Shake Shack Inc. 10-Q

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. This section and other parts of this Quarterly Report on Form 10-Q ("Form 10-Q") contain forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995 ("PSLRA"), which are subject to known and unknown risks, uncertainties and other important factors that may cause actual results to be materially different from the statements made herein. All statements other than statements of historical fact are forward-looking statements. Forward-looking statements discuss our current expectations and projections relating to our financial position, results of operations, plans, objectives, future performance and business. You can identify forward-looking statements by the fact that they do not relate strictly to any historical or current facts. These statements may include words such as "aim," "anticipate," "believe," "estimate," "expect," "forecast," "future," "intend," "outlook," "potential," "project," "projection," "plan," "seek," "may," "could," "would," "will," "should," "can," "can have," "likely," the negatives thereof and other similar expressions. All forward-looking statements are expressly qualified in their entirety by these cautionary statements. You should evaluate all forward-looking statements made in this Form 10-Q in the context of the risks and uncertainties disclosed in our Annual Report on Form 10-K for the fiscal year ended December 30, 2020 ("2020 Form 10-K"). The forward-looking statements included in this Form 10-Q are made only as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law. The following discussion should be read in conjunction with our 2020 Form 10-K and the condensed consolidated financial statements and notes thereto included in Part I, Item 1 of this Form 10-Q. All information presented herein is based on our fiscal calendar. Unless otherwise stated, references to particular years, quarters, months or periods refer to our fiscal years and the associated quarters, months and periods of those fiscal years. OVERVIEW Shake Shack is a modern day "roadside" burger stand serving a classic American menu of premium burgers, chicken sandwiches, hot dogs, crinkle cut fries, shakes, frozen custard, beer and wine. As of March 31, 2021, there were 321 Shacks in operation system-wide, of which 192 were domestic Company-operated Shacks, 22 were domestic licensed Shacks and 107 were international licensed Shacks. Shake Shack Inc. Form 10-Q | 25 Table of Contents Recent Developments and Trends We have experienced continued positive momentum in the business during the first quarter of 2021, and through April 28 ("fiscal April"), all while continuing to support our Shack teams, our guests and the communities in which we operate during the COVID-19 pandemic. With COVID cases stabilizing and more regions steadily loosening restrictions, we are optimistic that improving trends can continue for our industry. With a continued prioritization on health and safety, we have steadily re-opened dining rooms under modified operations to meet public health guidelines and evolving customer behaviors and expectations. Same-Shack sales continued to improve across all regions, up 5.7% in the first quarter 2021, when compared to down 17.4% in the fourth quarter 2020, with performance driven by increases in in-Shack dining in both urban and suburban Shacks, combined with high levels of digital sales retention. Same-Shack sales in fiscal April were up 86% compared to the same period last year. As of the end of fiscal April 2021, the vast majority of Shacks were operating with open dining rooms, the majority of which continue to remain under varying levels of capacity restrictions, especially in urban Shacks. The Company continues to experience recovery across urban and suburban markets, however many major urban markets, such as Manhattan, remain materially below pre-COVID levels, while office, events and tourism traffic return. Average weekly sales were $64,000 in the first quarter of 2021. Fiscal February was heavily impacted by severe winter weather, resulting in average weekly sales of $60,000, followed by a significant improvement to $68,000 in fiscal March, and continuing through fiscal April with $69,000. This continued improvement was driven by a substantial increase in in-Shack sales, as well as a high retention of digital sales. During the first quarter of 2021, total digital sales, including orders placed on the Shake Shack app, website and third-party delivery platforms, represented 60% of Shack sales. Fiscal January and February digital mix was 64% and 62% of Shack sales, respectively, driven largely by increased delivery due to bad weather across large portions of the United States. Digital sales mix decreased to 54% of Shack sales in fiscal March and 51% of Shack sales in fiscal April, driven by an increase in in-Shack dining as the weather improved and parts of the country continued to re-open. Encouragingly, while in-Shack dining continues to increase, there continues to be a high level of digital sales retention with 90% of fiscal January's digital sales retained in fiscal April. Company-owned app and web channels continued to perform well in the first quarter 2021, with 2.4 million first-time purchasers between mid-March of 2020 and the end of fiscal March 2021, and over 230% year-over-year sales growth, when compared to the first quarter 2020. Licensing revenue for the first quarter of 2021 was $4.6 million, reflecting a decrease of 9.9% versus the same period last year. We did, however, see improvement in total weekly sales performance throughout the quarter, with sales recovery led by improvements in both our international and domestic licensed Shacks, particularly in airports which are experiencing increases in Transportation Security Administration ("TSA") flight traffic. Development Highlights During the first quarter 2021, we opened ten new domestic Company-operated Shacks and two new international licensed Shacks. These openings were partially offset by the closure of one domestic Company-operated Shack and one international licensed Shack. 26 | Shake Shack Inc. Form 10-Q Table of Contents Location Type Opening Date Kuwait City, Kuwait — Waterfront International Licensed 1/28/2021 Plymouth Meeting, PA — Plymouth Meeting Domestic Company-Operated 2/4/2021 Nanuet, NY — Nanuet Domestic Company-Operated 2/8/2021 Dubai, UAE — First Avenue Mall, Motor City International Licensed 2/11/2021 Ardmore, PA — Suburban Square Domestic Company-Operated 2/19/2021 Towson, MD — Towson Domestic Company-Operated 2/20/2021 Woburn, MA — Woburn Domestic Company-Operated 3/1/2021 Huntersville, NC — Huntersville Domestic Company-Operated 3/2/2021 Nashville, TN — Downtown Nashville Domestic Company-Operated 3/4/2021 New York, NY — Bryant Park Domestic Company-Operated 3/22/2021 Boulder, CO — Boulder Domestic Company-Operated 3/26/2021 Hoboken, NJ — Hoboken Domestic Company-Operated 3/29/2021 As of May 6, 2021, we have opened another five domestic Company-operated Shacks, and expect a total of 16 to 18 openings by the mid-year point. Though our rate of recovery and development plans continue to be impacted by the ongoing uncertainty due to COVID, we are aiming to open a total of between 35 and 40 new domestic Company-operated Shacks, and 15 to 20 new licensed Shacks, in fiscal 2021. Liquidity Update In March 2021, we issued $225 million aggregate principal amount of 0% Convertible Senior Notes due 2028 (the “Convertible Notes”) in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933. We granted an option to the initial purchasers to purchase up to an additional $25 million aggregate principal amount of Convertible Notes to cover over-allotments, which was subsequently fully exercised during March 2021, resulting in a total issuance of $250 million aggregate principal amount of Convertible Notes. The Convertible Notes will mature on March 1, 2028, unless earlier converted, redeemed or repurchased in certain circumstances. Upon conversion, we pay or deliver, as the case may be, cash, shares of Shake