment terms, to source documents, such as lease contracts. We recalculated the right-of-use asset and the lease liability and, with the support of a valuation specialist, we evaluated the key assumptions and methodologies used in the Company’s selection of the incremental borrowing rate by developing a comparative calculation. We tested the Company’s impairment evaluation, we involved our valuation specialists to assist in evaluating significant assumptions, including market rent assumptions, lease terms, and discount rate, used to estimate the fair value of right-of-use assets, and valuation methodologies used in the Company’s models. We have served as the Company's auditor since 2014. New York, New York February 26, 2021 Shake Shack Inc. Form 10-K | 82 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and the Board of Directors of Shake Shack Inc. Opinion on Internal Control Over Financial Reporting We have audited Shake Shack Inc.’s (the Company’s) internal control over financial reporting as of December 30, 2020, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework ) (the COSO criteria). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 30, 2020, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 30, 2020 and December 25, 2019, the related consolidated statements of income (loss), comprehensive income (loss), stockholders' equity and cash flows for each of the three years in the period ended December 30, 2020, and the related notes and financial statement schedules listed in the Index at Item 15(a) (collectively referred to as the “consolidated financial statements”) and our report dated February 26, 2021 expressed an unqualified opinion thereon . Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. New York, New York February 26, 2021 Shake Shack Inc. Form 10-K | 83 SHAKE SHACK INC. CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share amounts) December 30 2020 December 25 2019 ASSETS Current assets: Cash and cash equivalents $ 146,873 $ 37,099 Marketable securities 36,887 36,508 Accounts receivable, net 9,464 9,970 Inventories 2,888 2,221 Prepaid expenses and other current assets 7,074 1,877 Total current assets 203,186 87,675 Property and equipment, net 336,541 314,862 Operating lease assets 306,317 274,426 Deferred income taxes, net 287,007 279,817 Other assets 12,297 11,488 TOTAL ASSETS $ 1,145,348 $ 968,268 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 23,487 $ 14,300 Accrued expenses 25,920 24,140 Accrued wages and related liabilities 10,441 11,451 Operating lease liabilities, current 35,657 30,002 Other current liabilities 14,200 19,499 Total current liabilities 109,705 99,392 Long-term operating lease liabilities 343,736 304,914 Liabilities under tax receivable agreement, net of current portion 232,954 226,649 Other long-term liabilities 24,460 15,328 Total liabilities 710,855 646,283 Commitments and contingencies Stockholders' equity: Preferred stock, no par value—10,000,000 shares authorized; none issued and outstanding as of December 30, 2020 and December 25, 2019, respectively. — — Class A common stock, $0.001 par value—200,000,000 shares authorized; 38,717,790 and 34,417,302 shares issued and outstanding as of December 30, 2020 and December 25, 2019, respectively. 39 35 Class B common stock, $0.001 par value—35,000,000 shares authorized; 2,951,188 and 3,145,197 shares issued and outstanding as of December 30, 2020 and December 25, 2019, respectively. 3 3 Additional paid-in capital 395,067 244,410 Retained earnings 12,209 54,367 Accumulated other comprehensive income 3 2 Total stockholders' equity attributable to Shake Shack Inc. 407,321 298,817 Non-controlling interests 27,172 23,168 Total equity 434,493 321,985 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,145,348 $ 968,268 See accompanying Notes to Consolidated Financial Statements. Shake Shack Inc. Form 10-K | 84 SHAKE SHACK INC. CONSOLIDATED STATEMENTS OF INCOME (LOSS) (in thousands, except per share amounts) Fiscal Year Ended December 30 2020 December 25 2019 December 26 2018 Shack sales $ 506,339 $ 574,625 $ 445,589 Licensing revenue 16,528 19,894 13,721 TOTAL REVENUE 522,867 594,519 459,310 Shack-level operating expenses: Food and paper costs 153,335 168,176 126,096 Labor and related expenses 156,814 160,811 122,094 Other operating expenses 73,220 69,169 51,783 Occupancy and related expenses 51,592 48,451 32,710 General and administrative expenses 64,250 65,649 52,720 Depreciation expense 48,801 40,392 29,000 Pre-opening costs 8,580 14,834 12,279 Impairment and loss on disposal of assets 10,151 1,352 917 TOTAL EXPENSES 566,743 568,834 427,599 OPERATING INCOME (LOSS) ( 43,876 ) 25,685 31,711 Other income (expense), net ( 786 ) 2,263 1,514 Interest expense ( 815 ) ( 434 ) ( 2,415 ) INCOME (LOSS) BEFORE INCOME TAXES ( 45,477 ) 27,514 30,810 Income tax expense 57 3,386 8,862 NET INCOME (LOSS) ( 45,534 ) 24,128 21,948 Less: net income (loss) attributable to non-controlling interests ( 3,376 ) 4,301 6,769 NET INCOME (LOSS) ATTRIBUTABLE TO SHAKE SHACK INC. $ ( 42,158 ) $ 19,827 $ 15,179 Earnings (loss) per share of Class A common stock: Basic $ ( 1.14 ) $ 0.63 $ 0.54 Diluted $ ( 1.14 ) $ 0.61 $ 0.52 Weighted-average shares of Class A common stock outstanding: Basic 37,129 31,381 28,299 Diluted 37,129 32,251 29,179 See accompanying Notes to Consolidated Financial Statements. Shake Shack Inc. Form 10-K | 85 SHAKE SHACK INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (in thousands) Fiscal Year Ended December 30 2020 December 25 2019 December 26 2018 Net income (loss) $ ( 45,534 ) $ 24,128 $ 21,948 Other comprehensive income, net of tax (1) : Change in foreign currency translation adjustment 1 2 — Equity securities: Change in net unrealized holding losses — — ( 3 ) Less: reclassification adjustments for net realized losses included in net income — — 16 Net change 1 2 13 OTHER COMPREHENSIVE INCOME 1 2 13 COMPREHENSIVE INCOME (LOSS) ( 45,533 ) 24,130 21,961 Less: comprehensive income (loss) attributable to non-controlling interests ( 3,376 ) 4,301 6,772 COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO SHAKE SHACK INC. $ ( 42,157 ) $ 19,829 $ 15,189 (1) Net of tax benefit of $ 0 for fiscal years ended December 30, 2020, December 25, 2019 and December 26, 2018 . See accompanying Notes to Consolidated Financial Statements. Shake Shack Inc. Form 10-K | 86 SHAKE SHACK INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (in thousands, except share amounts) Class A Common Stock Class B Common Stock Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Non- Controlling Interest Total Equity Shares Amount Shares Amount BALANCE, DECEMBER 27, 2017 26,527,477 27 10,250,007 10 153,105 16,399 ( 49 ) 54,987 224,479 Cumulative effect of accounting changes ( 1,174 ) 39 ( 439 ) ( 1,574 ) Net income 15,179 6,769 21,948 Other comprehensive income: Net change related to equity securities 10 3 13 Equity-based compensation 6,250 6,250 Activity under stock compensation plans 300,696 1 2,509 2,013 4,523 Redemption of LLC interests 2,692,660 2 ( 2,692,660 ) ( 2 ) 15,202 ( 15,202 ) — Establishment of liabilities under tax receivable agreement and related changes to deferred tax assets associated with increases in tax basis 18,567 18,567 Distributions paid to non-controlling interest holders ( 751 ) ( 751 ) BALANCE, DECEMBER 26, 2018 29,520,833 30 7,557,347 8 195,633 30,404 — 47,380 273,455 Cumulative effect of accounting changes 4,136 1,059 5,195 Net income 19,827 4,301 24,128 Other comprehensive income: Net change in foreign currency translation adjustment 2 — 2 Equity-based compensation 7,700 7,700 Activity under stock compensation plans 484,319 4,517 3,288 7,805 Redemption of LLC interests 1,721,887 2 ( 1,721,887 ) ( 2 ) 11,934 ( 11,934 ) — Effect of GTC Merger 2,690,263 3 ( 2,690,263 ) ( 3 ) 19,218 ( 19,218 ) — Establishment of liabilities under tax receivable agreement and related changes to deferred tax assets associated with increases in tax basis 5,408 5,408 Distributions paid to non-controlling interest holders ( 1,708 ) ( 1,708 ) BALANCE, DECEMBER 25, 2019 34,417,302 35 3,145,197 3 244,410 54,367 2 23,168 321,985 Net loss ( 42,158 ) ( 3,376 ) ( 45,534 ) Other comprehensive income: Net change in foreign currency translation adjustment 1 1 Equity-based compensation 5,600 5,600 Activity under stock compensation plans 456,942 1 5,909 305 6,215 Redemption of LLC interests 194,009 — ( 194,009 ) — 1,723 ( 1,723 ) — Establishment of liabilities under tax receivable agreement and related changes to deferred tax assets associated with increases in tax basis 1,707 1,707 Distributions paid to non-controlling interest holders ( 478 ) ( 478 ) Issuance of Class A common stock sold in equity offerings, net of underwriting discounts, commissions and offering costs 3,649,537 3 135,718 9,276 144,997 BALANCE, DECEMBER 30, 2020 38,717,790 $ 39 2,951,188 $ 3 $ 395,067 $ 12,209 $ 3 $ 27,172 $ 434,493 See accompanying Notes to Consolidated Financial Statements. Shake Shack Inc. Form 10-K | 87 SHAKE SHACK INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Fiscal Year Ended December 30 2020 December 25 2019 December 26 2018 OPERATING ACTIVITIES Net income (loss) (including amounts attributable to non-controlling interests) $ ( 45,534 ) $ 24,128 $ 21,948 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation expense 48,801 40,392 29,000 Amortization of cloud computing asset 1,444 312 — Non-cash operating lease cost 44,910 40,068 — Equity-based compensation 5,560 7,505 6,143 Deferred income taxes ( 1,356 ) ( 6,064 ) 788 Non-cash interest expense 66 170 72 (Gain) loss on sale of marketable securities ( 79 ) ( 22 ) 16 Impairment and loss on disposal of assets 10,151 1,352 917 Other non-cash expense (income) 1,937 ( 338 ) ( 78 ) Unrealized (gain) loss on equity securities 59 ( 194 ) — Net loss on sublease — — 672 Changes in operating assets and liabilities: Accounts receivable 1,006 10,726 5,530 Inventories ( 667 ) ( 472 ) ( 491 ) Prepaid expenses and other current assets ( 5,197 ) 134 ( 270 ) Other assets ( 2,940 ) ( 8,245 ) ( 2,726 ) Accounts payable 4,626 4,248 3,156 Accrued expenses 2,170 9,856 7,979 Accrued wages and related liabilities ( 1,010 ) 799 4,424 Other current liabilities 1,752 1,438 860 Deferred rent — — 1,247 Long-term operating lease liabilities ( 33,724 ) ( 37,308 ) — Other long-term liabilities 5,375 1,372 6,208 NET CASH PROVIDED BY OPERATING ACTIVITIES 37,350 89,857 85,395 INVESTING ACTIVITIES Purchases of property and equipment ( 69,038 ) ( 106,507 ) ( 87,525 ) Purchases of marketable securities ( 20,359 ) ( 1,179 ) ( 1,223 ) Sales of marketable securities 20,000 27,000 2,144 NET CASH USED IN INVESTING ACTIVITIES ( 69,397 ) ( 80,686 ) ( 86,604 ) FINANCING ACTIVITIES Proceeds from Revolving Credit Facility 50,000 — — Payments on Revolving Credit Facility ( 50,000 ) — — Proceeds from deemed landlord financing — — 1,382 Payments on deemed landlord financing — — ( 702 ) Deferred financing costs ( 64 ) ( 286 ) — Proceeds from issuance of Class A common stock sold in equity offerings, net of underwriting discounts, commissions and offering costs 144,997 — — Payments on principal of finance leases ( 2,206 ) ( 1,926 ) — Distributions paid to non-controlling interest holders ( 478 ) ( 1,708 ) ( 751 ) Payments under tax receivable agreement ( 6,643 ) ( 707 ) — Net proceeds from stock option exercises 8,033 9,201 5,472 Employee withholding taxes related to net settled equity awards ( 1,818 ) ( 1,396 ) ( 949 ) NET CASH PROVIDED BY FINANCING ACTIVITIES 141,821 3,178 4,452 INCREASE IN CASH AND CASH EQUIVALENTS 109,774 12,349 3,243 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 37,099 24,750 21,507 CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 146,873 $ 37,099 $ 24,750 Supplemental cash flow information and non-cash investing and financing activities are further described in the accompanying notes. See accompanying Notes to Consolidated Financial Statements. Shake Shack Inc. Form 10-K | 88 SHAKE SHACK INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share amounts) Page Note 1 Nature of Operations 90 Note 2 Summary of Significant Accounting Policies 90 Note 3 Revenue 96 Note 4 Fair Value Measurements 96 Note 5 Accounts Receivable 98 Note 6 Inventories 99 Note 7 Property and Equipment 99 Note 8 Supplemental Balance Sheet Information 100 Note 9 Debt 100 Note 10 Leases 101 Note 11 Employee Benefit Plans 104 Note 12 Stockholders' Equity 104 Note 13 Non-Controlling Interests 105 Note 14 Equity-Based Compensation 107 Note 15 Income Taxes 110 Note 16 Earnings (Loss) Per Share 114 Note 17 Supplemental Cash Flow Information 115 Note 18 Commitments and Contingencies 115 Note 19 Related Party Transactions 116 Note 20 Geographic Information 118 Note 21 Selected