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 June 30, 2021, there were 339 Shacks in operation system-wide, of which 200 were domestic Company-operated Shacks, 23 were domestic licensed Shacks and 116 were international licensed Shacks. Shake Shack Inc. Form 10-Q | 27 Table of Contents Recent Developments and Trends We experienced continued positive momentum in the business during the second quarter of 2021, while continuing to support our Shack teams, our guests and the communities in which we operate, as we navigate the COVID-19 pandemic. We remain focused on the recovery of both sales and profitability across our Shack base and growth over the long term. Our strategic plan centers on the evolution of our Shack formats through physical and digital transformation with the objective of delivering a seamless, elevated guest experience. Same-Shack sales grew 52.7% year-on-year in the second quarter of 2021, compared to up 5.7% in the first quarter of 2021. Sales improved across all regions, and was led by strength of in-Shack dining as well as healthy retention of our digital sales. Although suburban Shacks are performing closer to pre-pandemic levels than urban, we saw encouraging momentum across urban Shacks throughout the second quarter. We also reached a milestone in our urban recovery, with the reopening of the Union Station, DC and Grand Central Station, NYC Shacks in late June and early July, respectively. In the Southeast region, notably Texas, same-Shack sales are now above pre-pandemic levels; these markets continue to represent growth opportunities for the business across a variety of formats. Average weekly sales were $72,000 in the second quarter of 2021, marking the highest level since the pandemic started, and up from $64,000 in the first quarter of 2021. Average weekly sales grew each month of the second quarter of 2021 and were $74,000 in fiscal June. During the second quarter of 2021, total digital sales, including orders placed on the Shake Shack app, website and third-party delivery platforms, represented 47% of Shack sales. Even as the mix shifted with the return of in-Shack dining, retention of digital sales was approximately 80% in fiscal June when compared to fiscal January when digital sales peaked, with the Company-owned app channel performing higher than our digital average. During the second quarter of 2021 our new purchasers in Company-owned app and web channels grew 16.7% versus the first quarter of 2021, to 2.8 million total new purchasers since mid-March of 2020; continued investment across these channels is helping bring in new guests, even as in-Shack dining returns. We look forward to continuing to build on this strong foundation by offering our guests new and innovative ways to elevate their dining experience. Licensing revenue for the second quarter of 2021 was $6.0 million, reflecting an increase of 164.2% versus the same period last year. Improvement was driven domestically by the return of air travel across airports and gradual lifting of capacity restrictions at major US stadiums; internationally, improvement was seen across the regions where COVID-related restrictions have been eased . 28 | Shake Shack Inc. Form 10-Q Table of Contents Development Highlights During the second quarter of 2021, we opened eight new domestic Company-operated Shacks, one new domestic licensed Shack and nine new international licensed Shacks. There were no permanent Shack closures in the second quarter of 2021. Location Type Opening Date Bronx, NY — Bay Plaza Domestic Company-operated 4/1/2021 Seoul, South Korea — Nowon International Licensed 4/2/2021 Los Angeles, CA — Dodger Stadium Domestic Licensed 4/9/2021 Mexico City, Mexico — Roma Cibeles International Licensed 4/14/2021 Beaverton, OR — Cedar Hills Domestic Company-operated 4/16/2021 Macao, China — The Londoner International Licensed 4/17/2021 Santa Monica, CA — Santa Monica Domestic Company-operated 4/18/2021 Los Angeles, CA — Bunker Hill Domestic Company-operated 4/19/2021 Fishers, IN — Fishers Domestic Company-operated 4/22/2021 Beijing, China — China World International Licensed 4/26/2021 Singapore, Singapore — Great World International Licensed 4/28/2021 Shenzhen, China — MixC International Licensed 5/20/2021 Kuwait City, Kuwait — 360 Mall International Licensed 6/1/2021 Istanbul, Turkey — Istanbul Airport International Licensed 6/4/2021 Tampa, FL — Midtown Tampa Domestic Company-operated 6/7/2021 Seoul, South Korea — Coex Mall International Licensed 6/9/2021 San Francisco, CA — San Francisco Centre Domestic Company-operated 6/28/2021 Franklin, TN — Franklin Domestic Company-operated 6/28/2021 Financial Highlights for the Second Quarter 2021 ▪ Total revenue in the second quarter of 2021 increased 104.2% to $187.5 million versus the same period last year. ▪ Shack sales in the second quarter of 2021 increased 102.7% to $181.5 million versus the same period last year. ▪ Same-Shack sales (1) improved to up 52.7% in the second quarter of 2021 versus the same period last year. ▪ Licensed revenue in the second quarter of 2021 increased 164.2% to $6.0 million versus the same period last year. ▪ Shack system-wide sales in the second quarter of 2021 increased 127.7% to $281.9 million, versus the same period last year. ▪ Operating income in the second quarter of 2021 was $3.3 million compared to an operating loss of $24.1 million in the same period last year. ▪ Shack-level operating profit (2) increased 1,699.7% in the second quarter of 2021 versus the same period last year, to $34.8 million, or 19.2% of Shack sales. ▪ Net income was $2.1 million and adjusted EBITDA 2 was $20.6 million in the second quarter of 2021, compared to a net loss of $18.0 million and adjusted EBITDA of $(8.8) million in the same period last year. ▪ Net income attributable to Shake Shack Inc. was $1.9 million and adjusted pro forma net income 2 was $2.4 million, or $0.05 per fully exchanged and diluted share in the second quarter of 2021, compared to net loss attributable to Shake Shack Inc. of $16.2 million and adjusted pro forma net loss of $18.3 million, or $(0.45) per fully exchanged and diluted share, in the same period last year. ▪ Net system-wide Shack openings , comprised of eight net domestic Company-operated Shacks and ten net licensed Shacks. ▪ Cash and cash equivalents and marketable securities on hand was $420.2 million as of June 30, 2021. Shake Shack Inc. Form 10-Q | 29 Table of Contents (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 Q2 2021, same-Shack sales compares the thirteen weeks from April 1, 2021 through June 30, 2021 to the thirteen weeks from April 2, 2020 through July 1, 2020. (2) This represents a non-GAAP measure. Reconciliations to the most directly comparable financial measures presented in accordance with GAAP are set forth in the schedules within “Non-GAAP Financial Measures,” herein. 30 | Shake Shack Inc. Form 10-Q RESULTS OF OPERATIONS The following table summarizes our results of operations for the thirteen and twenty-six weeks ended June 30, 2021 and June 24, 2020: Thirteen Weeks Ended Twenty-Six Weeks Ended (dollar amounts in thousands) June 30 2021 June 24 2020 June 30 2021 June 24 2020 Shack sales $ 181,470 96.8 % $ 89,519 97.5 % $ 332,138 96.9 % $ 227,567 96.9 % Licensing revenue 5,990 3.2 % 2,267 2.5 % 10,604 3.1 % 7,389 3.1 % TOTAL REVENUE 187,460 100.0 % 91,786 100.0 % 342,742 100.0 % 234,956 100.0 % Shack-level operating expenses (1) : Food and paper costs 54,917 30.3 % 30,027 33.5 % 99,547 30.0 % 69,591 30.6 % Labor and related expenses 52,631 29.0 % 30,933 34.6 % 99,013 29.8 % 72,699 31.9 % Other operating expenses 24,275 13.4 % 14,304 16.0 % 47,419 14.3 % 32,083 14.1 % Occupancy and related expenses 14,876 8.2 % 12,323 13.8 % 28,787 8.7 % 24,881 10.9 % General and administrative expenses 20,366 10.9 % 14,017 15.3 % 39,931 11.7 % 30,208 12.9 % Depreciation and amortization expense 14,472 7.7 % 12,089 13.2 % 28,198 8.2 % 23,857 10.2 % Pre-opening costs 2,258 1.2 % 1,734 1.9 % 5,834 1.7 % 3,977 1.7 % Impairment and loss on disposal of assets 358 0.2 % 434 0.5 % 727 0.2 % 2,522 1.1 % TOTAL EXPENSES 184,153 98.2 % 115,861 126.2 % 349,456 102.0 % 259,818 110.6 % OPERATING INCOME (LOSS) 3,307 1.8 % (24,075) (26.2) % (6,714) (2.0) % (24,862) (10.6) % Other income, net 108 0.1 % 394 0.4 % 139 — % 301 0.1 % Interest expense (359) (0.2) % (442) (0.5) % (874) (0.3) % (554) (0.2) % INCOME (LOSS) BEFORE INCOME TAXES 3,056 1.6 % (24,123) (26.3) % (7,449) (2.2) % (25,115) (10.7) % Income tax expense (benefit) 991 0.5 % (6,092) (6.6) % (10,089) (2.9) % (6,005) (2.6) % NET INCOME (LOSS) 2,065 1.1 % (18,031) (19.6) % 2,640 0.8 % (19,110) (8.1) % Less: Net income (loss) attributable to non-controlling interests 121 0.1 % (1,820) (2.0) % (613) (0.2) % (1,939) (0.8) % NET INCOME (LOSS) ATTRIBUTABLE TO SHAKE SHACK INC. $ 1,944 1.0 % $ (16,211) (17.7) % $ 3,253 0.9 % $ (17,171) (7.3) % (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 for the comparable Shack base, which we define as the number of domestic Company-operated Shacks open for 24 months or longer. Thirteen Weeks Ended Twenty-Six Weeks Ended (dollar amounts in thousands) June 30 2021 June 24 2020 June 30 2021 June 24 2020 Shack sales $ 181,470 $ 89,519 $ 332,138 $ 227,567 Percentage of total revenue 96.8 % 97.5 % 96.9 % 96.9 % Dollar change compared to prior year $ 91,951 $ 104,571 Percentage change compared to prior year 102.7 % 46.0 % The increases in Shack sales for the thirteen and twenty-six weeks ended June 30, 2021 were primarily due to the continued momentum associated with the recovery from the COVID-19 pandemic, in addition to the opening of 29 net new domestic Shake Shack Inc. Form 10-Q | 31 Table of Contents Company-operated Shacks between June 24, 2020 and June 30, 2021. Digital sales for the thirteen and twenty-six weeks ended June 30, 2021 increased 27.4% and 89.3% respectively, compared to the same period last year. Same-Shack sales for the thirteen weeks ended June 30, 2021 increased 52.7% compared to the same period last year, with urban Shacks increasing 53.8% and suburban Shacks increasing 51.8%. The increase in same-Shack sales for the second quarter 2021 was driven by a 61.5% increase in guest traffic due to the return of in-Shack dining. Same-Shack sales for the twenty-six weeks ended June 30, 2021 increased 26.4% compared to the same period last year, primarily driven by a 16.1% increase in guest traffic and an increase in price mix of 10.3%. For the purpose of calculating same-Shack sales growth for the thirteen weeks ended June 30, 2021, Shack sales for 130 Shacks were included in the comparable Shack base, and for the twenty-six weeks ended June 30, 2021, Shack sales for 132 Shacks were included in the comparable Shack base. 