Shack’s Class A common stock or a combination of cash and shares of Shake Shack’s Class A common stock, at our election. Financial Highlights for the First Quarter 2021 ▪ Total revenue in the first quarter 2021 increased 8.5% to $155.3 million versus the same period last year. ▪ Shack sales in the first quarter 2021 increased 9.1% to $150.7 million versus the same period last year. Total Shack sales improved further in fiscal April with an increase of 171% versus the same period last year. ▪ Same-Shack sales 1 improved to up 5.7% in the first quarter 2021 versus the same period last year. In fiscal April, Same-Shack sales continued to recover, with an increase of 86% versus the same period last year. ▪ Licensed revenue in the first quarter 2021 decreased 9.9% to $4.6 million versus the same period last year. ▪ Shack system-wide sales in the first quarter 2021 increased 3.0% to $228.3 million, versus the same period last year. ▪ Operating loss in the first quarter 2021 was $10.0 million compared to an operating loss of $0.8 million in the same period last year. ▪ Shack-level operating profit 2 decreased 14.3% to $22.6 million, or 15.0% of Shack sales in the first quarter 2021, versus the same period last year. ▪ Net income was $0.6 million and adjusted EBITDA 2 was $7.1 million in the first quarter 2021, compared to a net loss of $1.1 million and adjusted EBITDA of $14.3 million in the same period last year. ▪ Net income attributable to Shake Shack Inc. was $1.3 million and adjusted pro forma net income 2 was $1.8 million, or $0.04 per fully exchanged and diluted share in the first quarter 2021, compared to net loss attributable to Shake Shack Inc. of $1.0 million and adjusted pro forma net income of $0.8 million, or $0.02 per fully exchanged and diluted share, in the same period last year. Shake Shack Inc. Form 10-Q | 27 Table of Contents ▪ Net system-wide Shack openings , comprised of nine net domestic Company-operated Shacks and one net licensed Shack. ▪ Cash and marketable securities on hand was $415.9 million as of March 31, 2021. 1 In order to compare like-for-like periods for fiscal 2021, same-Shack sales will compare the 52 weeks from December 31, 2020 through December 29, 2021 to the 52 weeks from January 2, 2020 through December 30, 2020. For Q1 2021, same-Shack sales compares the thirteen weeks from December 31, 2020 through March 31, 2021 to the thirteen weeks from January 2, 2021 through April 1, 2021. 2 This represents a non-GAAP measure. Reconciliations to the most directly comparable financial measures presented in accordance with GAAP are set forth in the schedules within “Non-GAAP Financial Measures,” herein. RESULTS OF OPERATIONS The following table summarizes our results of operations for the thirteen weeks ended March 31, 2021 and March 25, 2020: Thirteen Weeks Ended (dollar amounts in thousands) March 31 2021 March 25 2020 Shack sales $ 150,668 97.0 % $ 138,048 96.4 % Licensing revenue 4,614 3.0 % 5,122 3.6 % TOTAL REVENUE 155,282 100.0 % 143,170 100.0 % Shack-level operating expenses (1) : Food and paper costs 44,630 29.6 % 39,564 28.7 % Labor and related expenses 46,382 30.8 % 41,766 30.3 % Other operating expenses 23,144 15.4 % 17,779 12.9 % Occupancy and related expenses 13,911 9.2 % 12,558 9.1 % General and administrative expenses 19,565 12.6 % 16,191 11.3 % Depreciation and amortization expense 13,726 8.8 % 11,768 8.2 % Pre-opening costs 3,576 2.3 % 2,243 1.6 % Impairment and loss on disposal of assets 369 0.2 % 2,088 1.5 % TOTAL EXPENSES 165,303 106.5 % 143,957 100.5 % OPERATING LOSS (10,021) (6.5) % (787) (0.5) % Other income (expense), net 31 — % (93) (0.1) % Interest expense (515) (0.3) % (112) (0.1) % LOSS BEFORE INCOME TAXES (10,505) (6.8) % (992) (0.7) % Income tax expense (benefit) (11,080) (7.1) % 87 0.1 % NET INCOME (LOSS) 575 0.4 % (1,079) (0.8) % Less: net loss attributable to non-controlling interests (734) (0.5) % (119) (0.1) % NET INCOME (LOSS) ATTRIBUTABLE TO SHAKE SHACK INC. $ 1,309 0.8 % $ (960) (0.7) % (1) As a percentage of Shack sales. Shack Sales Shack sales represent the aggregate sales of food, beverages and Shake Shack branded merchandise at our domestic Company-operated Shacks. Shack sales in any period are directly influenced by the number of operating weeks in such period, the number of open Shacks and same-Shack sales. Same-Shack sales means, for any reporting period, sales performance at our Company-operated domestic Shacks that have been open for at least 24 months. 28 | Shake Shack Inc. Form 10-Q Table of Contents Thirteen Weeks Ended (dollar amounts in thousands) March 31 2021 March 25 2020 Shack sales $ 150,668 $ 138,048 Percentage of total revenue 97.0 % 96.4 % Dollar change compared to prior year $ 12,620 Percentage change compared to prior year 9.1 % Shack sales during the thirteen weeks ended March 31, 2021 increased 9.1% from the same prior-year period, primarily driven by the opening of 25 net new domestic Company-operated Shacks between March 25, 2020 and March 31, 2021, and to a lesser extent, an increase in same-Shack sales. Same-Shack sales continued to improve across all regions, and increased 5.7% for the first quarter of 2021, compared to down 17.4% in the fourth quarter of 2020, with performance driven by increases in in-Shack dining in both urban and suburban Shacks, combined with high levels of digital sales retention. The increase in first quarter 2021 same-Shack sales was due to a price and sales mix increase of 18.0% — a combination of our end-of-year price increase in December, increased pricing on third-party delivery channels which rolled out over the early part of this fiscal year, and a higher number of items per check, particularly in our digital channels — partially offset by a 12.3% decrease in guest traffic. For the purpose of calculating same-Shack sales growth, Shack sales for 123 Shacks were included in the comparable Shack base as of the end of the first quarter of 2021 versus 90 Shacks for the first quarter of 2020. Licensing Revenue Licensing revenue is comprised of license fees, opening fees for certain licensed Shacks and territory fees. License fees are calculated as a percentage of sales and territory fees are payments for the exclusive right to develop Shacks in a specific geographic area. Thirteen Weeks Ended (dollar amounts in thousands) March 31 2021 March 25 2020 Licensing revenue $ 4,614 $ 5,122 Percentage of total revenue 3.0 % 3.6 % Dollar change compared to prior year $ (508) Percentage change compared to prior year (9.9) % Licensed revenue for the thirteen weeks ended March 31, 2021 decreased 9.9% to $4.6 million versus the same prior-year period, primarily due to reduced sales related to the COVID-19 pandemic, partially offset by a net increase of 9 Shacks opened between March 25, 2020 and March 31, 2021. As of the end of the first quarter 2021, 16 licensed Shacks remained temporarily closed due to COVID. Through the first quarter of 2021, we did, however, see improvement in total weekly sales performance throughout the quarter, with sales recovery led by improvements in both our international and domestic licensed Shacks, particularly in airports which are experiencing increases in TSA flight traffic. Food and Paper Costs Food and paper costs include the direct costs associated with food, beverage and packaging of our menu items. The components of Food and paper costs are variable by nature, change with sales volume, are impacted by menu mix and fluctuations in commodity costs, as well as geographic scale and proximity. Shake Shack Inc. Form 10-Q | 29 Table of Contents Thirteen Weeks Ended (dollar amounts in thousands) March 31 2021 March 25 2020 Food and paper costs $ 44,630 $ 39,564 Percentage of Shack sales 29.6 % 28.7 % Dollar change compared to prior year $ 5,066 Percentage change compared to prior year 12.8 % The increase in Food and paper costs for the thirteen weeks ended March 31, 2021 was primarily due to the opening of 25 net new domestic Company-operated Shacks between March 25, 2020 and March 31, 2021, as well as increased paper and packaging