Quarterly Financial Data (Unaudited) 119 Shake Shack Inc. Form 10-K | 89 NOTE 1: NATURE OF OPERATIONS Shake Shack Inc. was formed on September 23, 2014 as a Delaware corporation for the purpose of facilitating an initial public offering and other related transactions in order to carry on the business of SSE Holdings, LLC and its subsidiaries ("SSE Holdings"). We are the sole managing member of SSE Holdings and, as sole managing member, we operate and control all of the business and affairs of SSE Holdings. As a result, we consolidate the financial results of SSE Holdings and report a non-controlling interest representing the economic interest in SSE Holdings held by the other members of SSE Holdings. As of December 30, 2020 we owned 92.9 % of SSE Holdings. Unless the context otherwise requires, "we," "us," "our," "Shake Shack," the "Company" and other similar references, refer to Shake Shack Inc. and, unless otherwise stated, all of its subsidiaries, including SSE Holdings. We operate and license Shake Shack restaurants ("Shacks"), which serve hamburgers, hot dogs, chicken, crinkle cut fries, shakes, frozen custard, beer, wine and more. As of December 30, 2020, there were 311 Shacks in operation, system-wide, of which 183 were domestic Company-operated Shacks, 22 were domestic licensed Shacks and 106 were international licensed Shacks. As of December 30, 2020, two domestic Company-operated Shacks and 17 licensed Shacks were temporarily closed primarily due to COVID-19. NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and include our accounts and the accounts of our subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. Certain reclassifications have been made to prior period amounts to conform to the current year presentation. SSE Holdings is considered a variable interest entity. Shake Shack Inc. is the primary beneficiary as we have the majority economic interest in SSE Holdings and, as the sole managing member, have decision making authority that significantly affects the economic performance of the entity, while the limited partners have no substantive kick-out or participating rights. As a result, we will continue to consolidate SSE Holdings. The assets and liabilities of SSE Holdings represent substantially all of our consolidated assets and liabilities with the exception of certain deferred taxes and liabilities under the Tax Receivable Agreement. As of December 30, 2020 and December 25, 2019, the net assets of SSE Holdings were $ 383,669 and $ 270,542 , respectively. The assets of SSE Holdings are subject to certain restrictions in SSE Holdings' revolving credit agreements. See Note 9, Debt, for more information. Fiscal Year We operate on a 52/53 week fiscal year ending on the last Wednesday in December. Fiscal year 2020 contained 53 weeks and ended on December 30, 2020 ("fiscal 2020"). Fiscal years 2019 and 2018 each contained 52 weeks and ended on December 25, 2019 ("fiscal 2019") and December 26, 2018 ("fiscal 2018"), respectively. Unless otherwise stated, references to years in this report relate to fiscal years. Use of Estimates The preparation of these consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of sales and expenses during the reporting period. Significant estimates inherent in the preparation of the consolidated financial statements include useful lives and impairments of long-lived tangible and intangible assets, accounting for income taxes and related uncertain tax positions, the valuation of equity-based compensation and awards, and reserves for litigation and other contingencies, amongst others. Actual results could differ from those estimates. Shake Shack Inc. Form 10-K | 90 Segment Reporting We own and operate Shacks in the United States. We also have domestic and international licensed operations. Our chief operating decision makers (the "CODMs") are our Chief Executive Officer and our President and Chief Financial Officer. As the CODMs review financial performance and allocate resources at a consolidated level on a recurring basis, we have one operating segment and one reportable segment. Fair Value Measurements We apply fair value accounting for all financial assets and liabilities and non-financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis. We categorize our assets and liabilities, based on the priority of the inputs to the valuation technique, into a three-level fair value hierarchy as set forth below. The three levels of the hierarchy are defined as follows: ▪ Level 1 — Unadjusted quoted prices in active markets for identical assets or liabilities ▪ Level 2 — Observable inputs other than quoted prices in active markets for identical assets or liabilities, quoted prices for identical assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities ▪ Level 3 — Inputs that are both unobservable and significant to the overall fair value measurements reflecting an entity's estimates of assumptions that market participants would use in pricing the asset or liability. Cash and Cash Equivalents Cash and cash equivalents consist primarily of cash on hand, deposits with banks, and short-term, highly liquid investments that have original maturities of three months or less. Cash equivalents are stated at cost, which approximates fair value. In fiscal 2019, cash equivalents consist primarily of money market funds. Marketable Securities Marketable securities consist of mutual funds that primarily invest in corporate bonds, certificates of deposits, asset-backed securities, commercial paper, U.S. Treasury obligations, and foreign government securities. Marketable securities are recorded at fair value, with unrealized gains and losses recorded in Other income, net. Dividend and interest income are recognized when earned and are recorded in Other income (expense), net on the consolidated statements of income (loss). Accounts Receivable, Net Accounts receivable consist primarily of receivables from our licensees for licensing revenue and related reimbursements, credit card receivables and vendor rebates. We evaluate the collectibility of our accounts receivable based on a variety of factors, including historical experience, current economic conditions and other factors. Inventories Inventories, which consist of food, paper goods, beverages, beer, wine and retail merchandise, are valued at the lower of weighted-average cost or net realizable value. No adjustment is deemed necessary to reduce inventory to net realizable value due to the rapid turnover and high utilization of inventory. Property and Equipment, Net Property and equipment, net is stated at historical cost less accumulated depreciation. Property and equipment is depreciated based on the straight-line method over the estimated useful lives of the assets, generally ranging from five to seven years for both equipment, and furniture and fixtures, and two to five years for computer equipment and software. Leasehold improvements are depreciated over the shorter of their estimated useful lives or the related lease terms. Shake Shack Inc. Form 10-K | 91 Costs incurred when constructing Shacks are capitalized. The cost of repairs and maintenance are expensed when incurred. Costs for refurbishments and improvements that significantly increase the productive capacity or extend the useful life of the asset are capitalized. When assets are disposed of, the resulting gain or loss is recognized in Impairment and loss on disposal of assets on the Consolidated Statements of Income (Loss). Valuation of Long-lived Assets We assess potential impairments to our long-lived assets, which includes property and equipment and operating lease right-of-use 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 the asset group to the estimated undiscounted future cash flows expected to be generated by the asset group. 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. Refer to Note 4, Fair Value Measurements, for further details. Deferred Financing Costs Deferred financing costs incurred in connection with the issuance of long-term debt and establishing credit facilities are capitalized and amortized to interest expense based on the related debt agreements. Deferred financing costs are included in Other assets on the Consolidated Balance Sheets. Other Assets Other assets consist primarily of capitalized implementation costs from cloud computing arrangements, transferable liquor licenses, certain custom furniture pre-ordered for future Shacks and yet to be placed in service and security deposits. The costs of obtaining non-transferable liquor licenses that are directly issued by local government agencies for nominal fees are expensed as incurred. The costs of purchasing transferable liquor licenses through open markets in jurisdictions with a limited number of authorized liquor licenses are capitalized as indefinite-lived intangible assets. Annual liquor license renewal fees are expensed over the renewal term. As of both December 30, 2020 and December 25, 2019, indefinite-lived intangible assets relating to transferable liquor licenses totaled $ 1,437 . We evaluate our indefinite-lived intangible assets for impairment annually during our fiscal fourth quarter, and whenever events or changes in circumstances indicate that an impairment may exist. When evaluating intangible assets for impairment, we may first perform a qualitative assessment to determine whether it is more likely than not that an intangible asset group is impaired. If we do not perform the qualitative assessment, or if we determine that it is not more likely than not that the fair value of the intangible asset group exceeds its carrying amount, we calculate the estimated fair value of the intangible asset group. If the carrying amount of the intangible asset group exceeds the estimated fair value, an impairment charge is recorded to reduce the carrying value to the estimated fair value. In addition, we continuously monitor and may revise our intangible asset useful lives if and when facts and circumstances change. Revenue Recognition Revenue consists of Shack sales and licensing revenue. Generally, revenue is recognized as promised goods or services transfer to the guest or customer in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. Shack revenues are recognized when payment is tendered at the point of sale as the performance obligation has been satisfied. Revenue from Shack sales is presented net of discounts and recognized when food, beverage and retail products are sold. Sales tax collected from customers is excluded from Shack sales and the obligation is included in sales tax payable until the taxes are remitted to the appropriate taxing authorities. Revenue from our gift cards is deferred and recognized upon redemption. Licensing revenues include initial territory fees, Shack opening fees and ongoing sales-based royalty fees from licensed Shacks. Generally, the licenses granted to develop, open and operate each Shack in a specified territory are the predominant goods or services transferred to the licensee in our contracts, and represent distinct performance obligations. Ancillary promised services, Shake Shack Inc. Form 10-K | 92 such as training and assistance during the initial opening of a Shack, are typically combined with the licenses and considered as one performance obligation per Shack. We determine the transaction price for each contract, which is comprised of the initial territory fee and an estimate of the total Shack opening fees we expect to be entitled to. The calculation of total Shack opening fees included in the transaction price requires judgment, as it is based on an estimate of the number of Shacks we expect the licensee to open. The transaction price is then allocated equally to each Shack expected to open. The performance obligations are satisfied over time, starting when a Shack opens, through the end of the term of the license granted to the Shack. Because we are transferring licenses to access our intellectual property during a contractual term, revenue is recognized on a straight-line basis over the license term. Generally, payment for the initial territory fee is received upon execution of the licensing agreement and payment for the Shack opening fees are received either in advance of or upon opening the related Shack. These payments are initially deferred and recognized as revenue as the performance obligations are satisfied, which occurs over a long-term period. Revenue from sales-based royalties is recognized as the related sales occur. 