Shake Shack Inc. 10-K

Item 8. Financial Statements and Supplementary Data. INDEX TO FINANCIAL STATEMENTS Page Management's Report 79 Report of Independent Registered Public Accounting Firm (PCAOB ID: 42 ) 80 Consolidated Balance Sheets 85 Consolidated Statements of Income (Loss) 86 Consolidated Statements of Comprehensive Income (Loss) 87 Consolidated Statements of Stockholders' Equity 88 Consolidated Statements of Cash Flows 89 Notes to Consolidated Financial Statements 90 Shake Shack Inc. Form 10-K | 78 MANAGEMENT'S REPORT Management's Annual Report on the Consolidated Financial Statements Management is responsible for the preparation, integrity and objectivity of the accompanying Consolidated Financial Statements and related financial information. The Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America and necessarily include certain amounts that are based on estimates and informed judgments. Our management also prepared the related financial information included in this Annual Report on Form 10-K and is responsible for its accuracy and consistency with the Consolidated Financial Statements. Ernst & Young LLP, our independent registered public accounting firm, has audited the Consolidated Financial Statements as of December 29, 2021, as stated in their report herein. Management's Report on Internal Control Over Financial Reporting Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f). Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the financial statements for external purposes in accordance with generally accepted accounting principles in the United States of America. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we assessed the effectiveness of our internal control over financial reporting as of December 29, 2021, based on the framework in Internal Control—Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Based on the results of our evaluation, management concluded that our internal control over financial reporting was effective as of December 29, 2021. Our independent registered public accounting firm, Ernst & Young LLP, has issued an attestation report on the effectiveness of our internal control over financial reporting as of December 29, 2021, as stated in their report herein. Shake Shack Inc. Form 10-K | 79 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and the Board of Directors of Shake Shack Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Shake Shack Inc. (the Company) as of December 29, 2021 and December 30, 2020, the related consolidated statements of income (loss), comprehensive income (loss), stockholders' equity and cash flows for each of the three years in the period ended December 29, 2021, and the related notes and financial statement schedules listed in the Index at Item 15(a) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 29, 2021 and December 30, 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 29, 2021, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 29, 2021, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 18, 2022 expressed an unqualified opinion thereon. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Shake Shack Inc. Form 10-K | 80 Measurement of deferred tax assets related to the Company’s investment in SSE Holdings LLC Description of the Matter As discussed in Notes 12 and 14 of the consolidated financial statements, the noncontrolling interest holders of SSE Holdings LLC (“LLC”) may redeem their equity interests in SSE Holdings LLC (“LLC interests”) for shares of the Company’s Class A common stock. For income tax purposes, these redemptions are treated as direct purchases of LLC equity and are recorded at their fair market value upon the date of the redemption. The resulting incremental tax basis in excess of the book basis arising from a redemption represents a deductible temporary difference for which a deferred tax asset is recorded. At December 29, 2021, the Company’s total deferred tax asset related to the basis difference in its investment in LLC was $117 million. The basis difference in the Company’s investment in LLC changes through redemptions of LLC interests and other qualifying transactions. Auditing management’s accounting for the basis differences in its investment in LLC is especially complex and challenging as the Company’s accounting requires timely identification of all historical basis differences and subsequent adjustments related to the redemptions, described above, and the related tax receivable agreement (“TRA”) payments to the LLC holders, discussed below. How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s process for determining the completeness and measurement of the Company’s basis differences in the investment in LLC. For example, we tested management’s review controls over the calculation of the change in tax basis resulting from the redemptions, including the determination of fair market value. In addition, we tested controls over management’s communication of redemptions to the Company’s stock transfer agent as detailed in redemption notices provided by the LLC holder. To test the completeness and accuracy of the deferred tax asset related to the basis difference in the investment in the LLC, we performed audit procedures that included, among others, on a sample basis, testing redemptions of LLC interests by inspection of redemption notices, inquiry with legal counsel to verify the completeness of the redemption notices in the period, and external confirmation of LLC’s and the Company’s shares issued and outstanding with the stock transfer agent. Further, to test the measurement of the deferred tax asset, for a selection of redemptions, we recalculated the change in tax basis resulting from the redemptions, including the determination of fair value. Measurement of the valuation allowance against deferred tax assets Description of the Matter As discussed in Notes 2 and 14 of the consolidated financial statements, a valuation allowance is recognized if the Company determines it is more likely than not that all or a portion of a deferred tax asset will not be recognized. In making such determination, the Company considers all available evidence, including scheduled reversals of deferred tax liabilities, tax planning strategies and recent and forecasted results of operations. As of December 29, 2021, the Company is in a three-year cumulative book loss position, and is looking to its forecasted future U.S. federal taxable income to conclude that it is more likely than not that these deferred tax assets, except for certain local unincorporated business tax and foreign tax credits, will be fully realized prior to their expiration. At December 29, 2021, the Company had a net deferred tax asset balance for U.S. federal income taxes of $299 million, for which a valuation allowance of $5 million was provided. Auditing management’s analysis of the realizability of these U.S. federal deferred tax assets is highly judgmental because it requires the evaluation of positive evidence to support the position that the Company will generate sufficient future U.S. federal taxable income to realize their deferred tax assets as tax deductions on future income tax returns. The Company’s forecasted financial information, which is inherently subjective is a significant component of management’s analysis. Shake Shack Inc. Form 10-K | 81 How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s income tax process, including the review of deferred taxes and the evaluation of valuation allowances. In addition, we obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s financial forecasting process. Such controls include management’s review of forecasted pretax income, including the significant assumptions such as projected Shack openings and operating margins, and operating costs, among others. In our testing surrounding the assessment of the valuation allowance as described above, we performed audit procedures that included, among others, evaluating the conclusions reached by the Company regarding the realizability of deferred tax assets, which involved performing procedures over (i) the scheduled reversal of deferred taxes and (ii) forecasted financial information. In order to test management’s financial forecasts, we assessed the historical accuracy of management’s forecasts and compared the significant assumptions used to current industry and economic trends and changes to the Company’s operations. In addition, we performed sensitivity analyses to evaluate the impact of changes in assumptions to future taxable income and ultimately, realizability of deferred tax assets. Measurement of the Tax Receivable Agreement liability Description of the Matter As discussed in Note 14 of the consolidated financial statements, the Company has a Tax Receivable Agreement (“TRA”) with certain current and historical holders of LLC interests, which is a contractual commitment to distribute 85% of any tax benefits (“TRA Payment”), realized or deemed to be realized by the Company to the parties to the TRA. The TRA payments are contingent upon, among other things, the generation of future taxable income over the term of the TRA and future changes in tax laws. At December 29, 2021, the Company’s liability due to the holders of LLC interests under the TRA (“TRA liability”), was $234 million. Auditing management’s accounting for the TRA liability is especially complex and judgmental as the Company’s calculation of the TRA liability requires estimates of its future qualified taxable income over the term of the TRA as a basis to determine if the related tax benefits are expected to be realized. Significant changes in estimates could have a material effect on the Company’s results of operations. How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s process for determining the measurement of the Company’s TRA obligation. Such controls include management review controls over the computation of the TRA liability, which is based on several inputs including the Company’s share of the tax basis in the LLC, as discussed above, as well as the estimate of future qualified taxable income over the term of the TRA. We also tested management review control over the calculation of the TRA liability in accordance with the terms set out in the TRA. We tested the measurement of the Company’s TRA liability by performing audit procedures that included, among others, procedures on the redemptions, as described above, and recalculating the Company’s share of the tax basis in the net assets of LLC, as discussed above. To test the Company’s position that there is sufficient future taxable income to realize