costs and beef costs. Labor and Related Expenses Labor and related expenses include domestic Company-operated Shack-level hourly and management wages, bonuses, payroll taxes, equity-based compensation, workers’ compensation expense and medical benefits. As we expect with other variable expense items, we expect labor costs to grow as our Shack sales grow. Factors that influence labor costs include minimum wage and payroll tax legislation, health care costs, size and location of the Shack and the performance of our domestic Company-operated Shacks. Thirteen Weeks Ended (dollar amounts in thousands) March 31 2021 March 25 2020 Labor and related expenses $ 46,382 $ 41,766 Percentage of Shack sales 30.8 % 30.3 % Dollar change compared to prior year $ 4,616 Percentage change compared to prior year 11.1 % The increase in Labor and related expenses for the thirteen weeks ended March 31, 2021 was primarily due to our annual wage rate increase, higher payroll taxes at the state level, and a more normalized level of performance related bonuses, including the impact of the opening of 25 net new domestic Company-operated Shacks between March 25, 2020 and March 31, 2021. As a percentage of Shack sales, the increase in Labor and related expenses for the thirteen weeks ended March 31, 2021 was primarily due to our annual wage increase, a more normalized level of performance related bonuses and new Shack openings at higher levels of labor, partially offset by an increase in labor productivity at existing Shacks. Other Operating Expenses Other operating expenses consist of Shack-level repairs and maintenance, utilities and other operating expenses incidental to operating our domestic Company-operated Shacks, such as delivery commissions, credit card fees, non-perishable supplies, and business insurance. Thirteen Weeks Ended (dollar amounts in thousands) March 31 2021 March 25 2020 Other operating expenses $ 23,144 $ 17,779 Percentage of Shack sales 15.4 % 12.9 % Dollar change compared to prior year $ 5,365 Percentage change compared to prior year 30.2 % The increase in Other operating expenses for the thirteen weeks ended March 31, 2021 was primarily due to the opening of 25 net new domestic Company-operated Shacks between March 25, 2020 and March 31, 2021 and higher delivery commission as a result of digital growth. 30 | Shake Shack Inc. Form 10-Q Table of Contents As a percentage of Shack sales, the increase in Other operating expenses for the thirteen weeks ended March 31, 2021 was primarily due to higher delivery commissions as a result of digital growth. Occupancy and Related Expenses Occupancy and related expenses consist of Shack-level occupancy expenses (including rent, common area expenses and certain local taxes), and exclude occupancy expenses associated with unopened Shacks, which are recorded separately in Pre-opening costs. Thirteen Weeks Ended (dollar amounts in thousands) March 31 2021 March 25 2020 Occupancy and related expenses $ 13,911 $ 12,558 Percentage of Shack sales 9.2 % 9.1 % Dollar change compared to prior year $ 1,353 Percentage change compared to prior year 10.8 % The increase in Occupancy and related expenses for the thirteen weeks ended March 31, 2021 was primarily due to the opening of 25 net new domestic Company-operated Shacks between March 25, 2020 and March 31, 2021. As a percentage of Shack sales, Occupancy and related expenses for the thirteen weeks ended March 31, 2021 was relatively consistent with the same-prior year period, and continues to be impacted by sales deleverage, particularly in our high-volume urban Shacks. General and Administrative Expenses General and administrative expenses consist of costs associated with home office and administrative functions that support Shack development and operations, as well as equity-based compensation expense. Thirteen Weeks Ended (dollar amounts in thousands) March 31 2021 March 25 2020 General and administrative expenses $ 19,565 $ 16,191 Percentage of total revenue 12.6 % 11.3 % Dollar change compared to prior year $ 3,374 Percentage change compared to prior year 20.8 % The increase in General and administrative expenses for the thirteen weeks ended March 31, 2021 was primarily due to continued investment across the business, including an increase in headcount to support the strategic growth plan, and increased investments in marketing and our digital initiatives. As a percentage of total revenue, the increase in General and administrative expenses for the thirteen weeks ended March 31, 2021 was primarily due primarily to drivers described above. Depreciation and Amortization Expense Depreciation and amortization expense primarily consists of the depreciation of fixed assets, including leasehold improvements and equipment, as well as financing equipment lease assets. Shake Shack Inc. Form 10-Q | 31 Table of Contents Thirteen Weeks Ended (dollar amounts in thousands) March 31 2021 March 25 2020 Depreciation and amortization expense $ 13,726 $ 11,768 Percentage of total revenue 8.8 % 8.2 % Dollar change compared to prior year $ 1,958 Percentage change compared to prior year 16.6 % The increase in Depreciation and amortization expense for the thirteen weeks ended March 31, 2021 was primarily due to incremental depreciation of capital expenditures related to the opening of 25 net new domestic Company-operated Shacks between March 25, 2020 and March 31, 2021 and increased technology investments to support our digital initiatives. As a percentage of total revenue, the increase in Depreciation and amortization expense for the thirteen weeks ended March 31, 2021 was primarily due to the aforementioned items. Pre-Opening Costs Pre-opening costs consist primarily of legal fees, rent, managers' salaries, training costs, employee payroll and related expenses, costs to relocate and compensate Shack management teams prior to an opening and wages, travel and lodging costs for our opening training team and other supporting team members. All such costs incurred prior to the opening of a domestic Company-operated Shack are expensed in the period in which the expense was incurred. Pre-opening costs can fluctuate significantly from period to period, based on the number and timing of domestic Company-operated Shack openings and the specific pre-opening costs incurred for each domestic Company-operated Shack. Additionally, domestic Company-operated Shack openings in new geographic market areas may initially experience higher pre-opening costs than our established geographic market areas, such as the New York City metropolitan area, where we have greater economies of scale and incur lower travel and lodging costs for our training team. Thirteen Weeks Ended (dollar amounts in thousands) March 31 2021 March 25 2020 Pre-opening costs $ 3,576 $ 2,243 Percentage of total revenue 2.3 % 1.6 % Dollar change compared to prior year $ 1,333 Percentage change compared to prior year 59.4 % The increase in Pre-opening costs for the thirteen weeks ended March 31, 2021 was due to the increased fiscal 2021 development pipeline for new domestic Company-operated Shacks, including those expected to open in the first half of the fiscal year. Impairment and Loss on Disposal of Assets Impairment and loss on disposal of assets include impairment charges related to our long-lived assets, which includes property and equipment, as well as operating and finance lease assets. Additionally, Impairment and loss on disposal of assets includes the net book value of assets that have been retired and consists primarily of furniture, equipment and fixtures that were replaced in the normal course of business. 