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 option pricing model and involves several assumptions, including the expected term of the option, expected volatility and risk-free interest rate. Forfeitures are recognized as they occur for all equity awards. Equity-based compensation expense is included within General and administrative expenses and Labor and related expenses on the Consolidated Statements of Income (Loss). Advertising The cost of advertising is expensed as incurred. Advertising costs amounted to $ 1,449 , $ 857 and $ 399 in fiscal 2020, fiscal 2019 and fiscal 2018, respectively, and are included in General and administrative expense and Other operating expenses on the Consolidated Statements of Income (Loss). Leases On December 27, 2018 we adopted Accounting Standards Update (“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. 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. 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 Shake Shack Inc. Form 10-K | 93 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, 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. Pre-opening Costs Pre-opening costs are expensed as incurred and consist primarily of occupancy, manager and employee wages, legal fees, travel and related training costs, cookware and marketing expenses incurred prior to the opening of a Shack. Income Taxes We account for income taxes pursuant to the asset and liability method which requires the recognition of deferred income tax assets and liabilities related to the expected future tax consequences arising from temporary differences between the carrying amounts and tax bases of assets and liabilities based on enacted statutory tax rates applicable to the periods in which the temporary differences are expected to reverse. Any effects of changes in income tax rates or laws are included in income tax expense in the period of enactment. A valuation allowance is recognized if we determine it is more likely than not that all or a portion of a deferred tax asset will not be recognized. In making such determination, the Company considers all available evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent and expected future results of operation. Shake Shack Inc. Form 10-K | 94 Recently Adopted Accounting Pronouncements We adopted the Accounting Standards Update ("ASU") summarized below in fiscal 2020. ASU Description Date Adopted Measurement of Credit Losses on Financial Instruments (ASU 2016-13) This standard replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The adoption of this standard did not have a material impact to our consolidated financial statements. December 26, 2019 Facilitation of the Effects of Reference Rate Reform on Financial Reporting (ASU 2020-04) This standard provides optional guidance for a limited time to ease the potential accounting burden associated with transitioning away from reference rates that are expected to be discontinued. The adoption of this standard did not have a material impact to our consolidated financial statements. Effective upon issuance (March 12, 2020) Recently Issued Accounting Pronouncements ASU Description Expected Impact Effective Date Simplifying the Accounting for Income Taxes (ASU 2019-12) This standard simplifies various aspects related to accounting for income taxes by removing certain exceptions to the general principles in ASC 740, “Income Taxes”, and clarifying certain aspects of the current guidance to promote consistency among reporting entities. The adoption of this standard is not expected to have a material impact on our consolidated financial statements. December 31, 2020 Early adoption is permitted. Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity's Own Equity (Subtopic 815-40)—Accounting For Convertible Instruments and Contracts in an Entity's Own Equity. (ASU 2020-06) This ASU amends the guidance on convertible instruments and the derivatives scope exception for contracts in an entity’s own equity and improves and amends the related earnings per share guidance for both Subtopics. We are currently evaluating the impact of this standard on our consolidated financial statements and related disclosures. December 30, 2021 Early adoption is permitted. Shake Shack Inc. Form 10-K | 95 NOTE 3: REVENUE Revenue Recognition Revenue recognized during fiscal 2020, fiscal 2019 and fiscal 2018 disaggregated by type is as follows: 2020 2019 2018 Shack sales $ 506,339 $ 574,625 $ 445,589 Licensing revenue: Sales-based royalties 15,773 19,318 13,422 Initial territory and opening fees 755 576 299 Total revenue $ 522,867 $ 594,519 $ 459,310 The aggregate amount of the transaction price allocated to performance obligations that are unsatisfied (or partially unsatisfied) as of December 30, 2020 is $ 16,937 . We expect to recognize this amount as revenue over a long-term period, as the license term for each Shack ranges from 5 to 20 years. This amount excludes any variable consideration related to sales-based royalties. Contract Balances Opening and closing balances of contract liabilities and receivables from contracts with customers is as follows: December 30 2020 December 25 2019 Shack sales receivables $ 5,373 $ 4,265 Licensing receivables, net of allowance for doubtful accounts 2,647 4,510 Gift card liability 2,637 2,258 Deferred revenue, current 608 511 Deferred revenue, long-term 12,151 11,310 Revenue recognized during fiscal 2020 and fiscal 2019 that was included in their respective liability balances at the beginning of the period is as follows: 2020 2019 Gift card liability $ 537 $ 524 Deferred revenue 723 536 NOTE 4: FAIR VALUE MEASUREMENTS Assets and Liabilities Measured at Fair Value on a Recurring Basis The following tables present information about our financial assets and liabilities measured at fair value on a recurring basis as of December 30, 2020 and December 25, 2019, and indicate the classification within the fair value hierarchy. Refer to Note 2, Summary of Significant Accounting Policies, for further information. Shake Shack Inc. Form 10-K | 96 Cash and Cash Equivalents and Marketable Securities The following tables summarize our Cash and cash equivalents and Marketable securities by significant investment categories as of December 30, 2020 and December 25, 2019: December 30, 2020 Cost Basis Gross Unrealized Gains Gross Unrealized Losses Fair Value Cash and Cash Equivalents Marketable Securities Cash $ 146,873 $ — $ — $ 146,873 $ 146,873 $ — Level 1: Money market funds — — — — — — Mutual funds 36,874 13 — 36,887 — 36,887 Total $ 183,747 $ 13 $ — $ 183,760 $ 146,873 $ 36,887 December 25, 2019 Cost Basis Gross Unrealized Gains Gross Unrealized Losses Fair Value Cash and Cash Equivalents Marketable Securities Cash $ 32,094 $ — $ — $ 32,094 $ 32,094 $ — Level 1: Money market funds 5,005 — — 5,005 5,005 — Mutual funds 36,436 72 36,508 — 36,508 Total $ 73,535 $ 72 $ — $ 73,607 $ 37,099 $ 36,508 A summary of other income from equity securities recognized during fiscal 2020, fiscal 2019 and fiscal 2018 is as follows: 2020 2019 2018 Equity securities: Dividend income $ 359 $ 1,244 $ 1,392 Interest income — — 9 Realized gain (loss) on sale of investments 79 22 ( 3 ) Unrealized gain (loss) on equity securities ( 59 ) 194 ( 61 ) Total $ 379 $ 1,460 $ 1,337 A summary of equity securities sold and gross realized gains and losses recognized during fiscal 2020, fiscal 2019 and fiscal 2018 is as follows: 2020 2019 2018 Equity securities: Gross proceeds from sales and redemptions $ 20,000 $ 27,000 $ 2,144 Cost basis of sales and redemptions 19,921 26,978 2,160 Gross realized gains included in net income (loss) 79 36 2 Gross realized losses included in net income (loss) — ( 14 ) ( 18 ) Amounts reclassified out of accumulated other comprehensive loss — — 16 Realized gains and losses are determined on a specific identification method and are included in Other income (expense), net on the Consolidated Statements of Income (Loss). Shake Shack Inc. Form 10-K | 97 We periodically review our marketable securities for other-than-temporary impairment. We consider factors such as the duration, severity and the reason for the decline in value, the potential recovery period and our intent to sell. As of December 30, 2020 and December 25, 2019, the declines in the market value of our marketable securities investment portfolio are considered to be temporary in nature. Other Financial Instruments The carrying value of our financial instruments, including accounts receivable, accounts payable and accrued expenses as of December 30, 2020 and December 25, 2019 approximated their fair value due to the short-term nature of these financial instruments. Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis Assets and liabilities that are measured at fair value on a non-recurring basis include our long-lived assets, operating lease right-of-use assets and indefinite-lived intangible assets. When the Company evaluates its long-lived assets for impairment, the assessment is performed for the related asset group that represents the lowest level for which identifiable cash flows are independent of the cash flows of other assets. This determination requires judgment, and is dependent on the Company's overall operating strategy. During fiscal 2020, we recognized an impairment charge of $ 7,644 at two Shacks, as well as our home office. Of the total impairment charge, $ 5,698 was attributed to operating lease right-of-use assets, $ 1,893 was attributed to property and equipment held and used, and $ 53 was attributed to finance lease right-of-use assets. The asset impairment charge is included in Impairment and loss on disposal of assets on the Consolidated Statement of Income (Loss). The fair values of assets were determined using an income-based approach and are classified as Level 3 within the fair value hierarchy. Significant inputs include projections of future cash flows, discount rates, Shack sales and profitability. There were no impairments recognized during fiscal 2019 and fiscal 2018. NOTE 5: ACCOUNTS RECEIVABLE The components of accounts receivable as of December 30, 2020 and December 25, 2019 are as follows: December 30 2020 December 25 2019 Licensing receivables $ 2,675 $ 4,510 Credit card receivables 2,989 3,417 Delivery receivables 2,229 722 Other receivables 1,599 1,321 Allowance for doubtful accounts ( 28 ) — Accounts receivable, net $ 9,464 $ 9,970 Shake Shack Inc. Form 10-K | 98 NOTE 6: INVENTORIES Inventories consisted of the following: December 30 2020 December 25 2019 Food $ 1,947 $ 1,738 Wine 75 107 Beer 111 114 Beverages 218 233 Retail merchandise 74 29 Paper goods 463 — Inventories $ 2,888 $ 2,221 NOTE 7: PROPERTY AND EQUIPMENT Property and equipment consisted of the following: December 30 2020 December 25 2019 Leasehold improvements $ 342,724 $ 302,204 Equipment 60,064 54,404 Furniture and fixtures 20,178 18,082 Computer equipment and software 30,477 24,226 Financing equipment lease right-of-use assets 9,622 7,442 Construction in progress 39,632 30,290 Property and equipment, gross 502,697 436,648 Less: accumulated depreciation ( 166,156 ) ( 121,786 ) Property and equipment, net $ 336,541 $ 314,862 Depreciation expense was $ 48,801 , $ 40,392 and $ 29,000 for fiscal 2020, fiscal 2019 and fiscal 2018, respectively. Shake Shack Inc. Form 10-K | 99 NOTE 8: SUPPLEMENTAL BALANCE SHEET INFORMATION The components of other current liabilities as of December 30, 2020 and December 25, 2019 are as follows: December 30 2020 December 25 2019 Sales tax payable $ 4,285 $ 4,086 Current portion of liabilities under tax receivable agreement — 7,777 Gift card liability 2,637 2,258 Current portion of financing equipment lease liabilities 1,998 1,873 Other 5,280 3,505 Other current liabilities $ 14,200 $ 19,499 The components of other long-term liabilities as of December 30, 2020 and December 25, 2019 are as follows: December 30 2020 December 25 2019 Deferred licensing revenue $ 12,151 $ 11,310 Long-term portion of financing equipment lease liabilities 3,586 3,643 Other (1) 8,723 375 Other long-term liabilities $ 24,460 $ 15,328 (1) As of December 30, 2020, Other included $ 3,182 of deferred lease incentive liabilities related to leases with variable lease cost as well as $ 5,214 of deferred social security taxes associated with the CARES Act. For further information relating to the Coronavirus Aid, Relief, and Economic Security Act (" CARES Act"), see Note 15, Income Taxes. NOTE 9: DEBT Revolving Credit Facility In August 2019, we terminated our previous revolving credit facility and entered into a new revolving credit facility agreement ("Revolving Credit Facility"), which permits borrowings up to $ 50,000 , of which the entire amount is available immediately, with the ability to increase available borrowings up to an additional $ 100,000 , to be made available subject to satisfaction of certain conditions. The Revolving Credit Facility will mature and all amounts outstanding will be due and payable in