the tax benefits related to the redemptions discussed above, we evaluated the assumptions used by management to develop the projections of future taxable income. For example, we compared management’s projections of future taxable income with the actual results of prior periods, as well as management’s consideration of current industry and economic trends. We also recalculated the TRA liability and verified the calculation of the TRA liability was in accordance with the terms set out in the TRA. Shake Shack Inc. Form 10-K | 82 Lease accounting Description of the Matter As discussed in Note 9 of the consolidated financial statements, domestic Company-operated Shacks are located on leased premises. As of December 29, 2021, the Company’s right-of-use assets and lease liability is $347 million and $436 million, respectively. Auditing management’s accounting and presentation for leases was especially complex and challenging as the Company’s accounting for the right-of-use asset, and the lease liability involved the compilation and review of the details associated with the population of non-uniform leases as well as the determination of the incremental borrowing rate and the evaluation of impairment of the right-of-use assets. How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s process for determining the classification, valuation and completeness of the right-of-use asset and the lease liability. Such controls include management’s review of the completeness of the population of leases, including lease modifications, verification of the accuracy of the computation of the right-of-use asset and lease liability, including the determination of the incremental borrowing rate, and the evaluation of impairment of the right-of-use assets. We tested the completeness of the lease population through the evidence obtained from inquiries of Company personnel and an assessment of leases on a location-by-location basis based upon our knowledge of the Company’s openings of new Shake Shack restaurants for each location. For a sample of leases, we performed audit procedures that included, among others, testing the accuracy of the data used in the calculation of the right-of-use asset and the lease liability by agreeing the underlying inputs, such as possession date, lease term and payment terms, to source documents, such as lease contracts. We recalculated the right-of-use asset and the lease liability and evaluated the key assumptions and methodologies used in the Company’s selection of the incremental borrowing rate by developing a comparative calculation. We tested the Company’s impairment assessment, by evaluating significant assumptions, including market rent assumptions, lease terms, and discount rate, used to estimate the fair value of right-of-use assets, and valuation methodologies used in the Company’s models. /s/ Ernst & Young LLP We have served as the Company's auditor since 2014. New York, New York February 18, 2022 Shake Shack Inc. Form 10-K | 83 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and the Board of Directors of Shake Shack Inc. Opinion on Internal Control Over Financial Reporting We have audited Shake Shack Inc.’s (the Company’s) internal control over financial reporting as of December 29, 2021, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Shake Shack Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 29, 2021, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 29, 2021 and December 30, 2020, the related consolidated statements of income (loss), comprehensive income (loss), stockholders' equity and cash flows for each of the three years in the period ended December 29, 2021, and the related notes and financial statement schedules listed in the Index at Item 15(a) (collectively referred to as the “consolidated financial statements”) and our report dated February 18, 2022 expressed an unqualified opinion thereon. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ Ernst & Young LLP New York, New York February 18, 2022 Shake Shack Inc. Form 10-K | 84 SHAKE SHACK INC. CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share amounts) December 29 2021 December 30 2020 ASSETS Current assets: Cash and cash equivalents $ 302,406 $ 146,873 Marketable securities 80,000 36,887 Accounts receivable, net 13,657 9,464 Inventories 3,850 2,888 Prepaid expenses and other current assets 9,763 7,074 Total current assets 409,676 203,186 Property and equipment, net of accumulated depreciation of $ 222,768 and $ 166,156 , respectively 389,386 336,541 Operating lease assets 347,277 306,317 Deferred income taxes, net 298,668 287,007 Other assets 12,563 12,297 TOTAL ASSETS $ 1,457,570 $ 1,145,348 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 19,947 $ 23,487 Accrued expenses 36,892 25,920 Accrued wages and related liabilities 14,638 10,441 Operating lease liabilities, current 35,519 35,657 Other current liabilities 14,501 14,200 Total current liabilities 121,497 109,705 Long-term debt 243,542 — Long-term operating lease liabilities 400,113 343,736 Liabilities under tax receivable agreement, net of current portion 234,045 232,954 Other long-term liabilities 22,773 24,460 Total liabilities 1,021,970 710,855 Commitments and contingencies (Note 17) Stockholders' equity: Preferred stock, no par value—10,000,000 shares authorized; none issued and outstanding as of December 29, 2021 and December 30, 2020. — — Class A common stock, $0.001 par value—200,000,000 shares authorized; 39,142,397 and 38,717,790 shares issued and outstanding as of December 29, 2021 and December 30, 2020, respectively. 39 39 Class B common stock, $0.001 par value—35,000,000 shares authorized; 2,921,587 and 2,951,188 shares issued and outstanding as of December 29, 2021 and December 30, 2020, respectively. 3 3 Additional paid-in capital 405,940 395,067 Retained earnings 3,554 12,209 Accumulated other comprehensive income 1 3 Total stockholders' equity attributable to Shake Shack Inc. 409,537 407,321 Non-controlling interests 26,063 27,172 Total equity 435,600 434,493 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,457,570 $ 1,145,348 See accompanying Notes to Consolidated Financial Statements. Shake Shack Inc. Form 10-K | 85 SHAKE SHACK INC. CONSOLIDATED STATEMENTS OF INCOME (LOSS) (in thousands, except per share amounts) Fiscal Year Ended December 29 2021 December 30 2020 December 25 2019 Shack sales $ 714,989 $ 506,339 $ 574,625 Licensing revenue 24,904 16,528 19,894 TOTAL REVENUE 739,893 522,867 594,519 Shack-level operating expenses: Food and paper costs 218,262 153,335 168,176 Labor and related expenses 215,114 156,814 160,811 Other operating expenses 103,232 73,220 69,169 Occupancy and related expenses 59,228 51,592 48,451 General and administrative expenses 85,996 64,250 65,649 Depreciation and amortization expense 58,991 48,801 40,392 Pre-opening costs 13,291 8,580 14,834 Impairment and loss on disposal of assets 1,632 10,151 1,352 TOTAL EXPENSES 755,746 566,743 568,834 INCOME (LOSS) FROM OPERATIONS ( 15,853 ) ( 43,876 ) 25,685 Other income (expense), net 95 ( 786 ) 2,263 Interest expense ( 1,577 ) ( 815 ) ( 434 ) INCOME (LOSS) BEFORE INCOME TAXES ( 17,335 ) ( 45,477 ) 27,514 Income tax expense (benefit) ( 7,224 ) 57 3,386 NET INCOME (LOSS) ( 10,111 ) ( 45,534 ) 24,128 Less: Net income (loss) attributable to non-controlling interests ( 1,456 ) ( 3,376 ) 4,301 NET INCOME (LOSS) ATTRIBUTABLE TO SHAKE SHACK INC. $ ( 8,655 ) $ ( 42,158 ) $ 19,827 Earnings (loss) per share of Class A common stock: Basic $ ( 0.22 ) $ ( 1.14 ) $ 0.63 Diluted $ ( 0.22 ) $ ( 1.14 ) $ 0.61 Weighted average shares of Class A common stock outstanding: Basic 39,085 37,129 31,381 Diluted 39,085 37,129 32,251 See accompanying Notes to Consolidated Financial Statements. Shake Shack Inc. Form 10-K | 86 SHAKE SHACK INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (in thousands) Fiscal Year Ended December 29 2021 December 30 2020 December 25 2019 Net income (loss) $ ( 10,111 ) $ ( 45,534 ) $ 24,128 Other comprehensive income (loss), net of tax (1) : Change in foreign currency translation adjustment ( 2 ) 1 2 Net change ( 2 ) 1 2 OTHER COMPREHENSIVE INCOME (LOSS) ( 2 ) 1 2 COMPREHENSIVE INCOME (LOSS) ( 10,113 ) ( 45,533 ) 24,130 Less: Comprehensive income (loss) attributable to non-controlling interests ( 1,456 ) ( 3,376 ) 4,301 COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO SHAKE SHACK INC. $ ( 8,657 ) $ ( 42,157 ) $ 19,829 (1) Net of tax benefit of $ 0 for fiscal years ended December 29, 2021, December 30, 2020 and December 25, 2019. See accompanying Notes to Consolidated Financial Statements. Shake Shack Inc. Form 10-K | 87 SHAKE SHACK INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (in thousands, except share amounts) Class A Common Stock Class B Common Stock Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Non- Controlling Interest Total Equity Shares Amount Shares Amount BALANCE DECEMBER 26, 2018 29,520,833 $ 30 7,557,347 $ 8 $ 195,633 $ 30,404 — $ 47,380 $ 273,455 Cumulative effect of accounting changes 4,136 1,059 5,195 Net income 19,827 4,301 24,128 Other comprehensive income: Net change in foreign currency translation adjustment 2 2 Equity-based compensation 7,700 7,700 Activity under stock compensation plans 484,319 — 4,517 3,288 7,805 Redemption of LLC interests 1,721,887 2 ( 1,721,887 ) ( 2 ) 11,934 ( 11,934 ) — Effect of GTC Merger 2,690,263 3 ( 2,690,263 ) ( 3 ) 19,218 ( 19,218 ) — Establishment of liabilities under tax receivable agreement and related changes to deferred tax assets associated with increases in tax basis 5,408 5,408 Distributions paid to non-controlling interest holders ( 1,708 ) ( 1,708 ) BALANCE DECEMBER 25, 2019 34,417,302 35 3,145,197 3 244,410 54,367 2 23,168 321,985 Net loss ( 42,158 ) ( 3,376 ) ( 45,534 ) Other comprehensive income: Net change in foreign currency translation adjustment 1 1 Equity-based compensation 5,600 5,600 Activity under stock compensation plans 456,942 1 5,909 305 6,215 Redemption of LLC interests 194,009 — ( 194,009 ) — 1,723 ( 1,723 ) — Establishment of liabilities under tax receivable agreement and related changes to deferred tax assets associated with increases in tax basis 1,707 1,707 Distributions paid to non-controlling interest holders ( 478 ) ( 478 ) Issuance of Class A common stock sold in equity offerings, net of underwriting discounts, commissions and offering costs 3,649,537 3 135,718 9,276 144,997 BALANCE DECEMBER 30, 2020 38,717,790 39 2,951,188 3 395,067 12,209 3 27,172 434,493 Net loss ( 8,655 ) ( 1,456 ) ( 10,111 ) Other comprehensive income: Net change in foreign currency translation adjustment ( 2 ) ( 2 ) Equity-based compensation 8,803 8,803 Activity under stock compensation plans 395,006 — 1,829 1,348 3,177 Redemption of LLC interests 29,601 — ( 29,601 ) — 33 ( 33 ) — Establishment of liabilities under tax receivable agreement and related changes to deferred tax assets associated with increases in tax basis 208 208 Distributions paid to non-controlling interest holders ( 968 ) ( 968 ) BALANCE DECEMBER 29, 2021 39,142,397 $ 39 2,921,587 $ 3 $ 405,940 $ 3,554 $ 1 $ 26,063 $ 435,600 See accompanying Notes to Consolidated Financial Statements. Shake Shack Inc. Form 10-K | 88 SHAKE SHACK INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Fiscal Year Ended December 29 2021 December 30 2020 December 25 2019 OPERATING ACTIVITIES Net income (loss) (including amounts attributable to non-controlling interests) $ ( 10,111 ) $ ( 45,534 ) $ 24,128 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization expense 58,991 48,801 40,392 Amortization of debt issuance costs 867 — — Amortization of cloud computing asset 1,245 1,444 312 Non-cash operating lease cost 50,888 44,910 40,068 Equity-based compensation 8,703 5,560 7,505 Deferred income taxes ( 10,379 ) ( 1,356 ) ( 6,064 ) Non-cash interest expense 353 66 170 (Gain) loss on sale of marketable securities 5 ( 79 ) ( 22 ) Impairment and loss on disposal of assets 1,632 10,151 1,352 Other non-cash expense (income) ( 4 ) 1,937 ( 338 ) Unrealized (gain) loss on equity securities 277 59 ( 194 ) Changes in operating assets and liabilities: Accounts receivable ( 4,193 ) 1,006 10,726 Inventories ( 962 ) ( 667 ) ( 472 ) Prepaid expenses and other current assets 4,913 ( 5,197 ) 134 Other assets ( 2,722 ) ( 2,940 ) ( 8,245 ) Accounts payable ( 6,450 ) 4,626 4,248 Accrued expenses 7,175 2,170 9,856 Accrued wages and related liabilities 4,200 ( 1,010 ) 799 Other current liabilities ( 1,166 ) 1,752 1,438 Long-term operating lease liabilities ( 43,417 ) ( 33,724 ) ( 37,308 ) Other long-term liabilities ( 1,443 ) 5,375 1,372 NET CASH PROVIDED BY OPERATING ACTIVITIES 58,402 37,350 89,857 INVESTING ACTIVITIES Purchases of property and equipment ( 101,495 ) ( 69,038 ) ( 106,507 ) Purchases of marketable securities ( 47,399 ) ( 20,359 ) ( 1,179 ) Sales of marketable securities 4,004 20,000 27,000 NET CASH USED IN INVESTING ACTIVITIES ( 144,890 ) ( 69,397 ) ( 80,686 ) FINANCING ACTIVITIES Proceeds from issuance of convertible notes, net of discount 243,750 — — Proceeds from Revolving Credit Facility — 50,000 — Payments on Revolving Credit Facility — ( 50,000 ) — Deferred financing costs ( 169 ) ( 64 ) ( 286 ) Proceeds from issuance of Class A common stock sold in equity offerings, net of underwriting discounts, commissions and offering costs — 144,997 — Payments on principal of finance leases ( 2,694 ) ( 2,206 ) ( 1,926 ) Distributions paid to non-controlling interest holders ( 968 ) ( 478 ) ( 1,708 ) Debt issuance costs ( 1,075 ) — — Payments under tax receivable agreement — ( 6,643 ) ( 707 ) Net proceeds from stock option exercises 6,731 8,033 9,201 Employee withholding taxes related to net settled equity awards ( 3,554 ) ( 1,818 ) ( 1,396 ) NET CASH PROVIDED BY FINANCING ACTIVITIES 242,021 141,821 3,178 INCREASE IN CASH AND CASH EQUIVALENTS 155,533 109,774 12,349 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 146,873 37,099 24,750 CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 302,406 $ 146,873 $ 37,099 Supplemental cash flow information and non-cash investing and financing activities are further described in the accompanying notes. See accompanying Notes to Consolidated Financial Statements. Shake Shack Inc. Form 10-K | 89 SHAKE SHACK INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Page Note 1 Nature of Operations 91 Note 2 Summary of Significant Accounting Policies 91 Note 3 Revenue 97 Note 4 Fair Value Measurements 97 Note 5 Accounts Receivable 98 Note 6 Property and Equipment 99 Note 7 Supplemental Balance Sheet Information 99 Note 8 Debt 100 Note 9 Leases 102 Note 10 Employee Benefit Plans 105 Note 11 Stockholders' Equity 105 Note 12 Non-Controlling Interests 106 Note 13 Equity-Based Compensation 108 Note 14 Income Taxes 110 Note 15 Earnings (Loss) Per Share 114 Note 16 Supplemental Cash Flow Information 115 Note 17 Commitments and Contingencies 115 Note 18 Related Party Transactions 116 Note 19 Geographic Information 119 Shake Shack Inc. Form 10-K | 90 NOTE 1: NATURE OF OPERATIONS Shake Shack Inc. was formed on September 23, 2014 as a Delaware corporation for the purpose of facilitating an initial public offering and other related transactions in order to carry on the business of SSE Holdings, LLC and its subsidiaries ("SSE Holdings"). We are the sole managing member of SSE Holdings and, as sole managing member, we operate and control all of the business and affairs of SSE Holdings. As a result, we consolidate the financial results of SSE Holdings and report a non-controlling interest representing the economic interest in SSE Holdings held by the other members of SSE Holdings. As of December 29, 2021 we owned 93.1 % of SSE Holdings. Unless the context otherwise requires, "we," "us," "our," "Shake Shack," the "Company" and other similar references, refer to Shake Shack Inc. and, unless otherwise stated, all of its subsidiaries, including SSE Holdings. We operate and license Shake Shack restaurants ("Shacks"), which serve hamburgers, hot dogs, chicken, crinkle cut fries, shakes, frozen custard, beer, wine and more. As of December 29, 2021, there were 369 Shacks in operation, system-wide, of which 218 were domestic Company-operated Shacks, 25 were domestic licensed Shacks and 126 were international licensed Shacks. NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accompanying Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") and include the accounts of Shake Shack Inc. and its subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. Certain reclassifications have been made to prior period amounts to conform to the current year presentation. SSE Holdings is a variable interest entity. Shake Shack Inc. is the primary beneficiary as we have the majority economic interest in SSE Holdings and, as the sole managing member, have decision making authority that significantly affects the economic performance of the entity, while the limited partners have no substantive kick-out or participating rights. As a result, we will continue to consolidate SSE Holdings. The assets and liabilities of SSE Holdings represent substantially all of our consolidated assets and liabilities with the exception of certain deferred taxes and liabilities under the Tax Receivable Agreement. As of December 29, 2021 and December 30, 2020, the net assets of SSE Holdings were $ 376,857 and $ 383,669 , respectively. The assets of SSE Holdings are subject to certain restrictions in SSE Holdings' revolving credit agreement. Refer to Note 8, Debt, for additional information. Fiscal Year We operate on a 52/53 week fiscal year ending on the last Wednesday of December. Fiscal year 2021 contained 52 weeks and ended on December 29, 2021 ("fiscal 2021"). Fiscal year 2020 contained 53 weeks and ended on December 30, 2020 ("fiscal 2020"). Fiscal year 2019 contained 52 weeks and ended on December 25, 2019 ("fiscal 2019"). Unless otherwise stated, references to years in this report relate to fiscal years. Use of Estimates The preparation of these Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of sales and expenses during the reporting period. Actual results could differ from those estimates. Shake Shack Inc. Form 10-K | 91 Segment Reporting Our chief operating decision maker (the "CODM") is the Chief Executive Officer. We have determined we have one operating segment and one reportable segment, as the CODM regularly reviews Shack operations and financial performance at a consolidated level to allocate resources. Fair Value Measurements We apply fair value accounting for all financial assets and liabilities and non-financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis. We categorize our assets and liabilities, based on the priority of the inputs to the valuation technique, into a three-level fair value hierarchy as set forth below. ▪ Level 1 — Quoted prices in active markets for identical assets or liabilities ▪ Level 2 — Observable inputs other than quoted prices in active markets for identical assets or liabilities, quoted prices for identical assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities ▪ Level 3 — Inputs that are both unobservable and significant to the overall fair value measurements reflecting an entity's estimates of assumptions that market participants would use in pricing the asset or liability. Cash and Cash Equivalents Cash and cash equivalents consist primarily of cash on hand, deposits with banks, money market funds and short-term, highly liquid investments that have original maturities of three months or less. Cash equivalents are stated at cost, which approximates fair value. Marketable Securities Marketable securities consist of mutual funds that primarily invest in corporate bonds, certificates of deposits, asset-backed securities, commercial paper, U.S. Treasury obligations, and foreign government securities. Marketable securities are recorded at fair value, with unrealized gains and losses recorded in Other income (expense), net. Dividend and interest income are recognized when earned and are recorded in Other income (expense), net on the Consolidated Statements of Income (Loss). Accounts Receivable, Net Accounts receivable, net consist primarily of receivables from our licensees for licensing revenue and related reimbursements, credit card receivables and vendor rebates. We evaluate the collectability of the accounts receivable based on a variety of factors, including historical experience, current economic conditions and other factors. Inventories Inventories, which consist of food, paper goods, beverages, beer, wine and retail merchandise, are valued at the lower of weighted average cost or net realizable value. No adjustment is deemed necessary to reduce inventory to net realizable value due to the rapid turnover and high utilization of inventory. Property and Equipment, Net Property and equipment, net is stated at historical cost less accumulated depreciation. Property and equipment is depreciated based on the straight-line method over the estimated useful lives of the assets, generally ranging from five to seven years for both equipment, and furniture and fixtures, and two to five years for computer equipment and software. Leasehold improvements are depreciated over the shorter of their estimated useful