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 Twenty-Six Weeks Ended (dollar amounts in thousands) June 30 2021 June 24 2020 June 30 2021 June 24 2020 Licensing revenue $ 5,990 $ 2,267 $ 10,604 $ 7,389 Percentage of total revenue 3.2 % 2.5 % 3.1 % 3.1 % Dollar change compared to prior year $ 3,723 $ 3,215 Percentage change compared to prior year 164.2 % 43.5 % The increases in Licensing revenue for the thirteen and twenty-six weeks ended June 30, 2021 were primarily due to a net increase of 18 Shacks that opened between June 24, 2020 and June 30, 2021 as well as increased strength across regions where COVID related restrictions have been eased. Our licensed business continues to show improvement despite challenges that still remain due to the COVID-19 pandemic. As of the end of the second quarter 2021, eight licensed Shacks were temporarily closed due to the COVID-19 pandemic. Food and Paper Costs Food and paper costs include the direct costs associated with food, beverage and packaging of our menu items. The components of food and paper costs are variable by nature, changing with sales volume, and are impacted by menu mix and fluctuations in commodity costs, as well as geographic scale and proximity. Thirteen Weeks Ended Twenty-Six Weeks Ended (dollar amounts in thousands) June 30 2021 June 24 2020 June 30 2021 June 24 2020 Food and paper costs $ 54,917 $ 30,027 $ 99,547 $ 69,591 Percentage of Shack sales 30.3 % 33.5 % 30.0 % 30.6 % Dollar change compared to prior year $ 24,890 $ 29,956 Percentage change compared to prior year 82.9 % 43.0 % The increases in Food and paper costs for the thirteen and twenty-six weeks ended June 30, 2021 were primarily due to increased sales volume associated with continued recovery from the COVID-19 pandemic and the opening of 29 net new domestic Company-operated Shacks between June 24, 2020 and June 30, 2021. As a percentage of Shack sales, the decreases in Food and paper costs for the thirteen and twenty-six weeks ended June 30, 2021 were primarily due to lower beef prices and paper and packaging prices, compared to the same period last year. 32 | Shake Shack Inc. Form 10-Q Table of Contents 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, labor costs should 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 Twenty-Six Weeks Ended (dollar amounts in thousands) June 30 2021 June 24 2020 June 30 2021 June 24 2020 Labor and related expenses $ 52,631 $ 30,933 $ 99,013 $ 72,699 Percentage of Shack sales 29.0 % 34.6 % 29.8 % 31.9 % Dollar change compared to prior year $ 21,698 $ 26,314 Percentage change compared to prior year 70.1 % 36.2 % The increases in Labor and related expenses for the thirteen and twenty-six weeks ended June 30, 2021 were primarily due to increases in Shack team costs across all Shacks associated with the recovery from COVID-19, as well as the opening of 29 net new domestic Company-operated Shacks between June 24, 2020 and June 30, 2021. As a percentage of Shack sales, the decreases in Labor and related expenses for the thirteen and twenty-six weeks ended June 30, 2021 were primarily due to greater sales leverage associated with the recovery from COVID-19, partially offset by increased headcount. Other Operating Expenses Other operating expenses consist of Shack-level marketing expenses, repairs and maintenance, utilities and other operating expenses incidental to operating our domestic Company-operated Shacks, such as non-perishable supplies, credit card fees and property insurance. Thirteen Weeks Ended Twenty-Six Weeks Ended (dollar amounts in thousands) June 30 2021 June 24 2020 June 30 2021 June 24 2020 Other operating expenses $ 24,275 $ 14,304 $ 47,419 $ 32,083 Percentage of Shack sales 13.4 % 16.0 % 14.3 % 14.1 % Dollar change compared to prior year $ 9,971 $ 15,336 Percentage change compared to prior year 69.7 % 47.8 % The increases in Other operating expenses for the thirteen and twenty-six weeks ended June 30, 2021 were primarily due to higher delivery and transaction costs associated with the continued momentum of digital sales and an increase of in-Shack dining across all Shacks, as well as the opening of 29 net new domestic Company-operated Shacks between June 24, 2020 and June 30, 2021. As a percentage of Shack sales, the decrease in Other operating expenses for the thirteen weeks ended June 30, 2021 was primarily due to sales leverage associated with the recovery from COVID-19 as higher in-Shack sales growth outpaced delivery compared to the same period last year. As a percentage of Shack sales, the increase in Other operating expenses for the twenty-six weeks ended June 30, 2021 was primarily related to higher delivery commissions as customers continue to take advantage of our multiple delivery offerings compared to the prior year period as well as higher costs for gloves and other disposables. 