August 2024. The Revolving Credit Facility also permits the issuance of letters of credit upon our request of up to $ 15,000 . Borrowings under the Revolving Credit Facility will bear interest at either: (i) LIBOR plus a percentage ranging from 1.0 % to 1.5 % or (ii) the base rate plus a percentage ranging from 0.0 % to 0.5 %, in each case depending on our net lease adjusted leverage ratio. To the extent the LIBOR reference rate is no longer available, the administrative agent, in consultation with us, will determine a replacement rate which will be generally in accordance with similar transactions in which it serves as administrative agent. The obligations under the Revolving Credit Facility are secured by a first-priority security interest in substantially all of the assets of SSE Holdings and the guarantors. The obligations under the Revolving Credit Facility are guaranteed by each of SSE Holdings' direct and indirect subsidiaries (with certain exceptions). The Revolving Credit Facility requires us to comply with maximum net lease adjusted leverage and minimum fixed charge coverage ratios. We are not subject to these coverage ratios for a period of time due to the First Amendment to the Revolving Credit Facility described below. In addition, the Revolving Credit Facility contains other customary affirmative and negative covenants, including those which (subject to certain exceptions and dollar thresholds) limit our ability to incur debt; incur liens; Shake Shack Inc. Form 10-K | 100 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 $ 25,000 through July 1, 2021 and outstanding borrowings during the applicable period covered by the First Amendment bear interest at either: (i) LIBOR plus a percentage ranging from 1.0 % to 2.5 % or (ii) the base rate plus a percentage ranging from 0.0 % to 1.5 %, in each case depending on our net lease adjusted leverage ratio. In March 2020, we drew down the full $ 50,000 available under the Revolving Credit Facility to enhance liquidity and financial flexibility given the uncertain market conditions created by the COVID-19 pandemic. We repaid this amount in full, plus interest, in June 2020. As of December 30, 2020 and December 25, 2019, no amounts were outstanding under the revolving credit facility. Total interest costs incurred were $ 815 , $ 434 and $ 2,572 in fiscal 2020, fiscal 2019 and fiscal 2018, respectively. Amounts capitalized into property and equipment were $ 157 during fiscal 2018. No amounts were capitalized into property and equipment during fiscal 2020 and fiscal 2019, respectively. Paycheck Protection Program In April 2020, we entered into a $ 10,000 note payable with J.P. Morgan pursuant to the Paycheck Protection Program (“PPP Loan”) under the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") and returned the entire outstanding balance plus interest in April 2020. NOTE 10: LEASES Nature of Leases 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. We evaluate contracts entered into to determine whether the contract involves the use of property or equipment, which is either explicitly or implicitly identified in the contract. We evaluate whether we control the use of the asset, which is determined by assessing whether we obtain substantially all economic benefits from the use of the asset, and whether we have the right to direct the use of the asset. If these criteria are met and we have identified a lease, we account for the contract under the requirements of Accounting Standards Codification Topic 842 ("ASC 842"). Upon the possession of a leased asset, we determine its classification as an operating or finance lease. Our real estate leases are classified as operating leases and most of our equipment leases are classified as finance leases. Generally, our real estate leases have initial terms ranging from 10 to 15 years and typically include two five -year renewal options. Renewal options are generally not recognized as part of the right-of-use assets and lease liabilities as it is not reasonably certain at commencement date that we would exercise the options to extend the lease. Our real estate leases typically provide for fixed minimum rent payments and/or contingent rent payments based upon sales in excess of specified thresholds. When the achievement of such sales thresholds 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 from the date we take possession of the leased property. Lease expense incurred before a Shack opens is recorded in Pre-opening costs on the Consolidated Statements of Income (Loss). Once a domestic Company-operated Shack opens, we record the straight-line lease expense and any contingent rent, if applicable, in Occupancy and related expenses on the 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). Shake Shack Inc. Form 10-K | 101 As there are no explicit rates provided in our leases, we use our incremental borrowing rate in determining the present value of future lease payments. The discount rate used to measure the lease liability 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 and is subject to judgment. We determined our credit rating based on a comparison of the financial information of SSE Holdings to other public companies and then used their respective credit ratings to develop our own. We expend cash for leasehold improvements to build out and equip our leased premises. Generally, a portion of the leasehold improvements and building costs are reimbursed by our landlords as landlord incentives pursuant to agreed-upon terms in our lease agreements. If obtained, landlord incentives usually take the form of cash, full or partial credits against our future minimum or contingent rents otherwise payable by us or a combination thereof. In most cases, landlord incentives are received after we take possession of the property, as we meet required milestones during the construction of the property. We include these amounts in the measurement of the initial operating lease liability, which are also reflected as a reduction to the initial measurement of the right-of-use asset. A summary of finance and operating lease right-of-use assets and liabilities as of December 30, 2020 and December 25, 2019 is as follows: Classification December 30, 2020 December 25, 2019 Finance leases Property and equipment, net $ 5,409 $ 5,444 Operating leases Operating lease assets 306,317 274,426 Total right-of-use assets $ 311,726 $ 279,870 Finance leases: Other current liabilities $ 1,998 $ 1,873 Other long-term liabilities 3,586 3,643 Operating leases: Operating lease liabilities, current 35,657 30,002 Long-term operating lease liabilities 343,736 304,914 Total lease liabilities $ 384,977 $ 340,432 Shake Shack Inc. Form 10-K | 102 The components of lease expense for fiscal 2020 and fiscal 2019 are as follows: Classification December 30 2020 December 25 2019 Finance lease cost: Amortization of right-of-use assets Depreciation expense $ 2,257 $ 1,998 Interest on lease liabilities Interest expense 213 193 Operating lease cost Occupancy and related expenses Pre-opening costs General and administrative expenses 44,910 40,068 Short-term lease cost Occupancy and related expenses 494 394 Variable lease cost Occupancy and related expenses Other operating expenses Pre-opening costs General and administrative expenses 13,766 16,060 Total lease cost $ 61,640 $ 58,713 As of December 30, 2020, future minimum lease payments for finance and operating leases consisted of the following: Finance Leases Operating Leases 2021 $ 2,169 $ 45,961 2022 1,633 53,114 2023 1,078 55,055 2024 584 54,404 2025 347 53,042 Thereafter 172 234,731 Total minimum payments 5,983 496,307 Less: imputed interest 399 116,914 Total lease liabilities $ 5,584 $ 379,393 As of December 30, 2020 we had additional operating lease commitments of $ 36,788 for non-cancelable leases without a possession date, which will begin to commence in fiscal 2021. These lease commitments are consistent with the leases that we have executed thus far. A summary of lease terms and discount rates for finance and operating leases as of December 30, 2020 and December 25, 2019 is as follows: December 30 2020 December 25 2019 Weighted-average remaining lease term (years): Finance leases 5.2 5.1 Operating leases 9.7 10.1 Weighted-average discount rate: Finance leases 3.6 % 3.7 % Operating leases 4.2 % 5.4 % Shake Shack Inc. Form 10-K | 103 Supplemental cash flow information related to leases as of December 30, 2020 and December 25, 2019 is as follows: December 30 2020 December 25 2019 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from finance leases $ 213 $ 193 Operating cash flows from operating leases 42,144 37,468 Financing cash flows from finance leases 2,206 1,926 Right-of-use assets obtained in exchange for lease obligations: Finance leases 2,298 2,831 Operating leases 59,969 65,556 NOTE 11: EMPLOYEE BENEFIT PLANS Defined Contribution Plan Our employees are eligible to participate in a defined contribution savings plan maintained by Shake Shack. The plan is funded by employee and employer contributions. We pay our share of the employer contributions directly to the third party trustee. Employer contributions to the plan are at our discretion. We make contributions matching a portion of participants' contributions. We match 100 % of participants' contributions for the first 3 % of eligible compensation contributed and 50 % of contributions made in excess of 3 % of eligible compensation up to 5 % of eligible compensation. Employer contributions totaled $ 895 , $ 772 and $ 509 for fiscal 2020, fiscal 2019 and fiscal 2018, respectively. NOTE 12: STOCKHOLDERS' EQUITY Equity Offering On April 17, 2020, we announced an “at-the-market” equity offering program (the “ATM Program”), under which we may offer and sell shares of our Class A common stock having an aggregate price of up to $ 75,000 from time to time. On April 21, 2020, we completed the sale of 233,467 shares of our Class A common stock pursuant to the ATM Program and received $ 9,794 of proceeds, net of commissions. The proceeds were used to purchase newly-issued LLC Interests. On April 21, 2020, we completed an underwritten offering of 3,416,070 shares of our Class A common stock, resulting in $ 135,857 of proceeds, net of underwriting discounts and commissions. The proceeds were used to purchase newly-issued LLC Interests. Redemptions of LLC Interests The SSE Holdings LLC Agreement 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 receive a corresponding number of LLC Interests, increasing our total ownership interest in SSE Holdings. Simultaneously, and in connection with a redemption, the corresponding number of shares of Class B common stock are surrendered and cancelled. Shake Shack Inc. Form 10-K | 104 The following table summarizes redemptions of LLC Interests activity during fiscal 2020, fiscal 2019 and fiscal 2018: 2020 2019 2018 Redemption and acquisition of LLC Interests Number of LLC Interests redeemed by non-controlling interest holders 194,009 1,721,887 2,692,660 Number of LLC Interests acquired in connection with the Gramercy Tavern Merger — 2,690,263 — Number of LLC Interests received by Shake Shack Inc. 194,009 4,412,150 2,692,660 Issuance of Class A common stock Shares of Class A common stock issued in connection with redemptions of LLC Interests 194,009 1,721,887 2,692,660 Shares of Class A common stock issued in connection with the Gramercy Tavern Merger — 2,690,263 — Cancellation of Class B common stock Shares of Class B common stock surrendered and cancelled 194,009 1,721,887 2,692,660 Shares of Class B common stock surrendered and cancelled in connection with the Gramercy Tavern Merger — 2,690,263 — Stock Compensation Plan Activity We received an aggregate of 456,942 , 484,319 and 300,696 LLC Interests in connection with the activity under our stock compensation plan during fiscal 2020, fiscal 2019 and fiscal 2018, respectively. Dividend Restrictions We are a holding company with no direct operations. As a result, our ability to pay cash dividends on our common stock, if any, is dependent upon cash dividends, distributions or other transfers from SSE Holdings. The amounts available to us to pay cash dividends are subject to certain covenants and restrictions set forth in the Revolving Credit Facility. As of December 30, 2020, essentially all of the net assets of SSE Holdings were restricted. See Note 9, Debt, for more information regarding the covenants and restrictions set forth in the Revolving Credit Facility. Gramercy Tavern Corp. Merger Pursuant to a Stockholders Agreement, dated as of February 4, 2015, as amended, by and among Daniel H. Meyer, the Daniel H. Meyer 2012 Gift Trust, now known as the DHM Gift Trust (the "Gift Trust"), other affiliates (collectively, the "Meyer Stockholders") and other parties thereto, the Meyer Stockholders had the right to cause all of the shares of Gramercy Tavern Corp. ("GTC") to be exchanged for shares of our Class A common stock pursuant to a tax-free reorganization. In August 2019, the Meyer Stockholders exercised their right with respect to GTC (the "GTC Merger"). To effect the GTC Merger, a newly-formed wholly-owned subsidiary of Shake Shack Inc. merged with and into GTC, with GTC as the surviving entity, which was then merged with and into Shake Shack Inc. Prior to the GTC Merger, GTC owned 2,690,263 LLC Interests and an equivalent number of shares of our Class B common stock. The stockholders of GTC, received on a one-for-one basis, 2,690,263 shares of Class A common stock based upon the amount of shares of GTC held by the stockholders; all of the shares of Class B common stock held by GTC were cancelled; and all of the LLC Interests held by GTC were transferred to us. NOTE 13: NON-CONTROLLING INTERESTS We are the sole managing member of SSE Holdings and, as a result, consolidate the financial results of SSE Holdings. We report a non-controlling interest representing the economic interest in SSE Holdings held by the other members of SSE Holdings. The Third Amended and Restated Limited Liability Company Agreement, as further amended, (the "LLC Agreement") of SSE Holdings provides that holders of LLC Interests may, from time to time, require SSE Holdings to redeem all or a portion of their LLC Interests for newly-issued shares of Class A common stock on a one -for-one basis. In connection with any redemption or exchange, we will receive a corresponding number of LLC Interests, increasing our total ownership interest in SSE Holdings. Changes in our ownership interest in SSE Holdings while we retain our controlling interest in SSE Holdings will be accounted for as equity transactions. As such, future redemptions or direct exchanges of LLC Interests in SSE Holdings by the Shake Shack Inc. Form 10-K | 105 other members of SSE Holdings will result in a change in ownership and reduce the amount recorded as non-controlling interest and increase additional paid-in capital. The following table summarizes the ownership interest in SSE Holdings as of December 30, 2020 and December 25, 2019: 2020 2019 LLC Interests Ownership % LLC Interests Ownership % Number of LLC Interests held by Shake Shack Inc. 38,717,790 92.9 % 34,417,302 91.6 % Number of LLC Interests held by non-controlling interest holders 2,951,188 7.1 % 3,145,197 8.4 % Total LLC Interests outstanding 41,668,978 100.0 % 37,562,499 100.0 % The weighted average ownership percentages for the applicable reporting periods are used to attribute net income (loss) and other comprehensive income (loss) to Shake Shack Inc. and the non-controlling interest holders. The non-controlling interest holders' weighted average ownership percentage for fiscal 2020 and fiscal 2019 was 7.7 % and 15.9 %, respectively. The following table summarizes the effects of changes in ownership in SSE Holdings on our equity during fiscal 2020, fiscal 2019 and fiscal 2018. 2020 2019 2018 Net income (loss) attributable to Shake Shack Inc. $ ( 42,158 ) $ 19,827 $ 15,179 Other comprehensive income (loss): Unrealized holding gains on equity securities — — 10 Unrealized gain on foreign currency translation adjustment 1 2 — Transfers (to) from non-controlling interests: Increase in additional paid-in capital as a result of the redemption of LLC Interests 1,723 11,934 15,202 Increase in additional paid-in-capital as a result of the GTC Merger — 19,218 — Increase in additional paid-in capital as a result of activity under the stock compensation plan and the related income tax effect 5,909 4,517 2,509 Increase in additional paid-in-capital as a result of the issuance of Class A common stock sold in equity offerings 135,718 — — Total effect of changes in ownership interest on equity attributable to Shake Shack Inc. $ 101,193 $ 55,498 $ 32,900 During fiscal 2020, an aggregate of 194,009 LLC Interests were redeemed by the non-controlling interest holders for newly-issued shares of Class A common stock, and we received 194,009 LLC Interests, increasing our total ownership interest in SSE Holdings to 92.9 %. During fiscal 2019, an aggregate of 4,412,150 LLC Interests were redeemed by the non-controlling interest holders for newly-issued shares of Class A common stock, of which 2,690,263 were received through the Gramercy Tavern Merger as described in Note 12, Stockholders' Equity, and we received 4,412,150 LLC Interests, increasing our total ownership interest in SSE Holdings to 91.6 %. We received an aggregate of 456,942 and 484,319 LLC Interests in connection with the activity under our stock compensation plans during fiscal 2020 and fiscal 2019, respectively. Shake Shack Inc. Form 10-K | 106 NOTE 14: EQUITY-BASED COMPENSATION A summary of equity-based compensation expense recognized during fiscal 2020, fiscal 2019 and fiscal 2018 is as follows: 2020 2019 2018 Stock options $ 322 $ 2,626 $ 3,039 Performance stock units 1,309 3,035 2,449 Restricted stock units 3,929 1,844 655 Equity-based compensation expense $ 5,560 $ 7,505 $ 6,143 Total income tax benefit recognized related to equity-based compensation $ 204 $ 188 $ 172 Equity-based compensation expense is allocated to General and administrative expenses and Labor and related expenses on the Consolidated Statements of Income (Loss) during fiscal 2020, fiscal 2019 and fiscal 2018 as follows: 2020 2019 2018 General and administrative expenses $ 5,039 $ 7,189 $ 5,991 Labor and related expenses 521 316 152 Equity-based compensation expense $ 5,560 $ 7,505 $ 6,143 We capitalized $ 40 , $ 195 and $ 107 of equity-based compensation expense associated with the construction cost of our Shacks and our enterprise-wide system upgrade, Project Concrete, during fiscal 2020, fiscal 2019 and fiscal 2018, respectively. Stock Options In January 2015, we adopted the 2015 Incentive Award Plan (the "2015 Plan") under which we may grant up to 5,865,522 stock options and other equity-based awards to employees, directors and officers. The stock options granted generally vest equally over periods ranging from one to five years. We do not use cash to settle any of our equity-based awards, and we issue new shares of Class A common stock upon the exercise of stock options. The fair value of stock option awards was determined on the grant date using the Black-Scholes valuation model based on the following weighted-average assumptions: 2020 2019 2018 Expected term (years) (1) 7.5 7.5 7.5 Expected volatility (2) 42.3 % 42.2 % 42.5 % Risk-free interest rate (3) 0.7 % 2.4 % 2.8 % Dividend yield (4) — % — % — % (1) Expected term represents the estimated period of time until an award is exercised and was determined using the simplified method. (2) Expected volatility is based on the historical volatility of a selected peer group over a period equivalent to the expected term. (3) The risk-free rate is an interpolation of yields on U.S. Treasury securities with maturities equivalent to the expected term. (4) We have assumed a dividend yield of zero as we have no plans to declare dividends in the foreseeable future. Shake Shack Inc. Form 10-K | 107 A summary of stock option activity for fiscal years 2020 is as follows: Stock Options Weighted Average Exercise Price Aggregate Intrinsic Value Weighted Average Remaining Contractual Life (Years) Outstanding as of December 25, 2019 890,267 $ 21.44 Granted 6,170 35.89 Exercised ( 405,688 ) 21.20 Forfeited ( 1,725 ) ( 21.00 ) Outstanding as of December 30, 2020 489,024 $ 21.83 $ 30,824 4.2 Options vested and exercisable as of December 30, 2020 474,744 $ 21.25 $ 30,199 4.1 Options expected to vest as of December 30, 2020 14,280 $ 41.09 $ 625 8.2 As of December 30, 2020, total unrecognized compensation expense related to unvested stock options was $ 223 , which is expected to be recognized over a weighted-average period of 3.2 years. The weighted-average grant date fair value of options granted during fiscal 2020, fiscal 2019 and fiscal 2018 was $ 16.21 , $ 26.42 , $ 19.86 , respectively. The total intrinsic value of stock options exercised during fiscal 2020, fiscal 2019 and fiscal 2018 was $ 25,824 , $ 16,905 and $ 5,786 , respectively. Cash received from stock option exercises was $ 8,224 and the cash tax benefit realized for the tax deductions from these option exercises was $229 for fiscal 2020. The total fair value of stock options vested during fiscal 2020, fiscal 2019 and fiscal 2018 was $ 2,674 , $ 2,950 and $ 3,483 , respectively. The total fair value of stock options vested during fiscal 2020, fiscal 2019 and fiscal 2018 was $ 2,674 , $ 2,950 and $ 3,483 , respectively. The following table summarizes information about stock options outstanding and exercisable as December 30, 2020: Options Outstanding Options Exercisable Number Outstanding at December 30, 2020 Weighted Average Remaining Contractual Life (Years) Weighted Average Exercise Price Number Exercisable at December 30, 2020 Weighted Average Remaining Contractual Life (Years) Weighted Average Exercise Price Exercise Price $21.00 466,225 4.1 $ 21.00 466,225 4.1 $ 21.00 $34.62 7,411 5.4 $ 34.62 7,411 5.4 $ 34.62 $36.41 1,108 5.9 $ 36.41 1,108 5.9 $ 36.41 $38.91 2,060 6.4 $ 38.91 — — $ — $39.91 3,022 7.2 $ 39.91 — — $ — $54.36 3,028 8.2 $ 54.36 — — $ — $35.89 6,170 9.2 $ 35.89 — — $ — Performance Stock Units Under the 2015 Plan, we may grant performance stock units and other types of performance-based equity awards that vest based on the outcome of certain performance criteria that are established and approved by the Compensation Committee of the Board of Directors. The actual number of equity awards earned is based on the level of performance achieved over a predetermined performance period, relative to established financial goals, none of which are considered market conditions. For performance stock units granted during fiscal 2020, the amount of awards that can be earned ranges from 0 % to 125 % of the number of performance stock units granted, based on the achievement of approved financial goals over a one -year performance Shake Shack Inc. Form 10-K | 108 period. In addition to the performance conditions, performance stock units are also subject to a requisite service period and the awards vest ratably over four years. The fair value of performance stock units is determined based on the closing market price of our Class A common stock on the date of grant. Compensation expense related to the performance stock units is recognized using a graded-vesting attribution method over the vesting period based on the most probable outcome of the performance conditions. A summary of unvested performance stock unit activity for fiscal year 2020, is as follows: Performance Stock Units Weighted Average Grant Date Fair Value Outstanding as of December 25, 2019 117,517 $ 51.97 Granted 79,388 57.20 Performance achievement (1) 7,792 52.47 Vested ( 50,242 ) 49.34 Forfeited ( 17,234 ) 54.45 Outstanding as of December 30, 2020 137,221 $ 55.67 (1) Represents the incremental awards earned and/or awards forfeited based on the achievement of performance conditions . As of December 30, 2020, there were 137,221 performance stock units outstanding, of which none were vested. The weighted average grant date fair value of share awards granted during fiscal 2020, fiscal 2019 and fiscal 2018 were $ 57.20 , $ 52.47 , and $ 58.46 , respectively. The total fair value of awards that vested during fiscal 2020, fiscal 2019 and fiscal 2018 was $ 2,730 , $ 3,456 and $ 2,310 , respectively. As of December 30, 2020, total unrecognized compensation expense related to unvested performance stock units was $ 966 , which is expected to be recognized over a weighted-average period of 1.9 years. Restricted Stock Units Under the 2015 Plan, we may grant restricted stock units to employees, directors and officers. The restricted stock units granted generally vest equally over periods ranging from one to five years. The fair value of restricted stock units is determined based on the closing market price of our Class A common stock on the date of grant. Compensation expense related to the restricted stock units is recognized using a straight-line attribution method over the vesting period. A summary of unvested restricted stock unit activity for fiscal year 2020 is as follows: Restricted Stock Units Weighted Average Grant Date Fair Value Outstanding as of December 25, 2019 152,098 $ 49.87 Granted 170,528 57.41 Vested ( 41,974 ) 50.66 Forfeited ( 22,159 ) 54.46 Outstanding as of December 30, 2020 258,493 $ 54.33 As of December 30, 2020, there were 258,493 restricted stock units