32 | Shake Shack Inc. Form 10-Q Table of Contents Thirteen Weeks Ended (dollar amounts in thousands) March 31 2021 March 25 2020 Impairment and loss on disposal of assets $ 369 $ 2,088 Percentage of total revenue 0.2 % 1.5 % Dollar change compared to prior year $ (1,719) Percentage change compared to prior year (82.3) % The decrease in Impairment and loss on disposal of assets for the thirteen weeks ended March 31, 2021 was primarily due to asset impairment charges of $1.1 million in the first quarter of 2020 related to the impairment of one Shack. In addition, loss on disposal of assets decreased due to several Shack renovations in fiscal 2020. Other Income (Expense), Net Other income (expense), net consists of adjustments to liabilities under our Tax Receivable Agreement, dividend income, interest income and net unrealized and realized gains and losses from the sale of marketable securities. Thirteen Weeks Ended (dollar amounts in thousands) March 31 2021 March 25 2020 Other income (expense), net $ 31 $ (93) Percentage of total revenue — % (0.1) % Dollar change compared to prior year $ 124 Percentage change compared to prior year (133.3) % The increase in Other income (expense), net for the thirteen weeks ended March 31, 2021 was primarily due to a decline in unrealized losses related to our investments in marketable securities, partially offset by a decrease in dividend income. Interest Expense Interest expense primarily consists of interest and fees on our Revolving Credit Facility, imputed interest related to our financing equipment leases, amortization of deferred financing costs, and interest on the current portion of our liabilities under the Tax Receivable Agreement. Thirteen Weeks Ended (dollar amounts in thousands) March 31 2021 March 25 2020 Interest expense $ (515) $ (112) Percentage of total revenue (0.3) % (0.1) % Dollar change compared to prior year $ (403) Percentage change compared to prior year 359.8 % The increase in Interest expense was primarily due to the write-off of previously capitalized costs of $0.3 million associated with the amendment of our Revolving Credit Facility in March 2021. Refer to Note 6, Debt, for further details. Income Tax Expense (Benefit) We are the sole managing member of SSE Holdings, and as a result, consolidate the financial results of SSE Holdings. SSE Holdings is treated as a partnership for U.S. federal and most applicable state and local income tax purposes. As a partnership, SSE Holdings is not subject to U.S. federal and certain state and local income taxes. Any taxable income or loss generated by SSE Holdings is passed through to and included in the taxable income or loss of its members, including us, on a pro rata basis. We are subject to U.S. federal income taxes, in addition to state and local income taxes with respect to our allocable share of any taxable income or loss of SSE Holdings, as well as any stand-alone income or loss generated by Shake Shack Inc. We are also subject to withholding taxes in foreign jurisdictions. Shake Shack Inc. Form 10-Q | 33 Table of Contents Thirteen Weeks Ended (dollar amounts in thousands) March 31 2021 March 25 2020 Income tax expense (benefit) $ (11,080) $ 87 Percentage of total revenue (7.1) % 0.1 % Dollar change compared to prior year $ (11,167) Percentage change compared to prior year (12,835.6) % Our effective income tax rates for the thirteen weeks ended March 31, 2021 and March 25, 2020 were 105.5% and (8.8)%, respectively. The increase was primarily driven by lower pre-tax book income resulting in a loss, causing tax credits and windfall tax benefits related to equity-based compensation to have an increasing effect on the tax rate, as well as a reduction of a valuation allowance. Additionally, an increase in our ownership interest in SSE Holdings increases our share of the taxable income (loss) of SSE Holdings. Our weighted-average ownership interest in SSE Holdings was 93.0% and 91.6% for the thirteen weeks ended March 31, 2021 and March 25, 2020, respectively. Net Loss Attributable to Non-Controlling Interests We are the sole managing member of SSE Holdings and have the sole voting power in, and control the management of, SSE Holdings. Accordingly, we consolidate the financial results of SSE Holdings and report a non-controlling interest on our Condensed Consolidated Statements of Income (Loss), representing the portion of Net income (loss) attributable to the other members of SSE Holdings. The Third Amended and Restated Limited Liability Company Agreement of SSE Holdings provides that holders of LLC Interests may, from time to time, require SSE Holdings to redeem all or a portion of their LLC Interests for newly-issued shares of Class A common stock on a one-for-one basis. In connection with any redemption or exchange, we will receive a corresponding number of LLC Interests, increasing our total ownership interest in SSE Holdings. The weighted average ownership percentages for the applicable reporting periods are used to attribute net income (loss) and other comprehensive income to Shake Shack Inc. and the non-controlling interest holders. Thirteen Weeks Ended (dollar amounts in thousands) March 31 2021 March 25 2020 Net loss attributable to non-controlling interests $ (734) $ (119) Percentage of total revenue (0.5) % (0.1) % Dollar change compared to prior year $ (615) Percentage change compared to prior year 516.8 % The increase in Net loss attributable to non-controlling interests for the thirteen weeks ended March 31, 2021 was primarily due to an increase in net loss for SSE Holdings for the period, partially offset by a decrease in the non-controlling interest holders' weighted average ownership, which was 7.0% and 8.4% for the thirteen weeks ended March 31, 2021 and March 25, 2020, respectively. NON-GAAP FINANCIAL MEASURES To supplement the condensed consolidated financial statements, which are prepared and presented in accordance with U.S. GAAP, we use the following non-GAAP financial measures: Shack-level operating profit, Shack-level operating profit margin, EBITDA, adjusted EBITDA, adjusted EBITDA margin, adjusted pro forma net income and adjusted pro forma earnings per fully exchanged and diluted share (collectively the "non-GAAP financial measures"). 34 | Shake Shack Inc. Form 10-Q Table of Contents Shack-Level Operating Profit Shack-level operating profit is defined as Shack sales less Shack-level operating expenses including Food and paper costs, Labor and related expenses, Other operating expenses and Occupancy and related expenses. How This Measure Is Useful When used in conjunction with GAAP financial measures, Shack-level operating profit and Shack-level operating profit margin are supplemental measures of operating performance that the Company believes are useful measures to evaluate the performance and profitability of its Shacks. Additionally, Shack-level operating profit and Shack-level operating profit margin are key metrics used internally by management to develop internal budgets and forecasts, as well as assess the performance of its Shacks relative to budget and against prior periods. It is also used to evaluate employee compensation as it serves as a metric in certain performance-based employee bonus arrangements. The Company believes presentation of Shack-level operating profit and Shack-level operating profit margin provides investors with a supplemental view of its operating performance that can provide meaningful insights to the underlying operating performance of the Shacks, as these measures depict the operating results that are directly impacted by the Shacks and exclude items that may not be indicative of, or are unrelated to, the ongoing operations of the Shacks. It may also assist investors to evaluate the Company's performance relative to peers of various sizes and maturities and provides greater transparency with respect to how management evaluates the business, as well as the financial and operational decision-making. Limitations of the Usefulness of this Measure Shack-level operating profit and Shack-level operating profit margin may differ from similarly titled measures used by other companies due to different methods of calculation. Presentation of Shack-level operating profit and Shack-level operating profit margin is not intended to be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP. Shack-level operating profit excludes certain costs, such as General and administrative expenses and Pre-opening costs, which are considered normal, recurring cash