lives or the related lease terms. Costs incurred when constructing Shacks are capitalized. The cost of repairs and maintenance are expensed when incurred. Costs for refurbishments and improvements that significantly increase the productive capacity or extend the useful life of the Shake Shack Inc. Form 10-K | 92 asset are capitalized. When assets are disposed of, the resulting gain or loss is recognized in Impairment and loss on disposal of assets on the Consolidated Statements of Income (Loss). Valuation of Long-lived Assets We assess potential impairments to our long-lived assets, which includes property and equipment and operating lease right-of-use assets, whenever events or circumstances indicate that the carrying value of an asset may not be recoverable. Recoverability of an asset is measured by a comparison of the carrying value of the asset group to the estimated undiscounted future cash flows expected to be generated by the asset group. If the carrying value of the asset group exceeds its estimated undiscounted future cash flows, an impairment charge is recognized in the amount by which the carrying value of the asset exceeds the fair value of the asset, considering external market participant assumptions. Since the determination of future cash flows is an estimate of future performance, there may be future impairments in the event that future cash flows do not meet expectations. Refer to Note 4, Fair Value Measurements, for additional information. Deferred Financing Costs Deferred financing costs incurred in connection with the issuance of long-term debt and establishing credit facilities are capitalized and amortized in Interest expense based on the related debt agreements. Deferred financing costs are included in Other assets on the Consolidated Balance Sheets. Other Assets Other assets consist primarily of capitalized implementation costs from cloud computing arrangements, certain custom pre-ordered furniture, fixtures and equipment for future and existing Shacks, transferable liquor licenses, and security deposits. Implementation costs associated with cloud computing arrangements hosted by third party vendors are capitalized when incurred during the application development phase. Amortization is calculated on a straight-line basis over the contractual term of the cloud computing arrangement and is recorded within General and administrative expenses on the Consolidated Statements of Income (Loss). As of December 29, 2021 and December 30, 2020, capitalized implementation costs from cloud computing arrangements totaled $ 6,431 and $ 6,497 , respectively, net of accumulated amortization. The costs of obtaining non-transferable liquor licenses that are directly issued by local government agencies for nominal fees are expensed as incurred. The costs of purchasing transferable liquor licenses through open markets in jurisdictions with a limited number of authorized liquor licenses are capitalized as indefinite-lived intangible assets. Annual liquor license renewal fees, for both types of licenses, are expensed over the renewal term. As of December 29, 2021 and December 30, 2020, indefinite-lived intangible assets relating to transferable liquor licenses totaled $ 1,461 and $ 1,437 , respectively. We evaluate our indefinite-lived intangible assets for impairment annually during the fiscal fourth quarter, and whenever events or changes in circumstances indicate that an impairment may exist. When evaluating intangible assets for impairment, we first perform a qualitative assessment to determine whether it is more likely than not that an intangible asset group is impaired. If we determine that it is more likely than not that the carrying value of the intangible asset group exceeds its fair value, we perform a quantitative assessment to derive the fair value of the intangible asset group. If the carrying value of the intangible asset group exceeds the estimated fair value, an impairment charge is recorded to reduce the carrying value to the estimated fair value. In addition, we continuously monitor and may revise our intangible asset useful lives if and when facts and circumstances change. Revenue Recognition Revenue consists of Shack sales and Licensing revenue. Generally, revenue is recognized as promised goods or services transfer to the guest or customer in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. Revenue from Shack sales is recognized when payment is tendered at the point of sale, net of discounts as the performance obligation has been satisfied. Sales tax collected from guests is excluded from Shack sales and the obligation is included as sales tax payable until the taxes are remitted to the appropriate taxing authorities. Revenue from gift cards is deferred and recognized upon redemption. Shake Shack Inc. Form 10-K | 93 Licensing revenues include initial territory fees, Shack opening fees and ongoing sales-based royalty fees from licensed Shacks. Generally, the licenses granted to develop, open and operate each Shack in a specified territory are the predominant good or service transferred to the licensee in our contracts, and represent distinct performance obligations. Ancillary promised services, such as training and assistance during the initial opening of a Shack, are typically combined with the licenses and considered as one performance obligation per Shack. We determine the transaction price for each contract, which is comprised of the initial territory fee and an estimate of the total Shack opening fees we expect to be entitled to. The calculation of total Shack opening fees included in the transaction price requires judgment, as it is based on an estimate of the number of Shacks we expect the licensee to open. The transaction price is then allocated equally to each Shack expected to open. The performance obligations are satisfied over time, starting when a Shack opens, through the end of the term of the license granted to the Shack. Because we are transferring licenses to access our intellectual property during a contractual term, revenue is recognized on a straight-line basis over the license term. Generally, payment for the initial territory fee is received upon execution of the licensing agreement and payment for the Shack opening fees are received either in advance of or upon opening the related Shack. These payments are initially deferred and recognized as revenue as the performance obligations are satisfied, which occurs over a long-term period. Revenue from sales-based royalties is recognized as the related sales occur. Equity-based Compensation Equity-based compensation expense is measured based on the grant-date fair value of the awards. For awards with graded-vesting features and service conditions only, compensation expense is recognized on a straight-line basis over the total requisite service period for the entire award. For awards with graded-vesting features and a combination of service and performance conditions, compensation expense is recognized using a graded-vesting attribution method over the vesting period based on the most probable outcome of the performance conditions. Actual distributed shares are calculated upon conclusion of the service and performance periods. For stock option awards, the grant-date fair value of the awards is determined using the Black-Scholes option pricing model and involves several assumptions, including the expected term of the option, expected volatility and risk-free interest rate. Forfeitures are recognized as they occur for all equity awards. Equity-based compensation expense is included in General and administrative expenses and Labor and related expenses on the Consolidated Statements of Income (Loss). Advertising The cost of advertising is expensed as incurred. Advertising costs amounted to $ 5,677 , $ 1,449 and $ 857 in fiscal 2021, fiscal 2020 and fiscal 2019, respectively, and are included in General and administrative expense and Other operating expenses on the Consolidated Statements of Income (Loss). Leases We currently lease all of our domestic Company-operated Shacks, our home office and certain equipment under various non-cancelable lease agreements that expire on various dates through 2038. Upon the possession of a leased asset, we determine its classification as an operating or financing lease. All of our real estate leases are classified as operating leases and most of our equipment leases are classified as finance leases. Generally, our real estate leases have initial terms ranging from 10 to 15 years and typically include two five-year renewal options. Renewal options are typically not included in the lease term as it is not reasonably certain at commencement date that we would exercise the options to extend the lease. Our real estate leases typically provide for fixed minimum rent payments and/or contingent rent payments based upon sales in excess of specified thresholds. When the achievement of such sales thresholds are deemed to be probable, contingent rent is accrued in proportion to the sales recognized during the period. Fixed minimum rent payments are recognized on a straight-line basis over the lease term starting on the date we take possession of the leased property. Lease expense incurred before a Shack opens is recorded in Pre-opening costs on the Consolidated Statements of Income (Loss). Once a Shack opens, we record the straight-line lease expense and contingent rent, if applicable, in Occupancy and related expenses on the Consolidated Statements of Income (Loss). Many of our leases also require us to pay real estate taxes, common area maintenance costs and other occupancy costs which are included in Occupancy and related expenses on the Consolidated Statements of Income (Loss). Shake Shack Inc. Form 10-K | 94 We calculate operating lease assets and lease liabilities as the present value of fixed lease payments over the reasonably certain lease term beginning at the commencement date. We measure the lease liability by discounting the future fixed contractual payments included in the lease agreement, using either the rate explicit in the lease or our incremental borrowing rate (“IBR”). The IBR used to measure the lease liability is derived from the average of the yield curves obtained from using the notching method and the recovery rate method. The most significant assumption in calculating the IBR is our credit rating and is subject to judgment. The credit rating used to develop the IBR is determined by utilizing the credit ratings of other public companies with similar financial information as SSE Holdings. For operating leases, fixed lease payments