outstanding, of which none were vested. The weighted average grant date fair value of share awards granted during fiscal 2020, fiscal 2019 and fiscal 2018 were $ 57.41 , $ 52.51 , and $ 49.12 , respectively. The total fair value of shares vested during fiscal 2020, fiscal 2019 and fiscal 2018 was $2,463, $947 and $867, respectively. As of December 30, 2020, total unrecognized compensation expense related to unvested restricted stock units was $ 10,654 , which is expected to be recognized over a weighted-average period of 2.8 years. Shake Shack Inc. Form 10-K | 109 NOTE 15: INCOME TAXES We are the sole managing member of SSE Holdings, and as a result, consolidate the financial results of SSE Holdings. SSE Holdings is treated as a partnership for U.S. federal and most applicable state and local income tax purposes. As a partnership, SSE Holdings is not subject to U.S. federal and certain state and local income taxes. Any taxable income or loss generated by SSE Holdings is passed through to and included in the taxable income or loss of its members, including us, on a pro rata basis. We are subject to U.S. federal income taxes, in addition to state and local income taxes with respect to our allocable share of any taxable income or loss of SSE Holdings, as well as any stand-alone income or loss generated by Shake Shack Inc. We are also subject to withholding taxes in foreign jurisdictions. Income Tax Expense The components of income (loss) before income taxes are follows: 2020 2019 2018 Domestic $ ( 59,873 ) $ 11,797 $ 21,595 Foreign 14,396 15,717 9,215 Income (loss) before income taxes $ ( 45,477 ) $ 27,514 $ 30,810 The components of income tax expense are as follows: 2020 2019 2018 Current income taxes: Federal $ — $ 2,984 $ 5,281 State and local 190 4,283 858 Foreign 1,223 2,183 1,935 Total current income taxes 1,413 9,450 8,074 Deferred income taxes: Federal ( 12,638 ) ( 5,643 ) ( 210 ) State and local 11,282 ( 421 ) 998 Total deferred income taxes ( 1,356 ) ( 6,064 ) 788 Income tax expense $ 57 $ 3,386 $ 8,862 Shake Shack Inc. Form 10-K | 110 Reconciliations of income tax expense computed at the U.S. federal statutory income tax rate to the recognized income tax expense and the U.S. statutory income tax rate to our effective tax rates are as follows: 2020 2019 2018 Expected U.S. federal income taxes at statutory rate $ ( 9,550 ) 21.0 % $ 5,778 21.0 % $ 6,470 21.0 % State and local income taxes, net of federal benefit 5,776 ( 12.7 ) % 3,924 14.2 % 797 2.6 % Foreign withholding taxes 1,223 ( 2.7 ) % 2,183 7.9 % 1,935 6.3 % Tax credits ( 1,533 ) 3.4 % ( 3,007 ) ( 10.9 ) % ( 2,151 ) ( 7.0 ) % Non-controlling interest 537 ( 1.2 ) % ( 1,405 ) ( 5.1 ) % ( 1,908 ) ( 6.2 ) % Remeasurement of deferred tax assets in connection with other tax rate changes 5,433 ( 11.9 ) % 208 0.8 % 3,794 12.3 % Change in valuation allowance ( 2,264 ) 5.0 % ( 4,669 ) ( 17.0 ) % — — % Other 435 ( 1.0 ) % 374 1.4 % ( 75 ) ( 0.2 ) % Income tax expense $ 57 ( 0.1 ) % $ 3,386 12.3 % $ 8,862 28.8 % Our effective income tax rates for fiscal 2020, fiscal 2019 and fiscal 2018 were ( 0.1 )%, 12.3 % and 28.8 %, 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. The decrease in our effective income tax rate from fiscal 2018 to fiscal 2019 was primarily due to higher tax credits, an increase in windfall benefits from equity-based compensation and a decrease in valuation allowance, partially offset by an increase in our ownership of SSE Holdings, which increases our share of taxable income of SSE Holdings. Shake Shack Inc. Form 10-K | 111 Deferred Tax Assets and Liabilities The components of deferred tax assets and liabilities are as follows: December 30 2020 December 25 2019 Deferred tax assets: Investment in partnership $ 139,379 $ 179,363 Tax Receivable Agreement 63,853 65,679 Operating lease liability 3,470 4,768 Financing lease liability 51 78 Deferred revenue 141 199 Equity-based compensation 331 347 Net operating loss carryforwards 75,522 26,058 Tax credits 9,610 8,419 Other assets 457 398 Total gross deferred tax assets 292,814 285,309 Valuation allowance ( 2,656 ) ( 954 ) Total deferred tax assets, net of valuation allowance 290,158 284,355 Deferred tax liabilities: Property and equipment ( 300 ) ( 585 ) Operating lease right-of-use asset ( 2,802 ) ( 3,876 ) Financing lease right-of-use asset ( 49 ) ( 77 ) Total gross deferred tax liabilities ( 3,151 ) ( 4,538 ) Net deferred tax assets $ 287,007 $ 279,817 As of December 30, 2020, our federal and state net operating loss carryforwards for income tax purposes were $ 313,940 and $ 183,829 . If not utilized, $ 262,073 of our federal net operating losses can be carried forward indefinitely, and the remainder will begin to expire in 2035. If not utilized $ 40,695 of our state net operating loss carryforwards can be carried forward indefinitely, and the remainder will begin to expire in 2023. As of December 30, 2020, we had federal tax credit carryforwards of $ 9,002 which will begin to expire in 2025 and state tax credits of $ 608 which have an indefinite carryforward period. As described in Note 12, Stockholders' Equity, we acquired an aggregate of 650,951 LLC Interests during fiscal 2020 through redemptions of LLC Interests and activity under stock-based compensation plans. We recognized a deferred tax asset in the amount of $ 8,609 associated with the basis difference in our investment in SSE Holdings upon acquiring these LLC Interests. As of December 30, 2020, the total deferred tax asset related to the basis difference in our investment in SSE Holdings was $ 139,379 . However, a portion of the total basis difference will only reverse upon the eventual sale of our interest in SSE Holdings, which we expect would result in a capital loss. During fiscal 2020, the total valuation allowance established against this deferred tax asset to which it relates was $ 77 . During fiscal 2020, we also recognized $ 1,106 of deferred tax assets, and other loss of $ 1,147 , related to additional tax basis changes generated from expected future payments under the Tax Receivable Agreement and related deductions for imputed interest on such payments. See "—Tax Receivable Agreement" for more information. We evaluate the realizability of our deferred tax assets on a quarterly basis and establish valuation allowances when it is more likely than not that all or a portion of a deferred tax asset may not be realized. As of December 30, 2020, we concluded, based on the weight of all available positive and negative evidence, that all of our deferred tax assets (except for those deferred tax assets described above relating to basis differences that expected to result in a capital loss upon the eventual sale of our interest in SSE Holdings) are more likely than not to be realized, except for tax credits related to New York City UBT and certain foreign Shake Shack Inc. Form 10-K | 112 tax credits no longer expected to be utilized before expiration. As such, a valuation allowance in the amount of $ 2,579 was recognized. The net change in valuation allowance for fiscal 2020 was an increase of $ 1,625 . Uncertain Tax Positions There were no reserves for uncertain tax positions as of December 30, 2020 and December 25, 2019. Shake Shack Inc. was formed in September 2014 and did not engage in any operations prior to the IPO and Organizational Transactions. The statute of limitations remains open for tax years beginning in 2015 for Shake Shack Inc. Additionally, although SSE Holdings is treated as a partnership for U.S. federal and state income taxes purposes, it is still required to file an annual U.S. Return of Partnership Income, which is subject to examination by the Internal Revenue Service ("IRS"). The statute of limitations has expired for tax years through 2016 for SSE Holdings. Tax Receivable Agreement Pursuant to our election under Section 754 of the Internal Revenue Code (the "Code"), we expect to obtain an increase in our share of the tax basis in the net assets of SSE Holdings when LLC Interests are redeemed or exchanged by the non-controlling interest holders and other qualifying transactions. We plan to make an election under Section 754 of Code for each taxable year in which a redemption or exchange of LLC Interest occurs. We intend to treat any redemptions and exchanges of LLC Interests by the non-controlling interest holders as direct purchases of LLC Interests for U.S. federal income tax purposes. These increases in tax basis may reduce the amounts that we would otherwise pay in the future to various tax authorities. They may also decrease gains (or increase losses) on future dispositions of certain capital assets to the extent tax basis is allocated to those capital assets. On February 4, 2015, we entered into a tax receivable agreement with the then-existing non-controlling interest holders (the "Tax Receivable Agreement") that provides for the payment by us to the non-controlling interest holders of 85 % of the amount of any tax benefits that we actually realize, or in some cases are deemed to realize, as a result of (i) increases in our share of the tax basis in the net assets of SSE Holdings resulting from any redemptions or exchanges of LLC Interests, (ii) tax basis increases attributable to payments made under the Tax Receivable Agreement, and (iii) deductions attributable to imputed interest pursuant to the Tax Receivable Agreement (the "TRA Payments"). We expect to benefit from the remaining 15 % of any tax benefits that we may actually realize. The TRA Payments are not conditioned upon any continued ownership interest in SSE Holdings or us. The rights of each non-controlling interest holder under the Tax Receivable Agreement are assignable to transferees of its LLC Interests. During fiscal 2020, we acquired an aggregate of 194,009 LLC Interests in connection with the redemption of LLC Interests that resulted in an increase in the tax basis of our investment in SSE Holdings subject to the provisions of the Tax Receivable Agreement. We recognized an additional liability in the amount of $ 4,024 for the TRA Payments due to the redeeming members, representing 85 % of the aggregate tax benefits we expect to realize from the tax basis increases related to the redemption of LLC Interests, after concluding it was probable that such TRA Payments would be paid based on our estimates of future taxable income. During fiscal 2020 payments of $ 6,643 , inclusive of interest, were made to the members of SSE Holdings pursuant to the Tax Receivable Agreement. Payments of $707 were made to members of SSE Holdings pursuant to the Tax Receivable Agreement during fiscal 2019. As of December 30, 2020, the total amount of TRA Payments due under the Tax Receivable Agreement was $ 232,954 , of which no amount was included in Other current liabilities on the Consolidated Balance Sheet. See Note 18, Commitments and Contingencies, for more information relating to our liabilities under the Tax Receivable Agreement. On March 27, 2020, the U.S. government enacted the CARES Act to provide certain relief as a result of the COVID-19 pandemic. The CARES Act provides tax relief, along with other stimulus measures, including a retroactive technical correction of prior tax legislation for tax depreciation of certain qualified improvement property, among other changes. During fiscal 2020, we recognized accelerated tax depreciation deductions of $ 351 related to qualified improvement property assets placed in service in fiscal 2020, and are recorded as components within our Deferred income taxes, net on the Consolidated Balance Sheets. In addition, subsequent to the second quarter of 2020, we began deferring the employer-paid portion of social security taxes as permitted by the CARES Act. Shake Shack Inc. Form 10-K | 113 NOTE 16: EARNINGS (LOSS) PER SHARE Basic earnings (loss) per share of Class A common stock is computed by dividing net income (loss) attributable to Shake Shack Inc. by the weighted-average number of shares of Class A common stock outstanding during the period. Diluted earnings (loss) per share of Class A common stock is computed by dividing net income (loss) attributable to Shake Shack Inc. by the weighted-average number of shares of Class A common stock outstanding adjusted to give effect to potentially dilutive securities. The following table sets forth reconciliations of the numerators and denominators used to compute basic and diluted earnings (loss) per share of Class A common stock for fiscal 2020, fiscal 2019 and fiscal 2018. 