operating expenses and are essential to support the operation and development of the Company's Shacks. Therefore, this measure may not provide a complete understanding of the Company's operating results as a whole and Shack-level operating profit and Shack-level operating profit margin should be reviewed in conjunction with the Company's GAAP financial results. A reconciliation of Shack-level operating profit to Operating loss, the most directly comparable GAAP financial measure, is set forth below. Thirteen Weeks Ended (dollar amounts in thousands) March 31 2021 March 25 2020 Operating loss $ (10,021) $ (787) Less: Licensing revenue 4,614 5,122 Add: General and administrative expenses 19,565 16,191 Depreciation and amortization expense 13,726 11,768 Pre-opening costs 3,576 2,243 Impairment and loss on disposal of assets (1) 369 2,088 Shack-level operating profit $ 22,601 $ 26,381 Total revenue $ 155,282 $ 143,170 Less: licensing revenue 4,614 5,122 Shack sales $ 150,668 $ 138,048 Shack-level operating profit margin (2) 15.0 % 19.1 % (1) For the thirteen weeks ended March 25, 2020, amount includes a non-cash impairment charge of $1.1 million related to one Shack. (2) As a percentage of Shack sales. Shake Shack Inc. Form 10-Q | 35 Table of Contents EBITDA and Adjusted EBITDA EBITDA is defined as Net income (loss) before interest expense (net of interest income), Income tax expense (benefit) and Depreciation and amortization expense. Adjusted EBITDA is defined as EBITDA (as defined above) excluding equity-based compensation expense, deferred lease cost, Impairment and loss on the disposal of assets, amortization of cloud-based software implementation costs, as well as certain non-recurring items that the Company does not believe directly reflect its core operations and may not be indicative of the Company's recurring business operations. How These Measures Are Useful When used in conjunction with GAAP financial measures, EBITDA and adjusted EBITDA are supplemental measures of operating performance that the Company believes are useful measures to facilitate comparisons to historical performance and competitors' operating results. Adjusted EBITDA is a key metric used internally by management to develop internal budgets and forecasts and also serves as a metric in its performance-based equity incentive programs and certain bonus arrangements. The Company believes presentation of EBITDA and adjusted EBITDA provides investors with a supplemental view of the Company's operating performance that facilitates analysis and comparisons of its ongoing business operations because they exclude items that may not be indicative of the Company's ongoing operating performance. Limitations of the Usefulness of These Measures EBITDA and adjusted EBITDA may differ from similarly titled measures used by other companies due to different methods of calculation. Presentation of EBITDA and adjusted EBITDA is not intended to be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP. EBITDA and adjusted EBITDA exclude certain normal recurring expenses. Therefore, these measures may not provide a complete understanding of the Company's performance and should be reviewed in conjunction with the GAAP financial measures. A reconciliation of EBITDA and adjusted EBITDA to Net income (loss), the most directly comparable GAAP measure, is as follows. Thirteen Weeks Ended (dollar amounts in thousands) March 31 2021 March 25 2020 Net income (loss) $ 575 $ (1,079) Depreciation and amortization expense 13,726 11,768 Interest expense, net 515 112 Income tax expense (benefit) (11,080) 87 EBITDA $ 3,736 $ 10,888 Equity-based compensation 1,681 1,300 Amortization of cloud-based software implementation costs (1) 313 260 Deferred lease costs (2) 204 (330) Impairment and loss on disposal of assets (3) 369 2,088 Debt offering related costs (4) 236 — Legal settlement (5) 595 — Executive transition costs (6) — 34 Project Concrete (7) — (261) Other (8) — 285 ADJUSTED EBITDA $ 7,134 $ 14,264 Adjusted EBITDA margin (9) 4.6 % 10.0 % (1) Represents amortization of capitalized implementation costs related to cloud-based software arrangements that are included within General and administrative expenses. (2) Reflects the extent to which lease expense is greater than or less than contractual fixed base rent. (3) Includes losses on disposals of property and equipment in the normal course of business. For the thirteen weeks ended March 25, 2020, amount includes a non-cash impairment charge of $1.1 million related to one Shack. 36 | Shake Shack Inc. Form 10-Q Table of Contents (4) Costs incurred in connection with the Company’s Convertible Notes, issued in March 2021, including consulting and advisory fees. Refer to Note 6, Debt, for further details. (5) Expense incurred to establish an accrual related to the settlement of a legal matter. See Note 13, Commitments and Contingencies, for further details. (6) Represents fees paid in connection with the search and hiring of certain executive and key management positions. (7) Represents consulting and advisory fees related to the Company's enterprise-wide system upgrade initiative called Project Concrete. (8) Represents incremental expenses incurred related to an inventory adjustment and certain employee-related expenses. (9) Calculated as a percentage of total revenue which was $155.3 million and $143.2 million for the thirteen weeks ended March 31, 2021 and March 25, 2020, respectively. Adjusted Pro Forma Net Income and Adjusted Pro Forma Earnings Per Fully Exchanged and Diluted Share Adjusted pro forma net income represents net income (loss) attributable to Shake Shack Inc. assuming the full exchange of all outstanding SSE Holdings, LLC membership interests ("LLC Interests") for shares of Class A common stock, adjusted for certain non-recurring items that we don't believe directly reflect our core operations and may not be indicative of our recurring business operations. Adjusted pro forma earnings per fully exchanged and diluted share is calculated by dividing adjusted pro forma net income (loss) by the weighted-average shares of Class A common stock outstanding, assuming the full exchange of all outstanding LLC Interests, after giving effect to any dilutive securities such as outstanding equity-based awards. How These Measures Are Useful When used in conjunction with GAAP financial measures, adjusted pro forma net income and adjusted pro forma earnings per fully exchanged and diluted share are supplemental measures of operating performance that we believe are useful measures to evaluate our performance period over period and relative to our competitors. By assuming the full exchange of all outstanding LLC Interests, we believe these measures facilitate comparisons with other companies that have different organizational and tax structures, as well as comparisons period over period because it eliminates the effect of any changes in net income (loss) attributable to Shake Shack Inc. driven by increases in our ownership of SSE Holdings, which are unrelated to our operating performance, and excludes items that are non-recurring or may not be indicative of our ongoing operating performance. Limitations of the Usefulness of These Measures Adjusted pro forma net income and adjusted pro forma earnings per fully exchanged and diluted share are not necessarily comparable to similarly titled measures used by other companies due to different methods of calculation. Presentation of adjusted pro forma net income and adjusted pro forma earnings per fully exchanged and diluted share should not be considered alternatives to net income (loss) and earnings (loss) per share, as determined under GAAP. While these measures are useful in evaluating our performance, it does not account for the earnings attributable to the non-controlling interest holders and therefore does not provide a complete understanding of the net income (loss) attributable to Shake Shack Inc. Adjusted pro forma net income and adjusted pro forma earnings per fully exchanged and diluted share should be evaluated in conjunction with our