are recognized as operating lease cost on a straight-line basis over the lease term. Finance leases are recognized in depreciation expense on a straight-line basis over the remaining lease term, along with recognition of interest expense associated with accretion of the lease liability. For leases with a lease term of 12 months or less ("short-term lease"), any fixed lease payments are recognized on a straight-line basis over such term, and are not recognized on the Consolidated Balance Sheets. For both operating and finance leases that contain lease and non-lease components, the components are combined and accounted for as a single lease component. Variable lease cost for both operating and finance leases, if any, is recognized as incurred. We expend cash for leasehold improvements to build out and equip our leased premises. Generally, a portion of the leasehold improvements and building costs are reimbursed by our landlords through landlord incentives pursuant to agreed-upon terms in our lease agreements. If obtained, landlord incentives usually take the form of up-front cash, full or partial credits against our future minimum or contingent rents otherwise payable by us, or a combination thereof. In most cases, landlord incentives are received after we take possession of the property and as we meet required milestones during the construction of the property. We include these amounts in the measurement of the initial operating lease liability, which are also reflected as a reduction to the initial measurement of the right-of-use asset. Pre-opening Costs Pre-opening costs are expensed as incurred and consist primarily of occupancy, manager and team member wages, legal fees, travel and related training costs, cookware and marketing expenses incurred prior to the opening of a Shack. Income Taxes We account for income taxes pursuant to the asset and liability method which requires the recognition of deferred income tax assets and liabilities related to the expected future tax consequences arising from temporary differences between the carrying values and tax bases of assets and liabilities based on enacted statutory tax rates applicable to the periods in which the temporary differences are expected to reverse. Any effects of changes in income tax rates or laws are included in Income tax expense in the period of enactment. A valuation allowance is recognized if we determine it is more likely than not that all or a portion of a deferred tax asset will not be recognized. In making such determination, the Company considers all available evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent and expected future results of operations. Shake Shack Inc. Form 10-K | 95 Recently Adopted Accounting Pronouncements We adopted the Accounting Standards Update ("ASU") summarized below in fiscal 2021 . ASU Description Date Adopted Simplifying the Accounting for Income Taxes (ASU 2019-12) This standard simplifies various aspects related to accounting for income taxes by removing certain exceptions to the general principles in ASC 740, “Income Taxes” (“ASC 740”), and clarifying certain aspects of the current guidance to promote consistency among reporting entities. The adoption of this standard did not have a material impact to the Company's consolidated financial statements. December 31, 2020 Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity's Own Equity (Subtopic 815-40)—Accounting For Convertible Instruments and Contracts in an Entity's Own Equity. (ASU 2020-06) This ASU amends the guidance on convertible instruments and the derivatives scope exception for contracts in an entity’s own equity and improves and amends the related earnings per share guidance for both Subtopics. The Company elected to early adopt this standard, beginning December 31, 2020. The guidance of this ASU is applicable to the convertible notes issued in March 2021. As a result, the convertible notes are accounted for as a single liability measured at amortized cost. The if-converted earnings per share ("EPS") method is used, with the effect of potential share settlement included in diluted EPS. Refer to Note 8, Debt, and Note 15, Earnings Per Share, for additional information. December 31, 2020 Recently Issued Accounting Pronouncements ASU Description Effective Date Government Assistance (Topic 832)—Disclosures by Business Entities about Government Assistance (ASU 2021-10) This ASU requires disclosures about transactions with a government that have been accounted for by analogizing to a grant or contribution accounting model to increase transparency about the types of transactions, the accounting for the transactions and the effect of the transactions on an entity’s financial statements. This ASU is effective for fiscal years beginning after December 15, 2021 and can be applied either prospectively or retrospectively with early adoption permitted. As this ASU is primarily around disclosure of transactions, the Company does not expect this to have a material impact on the financial statements. December 30, 2021 Shake Shack Inc. Form 10-K | 96 NOTE 3: REVENUE Revenue Recognition Revenue recognized during fiscal 2021, fiscal 2020 and fiscal 2019 disaggregated by type is as follows: 2021 2020 2019 Shack sales $ 714,989 $ 506,339 $ 574,625 Licensing revenue: Sales-based royalties 24,150 15,773 19,318 Initial territory and opening fees 754 755 576 Total revenue $ 739,893 $ 522,867 $ 594,519 The aggregate amount of the transaction price allocated to performance obligations that are unsatisfied (or partially unsatisfied) as of December 29, 2021 is $ 17,633 . We expect to recognize this amount as revenue over a long-term period, as the license term for each Shack ranges from 5 to 20 years. This amount excludes any variable consideration related to sales-based royalties. Contract Balances Opening and closing balances of contract liabilities and receivables from contracts with customers is as follows: December 29 2021 December 30 2020 Shack sales receivables $ 6,939 $ 5,373 Licensing receivables, net of allowance for doubtful accounts 4,005 2,647 Gift card liability 3,297 2,637 Deferred revenue, current 763 608 Deferred revenue, long-term 12,669 12,151 Revenue recognized during fiscal 2021 and fiscal 2020 that was included in their respective liability balances at the beginning of the period is as follows: 2021 2020 Gift card liability $ 456 $ 537 Deferred revenue 716 723 NOTE 4: FAIR VALUE MEASUREMENTS Assets and Liabilities Measured at Fair Value on a Recurring Basis The carrying value of the Company's Cash and cash equivalents, Accounts receivable, net, Accounts payable and Accrued expenses approximate their fair value due to the short-term nature of these financial instruments. As of December 29, 2021 and December 30, 2020, the Company held certain assets that are required to be measured at fair value on a recurring basis including Marketable securities, which consist of investments in equity securities. Fair value of these Shake Shack Inc. Form 10-K | 97 investments is measured using Level 1 inputs. The carrying value of these investments in equity securities approximates fair value. Assets measured at fair value on a recurring basis as of December 29, 2021 and December 30, 2020 were as follows: Fair Value Measurements December 29 2021 December 30 2020 Level 1 Level 1 Equity securities: Mutual funds $ 80,000 $ 36,887 Total Marketable securities $ 80,000 $ 36,887 Refer to Note 6, Debt, for additional information relating to the fair value of the Company's outstanding debt instruments. A summary of other income from equity securities recognized during fiscal 2021, fiscal 2020 and fiscal 2019 is as follows: 2021 2020 2019 Equity securities: Dividend income $ 301 $ 359 $ 1,244 Realized gain (loss) on sale of investments ( 5 ) 79 22 Unrealized gain (loss) on equity securities ( 277 ) ( 59 ) 194 Total $ 19 $ 379 $ 1,460 Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis Assets and liabilities that are measured at fair value on a non-recurring basis include our long-lived assets, operating lease right-of-use assets and indefinite-lived intangible assets. There were no impairment charges recognized during fiscal 2021. During 2020, the Company recognized an impairment charge of $ 7,644 at two Shacks, as well as the home office. Of the total impairment charge, $ 5,698 was attributed to operating lease right-of-use assets, $ 1,893 was attributed to property and equipment held and used, and $ 53 was attributed to finance lease right-of-use assets. The impairment charge was included in Impairment and loss on disposal of assets on the Consolidated Statement of Income (Loss). The fair values of assets were determined using an income-based approach and are classified as Level 3 within the fair value hierarchy. Significant inputs include projections of future cash flows, discount rates, Shack sales and profitability. There were no impairment charges recognized during fiscal 2019. NOTE 5: ACCOUNTS RECEIVABLE, NET The components of Accounts receivable, net as of December 29, 2021 and December 30, 2020 are as follows: December 29 2021 December 30 2020 Licensing receivables $ 4,005 $ 2,675 Credit card receivables 4,091 2,989 Delivery receivables 2,553 2,229 Other receivables 3,008 1,599 Allowance for doubtful accounts — ( 28 ) Accounts receivable, net $ 13,657 $ 9,464 Shake Shack Inc. Form 10-K | 98 NOTE 6: PROPERTY AND EQUIPMENT, NET The components of Property and equipment, net as of December 29, 2021 and December 30, 2020 are as follows: December 29 2021 December 30 2020 Leasehold improvements $ 413,893 $ 342,724 Equipment 68,682 60,064 Furniture and fixtures 23,735 20,178 Computer equipment and software 44,821 30,477 Financing equipment lease right-of-use assets 13,741 9,622 Construction in progress 47,282 39,632 Property and equipment, gross 612,154 502,697 Less: accumulated depreciation ( 222,768 ) ( 166,156 ) Property and equipment, net $ 389,386 $ 336,541 Depreciation expense was $ 58,961 , $ 48,801 and $ 40,392 for fiscal 2021, fiscal 2020 and fiscal 2019, respectively. NOTE 7: SUPPLEMENTAL BALANCE SHEET INFORMATION The components of Other current liabilities as of December 29, 2021 and December 30, 2020 are as follows: December 29 2021 December 30 2020 Sales tax payable $ 4,575 $ 4,285 Gift card liability 3,297 2,637 Current portion of financing equipment lease liabilities 2,711 1,998 Other 3,918 5,280 Other current liabilities $ 14,501 $ 14,200 The components of Other long-term liabilities as of December 29, 2021 and December 30, 2020 are as follows: December 29 2021 December 30 2020 Deferred licensing revenue $ 12,669 $ 12,151 Long-term portion of financing equipment lease liabilities 4,303 3,586 Other (1) 5,801 8,723 Other long-term liabilities $ 22,773 $ 24,460 (1) As of December 29, 2021, Other included $ 3,334 of deferred lease incentive liabilities related to leases with variable lease cost as well as $ 2,182 of deferred social security taxes associated with the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"). As of December 30, 2020, Other included $ 3,182 of deferred lease incentive liabilities related to leases with variable lease cost as well as $ 5,214 of deferred social security taxes associated with the CARES Act. Refer to Note 14, Income Taxes, for additional information relating to the CARES Act . Shake Shack Inc. Form 10-K | 99 NOTE 8: DEBT Revolving Credit Facility In August 2019, we entered into a revolving credit facility agreement ("Revolving Credit Facility"), which permits borrowings up to $ 50,000 , of which the entire amount is available immediately, with the ability to increase available borrowings up to an additional $ 100,000 , to be made available subject to satisfaction of certain conditions. The Revolving Credit Facility also permits the issuance of letters of credit upon our request of up to $ 15,000 . In March 2020, we drew down the full $ 50,000 available under the Revolving Credit Facility to enhance liquidity and financial flexibility given the uncertain market conditions created by the COVID-19 pandemic. We repaid this amount in full, plus interest, in June 2020. In May 2020, we entered into a first amendment to the Revolving Credit Facility ("First Amendment"), which, among other things, provides for modified financial covenant compliance requirements for a period of time. The First Amendment requires us to maintain minimum liquidity of $ 25,000 through July 1, 2021 and outstanding borrowings during the applicable period covered by the First Amendment bear interest at either: (i) LIBOR plus a percentage ranging from 1.0 % to 2.5 % or (ii) the base rate plus a percentage ranging from 0.0 % to 1.5 %, in each case depending on our net lease adjusted leverage ratio. In March 2021, the Company entered into a second amendment to the Revolving Credit Facility (“Second Amendment”). The Second Amendment modified the applicable covenants and restrictions in the Revolving Credit Facility 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) permit minimum liquidity to be less than $ 25,000 through July 1, 2022; (ii) extended the period applicable to the increased interest rate margin as set forth in the First Amendment; (iii) shortened the maturity date of the Revolving Credit Facility from August 2024 to September 2022 and (iv) added mechanics relating to the transition from the use of LIBOR to the Secured Overnight Financing Rate ("SOFR") upon the discontinuance or unavailability of LIBOR. Subsequently, and also in March 2021, the Company entered into a third amendment to the Revolving Credit Facility (“Third Amendment”) as 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 December 29, 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 the Company to comply with maximum net lease adjusted leverage and minimum fixed charge coverage ratios. The Company is 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 the Company's 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; pay dividends; engage in transactions with affiliates; and prohibits the Company, with certain exceptions, from engaging in any line of business not related to its current line of business. As of December 29, 2021, the Company was in compliance with all covenants. As of December 29, 2021, the Revolving Credit Facility had unamortized deferred financing costs of $ 82 , and was included in Other assets on the Consolidated Balance Sheets. Total interest expense related to the Revolving Credit Facility was $ 479 , $ 531 and $ 49 , respectively, for fiscal 2021, fiscal 2020 and fiscal 2019. Interest expense for fiscal 2021 primarily included the write-off of previously capitalized costs on the Revolving Credit Facility. Shake Shack Inc. Form 10-K | 100 Convertible Notes In March 2021, the Company issued $ 225,000 aggregate principal amount of 0% Convertible Senior Notes due 2028 (“Convertible Notes”) in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933. The Company granted an option to the initial purchasers to purchase up to an additional $ 25,000 aggregate principal amount of Convertible Notes to cover over-allotments, which was subsequently fully exercised during March 2021, resulting in a total issuance of $ 250,000 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, the Company pays or delivers, 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 the Company's 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 the Company's 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 (the “measurement 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 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 the Company calls 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. Shake Shack may not redeem the Convertible Notes prior to March 6, 2025. The Company may redeem for cash all or any portion of the Convertible Notes, at the Company's 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 the Company provides 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 Shake Shack undergoes a fundamental change (as defined in the indenture governing the Convertible Notes), subject to certain conditions, holders may require it 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 the Company delivers a notice of redemption in respect of some or all of the Convertible Notes, the Company will, in certain circumstances, increase the conversion rate of the Convertible Notes for a holder who elects to convert the Convertible Notes in connection with such a corporate event or convert the 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 (“Intercompany Note”). 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, held by Shake Shack Inc. and the aggregate number of outstanding shares of common stock. Shake Shack Inc. Form 10-K | 101 As of December 29, 2021, the Convertible Notes had a gross principal balance of $ 250,000 and a balance of $ 243,542 , net of unamortized discount and debt issuance costs of $ 6,458 . As of December 29, 2021, the unamortized balance of discount and debt issuance costs was recorded as a contra-liability and netted with Long-term debt on the Consolidated Balance Sheets and was being amortized as interest expense using the effective interest method. Total amortization expense was $ 867 and was included in Interest expense in the Consolidated Statements of Income (Loss). In connection with the issuance of the Convertible Notes, the Company also incurred consulting and advisory fees of $ 231 as of December 29, 2021 and was included in General and administrative expenses in the Consolidated Statements of Income (Loss). At December 29, 2021, the fair value of the Convertible Notes was approximately $ 206,018 , 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. NOTE 9: LEASES Nature of Leases We currently lease all of our domestic Company-operated Shacks, our home office and certain equipment under various non-cancelable lease agreements that expire on various dates through 2038. We evaluate contracts entered into to determine whether the contract involves the use of property or equipment, which is either explicitly or implicitly identified in the contract. We evaluate whether we control the use of the asset, which is determined by assessing whether we obtain substantially all economic benefits from the use of the asset, and whether we have the right to direct the use of the asset. If these criteria are met and we have identified a lease, we account for the contract under the requirements of Accounting Standards Codification Topic 842. Upon the possession of a leased asset, we determine its classification as an operating or finance lease. Our real estate leases are classified as operating leases and most of our equipment leases are classified as finance leases. Generally, our real estate leases have initial terms ranging from 10 to 15 years and typically include two five -year renewal options. Renewal options are generally not recognized as part of the right-of-use assets and lease liabilities as it is not reasonably certain at commencement date that we would exercise the options to extend the lease. Our real estate leases typically provide for fixed minimum rent payments and/or contingent rent payments based upon sales in excess of specified thresholds. When the achievement of such sales thresholds are deemed to be probable, contingent rent is accrued in proportion to the sales recognized during the period. Fixed minimum rent payments are recognized on a straight-line basis over the lease term from the date we take possession of the leased property. Lease expense incurred before a Shack opens is recorded in Pre-opening costs on the Consolidated Statements of Income (Loss). Once a domestic Company-operated Shack opens, we record the straight-line lease expense and contingent rent, if applicable, in Occupancy and related expenses on the Consolidated Statements of Income (Loss). Many of our leases also require us to pay real estate taxes, common area maintenance costs and other occupancy costs which are included in Occupancy and related expenses on the Consolidated Statements of Income (Loss). As there are no explicit rates provided in our leases, we use our incremental borrowing rate in determining the present value of future lease payments. The discount rate used to measure the lease liability is derived from the average of the yield curves obtained from using the notching method and the recovery rate method. The most significant assumption in calculating the incremental borrowing rate is our credit rating and is subject to judgment. We determined our credit rating based on a comparison of the financial information of SSE Holdings to other public companies and then use their respective credit ratings to develop our own. We expend cash for leasehold improvements to build out and equip our leased premises. Generally, a portion of the leasehold improvements and building costs are reimbursed by our landlords through landlord incentives pursuant to agreed-upon terms in our lease agreements. If obtained, landlord incentives usually take the form of cash, full or partial credits against our future minimum or contingent rents otherwise payable by us or a combination thereof. In most cases, landlord incentives are received after we take