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. Shake Shack Inc. Form 10-Q | 33 Table of Contents Thirteen Weeks Ended Twenty-Six Weeks Ended (dollar amounts in thousands) June 30 2021 June 24 2020 June 30 2021 June 24 2020 Occupancy and related expenses $ 14,876 $ 12,323 $ 28,787 $ 24,881 Percentage of Shack sales 8.2 % 13.8 % 8.7 % 10.9 % Dollar change compared to prior year $ 2,553 $ 3,906 Percentage change compared to prior year 20.7 % 15.7 % The increases in Occupancy and related expenses for the thirteen and twenty-six weeks ended June 30, 2021 were primarily due to the opening of 29 net new domestic Company-operated Shacks between June 24, 2020 and June 30, 2021. As a percentage of Shack sales, the decreases in Occupancy and related expenses for the thirteen and twenty-six weeks ended June 30, 2021 were primarily due to sales leverage associated with the continued recovery from the COVID-19 pandemic. General and Administrative Expenses General and administrative expenses consist of costs associated with corporate and administrative functions that support Shack development and operations, as well as equity-based compensation expense. Thirteen Weeks Ended Twenty-Six Weeks Ended (dollar amounts in thousands) June 30 2021 June 24 2020 June 30 2021 June 24 2020 General and administrative expenses $ 20,366 $ 14,017 $ 39,931 $ 30,208 Percentage of total revenue 10.9 % 15.3 % 11.7 % 12.9 % Dollar change compared to prior year $ 6,349 $ 9,723 Percentage change compared to prior year 45.3 % 32.2 % The increases in General and administrative expenses for the thirteen and twenty-six weeks ended June 30, 2021 were primarily due to an increase in wages and other team costs to support the continued recovery from the COVID-19 pandemic, as well as an increase in marketing expenses. As a percentage of total revenue, the decreases in General and administrative expenses for the thirteen and twenty-six weeks ended June 30, 2021 were primarily due to sales leverage associated with the continued recovery from the COVID-19 pandemic. Depreciation and Amortization Expense Depreciation and amortization expense consists of the depreciation of fixed assets, including leasehold improvements and equipment. Thirteen Weeks Ended Twenty-Six Weeks Ended (dollar amounts in thousands) June 30 2021 June 24 2020 June 30 2021 June 24 2020 Depreciation and amortization expense $ 14,472 $ 12,089 $ 28,198 $ 23,857 Percentage of total revenue 7.7 % 13.2 % 8.2 % 10.2 % Dollar change compared to prior year $ 2,383 $ 4,341 Percentage change compared to prior year 19.7 % 18.2 % The increases in Depreciation and amortization expense for the thirteen and twenty-six weeks ended June 30, 2021 were predominantly due to incremental depreciation of capital expenditures related to the opening of 29 net new domestic Company-operated Shacks between June 24, 2020 and June 30, 2021. As a percentage of total revenue, the decreases in Depreciation and amortization expense for the thirteen and twenty-six weeks ended June 30, 2021 were primarily due to sales leverage associated with the recovery from the COVID-19 pandemic. 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 34 | Shake Shack Inc. Form 10-Q Table of Contents 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 Twenty-Six Weeks Ended (dollar amounts in thousands) June 30 2021 June 24 2020 June 30 2021 June 24 2020 Pre-opening costs $ 2,258 $ 1,734 $ 5,834 $ 3,977 Percentage of total revenue 1.2 % 1.9 % 1.7 % 1.7 % Dollar change compared to prior year $ 524 $ 1,857 Percentage change compared to prior year 30.2 % 46.7 % The increases in Pre-opening costs for the thirteen and twenty-six weeks ended June 30, 2021 were due to the higher number of new domestic Company-operated Shacks opened during the current period compared to the prior-year period, as well as those expected to open. 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. Thirteen Weeks Ended Twenty-Six Weeks Ended (dollar amounts in thousands) June 30 2021 June 24 2020 June 30 2021 June 24 2020 Impairment and loss on disposal of assets $ 358 $ 434 $ 727 $ 2,522 Percentage of total revenue 0.2 % 0.5 % 0.2 % 1.1 % Dollar change compared to prior year $ (76) $ (1,795) Percentage change compared to prior year (17.5) % (71.2) % The decrease in Impairment and loss on disposal of assets for the thirteen weeks ended June 30, 2021 was primarily due to the number of Shacks maturing in our base. For the twenty-six weeks ended June 30, 2021, the decrease was primarily due to an impairment charge of $1.1 million recorded during the first quarter of 2020. Other Income, Net Other income, net consists of interest income, dividend income and net unrealized and realized gains and losses from marketable securities. Thirteen Weeks Ended Twenty-Six Weeks Ended (dollar amounts in thousands) June 30 2021 June 24 2020 June 30 2021 June 24 2020 Other income, net $ 108 $ 394 $ 139 $ 301 Percentage of total revenue 0.1 % 0.4 % — % 0.1 % Dollar change compared to prior year $ (286) $ (162) Percentage change compared to prior year (72.6) % (53.8) % The decrease in Other income, net for the thirteen weeks ended June 30, 2021 was primarily due to a decrease in unrealized gains related to our investments in marketable securities partially offset by an increase in dividend income. The decrease in Other income, net for the twenty-six weeks ended June 30, 2021 was primarily due to a decrease in dividend income and an increase in unrealized losses related to our investments in marketable securities. Shake Shack Inc. Form 10-Q | 35 Table of Contents Interest Expense Interest expense primarily consists of interest on the current portion of our liabilities under the Tax Receivable Agreement, imputed interest related to our financing equipment leases, amortization of deferred financing costs, imputed interest on deferred compensation, imputed interest on our deemed landlord financing liability, and interest and fees on our Revolving Credit Facility. Thirteen Weeks Ended Twenty-Six Weeks Ended (dollar amounts in thousands) June 30 2021 June 24 2020 June 30 2021 June 24 2020 Interest expense $ (359) $ (442) $ (874) $ (554) Percentage of