2020 2019 2018 Numerator: Net income (loss) $ ( 45,534 ) $ 24,128 $ 21,948 Less: net income (loss) attributable to non-controlling interests ( 3,376 ) 4,301 6,769 Net income (loss) attributable to Shake Shack Inc. $ ( 42,158 ) $ 19,827 $ 15,179 Denominator: Weighted-average shares of Class A common stock outstanding—basic 37,129 31,381 28,299 Effect of dilutive securities: Stock options — 743 798 Performance stock units — 70 63 Restricted stock units — 57 19 Weighted-average shares of Class A common stock outstanding—diluted 37,129 32,251 29,179 Earnings (loss) per share of Class A common stock—basic $ ( 1.14 ) $ 0.63 $ 0.54 Earnings (loss) per share of Class A common stock—diluted $ ( 1.14 ) $ 0.61 $ 0.52 Shares of our Class B common stock do not share in the earnings or losses of Shake Shack and are therefore not participating securities. As such, separate presentation of basic and diluted earnings (loss) per share of Class B common stock under the two-class method has not been presented. The following table presents potentially dilutive securities, as of the end of the period, excluded from the computations of diluted earnings (loss) per share of Class A common stock for fiscal 2020, fiscal 2019 and fiscal 2018. 2020 2019 2018 Stock options 489,024 (1) 946 (2) — Performance stock units 137,221 (1) 51,197 (3) 21,560 (3) Restricted stock units 258,493 (1) — — Shares of Class B common stock 2,951,188 (4) 3,145,197 (4) 7,557,347 (4) (1) Represents number of instruments outstanding at the end of the period that were excluded from the computation of diluted earnings (loss) per share of Class A common stock because the effect would have been anti-dilutive. (2) Weighted-average number of securities excluded from the computation of diluted earnings (loss) per share of Class A common stock because the exercise price of the stock options exceeded the average market price of our Class A common stock during the period ("out-of-the-money"). (3) Weighted-average number of securities excluded from the computation of diluted earnings (loss) per share of Class A common stock because the performance conditions associated with these awards were not met for a portion of the fiscal year. (4) Shares of our Class B common stock outstanding as of the end of the period are considered potentially dilutive shares of Class A common stock. Amounts have been excluded from the computations of diluted earnings (loss) per share of Class A common stock because the effect would have been anti-dilutive under the if-converted and two-class methods. Shake Shack Inc. Form 10-K | 114 NOTE 17: SUPPLEMENTAL CASH FLOW INFORMATION The following table sets forth supplemental cash flow information for fiscal 2020, fiscal 2019 and fiscal 2018: 2020 2019 2018 Cash paid for: Income taxes, net of refunds $ 1,612 $ 3,044 $ 3,272 Interest, net of amounts capitalized 643 255 2,261 Non-cash investing activities: Accrued purchases of property and equipment 15,515 12,620 17,443 Capitalized landlord assets for leases where we are deemed the accounting owner — — 5,443 Capitalized equity-based compensation 37 101 107 Non-cash financing activities: Class A common stock issued in connection with the redemption of LLC Interests — 2 2 Class A common stock issued in connection with the GTC Merger — 3 — Cancellation of Class B common stock in connection with the redemption of LLC Interests — ( 2 ) ( 2 ) Cancellation of Class B common stock in connection with the GTC Merger — ( 3 ) — Establishment of liabilities under tax receivable agreement 4,024 32,065 44,338 NOTE 18: COMMITMENTS AND CONTINGENCIES Lease Commitments We are obligated under various operating leases for Shacks and our home office space, expiring in various years through 2037. Under certain of these leases, we are liable for contingent rent based on a percentage of sales in excess of specified thresholds and are responsible for our proportionate share of real estate taxes, common area maintenance costs and other occupancy costs. See Note 10, Leases. As security under the terms of one of our leases, we are obligated under a letter of credit totaling $ 130 as of December 30, 2020, which expires in February 2026. Additionally, in September 2017, we entered into a letter of credit in conjunction with our new home office lease in the amount of $ 603 , which expires in August 2021 and renews automatically for one-year periods through January 31, 2034. Purchase Commitments Purchase obligations include legally binding contracts, including commitments for the purchase, construction or remodeling of real estate and facilities, firm minimum commitments for inventory purchases, equipment purchases, marketing-related contracts, software acquisition/license commitments and service contracts. These obligations are generally short-term in nature and are recorded as liabilities when the related goods are received or services rendered. We also enter into long-term, exclusive contracts with certain vendors to supply us with food, beverages and paper goods, obligating us to purchase specified quantities. Shake Shack Inc. Form 10-K | 115 Legal Contingencies In February 2018, a claim was filed against Shake Shack in California state court alleging certain violations of the California Labor Code. At a mediation between the parties, we agreed to settle the matter with the plaintiff and all other California employees who elected to participate in the settlement for $ 1,200 . As of December 30, 2020, an accrual in the amount of $ 1,180 was recorded for this matter and related expenses. We are subject to various legal proceedings, claims and liabilities, such as employment-related claims and slip and fall cases, which arise in the ordinary course of business and are generally covered by insurance. As of December 30, 2020, the amount of the ultimate liability with respect to these matters was not material. Liabilities under Tax Receivable Agreement As described in Note 15, Income Taxes, 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. We are not obligated to make any payments under the Tax Receivable Agreement until the tax benefits associated the transaction that gave rise to the payment are realized. Amounts payable under the Tax Receivable Agreement are contingent upon, among other things, (i) generation of future taxable income over the term of the Tax Receivable Agreement and (ii) future changes in tax laws. If we do not generate sufficient taxable income in the aggregate over the term of the Tax Receivable Agreement to utilize the tax benefits, then we would not be required to make the related TRA Payments. As of December 30, 2020, we recognized $ 232,954 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. NOTE 19: RELATED PARTY TRANSACTIONS Union Square Hospitality Group The Chairman of our Board of Directors serves as the Chief Executive Officer of Union Square Hospitality Group, LLC. As a result, Union Square Hospitality Group, LLC and its subsidiaries, set forth below, are considered related parties. Hudson Yards Sports and Entertainment In fiscal 2011, we entered into a Master License Agreement (as amended, "MLA") with Hudson Yards Sports and Entertainment LLC ("HYSE") to operate Shake Shack branded limited menu concession stands in sports and entertainment venues within the United States. In February 2019, the agreement was assigned to Hudson Yards Catering ("HYC"), the parent of HYSE. The agreement expires in January 2027 and includes five consecutive five-year renewal options at HYC's option. As consideration for these rights, HYC pays us a license fee based on a percentage of net food sales, as defined in the MLA. HYC also pays us a percentage of profits on sales of branded beverages, as defined in the MLA. Classification 2020 2019 2018 Amounts received from HYC Licensing revenue $ 67 $ 571 $ 420 Classification December 30 2020 December 25 2019 Amounts due from HYC Accounts receivable $ 8 $ 47 Shake Shack Inc. Form 10-K | 116 Madison Square Park Conservancy The Chairman of our Board of Directors serves as a director of the Madison Square Park Conservancy ("MSP Conservancy"), with which we have a license agreement and pay license fees to operate our Madison Square Park Shack. Classification 2020 2019 2018 Amounts paid to MSP Conservancy Occupancy and related expenses $ 846 $ 964 $ 877 Classification December 30 2020 December 25 2019 Amounts due to MSP Conservancy Accrued expenses $ — $ 53 Share Our Strength The Chairman of our Board of Directors serves as a director of Share Our Strength, for which Shake Shack has held the "Great American Shake Sale" to raise money and awareness for childhood hunger. During the Great American Shake Sale, we encourage guests to donate money to Share Our Strength's No Kid Hungry campaign in exchange for a coupon for a free shake. All of the guest donations we collect go directly to Share Our Strength. No amounts were due to Share Our Strength as of both December 30, 2020 and December 25, 2019. Classification 2020 2019 2018 Amounts raised through donations — $ — $ 190 $ 343 Costs incurred for free shakes redeemed General and administrative expenses $ — $ 30 $ 53 Olo, Inc. The Chairman of our Board of Directors serves as a director of Olo, Inc. (formerly known as "Mobo Systems, Inc."), a platform we use in connection with our mobile ordering application. No amounts were due to Olo as of both December 30, 2020 and December 25, 2019. Classification 2020 2019 2018 Amounts paid to Olo Other operating expenses $ 242 $ 170 $ 111 Square, Inc. Our Chief Executive Officer is a member of the Board of Directors of Square, Inc. ("Square"). We currently use certain point-of-sale applications, payment processing services, hardware and other enterprise platform services in connection with the processing of a limited amount of sales at certain of our locations, sales for certain off-site events and in connection with our kiosk technology. No amounts were due to Square as of both December 30, 2020 and December 25, 2019. Classification 2020 2019 2018 Amounts paid to Square Other operating expenses $ 1,697 $ 1,692 $ 445 USHG Acquisition Corp. Our Chief Executive Officer has been appointed to the board of directors of USHG Acquisition Corp. in which the Chairman of our Board of Directors serves as the chairman of the board of directors of USHG Acquisition Corp. USHG Acquisition Corp. is a newly organized blank check company incorporated for the purpose of effecting a merger, share exchange, asset acquisition, share purchase, reorganization or similar business combination with one or more businesses or entities. No amounts were due to or due from USHG Acquisition Corp as of both December 30, 2020 and December 25, 2019. Shake Shack Inc. Form 10-K | 117 Tax Receivable Agreement As described in Note 15, Income Taxes, we entered into a Tax Receivable Agreement with certain members of SSE Holdings that provides for the payment by us of 85% of the amount of tax benefits, if any, that Shake Shack actually realizes or in some cases is deemed to realize as a result of certain transactions. Classification 2020 2019 2018 Amounts paid to members (inclusive of interest) Other current liabilities $ 6,643 $ 707 $ — Classification December 30 2020 December 25 2019 Amounts due under the Tax Receivable Agreement Other current liabilities Liabilities under Tax Receivable Agreement, net of current portion $ 232,954 $ 234,426 Distributions to Members of SSE Holdings Under the terms of the SSE Holdings LLC Agreement, SSE Holdings is obligated to make tax distributions to its members. No tax distributions were payable to non-controlling interest holders as of December 30, 2020 and December 25, 2019. Classification 2020 2019 2018 Amounts paid to non-controlling interest holders Non-controlling interests $ 478 $ 1,708 $ 751 Gramercy Tavern Corp. Merger Pursuant to a Stockholders Agreement, dated as of February 4, 2015, as amended, by and among Daniel H. Meyer, the Daniel H. Meyer 2012 Gift Trust dtd 10/31/12 (the "Gift Trust"), other affiliates (collectively, the "Meyer Stockholders") and other parties thereto, the Meyer Stockholders had the right to cause all of the shares of Gramercy Tavern Corp. ("GTC") to be exchanged for shares of our Class A common stock pursuant to a tax-free reorganization. In August 2019, the Meyer Stockholders exercised their right with respect to GTC (the "GTC Merger"). To effect the GTC Merger, a newly-formed wholly-owned subsidiary of Shake Shack Inc. merged with and into GTC, with GTC as the surviving entity, which was then merged with and into Shake Shack Inc. The stockholders of GTC received on a one-for-one basis shares of Class A common stock based upon the amount of shares of GTC held by the stockholders; all of the shares of Class B common stock held by GTC were canceled; and all of the LLC Interests held by GTC were transferred to us. See Note 12 for more information. NOTE 20: GEOGRAPHIC INFORMATION Revenue by geographic area for fiscal 2020, fiscal 2019 and fiscal 2018 