possession of the property and as we meet required milestones during the construction of the property. We include Shake Shack Inc. Form 10-K | 102 these amounts in the measurement of the initial operating lease liability, which are also reflected as a reduction to the initial measurement of the right-of-use asset. A summary of operating and finance lease right-of-use assets and liabilities as of December 29, 2021 and December 30, 2020 is as follows: Classification December 29 2021 December 30 2020 Operating leases Operating lease assets $ 347,277 $ 306,317 Finance leases Property and equipment, net 6,810 5,409 Total right-of-use assets $ 354,087 $ 311,726 Operating leases: Operating lease liabilities, current $ 35,519 $ 35,657 Long-term operating lease liabilities 400,113 343,736 Finance leases: Other current liabilities 2,711 1,998 Other long-term liabilities 4,303 3,586 Total lease liabilities $ 442,646 $ 384,977 Shake Shack Inc. Form 10-K | 103 The components of lease expense for fiscal 2021 and fiscal 2020 are as follows: Classification December 29 2021 December 30 2020 Operating lease cost Occupancy and related expenses Pre-opening costs General and administrative expenses $ 50,888 $ 44,910 Finance lease cost: Amortization of right-of-use assets Depreciation and amortization expense 2,719 2,257 Interest on lease liabilities Interest expense 207 213 Variable lease cost Occupancy and related expenses Other operating expenses Pre-opening costs General and administrative expenses 13,019 13,766 Short-term lease cost Occupancy and related expenses 290 494 Total lease cost $ 67,123 $ 61,640 As of December 29, 2021, future minimum lease payments for operating and finance leases consisted of the following: Operating Leases Finance Leases 2022 (1) $ 50,444 $ 2,886 2023 62,729 1,996 2024 62,700 1,234 2025 61,795 674 2026 58,011 409 Thereafter 249,730 244 Total minimum payments 545,409 7,443 Less: imputed interest 117,380 428 Total lease liabilities $ 428,029 $ 7,015 (1) Operating leases are net of certain tenant allowance receivables that were reclassified to Other current assets as of December 29, 2021. As of December 29, 2021 we had additional operating lease commitments of $ 77,955 for non-cancelable leases without a possession date, which begin to commence in fiscal 2022. These lease commitments are consistent with the leases that we have executed thus far. A summary of lease terms and discount rates for operating and finance leases as of December 29, 2021 and December 30, 2020 is as follows: December 29 2021 December 30 2020 Weighted average remaining lease term (years): Operating leases 9.5 9.7 Finance leases 5.4 5.2 Weighted average discount rate: Operating leases 3.9 % 4.2 % Finance leases 3.1 % 3.6 % Shake Shack Inc. Form 10-K | 104 Supplemental cash flow information related to leases as of December 29, 2021 and December 30, 2020 is as follows: December 29 2021 December 30 2020 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 49,079 $ 42,144 Operating cash flows from finance leases 207 213 Financing cash flows from finance leases 2,694 2,206 Right-of-use assets obtained in exchange for lease obligations: Operating leases 66,959 59,969 Finance leases 4,119 2,298 NOTE 10: EMPLOYEE BENEFIT PLANS Defined Contribution Plan Our team members are eligible to participate in a defined contribution savings plan maintained by Shake Shack. The plan is funded by participant and employer contributions. We pay our share of the employer contributions directly to the third party trustee. Employer contributions to the plan are at our discretion. We make contributions matching a portion of participants' contributions. We match 100 % of participants' contributions for the first 3 % of eligible compensation contributed and 50 % of contributions made in excess of 3 % of eligible compensation up to 5 % of eligible compensation. Employer contributions totaled $ 1,337 , $ 895 and $ 772 , respectively, for fiscal 2021, fiscal 2020 and fiscal 2019. NOTE 11: STOCKHOLDERS' EQUITY Equity Offering On April 17, 2020, we announced an “at-the-market” equity offering program (the “ATM Program”), under which we may offer and sell shares of our Class A common stock having an aggregate price of up to $ 75,000 from time to time. On April 21, 2020, we completed the sale of 233,467 shares of our Class A common stock pursuant to the ATM Program and received $ 9,794 of proceeds, net of commissions. The proceeds were used to purchase newly-issued LLC Interests. On April 21, 2020, we completed an underwritten offering of 3,416,070 shares of our Class A common stock, resulting in $ 135,857 of proceeds, net of underwriting discounts and commissions. The proceeds were used to purchase newly-issued LLC Interests. Redemptions of LLC Interests The SSE Holdings LLC Agreement provides that holders of LLC Interests may, from time to time, require SSE Holdings to redeem all or a portion of their LLC Interests for newly-issued shares of Class A common stock on a one-for-one basis. In connection with any redemption or exchange, we receive a corresponding number of LLC Interests, increasing our total ownership interest in SSE Holdings. Simultaneously, and in connection with a redemption, the corresponding number of shares of Class B common stock are surrendered and cancelled. Shake Shack Inc. Form 10-K | 105 The following table summarizes redemptions of LLC Interests activity during fiscal 2021, fiscal 2020 and fiscal 2019: 2021 2020 2019 Redemption and acquisition of LLC Interests Number of LLC Interests redeemed by non-controlling interest holders 29,601 194,009 1,721,887 Number of LLC Interests acquired in connection with the Gramercy Tavern Corp. Merger — — 2,690,263 Number of LLC Interests received by Shake Shack Inc. 29,601 194,009 4,412,150 Issuance of Class A common stock Shares of Class A common stock issued in connection with redemptions of LLC Interests 29,601 194,009 1,721,887 Shares of Class A common stock issued in connection with the Gramercy Tavern Corp. Merger — — 2,690,263 Cancellation of Class B common stock Shares of Class B common stock surrendered and cancelled 29,601 194,009 1,721,887 Shares of Class B common stock surrendered and cancelled in connection with the Gramercy Tavern Merger — — 2,690,263 Stock Compensation Plan Activity We received an aggregate of 395,006 , 456,942 and 484,319 LLC Interests in connection with the activity under our stock compensation plan during fiscal 2021, fiscal 2020 and fiscal 2019, respectively. Dividend Restrictions We are a holding company with no direct operations. As a result, our ability to pay cash dividends on our common stock, if any, is dependent upon cash dividends, distributions or other transfers from SSE Holdings. The amounts available to us to pay cash dividends are subject to certain covenants and restrictions set forth in the Revolving Credit Facility. As of December 29, 2021, essentially all of the net assets of SSE Holdings were restricted. Refer to Note 8, Debt, for additional information relating to the covenants and restrictions set forth in the Revolving Credit Facility. Gramercy Tavern Corp. Merger Pursuant to a Stockholders Agreement, dated February 4, 2015, as amended, by and among Daniel H. Meyer, the Daniel H. Meyer 2012 Gift Trust, now known as the DHM Gift Trust (the "Gift Trust"), other affiliates (collectively, the "Meyer Stockholders") and other parties thereto, the Meyer Stockholders had the right to cause all of the shares of Gramercy Tavern Corp. ("GTC") to be exchanged for shares of our Class A common stock pursuant to a tax-free reorganization. In August 2019, the Meyer Stockholders exercised their right with respect to GTC (the "GTC Merger"). To effect the GTC Merger, a newly-formed wholly-owned subsidiary of Shake Shack Inc. merged with and into GTC, with GTC as the surviving entity, which was then merged with and into Shake Shack Inc. Prior to the GTC Merger, GTC owned 2,690,263 LLC Interests and an equivalent number of shares of our Class B common stock. The stockholders of GTC, received on a one-for-one basis, 2,690,263 shares of Class A common stock based upon the amount of shares of GTC held by the stockholders; all of the shares of Class B common stock held by GTC were cancelled; and all of the LLC Interests held by GTC were transferred to us. NOTE 12: NON-CONTROLLING INTERESTS We are the sole managing member of SSE Holdings and, as a result, consolidate the financial results of SSE Holdings. We report a non-controlling interest representing the economic interest in SSE Holdings held by the other members of SSE Holdings. The Third Amended and Restated Limited Liability Company Agreement, as further amended, (the "LLC Agreement") of SSE Holdings provides that holders of LLC Interests may, from time to time, require SSE Holdings to redeem all or a portion of their LLC Interests for newly-issued shares of Class A common stock on a one -for-one basis. In connection with any redemption or exchange, we will receive a corresponding number of LLC Interests, increasing our total ownership interest in SSE Shake Shack Inc. Form 10-K | 106 Holdings. Changes in our ownership interest in SSE Holdings while we retain a controlling interest in SSE Holdings will be accounted for as equity transactions. As such, future redemptions or direct exchanges of LLC Interests in SSE Holdings by the other members of SSE Holdings will result in a change in ownership and reduce the amount recorded as non-controlling interest and increase additional paid-in capital. The following table summarizes the ownership interest in SSE Holdings as of December 29, 2021 and December 30, 2020: 2021 2020 LLC Interests Ownership % LLC Interests Ownership % Number of LLC Interests held by Shake Shack Inc. 39,142,397 93.1 % 38,717,790 92.9 % Number of LLC Interests held by non-controlling interest holders 2,921,587 6.9 % 2,951,188 7.1 % Total LLC Interests outstanding 42,063,984 100.0 % 41,668,978 100.0 % The weighted average ownership percentages for the applicable reporting periods are used to attribute Net income (loss) and other comprehensive income (loss) to Shake Shack Inc. and the non-controlling interest holders. The non-controlling interest holders' weighted average ownership percentage for fiscal 2021 and fiscal 2020 was 7.0 % and 7.7 %, respectively. During fiscal 2021, an aggregate of 29,601 LLC Interests were redeemed by the non-controlling interest holders for newly-issued shares of Class A common stock, and we received 29,601 LLC Interests, increasing our total ownership interest in SSE Holdings to 93.1 %. During fiscal 2020, an aggregate of 194,009 LLC Interests were redeemed by the non-controlling interest holders for newly-issued shares of Class A common stock, and we received 194,009 LLC Interests, increasing our total ownership interest in SSE Holdings to 92.9 %. The following table summarizes the effects of changes in ownership in SSE Holdings on our equity during fiscal 2021, fiscal 2020 and fiscal 2019. 