total revenue (0.2) % (0.5) % (0.3) % (0.2) % Dollar change compared to prior year $ 83 $ (320) Percentage change compared to prior year (18.8) % 57.8 % The decrease in Interest expense for the thirteen weeks ended June 30, 2021 was primarily due to a decrease in interest charges and fees associated with our Revolving Credit Facility in the current period. The increase in Interest expense for the twenty-six weeks ended June 30, 2021 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, in the accompanying Condensed Consolidated Financial Statements, for additional information. Income Tax Expense (Benefit) We are the sole managing member of SSE Holdings and, as a result, consolidates 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 its allocable share of any taxable income or loss of SSE Holdings, as well as any stand-alone income or loss generated by us. We are also subject to withholding taxes in foreign jurisdictions. Thirteen Weeks Ended Twenty-Six Weeks Ended (dollar amounts in thousands) June 30 2021 June 24 2020 June 30 2021 June 24 2020 Income tax expense (benefit) $ 991 $ (6,092) $ (10,089) $ (6,005) Percentage of total revenue 0.5 % (6.6) % (2.9) % (2.6) % Dollar change compared to prior year $ 7,083 $ (4,084) Percentage change compared to prior year (116.3) % 68.0 % Our effective income tax rates for the thirteen weeks ended June 30, 2021 and June 24, 2020 were 32.4% and 25.3%, respectively. The increase was primarily driven by higher pre-tax book income resulting in income and higher foreign withholding taxes, partially offset by 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 92.3% for the thirteen weeks ended June 30, 2021 and June 24, 2020, respectively. Our effective income tax rates for the twenty-six weeks ended June 30, 2021 and June 24, 2020 were 135.4% and 23.9%, respectively. Our weighted-average ownership interest in SSE Holdings was 93.0% and 92.0% for the twenty-six weeks ended June 30, 2021 and June 24, 2020, respectively. 36 | Shake Shack Inc. Form 10-Q Table of Contents Net Income (Loss) Attributable to Non-Controlling Interests We are the sole managing member of SSE Holdings and have the sole voting power in, and control the management of, SSE Holdings. Accordingly, we consolidate the financial results of SSE Holdings and report a non-controlling interest on our 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 Twenty-Six Weeks Ended (dollar amounts in thousands) June 30 2021 June 24 2020 June 30 2021 June 24 2020 Net income (loss) attributable to non-controlling interests $ 121 $ (1,820) $ (613) $ (1,939) Percentage of total revenue 0.1 % (2.0) % (0.2) % (0.8) % Dollar change compared to prior year $ 1,941 $ 1,326 Percentage change compared to prior year (106.6) % (68.4) % The increase in Net income (loss) attributable to non-controlling interests for the thirteen weeks ended June 30, 2021 was primarily due to an increase in net results causing a profit for the period, partially offset by a decrease in the non-controlling interest holders' weighted average ownership, which was 7.0% and 7.7% for the thirteen weeks ended June 30, 2021 and June 24, 2020, respectively. The increase in Net income (loss) attributable to non-controlling interests for the twenty-six weeks ended June 30, 2021 was primarily due to an increase in net results which moderated the loss for the period, and a decrease in the non-controlling interest holders' weighted average ownership, which was 7.0% and 8.0% for the twenty-six weeks ended June 30, 2021 and June 24, 2020, respectively. NON-GAAP FINANCIAL MEASURES To supplement the condensed consolidated financial statements, which are prepared and presented in accordance with accounting principles generally accepted in the United States of America ("GAAP"), we use the following non-GAAP financial measures: Shack-level operating profit, Shack-level operating profit margin, EBITDA, adjusted EBITDA, adjusted EBITDA margin, adjusted pro forma net income (loss) and adjusted pro forma earnings (loss) per fully exchanged and diluted share (collectively the "non-GAAP financial measures"). Shake Shack Inc. Form 10-Q | 37 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 we believe are useful measures to evaluate the performance and profitability of our Shacks. Additionally, Shack-level operating profit and Shack-level operating profit margin are key metrics used internally to develop our internal budgets and forecasts, as well as assess the performance of our Shacks relative to budget and against prior periods. It is also used to evaluate employee compensation as it serves as a metric in certain performance-based employee bonus arrangements. We believe presentation of Shack-level operating profit and Shack-level operating profit margin provides investors with a supplemental view of our operating performance that can provide meaningful insights to the underlying operating performance of 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 our 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 income (loss), the most directly comparable GAAP financial measure, is set forth below. Thirteen Weeks Ended Twenty-Six Weeks Ended (dollar amounts in thousands) June 30 2021 June 24 2020 June 30 2021 June 24 2020 Operating income (loss) $ 3,307 $ (24,075) $ (6,714) $ (24,862) Less: Licensing revenue 5,990 2,267 10,604 7,389 Add: General and administrative expenses 20,366 14,017 39,931 30,208 Depreciation and amortization expense 14,472 12,089 28,198 23,857 Pre-opening costs 2,258 1,734 5,834 3,977 Impairment and loss on disposal of assets (1) 358 434 727 2,522 Shack-level operating profit $ 34,771 $ 1,932 $ 57,372 $ 28,313 Total revenue $ 187,460 $ 91,786 $ 342,742 $ 234,956 Less: Licensing revenue 5,990 2,267 10,604 7,389 Shack sales $ 181,470 $ 89,519 $ 332,138 $ 227,567 Shack-level operating profit margin (2) 19.2 % 2.2 % 17.3 % 12.4 % (1) For the twenty-six weeks ended June 24, 2020, amount includes a non-cash impairment charge of $1.1 million related to one Shack. (2) As a percentage of Shack sales. 