GAAP financial results. A reconciliation of adjusted pro forma net income to net income (loss) attributable to Shake Shack Inc., the most directly comparable GAAP measure, and the computation of adjusted pro forma earnings per fully exchanged and diluted share are set forth below. Shake Shack Inc. Form 10-Q | 37 Table of Contents Thirteen Weeks Ended (in thousands, except per share amounts) March 31 2021 March 25 2020 Numerator: Net income (loss) attributable to Shake Shack Inc. $ 1,309 $ (960) Adjustments: Reallocation of net loss attributable to non-controlling interests from the assumed exchange of LLC Interests (1) (734) (119) Executive transition costs (2) — 34 Project Concrete (3) — (261) Legal settlement (4) 595 — Debt offering related costs (5) 236 — Revolving Credit Facility amendment-related costs (6) 323 — Income tax benefit (7) 24 1,819 Other (8) — 285 Adjusted pro forma net income $ 1,753 $ 798 Denominator: Weighted-average shares of Class A common stock outstanding—diluted 42,789 34,444 Adjustments: Assumed exchange of LLC Interests for shares of Class A common stock (1) — 3,144 Dilutive effect of stock options — 704 Adjusted pro forma fully exchanged weighted-average shares of Class A common stock outstanding—diluted 42,789 38,292 Adjusted pro forma earnings per fully exchanged share—diluted $ 0.04 $ 0.02 Thirteen Weeks Ended March 31 2021 March 25 2020 Earnings (loss) per share of Class A common stock - diluted $ 0.01 $ (0.03) Assumed exchange of LLC Interests for shares of Class A common stock (1) — — Non-GAAP adjustments (9) 0.03 0.05 Adjusted pro forma earnings per fully exchanged share—diluted $ 0.04 $ 0.02 (1) Assumes the exchange of all outstanding LLC Interests for shares of Class A common stock, resulting in the elimination of the non-controlling interest and recognition of the net loss attributable to non-controlling interests. (2) Represents fees paid in connection with the search and hiring of certain executive and key management positions. (3) Represents consulting and advisory fees related to the Company's enterprise-wide system upgrade initiative called Project Concrete. (4) Expense incurred to establish an accrual related to the settlement of a legal matter. See Note 13, Commitments and Contingencies, for further details. (5) Costs incurred in connection with the Company’s Convertible Notes, issued in March 2021, including consulting and advisory fees. Refer to Note 6, Debt, for further details. (6) Expense incurred in connection with the Company's amendments on the Revolving Credit Facility, including the write-off of previously capitalized costs on the Revolving Credit Facility. Refer to Note 6, Debt, for further details. (7) Represents the tax effect of the aforementioned adjustments and pro forma adjustments to reflect corporate income taxes at assumed effective tax rates of 118.8% and 185.4% for the thirteen weeks ended March 31, 2021 and March 25, 2020, respectively. Amounts include provisions for U.S. federal income taxes, certain LLC entity-level taxes and foreign withholding taxes, assuming the highest statutory rates apportioned to each applicable state, local and foreign jurisdiction. (8) Represents incremental expenses incurred related to an inventory adjustment and certain employee-related expenses. (9) Represents the per share impact of non-GAAP adjustments for each period. Refer to the reconciliation of Adjusted Pro Forma Net Income above for further details. LIQUIDITY AND CAPITAL RESOURCES Sources and Uses of Cash 38 | Shake Shack Inc. Form 10-Q Table of Contents Our primary sources of liquidity are cash from operations, cash and cash equivalents on hand, short-term investments and availability under our Revolving Credit Facility. In March 2021, we issued 0% Convertible Notes of Convertible Debt, and received $243.8 million of proceeds, net of discounts. Refer to Note 6, Debt, for further discussion. As of March 31, 2021, we maintained a cash and cash equivalents balance of $375.0 million and a short-term investments balance of $40.9 million within Marketable securities. On June 8, 2018, we filed a Registration Statement on Form S-3 with the SEC which permits us to issue a combination of securities described in the prospectus in one or more offerings from time to time. To date, we have not experienced difficulty accessing the capital markets; however, future volatility in the capital markets may affect our ability to access those markets or increase the costs associated with issuing debt or equity instruments. Our primary requirements for liquidity are to fund our working capital needs, operating and finance lease obligations, capital expenditures and general corporate needs. Our requirements for working capital are generally not significant because our guests pay for their food and beverage purchases in cash or on debit or credit cards at the time of the sale and we are able to sell many of our inventory items before payment is due to the supplier of such items. Our ongoing capital expenditures are principally related to opening new Shacks, existing Shack capital investments (both for remodels and maintenance), as well as investments in our corporate and digital infrastructure. In addition, we are obligated to make payments to certain members of SSE Holdings under the Tax Receivable Agreement. As of March 31, 2021, such obligations totaled $234.0 million. Amounts payable under the Tax Receivable Agreement are contingent upon, among other things, (i) generation of future taxable income over the term of the Tax Receivable Agreement and (ii) future changes in tax laws. If we do not generate sufficient taxable income in the aggregate over the term of the Tax Receivable Agreement to utilize the tax benefits, then we would not be required to make the related TRA Payments. Although the amount of any payments that must be made under the Tax Receivable Agreement may be significant, the timing of these payments will vary and will generally be limited to one payment per member per year. The amount of such payments are also limited to the extent we utilize the related deferred tax assets. The payments that we are required to make will generally reduce the amount of overall cash flow that might have otherwise been available to us or to SSE Holdings, but we expect the cash tax savings we will realize from the utilization of the related deferred tax assets to fund the required payments. In response to the uncertain market conditions resulting from the onset of the COVID-19 pandemic, we took the following actions in fiscal 2020. • 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 $75.0 million from time to time. On April 21, 2020, we completed the sale of 233,467 shares of our Class A common stock pursuant to the ATM Program and received $9.8 million of proceeds, net of commissions. The proceeds were used to purchase newly-issued LLC Interests. • On April 21, 2020, we completed an underwritten offering of 3,416,070 shares of our Class A common stock, resulting in $135.9 million of proceeds, net of underwriting discounts and commissions. The proceeds were used to purchase newly-issued LLC Interests. • In May 2020, we entered into an amendment to our Revolving Credit Facility that provided for a number of enhanced modifications to reflect the current and ongoing impact from COVID-19. Our Revolving Credit Facility was further amended in March 2021, resulting in a modification of the applicable covenants and restrictions in the Credit Agreement to permit the incurrence of the Convertible Notes, including obligations and transactions in connection therewith. Refer to Note 6, Debt, for further information. • In March 2020, we drew down the full $50.0 million available under the Revolving Credit Facility to enhance liquidity and financial flexibility given the uncertain market conditions created by the COVID-19 pandemic. We repaid this amount in full, plus interest, in June 2020. As of March 31, 2021, we were in compliance with all covenants. We believe our existing cash and marketable securities balances will be sufficient to fund