is as follows: 2020 2019 2018 United States $ 508,292 $ 578,702 $ 447,575 Other countries 14,575 15,817 11,735 Total revenue $ 522,867 $ 594,519 $ 459,310 Revenues are shown based on the geographic location of our customers and licensees. Our long-lived assets are primarily located in the United States. Shake Shack Inc. Form 10-K | 118 NOTE 21: SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) The following table sets forth certain unaudited financial information for each quarter of fiscal 2020 and fiscal 2019. The unaudited quarterly information includes all adjustments (consisting of normal recurring adjustments) that, in the opinion of management, are necessary for the fair presentation of the information presented. Operating results for interim periods are not necessarily indicative of the results that may be expected for a full fiscal year. 2020 First Second Third Fourth Quarter Quarter Quarter Quarter Total revenue $ 143,170 $ 91,786 $ 130,401 $ 157,510 Operating loss ( 787 ) ( 24,075 ) ( 6,798 ) ( 12,216 ) Net loss ( 1,079 ) ( 18,031 ) ( 6,110 ) ( 20,314 ) Net loss attributable to Shake Shack Inc. ( 960 ) ( 16,211 ) ( 5,559 ) ( 19,428 ) Loss per share (1) : Basic $ ( 0.03 ) $ ( 0.43 ) $ ( 0.15 ) $ ( 0.50 ) Diluted $ ( 0.03 ) $ ( 0.43 ) $ ( 0.15 ) $ ( 0.50 ) 2019 First Second Third Fourth Quarter Quarter Quarter Quarter Total revenue $ 132,609 $ 152,713 $ 157,762 $ 151,435 Operating income 5,162 11,871 8,164 488 Net income (loss) 3,607 11,171 11,423 ( 2,073 ) Net income (loss) attributable to Shake Shack Inc. 2,546 9,030 10,344 ( 2,093 ) Earnings (loss) per share (1) : Basic $ 0.09 $ 0.30 $ 0.32 $ ( 0.06 ) Diluted $ 0.08 $ 0.29 $ 0.31 $ ( 0.06 ) (1) Basic and diluted earnings (loss) per share are computed independently for each of the quarters presented. Therefore, the sum of quarterly basic and diluted earnings (loss) per share amounts may not equal annual basic and diluted earnings (loss) per share amounts. Shake Shack Inc. Form 10-K | 119 Schedule I: Condensed Financial Information of Registrant SHAKE SHACK INC. CONDENSED BALANCE SHEETS (PARENT COMPANY ONLY) (in thousands, except share and per share amounts) December 30 2020 December 25 2019 ASSETS Current assets: Cash $ 9,469 $ 9,223 Accounts receivable — 1 Prepaid expenses 45 206 Total current assets 9,514 9,430 Due from SSE Holdings 2,103 7,124 Deferred income taxes, net 285,577 279,012 Investment in subsidiaries 356,497 247,372 TOTAL ASSETS $ 653,691 $ 542,938 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable 3 1 Accrued expenses 125 44 Due to SSE Holdings 13,288 9,652 Current portion of liabilities under tax receivable agreement — 7,777 Total current liabilities 13,416 17,474 Liabilities under tax receivable agreement, net of current portion 232,954 226,649 Total liabilities 246,370 244,123 Commitments and contingencies Stockholders' equity: Preferred stock, no par value—10,000,000 shares authorized; none issued and outstanding as of December 30, 2020 and December 25, 2019, respectively. — — Class A common stock, $0.001 par value—200,000,000 shares authorized; 38,717,790 and 34,417,302 shares issued and outstanding as of December 30, 2020 and December 25, 2019, respectively. 39 35 Class B common stock, $0.001 par value—35,000,000 shares authorized; 2,951,188 and 3,145,197 shares issued and outstanding as of December 30, 2020 and December 25, 2019, respectively. 3 3 Additional paid-in capital 395,067 244,410 Retained earnings 12,209 54,367 Accumulated other comprehensive loss 3 — Total stockholders' equity 407,321 298,815 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 653,691 $ 542,938 See accompanying Notes to Condensed Financial Statements. Shake Shack Inc. Form 10-K | 120 Schedule I: Condensed Financial Information of Registrant (continued) SHAKE SHACK INC. CONDENSED STATEMENTS OF INCOME (LOSS) (PARENT COMPANY ONLY) (in thousands) Fiscal Year Ended December 30 2020 December 25 2019 December 26 2018 Intercompany revenue $ 1,560 $ 2,018 $ 2,055 TOTAL REVENUE 1,560 2,018 2,055 General and administrative expenses 2,179 1,683 1,933 TOTAL EXPENSES 2,179 1,683 1,933 OPERATING INCOME (LOSS) ( 619 ) 335 122 Equity in net income (loss) of subsidiaries ( 41,152 ) 19,831 21,537 Other income (loss) ( 1,147 ) 808 78 Interest expense — ( 150 ) ( 14 ) INCOME (LOSS) BEFORE INCOME TAXES ( 42,918 ) 20,824 21,723 Income tax expense (benefit) ( 760 ) 997 6,544 NET INCOME (LOSS) $ ( 42,158 ) $ 19,827 $ 15,179 See accompanying Notes to Condensed Financial Statements. Shake Shack Inc. Form 10-K | 121 Schedule I: Condensed Financial Information of Registrant (continued) SHAKE SHACK INC. CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (PARENT COMPANY ONLY) (in thousands) Fiscal Year Ended December 30 2020 December 25 2019 December 26 2018 Net income (loss) $ ( 42,158 ) $ 19,827 $ 15,179 Other comprehensive income, net of tax (1) : Change in foreign currency translation adjustment 1 — — Equity securities: Change in net unrealized holding losses — — ( 3 ) Less: reclassification adjustments for net realized losses included in net income — — 13 Net change 1 — 10 OTHER COMPREHENSIVE INCOME 1 — 10 COMPREHENSIVE INCOME (LOSS) $ ( 42,157 ) $ 19,827 $ 15,189 (1) Net of tax benefit of $ 0 for fiscal years ended December 30, 2020, December 25, 2019 and December 26, 2018 . See accompanying Notes to Condensed Financial Statements. Shake Shack Inc. Form 10-K | 122 Schedule I: Condensed Financial Information of Registrant (continued) SHAKE SHACK INC. CONDENSED STATEMENTS OF CASH FLOWS (PARENT COMPANY ONLY) (in thousands) Fiscal Year Ended December 30 2020 December 25 2019 December 26 2018 OPERATING ACTIVITIES Net income (loss) $ ( 42,158 ) $ 19,827 $ 15,179 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Equity in net income of subsidiaries 41,152 ( 19,831 ) ( 21,537 ) Equity-based compensation 555 279 252 Deferred income taxes ( 721 ) ( 5,317 ) 777 Non-cash interest expense — 151 — Other non-cash income 1,147 ( 808 ) ( 78 ) Changes in operating assets and liabilities: Accounts receivable 1 ( 1 ) — Prepaid expenses and other current assets 161 ( 71 ) — Due to/from SSE Holdings ( 1,254 ) ( 5,190 ) ( 7,103 ) Accounts payable 2 1 — Accrued expenses ( 29 ) 6,003 5,669 Other current liabilities — — 14 NET CASH USED IN OPERATING ACTIVITIES ( 1,144 ) ( 4,957 ) ( 6,827 ) INVESTING ACTIVITIES Purchases of LLC Interests from SSE Holdings ( 171,180 ) ( 29,481 ) ( 11,142 ) Return of investment in SSE Holdings — — 2,053 NET CASH USED IN INVESTING ACTIVITIES ( 171,180 ) ( 29,481 ) ( 9,089 ) FINANCING ACTIVITIES Proceeds from issuance of Class A common stock sold in equity offerings, net of underwriting discounts, commissions and offering costs 144,861 — — Proceeds from issuance of Class A common stock to SSE Holdings upon settlement of equity awards 26,319 29,481 11,142 Proceeds from stock option exercises 8,033 9,201 5,472 Payments under tax receivable agreement ( 6,643 ) ( 707 ) — NET CASH PROVIDED BY FINANCING ACTIVITIES 172,570 37,975 16,614 INCREASE IN CASH 246 3,537 698 CASH AT BEGINNING OF PERIOD 9,223 5,686 4,988 CASH AT END OF PERIOD $ 9,469 $ 9,223 $ 5,686 See accompanying Notes to Condensed Financial Statements. Shake Shack Inc. Form 10-K | 123 Schedule I: Condensed Financial Information of Registrant (continued) SHAKE SHACK INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (PARENT COMPANY ONLY) (in thousands, except share and per share amounts) NOTE 1: ORGANIZATION Shake Shack Inc. (the "Parent Company") was formed on September 23, 2014 as a Delaware corporation and is a holding company with no direct operations. The Parent Company's assets consist primarily of its equity interest in SSE Holdings, LLC ("SSE Holdings") and certain deferred tax assets. The Parent Company's cash inflows are primarily from cash dividends or distributions and other transfers from SSE Holdings. The amounts available to the Parent Company to fulfill cash commitments and pay cash dividends on its common stock are subject to certain restrictions in SSE Holdings' Revolving Credit Facility. See Note 9, Debt, to the Company's consolidated financial statements. NOTE 2: BASIS OF PRESENTATION These condensed Parent Company financial statements should be read in conjunction with the consolidated financial statements of Shake Shack Inc. and the accompanying notes thereto, included in this Annual Report on Form 10-K. For purposes of these condensed financial statements, the Parent Company's interest in SSE Holdings is recorded based upon its proportionate share of SSE Holdings' net assets (similar to presenting them on the equity method). The Parent Company is the sole managing member of SSE Holdings, and pursuant to the Third Amended and Restated LLC Agreement of SSE Holdings (the “SSE Holdings LLC Agreement”), receives compensation in the form of reimbursements for all costs associated with being a public company and maintaining its existence. Intercompany revenue consists of these reimbursement payments and is recognized when the corresponding expense to which it relates is recognized. Certain intercompany balances presented in these condensed Parent Company financial statements are eliminated in the consolidated financial statements. Intercompany receivables of $ 2,103 and $ 7,124 were eliminated in consolidation as of December 30, 2020 and December 25, 2019, respectively. Intercompany payables of $ 13,288 and $ 9,652 were eliminated in consolidation as of December 30, 2020 and December 25, 2019, respectively. For fiscal 2020, $ 1,560 and $ 41,152 of intercompany revenue and equity in net loss of subsidiaries, respectively, was eliminated in consolidation. For fiscal 2019, $ 2,018 and $ 19,831 of intercompany revenue and equity in net income of subsidiaries, respectively, was eliminated in consolidation. Related party amounts that were not eliminated in the consolidated financial statements include the Parent Company's liabilities under the tax receivable agreement, which totaled $ 232,954 and $ 234,426 as of December 30, 2020 and December 25, 2019, respectively. NOTE 3: COMMITMENTS AND CONTINGENCIES On February 4, 2015, the Parent Company entered into a tax receivable agreement with the non-controlling interest holders that provides for payments to the non-controlling interest holders of 85 % of the amount of any tax benefits that the Parent Company actually realizes, or in some cases is deemed to realize, as a result of certain transactions. See Note 15, Income Taxes, to the consolidated financial statements for more information regarding the Parent Company's Tax Receivable Agreement. As described in Note 18, Commitments and Contingencies, to the consolidated financial statements, amounts payable under the Tax Receivable Agreement are contingent upon, among other things, (i) generation of future taxable income of Shake Shack Inc. over the term of the Tax Receivable Agreement and (ii) future changes in tax laws. Shake Shack Inc. Form 10-K | 124 As of December 30, 2020 and December 25, 2019, liabilities under the tax receivable agreement totaled $ 232,954 and $ 234,426 , respectively. NOTE 4: SUPPLEMENTAL CASH FLOW INFORMATION The following table sets forth supplemental cash flow information for fiscal 2020, fiscal 2019 and fiscal 2018: 2020 2019 2018 Cash paid for: Income taxes $ 124 $ 233 $ 185 Non-cash investing activities: Accrued contribution related to stock option exercises 8,094 9,227 5,472 Class A common stock issued in connection with the acquisition of LLC Interests upon redemption by the non-controlling interest holders 1,723 11,934 15,202 Class A common stock issued in connection with the GTC merger — 19,218 — Non-cash contribution made in connection with equity awards granted to employees of SSE Holdings 5,193 4,402 5,999 Non-cash financing activities: Cancellation of Class B common stock in connection with the redemption of LLC Interests — ( 2 ) ( 2 ) Cancellation of Class B common stock in connection with the GTC merger — ( 3 ) — Establishment of liabilities under tax receivable agreement 4,024 32,065 44,338 Shake Shack Inc. Form 10-K | 125 Schedule II: Valuation and Qualifying Accounts Balance at beginning of period Additions Reductions Balance at end of period (in thousands) Charged to costs and expenses Charged to other accounts Deferred tax asset valuation allowance: Fiscal year ended December 26, 2018 $ 10,114 $ 782 $ — $ ( 3,971 ) $ 6,925 Fiscal year ended December 25, 2019 $ 6,925 $ ( 4,654 ) $ — $ ( 1,317 ) $ 954 Fiscal year ended December 30, 2020 $ 954 $ ( 2,610 ) $ 4,312 (1) $ — $ 2,656 (1) Amount relates to a valuation allowance established on deferred tax assets related to our investment in SSE Holdings. Shake Shack Inc. Form 10-K | 126 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None.