38 | Shake Shack Inc. Form 10-Q 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 costs, Impairment and loss on the disposal of assets, amortization of cloud-based software implementation costs, as well as certain non-recurring items that we do not believe directly reflect the core operations and may not be indicative of recurring business operations. How These Measures Are Useful When used in conjunction with GAAP financial measures, EBITDA and adjusted EBITDA are supplemental measures of operating performance that we believe are useful measures to facilitate comparisons to historical performance and competitors' operating results. Adjusted EBITDA is a key metric used internally to develop internal budgets and forecasts and also serves as a metric in our performance-based equity incentive programs and certain bonus arrangements. We believe presentation of EBITDA and adjusted EBITDA provides investors with a supplemental view of our operating performance that facilitates analysis and comparisons of its ongoing business operations because they exclude items that may not be indicative of the our ongoing operating performance. Limitations of the Usefulness of These Measures EBITDA and adjusted EBITDA may differ from similarly titled measures used by other companies due to different methods of calculation. Presentation of EBITDA and adjusted EBITDA is not intended to be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP. EBITDA and adjusted EBITDA exclude certain normal recurring expenses. Therefore, these measures may not provide a complete understanding of our performance and should be reviewed in conjunction with the GAAP financial measures. A reconciliation of EBITDA and adjusted EBITDA to Net income (loss), the most directly comparable GAAP measure, is as follows. Shake Shack Inc. Form 10-Q | 39 Table of Contents Thirteen Weeks Ended Twenty-Six Weeks Ended (dollar amounts in thousands) June 30 2021 June 24 2020 June 30 2021 June 24 2020 Net income (loss) $ 2,065 $ (18,031) $ 2,640 $ (19,110) Depreciation and amortization expense 14,472 12,089 28,198 23,857 Interest expense, net 359 442 874 554 Income tax expense (benefit) 991 (6,092) (10,089) (6,005) EBITDA 17,887 (11,592) 21,623 (704) Equity-based compensation 1,958 1,419 3,639 2,719 Amortization of cloud-based software implementation costs (1) 314 368 627 628 Deferred lease costs (2) (75) 479 129 149 Impairment and loss on disposal of assets (3) 358 434 727 2,522 Debt offering related costs (4) — — 236 — Legal settlement (5) 24 — 619 — Executive transition costs (6) 179 34 179 68 Project Concrete (7) — 24 — (237) Other (8) — — — 285 Adjusted EBITDA $ 20,645 $ (8,834) $ 27,779 $ 5,430 Adjusted EBITDA margin (9) 11.0 % (9.6) % 8.1 % 2.3 % (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 twenty-six weeks ended June 24, 2020, this amount includes a non-cash impairment charge of $1.1 million related to one Shack. (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, in the accompanying Condensed Consolidated Financial Statements , for additional information. (5) Expense incurred to establish an accrual related to the settlement of a legal matter. Refer to Note 13, Commitments and Contingencies, in the accompanying Condensed Consolidated Financial Statements , for additional information. (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 $187,460 and $342,742 for the thirteen and twenty-six weeks ended June 30, 2021, respectively, and $91,786 and $234,956 for the thirteen and twenty-six weeks ended June 24, 2020, respectively. Adjusted Pro Forma Net Income (Loss) and Adjusted Pro Forma Earnings (loss) Fully Exchanged and Diluted Share Adjusted pro forma net income (loss) represents Net income (loss) attributable to Shake Shack Inc. assuming the full exchange of all outstanding SSE Holdings, LLC membership interests ("LLC Interests") for shares of Class A common stock, adjusted for certain non-recurring items that we do not believe are directly related to our core operations and may not be indicative of our recurring business operations. Adjusted pro forma earnings (loss) per fully exchanged and diluted share is calculated by dividing adjusted pro forma net income (loss) by the weighted-average shares of Class A common stock outstanding, assuming the full exchange of all outstanding LLC Interests, after giving effect to the dilutive effect of outstanding equity-based awards. How These Measures Are Useful When used in conjunction with GAAP financial measures, adjusted pro forma net income (loss) and adjusted pro forma earnings (loss) per fully exchanged and diluted share are supplemental measures of operating performance that we believe are useful measures to evaluate our performance period over period and relative to our competitors. By assuming the full exchange of all outstanding LLC Interests, we believe