our operating and finance lease obligations, capital expenditures, Tax Receivable Agreement obligations and working capital needs for at least the next 12 months and the foreseeable future. Shake Shack Inc. Form 10-Q | 39 Table of Contents Summary of Cash Flows The following table presents a summary of our cash flows from operating, investing and financing activities. Thirteen Weeks Ended (in thousands) March 31 2021 March 25 2020 Net cash provided by operating activities $ 9,951 $ 7,484 Net cash provided by (used in) investing activities (27,228) 649 Net cash provided by financing activities 245,403 42,574 Increase in cash and cash equivalents 228,126 50,707 Cash and cash equivalents at beginning of period 146,873 37,099 Cash and cash equivalents at end of period $ 374,999 $ 87,806 Operating Activities For the thirteen weeks ended March 31, 2021 net cash provided by operating activities was $10.0 million compared to $7.5 million for the thirteen weeks ended March 25, 2020, an increase of $2.5 million. The increase was primarily due to change in operating assets and liabilities of $3.9 million and an increase in net income of $1.7 million, partially offset by the impact of non-cash charges of $3.1 million. The $3.9 million change in our operating asset and liability balances was primarily driven by Accrued wages and related liabilities being a source of cash of $2.9 million in the first quarter of 2021, primarily driven by higher accruals associated with payroll costs, compared to a use of cash of $5.1 million in the first quarter of 2020; Accounts payable being a source of cash of $1.5 million in the first quarter of 2021, driven by timing of payments, compared to a use of cash of $4.4 million in the first quarter of 2020; partially offset by Accrued expenses being a use of cash of $9.4 million in the first quarter of 2021, due to the timing of accruals associated with tax payments, compared to a use of cash of $6.3 million in the first quarter of 2020; Other long-term liabilities being a use of cash of $1.8 million in the first quarter of 2021, due to the timing of tax payments, compared to a source of cash of $0.5 million in the first quarter of 2020; and Accounts Receivable being a source of cash of $0.6 million in the first quarter of 2021, primarily driven by timing of cash receipts of open receivables, compared to a source of cash of $3.2 million in the first quarter of 2020. Investing Activities For the thirteen weeks ended March 31, 2021 net cash used in investing activities was $27.2 million compared to net cash provided by investing activities of $0.6 million for the thirteen weeks ended March 25, 2020, a decrease of $27.8 million. This decrease was primarily due to a decrease of $20.0 million of proceeds from sales of marketable securities, an increase of $4.0 million in capital expenditures to support our real estate development and digital initiatives and increased purchases of marketable securities of $3.9 million. Financing Activities For the thirteen weeks ended March 31, 2021 net cash provided by financing activities was $245.4 million compared to $42.6 million for the thirteen weeks ended March 25, 2020, an increase of $202.8 million. This increase was primarily due to $243.8 million in net cash proceeds from the issuance of the Convertible Notes, decreased payments made under the Tax Receivable Agreement, and increased proceeds from stock option exercises, partially offset by $50.0 million in gross cash proceeds from the drawdown of funds from our Revolving Credit Facility in the first quarter of 2020 — which was repaid in full, plus interest, in the second quarter of 2020. Revolving Credit Facility In August 2019, we entered into a Revolving Credit Facility, which permits borrowings up to $50.0 million, of which the entire amount is available immediately, with the ability to increase available borrowings up to an additional $100.0 million, to be made available subject to satisfaction of certain conditions. The Revolving Credit Facility also permits the issuance of letters of credit upon our request of up to $15.0 million. 40 | Shake Shack Inc. Form 10-Q Table of Contents In March 2020, we drew down the full $50.0 million available under the Revolving Credit Facility to enhance liquidity and financial flexibility given the uncertain market conditions created by the COVID-19 pandemic. We repaid this amount in full, plus interest, in June 2020. In May 2020, we entered into a First Amendment, which, among other things, provided for modified financial covenant compliance requirements for a period of time. The First Amendment required us to maintain minimum liquidity of $25.0 million through July 1, 2021 and outstanding borrowings during the applicable period covered by the First Amendment bore interest at either: (i) LIBOR plus a percentage ranging from 1.0% to 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 2021, we entered into a Second Amendment. The Second Amendment modified the applicable covenants and restrictions in the Credit Agreement to permit the incurrence of the Convertible Notes (as defined below), including obligations and transactions in connection therewith. In addition, the Second Amendment, among other things, (i) extended the period applicable to the increased interest rate margin as set forth in the First Amendment; (ii) shortened the maturity date of the Revolving Credit Facility from August 2024 to September 2022 and (iii) added mechanics relating to the transition from the use of LIBOR to SOFR upon the discontinuance or unavailability of LIBOR. Subsequently, and also in March 2021, we entered into a Third Amendment with JPMorgan Chase Bank, N.A. (as successor agent to Wells Fargo Bank, National Association), as administrative agent, and the lenders party thereto. In addition, in March 2021, Wells Fargo Bank resigned as administrative agent under the Revolving Credit Facility and assigned its commitments thereunder to JPMorgan Bank, N.A. The Third Amendment appoints JPMorgan Bank, N.A. as administrative agent under the Revolving Credit Facility. In addition, the Third Amendment, among other things, extends the maturity date of the Revolving Credit Facility from September 2022 to March 2026. As of March 31, 2021 and December 30, 2020, no amounts were outstanding under the Revolving Credit Facility. The obligations under the Revolving Credit Facility are secured by a first-priority security interest in substantially all of the assets of SSE Holdings and the guarantors. The obligations under the Revolving Credit Facility are guaranteed by each of SSE Holdings' direct and indirect subsidiaries (with certain exceptions). The Revolving Credit Facility requires us to comply with maximum net lease adjusted leverage and minimum fixed charge coverage ratios. We are not subject to these coverage ratios for a period of time due to the Second Amendment to the Revolving Credit Facility described above. In addition, the Revolving Credit Facility contains other customary affirmative and negative covenants, including those which (subject to certain exceptions and dollar thresholds) limit our ability to incur debt; incur liens; make investments; engage in mergers, consolidations, liquidations or acquisitions; dispose of assets; make distributions on or repurchase equity securities; engage in transactions with affiliates; and prohibits us, with certain exceptions, from engaging in any line of business not related to our current line of business. As of March 31, 2021, we were in compliance with all covenants. As of March 31, 2021, the Revolving Credit Facility had unamortized deferred financing costs of $0.1 million, and was included in Other assets on the Condensed Consolidated Balance Sheet. Total interest expense related to the Revolving Credit Facility were $0.4 million and $0.1 million for the thirteen weeks ended March 31, 2021 and March 25, 2020, respectively. Total interest expense for the thirteen weeks ended March 31, 2021 primarily included write-off of previously capitalized costs on the Revolving Credit Facility. Convertible Notes In March 2021, we issued $225.0 million aggregate principal amount of 0% Convertible Senior Notes due 2028 in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933. We granted an option to the initial purchasers to purchase up to an additional $25.0 million aggregate principal amount of Convertible Notes to cover over-allotments, which was subsequently fully exercised during March 2021, resulting in a total issuance of $250.0 million aggregate principal amount of Convertible Notes. The Convertible Notes will mature on March 1, 2028, unless earlier converted, redeemed or repurchased in certain circumstances. Upon conversion, we pay or deliver, as the case may be, cash, shares of Shake Shack’s Class A common stock or a combination of cash and shares of Shake Shack’s Class A common stock, at our election. The Convertible Notes are convertible at the option of the holders at any time prior to the close of business on the business day immediately preceding December 1, 2027, only under the following circumstances: (1) during any fiscal quarter commencing after the fiscal quarter ending on June 30, 2021 (and only during such fiscal quarter), if the last reported sale price of our Class A common stock, par value $0.001 per share, for at least 20 trading days (whether or not consecutive) during a period of 30 Shake Shack Inc. Form 10-Q | 41 Table of Contents consecutive trading days ending on, and including, the last trading day of the immediately preceding fiscal quarter is greater than or equal to 130% of the conversion price for the Convertible Notes on each applicable trading day; (2) during the five business day period after any ten consecutive trading day period in which the trading price (as defined in the Indenture) per $1,000 principal amount of the Convertible Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of Class A common stock and the conversion rate for the Convertible Notes on each such trading day; (3) if we call such Convertible Notes for redemption, at any time prior to the close of business on the scheduled trading day immediately preceding the redemption date, but only with respect to the Convertible Notes called (or deemed called) for redemption; and (4) upon the occurrence of specified corporate events as set forth in the Indenture. On or after December 1, 2027, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders of the Convertible Notes may convert all or any portion of their Convertible Notes at any time, regardless of the foregoing circumstances. The Convertible Notes had an initial conversion rate of 5.8679 shares of Shake Shack’s Class A common stock per $1,000 principal amount of Convertible Notes, which is equivalent to an initial conversion price of approximately $170.42 per share of Shake Shack’s Class A common stock. We may not redeem the Convertible Notes prior to March 6, 2025. We may redeem for cash all or any portion of the Convertible Notes, at our option, on or after March 6, 2025 if the last reported sale price of Shake Shack’s Class A common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which we provide notice of redemption at a redemption price equal to 100% of the principal amount of the Convertible Notes to be redeemed, plus accrued and unpaid special interest, if any, to, but excluding, the redemption date. In addition, if we undergo a fundamental change (as defined in the indenture governing the Convertible Notes), subject to certain conditions, holders may require us to repurchase for cash all or any portion of their Convertible Notes at a repurchase price equal to 100% of the principal amount of the Convertible Notes to be repurchased, plus accrued and unpaid special interest, if any, to, but excluding, the fundamental change repurchase date. In addition, following certain corporate events that occur prior to the maturity date of the Convertible Notes or if we deliver a notice of redemption in respect of some or all of the Convertible Notes, we will, in certain circumstances, increase the conversion rate of the Convertible Notes for a holder who elects to convert our Convertible Notes in connection with such a corporate event or convert our Convertible Notes called (or deemed called) for redemption during the related redemption period, as the case may be. Contemporaneously with the issuance of the Convertible Notes, Shake Shack Inc. entered into an Intercompany Note with SSE Holdings, LLC. SSE Holdings promises to pay Shake Shack, Inc., for value received, the principal amount with interest of the Intercompany Note in March 2028. Shake Shack Inc. will exercise its right to convert the Intercompany Note to maintain at all times a one-to-one ratio between the number of common units, directly or indirectly, by Shake Shack Inc and the aggregate number of outstanding shares of common stock. As of March 31, 2021, the Convertible Notes had a gross principal balance of $250.0 million and a balance of $242.9 million, net of unamortized discount and debt issuance costs of $7.1 million. As of March 31, 2021, the unamortized balance of discount and debt issuance costs was recorded as a contra-liability and netted with Long-term debt on the Condensed Consolidated Balance Sheets and was being amortized as interest expense using the effective interest method. Total amortization expense was $0.1 million for the thirteen weeks ended March 31, 2021 and was included in Interest expense in the Condensed Consolidated Statements of Income (Loss). In connection with the Convertible Notes, we also incurred costs of $0.2 million, including consulting and advisory fees, in the thirteen weeks ended March 31, 2021 and was included in General and administrative expense in the Condensed Consolidated Statements of Income (Loss). At March 31, 2021, the fair value of the Convertible Notes was approximately $248.1 million, based on external pricing data, including available quoted market prices of these instruments, and consideration of comparable debt instruments with similar interest rates and trading frequency, among other factors, and is classified as a Level 2 measurement within the fair value hierarchy. 42 | Shake Shack Inc. Form 10-Q Table of Contents CONTRACTUAL OBLIGATIONS There have been no material changes to the contractual obligations as disclosed in our Annual Report on Form 10-K for the fiscal year ended December 30, 2020, other than those made in the ordinary course of business. OFF-BALANCE SHEET ARRANGEMENTS There have been no material changes to our off-balance sheet arrangements as disclosed in our Annual Report on Form 10-K for the fiscal year ended December 30, 2020. CRITICAL ACCOUNTING POLICIES AND ESTIMATES Our discussion and analysis of our consolidated financial condition and results of operations is based upon the accompanying condensed consolidated financial statements and notes thereto, which have been prepared in accordance with GAAP. The preparation of the condensed consolidated financial statements requires us to make estimates, judgments and assumptions, which we believe to be reasonable, based on the information available. These estimates and assumptions affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. Variances in the estimates or assumptions used to actual experience could yield materially different accounting results. On an ongoing basis, we evaluate the continued appropriateness of our accounting policies and resulting estimates to make adjustments we consider appropriate under the facts and circumstances. There have been no significant changes to our critical accounting policies as disclosed in our Annual Report on Form 10-K for the fiscal year ended December 30, 2020. Recently Issued Accounting Pronouncements See "Note 2: Summary of Significant Accounting Policies—Recently Issued Accounting Pronouncements” under Part I, Item 1 of this Form 10-Q. Item 3. Quantitative and Qualitative Disclosures About Market Risk. There have been no material changes to our exposure to market risks as described in Part II, Item 7A of our Annual Report on Form 10-K for the fiscal year ended December 30, 2020.