these measures facilitate comparisons with other companies that have different organizational and tax structures, as well as comparisons period over period because it eliminates the effect of any changes in Net income (loss) attributable to Shake Shack Inc. driven by increases in our ownership of SSE Holdings, which are unrelated to 40 | Shake Shack Inc. Form 10-Q Table of Contents our operating performance, and excludes items that are non-recurring or may not be indicative of our ongoing operating performance. Limitations of the Usefulness of These Measures Adjusted pro forma net income (loss) and adjusted pro forma earnings (loss) per fully exchanged and diluted share may differ from similarly titled measures used by other companies due to different methods of calculation. Presentation of adjusted pro forma net income (loss) and adjusted pro forma earnings (loss) per fully exchanged and diluted share should not be considered alternatives to Net income (loss) and earnings (loss) per share, as determined under GAAP. While these measures are useful in evaluating our performance, 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 (loss) and adjusted pro forma earnings (loss) per fully exchanged and diluted share should be evaluated in conjunction with our GAAP financial results. A reconciliation of adjusted pro forma net income (loss) to Net income (loss) attributable to Shake Shack Inc., the most directly comparable GAAP measure, and the computation of adjusted pro forma earnings (loss) per fully exchanged and diluted share are set forth below. Shake Shack Inc. Form 10-Q | 41 Table of Contents Thirteen Weeks Ended Twenty-Six Weeks Ended (in thousands, except per share amounts) June 30 2021 June 24 2020 June 30 2021 June 24 2020 Numerator: Net income (loss) attributable to Shake Shack Inc. $ 1,944 $ (16,211) $ 3,253 $ (17,171) Adjustments: Reallocation of Net income (loss) attributable to non-controlling interests from the assumed exchange of LLC Interests (1) 121 (1,820) (613) (1,939) Executive transition costs (2) 179 34 179 68 Project Concrete (3) — 24 — (237) Legal settlement (4) 24 — 619 — Debt offering related costs (5) — — 236 — Revolving Credit Facility amendments related costs (6) — — 323 — Income tax (expense) benefit (7) 112 (286) 136 1,533 Other (8) — — — 285 Adjusted pro forma net income (loss) $ 2,380 $ (18,259) $ 4,133 $ (17,461) Denominator: Weighted-average shares of Class A common stock outstanding—diluted 43,789 37,309 43,289 35,876 Adjustments: Assumed exchange of LLC Interests for shares of Class A common stock (1) — 3,117 — 3,131 Adjusted pro forma fully exchanged weighted-average shares of Class A common stock outstanding—diluted 43,789 40,426 43,289 39,007 Adjusted pro forma earnings (loss) per fully exchanged share—diluted $ 0.05 $ (0.45) $ 0.10 $ (0.45) Thirteen Weeks Ended Twenty-Six Weeks Ended June 30 2021 June 24 2020 June 30 2021 June 24 2020 Earnings (loss) per share of Class A common stock - diluted $ 0.05 $ (0.43) $ 0.06 $ (0.48) Assumed exchange of LLC Interests for shares of Class A common stock (1) — (0.01) — (0.01) Non-GAAP adjustments (9) — (0.01) 0.04 0.04 Adjusted pro forma earnings (loss) per fully exchanged share—diluted $ 0.05 $ (0.45) $ 0.10 $ (0.45) (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 income (loss) attributable to non-controlling interests. Refer to Note 11, Earnings (Loss) per Share, in the accompanying Condensed Consolidated Financial Statements , for additional information. (2) Represents costs incurred in connection with our executive search, including fees paid to an executive recruiting firm. (3) Represents consulting and advisory fees related to our enterprise-wide system upgrade initiative called Project Concrete. (4) Expense incurred to establish an accrual related to the settlement of a legal matter. Refer to Note 13, Commitments and Contingencies, in the accompanying Condensed Consolidated Financial Statements , for additional information. (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, in the accompanying Condensed Consolidated Financial Statements , for additional information. (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, in the accompanying Condensed Consolidated Financial Statements , for additional information. (7) Represents the tax effect of the aforementioned adjustments and pro forma adjustments to reflect corporate income taxes at assumed effective tax rates of 27.0% and 167.8% for the thirteen and twenty-six weeks ended June 30, 2021, respectively, and 24.1% and 30.2% for the thirteen and twenty-six weeks ended June 24, 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. Additionally, the thirteen and twenty-six weeks ended June 24, 2020 includes the establishment of a valuation allowance. (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 (Loss) above, for additional information. 42 | Shake Shack Inc. Form 10-Q Table of Contents LIQUIDITY AND CAPITAL RESOURCES Sources and Uses of Cash Our primary sources of liquidity are cash from operations, cash and cash equivalents on hand, short-term investments and availability under our Revolving Credit Facility. In March 2021, we issued 0% Convertible Senior Notes (“Convertible Notes”), and received $243.8 million of proceeds, net of discounts. Refer to Note 6, Debt, in the accompanying Condensed Consolidated Financial Statements, for additional information. As of June 30, 2021, we maintained a Cash and cash equivalents balance of $340.1 million and a short-term investments balance of $80.1 million within Marketable securities. On June 7, 2021, 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 June 30, 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, in the accompanying condensed consolidated financial statements, for additional information. Shake Shack Inc. Form 10-Q | 43 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. 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. Summary of Cash Flows The following table presents a summary of our cash flows from operating, investing and financing activities. Twenty-Six Weeks Ended (in thousands) June 30 2021 June 24 2020 Net cash provided by operating activities $ 37,005 $ 17,993 Net cash used in investing activities (87,969) (17,905) Net cash provided by financing activities 244,194 136,797 Increase in Cash and cash equivalents 193,230 136,885 Cash and cash equivalents at beginning of period 146,873 37,099 Cash and cash equivalents at end of period $ 340,103 $ 173,984 Operating Activities For the twenty-six weeks ended June 30, 2021 net cash provided by operating activities was $37.0 million compared to $18.0 million for the twenty-six weeks ended June 24, 2020, an increase of $19.0 million. The increase was primarily due to an increase in net income of $21.7 million and the impact of non-cash charges of $0.9 million partially offset by a change in operating assets and liabilities of $(3.6) million. The $(3.6) million change in our operating asset and liability balances was primarily driven by an increase in and timing of rent payments, partially offset by higher accrued wages and timing of cash receipts of receivables. Investing Activities For the twenty-six weeks ended June 30, 2021 net cash used in investing activities was $88.0 million compared to $17.9 million for the twenty-six weeks ended June 24, 2020, an increase of $70.1 million. This increase was primarily due to increased purchases of marketable securities of $47.0 million, a decrease of $16.0 million of proceeds from sales of marketable securities and an increase of $7.1 million in capital expenditures to support our real estate development and digital initiatives. Financing Activities For the twenty-six weeks ended June 30, 2021 net cash provided by financing activities was $244.2 million compared to $136.8 million for the twenty-six weeks ended June 24, 2020, an increase of $107.4 million. This increase was primarily due to $243.8 million in net cash proceeds from the issuance of the Convertible Notes, net of discount, decreased payments made under the Tax Receivable Agreement, and increased proceeds from stock option exercises, partially offset by $145.7 million in net cash proceeds from the issuance of Class A common stock during the twenty-six weeks ended June 24, 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. 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. 44 | Shake Shack Inc. Form 10-Q Table of Contents 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 June 30, 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 June 30, 2021, we were in compliance with all covenants. As of June 30, 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 Sheets. During the thirteen and twenty-six weeks ended June 30, 2021, total interest expense related to the Revolving Credit Facility were $0.04 million and $0.4 million, respectively and $0.4 million and $0.6 million, respectively, during thirteen and twenty-six weeks ended June 24, 2020. Total interest expense for the twenty-six weeks ended June 30, 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 Class A common stock or a combination of cash and shares of 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 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 one thousand dollar principal amount of the Convertible Notes for each trading day of the measurement period was less than 98% of the Shake Shack Inc. Form 10-Q | 45 Table of Contents 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 Class A common stock per one thousand dollar principal amount of Convertible Notes, which is equivalent to an initial conversion price of approximately $170.42 per share of 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 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 June 30, 2021, the Convertible Notes had a gross principal balance of $250.0 million and a balance of $243.0 million, net of unamortized discount and debt issuance costs of $7.0 million. As of June 30, 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 $0.2 million and $0.3 million respectively, for thirteen and twenty-six weeks ended June 30, 2021 and was included in Interest expense in the Condensed Consolidated Statements of Income (Loss). In connection with the Convertible Notes, the Company also incurred consulting and advisory fees of $0.2 million for the twenty-six weeks ended June 30, 2021 and was included in General and administrative expense in the Condensed Consolidated Statements of Income (Loss). At June 30, 2021, the fair value of the Convertible Notes was approximately $237.2 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. 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. 46 | Shake Shack Inc. Form 10-Q Table of Contents 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 Refer to Note 2, Summary of Significant Accounting Policies 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.