2021 2020 2019 Net income (loss) attributable to Shake Shack Inc. $ ( 8,655 ) $ ( 42,158 ) $ 19,827 Other comprehensive income (loss): Unrealized gain (loss) on foreign currency translation adjustment ( 2 ) 1 2 Transfers (to) from non-controlling interests: Increase in additional paid-in capital as a result of the redemption of LLC Interests 33 1,723 11,934 Increase in additional paid-in-capital as a result of the GTC Merger — — 19,218 Increase in additional paid-in capital as a result of activity under the stock compensation plan and the related income tax effect 1,829 5,909 4,517 Increase in additional paid-in-capital as a result of the issuance of Class A common stock sold in equity offerings — 135,718 — Total effect of changes in ownership interest on equity attributable to Shake Shack Inc. $ ( 6,795 ) $ 101,193 $ 55,498 We received an aggregate of 395,006 and 456,942 LLC Interests in connection with the activity under our stock compensation plans during fiscal 2021 and fiscal 2020, respectively. Shake Shack Inc. Form 10-K | 107 NOTE 13: EQUITY-BASED COMPENSATION A summary of equity-based compensation expense recognized during fiscal 2021, fiscal 2020 and fiscal 2019 is as follows: 2021 2020 2019 Stock options $ 3 $ 322 $ 2,626 Performance stock units 3,471 1,309 3,035 Restricted stock units 5,229 3,929 1,844 Equity-based compensation expense $ 8,703 $ 5,560 $ 7,505 Total income tax benefit recognized related to equity-based compensation $ 223 $ 204 $ 188 Equity-based compensation expense is recorded in General and administrative expenses and Labor and related expenses on the Consolidated Statements of Income (Loss) during fiscal 2021, fiscal 2020 and fiscal 2019 as follows: 2021 2020 2019 General and administrative expenses $ 7,907 $ 5,039 $ 7,189 Labor and related expenses 796 521 316 Equity-based compensation expense $ 8,703 $ 5,560 $ 7,505 We capitalized $ 100 , $ 40 and $ 195 of equity-based compensation expense associated with the construction cost of our Shacks and our enterprise-wide system upgrade, Project Concrete, during fiscal 2021, fiscal 2020 and fiscal 2019, respectively. Stock Options In January 2015, we adopted the 2015 Incentive Award Plan (the "2015 Plan") under which we may grant up to 5,865,522 stock options and other equity-based awards to team members, directors and officers. The stock options granted generally vest equally over periods ranging from one to five years. We do not use cash to settle any of our equity-based awards, and we issue new shares of Class A common stock upon the exercise of stock options. The fair value of stock option awards was determined on the grant date using the Black-Scholes valuation model based on the following weighted average assumptions: 2021 2020 2019 Expected term (years) (1) 7.5 7.5 7.5 Expected volatility (2) 45.4 % 42.3 % 42.2 % Risk-free interest rate (3) 1.4 % 0.7 % 2.4 % Dividend yield (4) — % — % — % (1) Expected term represents the estimated period of time until an award is exercised and was determined using the simplified method. (2) Expected volatility is based on the historical volatility of a selected peer group over a period equivalent to the expected term. (3) The risk-free rate is an interpolation of yields on U.S. Treasury securities with maturities equivalent to the expected term. (4) We have assumed a dividend yield of zero as we have no plans to declare dividends in the foreseeable future. Shake Shack Inc. Form 10-K | 108 A summary of stock option activity for fiscal year 2021 is as follows: Stock Options Weighted Average Exercise Price Aggregate Intrinsic Value Weighted Average Remaining Contractual Life (Years) Outstanding as of December 30, 2020 489,024 $ 21.83 Granted 1,698 119.39 Exercised ( 323,512 ) 21.19 Forfeited ( 12,979 ) 51.15 Outstanding as of December 29, 2021 154,231 $ 21.77 $ 7,456 3.2 Options vested and exercisable as of December 29, 2021 154,231 $ 21.77 $ 7,456 3.2 Options expected to vest as of December 29, 2021 — $ — $ — — As of December 29, 2021, total unrecognized compensation expense related to unvested stock options was nil. Cash received from stock options exercised was $ 6,731 and the cash tax benefit realized for the tax deductions from these option exercises was $ 365 for fiscal 2021. The weighted average grant date fair value of options granted during fiscal 2021, fiscal 2020 and fiscal 2019 was $ 58.92 , $ 16.21 , $ 26.42 , respectively. The total intrinsic value of stock options exercised during fiscal 2021, fiscal 2020 and fiscal 2019 was $ 30,533 , $ 25,824 and $ 16,905 , respectively. The total fair value of stock options vested during fiscal 2021, fiscal 2020 and fiscal 2019 was $ 60 , $ 2,674 and $ 2,950 , respectively. The following table summarizes information about stock options outstanding and exercisable as December 29, 2021: Options Outstanding Options Exercisable Number Outstanding at December 29, 2021 Weighted Average Remaining Contractual Life (Years) Weighted Average Exercise Price Number Exercisable at December 29, 2021 Weighted Average Remaining Contractual Life (Years) Weighted Average Exercise Price Exercise Price $ 21.00 145,712 3.1 $ 21.00 145,712 3.1 $ 21.00 $ 34.62 7,411 4.4 $ 34.62 7,411 4.4 $ 34.62 $ 36.41 1,108 4.9 $ 36.41 1,108 4.9 $ 36.41 Performance Stock Units Under the 2015 Plan, we may grant performance stock units and other types of performance-based equity awards that vest based on the outcome of certain performance criteria that are established and approved by the Compensation Committee of the Board of Directors. The actual number of equity awards earned is based on the level of performance achieved over a predetermined performance period, relative to established financial goals, none of which are considered market conditions. For performance stock units granted during fiscal 2021, the amount of awards that can be earned ranges from 0 % to 200 % of the number of performance stock units granted, based on the achievement of approved financial goals over a one -year or three -year performance period. In addition to the performance conditions, performance stock units are also subject to a requisite service period and the awards vest ratably over four years or cliff vest over three years . The fair value of performance stock units is determined based on the closing market price of our Class A common stock on the date of grant. Compensation expense related to the performance stock units is recognized using either a graded-vesting attribution method or straight-line over the vesting period based on the most probable outcome of the performance conditions. Shake Shack Inc. Form 10-K | 109 A summary of performance stock unit activity for fiscal year 2021, is as follows: Performance Stock Units Weighted Average Grant Date Fair Value Outstanding as of December 30, 2020 137,221 $ 55.67 Granted 165,263 98.87 Performance achievement (1) ( 74,137 ) 57.20 Vested ( 29,892 ) 55.24 Forfeited ( 12,296 ) 103.83 Outstanding as of December 29, 2021 186,159 $ 90.31 (1) Represents the incremental awards earned and/or awards forfeited based on the achievement of performance conditions . As of December 29, 2021, there were 186,159 performance stock units outstanding, of which none were vested. The weighted average grant date fair value of share awards granted during fiscal 2021, fiscal 2020 and fiscal 2019 were $ 98.87 , $ 57.20 , and $ 52.47 , respectively. The total fair value of awards that vested during fiscal 2021, fiscal 2020 and fiscal 2019 was $ 3,083 , $ 2,730 and $ 3,456 , respectively. As of December 29, 2021, total unrecognized compensation expense related to unvested performance stock units was $ 12,058 , which is expected to be recognized over a weighted average period of 2.8 years. Restricted Stock Units Under the 2015 Plan, we may grant restricted stock units to team members, directors and officers. The restricted stock units granted generally vest equally over periods ranging from one to five years. The fair value of restricted stock units is determined based on the closing market price of our Class A common stock on the date of grant. Compensation expense related to the restricted stock units is recognized using a straight-line attribution method over the vesting period. A summary of restricted stock unit activity for fiscal year 2021 is as follows: Restricted Stock Units Weighted Average Grant Date Fair Value Outstanding as of December 30, 2020 258,493 $ 54.33 Granted 127,013 117.39 Vested ( 75,312 ) 55.23 Forfeited ( 78,765 ) 66.87 Outstanding as of December 29, 2021 231,429 $ 84.37 As of December 29, 2021, there were 231,429 restricted stock units outstanding, of which none were vested. The weighted average grant date fair value of share awards granted during fiscal 2021, fiscal 2020 and fiscal 2019 were $ 117.39 , $ 57.41 , and $ 52.51 , respectively. The total fair value of shares vested during fiscal 2021, fiscal 2020 and fiscal 2019 was $ 8,385 , $ 2,463 and $ 947 , respectively. As of December 29, 2021, total unrecognized compensation expense related to unvested restricted stock units was $ 14,984 , which is expected to be recognized over a weighted average period of 2.9 years. NOTE 14: INCOME TAXES We are the sole managing member of SSE Holdings, and as a result, consolidate the financial results of SSE Holdings. SSE Holdings is treated as a partnership for U.S. federal and most applicable state and local income tax purposes. As a partnership, SSE Holdings is not subject to U.S. federal and certain state and local income taxes. Any taxable income or loss generated by Shake Shack Inc. Form 10-K | 110 SSE Holdings is passed through to and included in the taxable income or loss of its members, including us, on a pro rata basis. We are subject to U.S. federal income taxes, in addition to state and local income taxes with respect to our allocable share of any taxable income or loss of SSE Holdings, as well as any stand-alone income or loss generated by Shake Shack Inc. We are also subject to withholding taxes in foreign jurisdictions. Income Tax Expense The components of Income (loss) before income taxes are follows: 2021 2020 2019 Domestic $ ( 38,833 ) $ ( 59,873 ) $ 11,797 Foreign 21,498 14,396 15,717 Income (loss) before income taxes $ ( 17,335 ) $ ( 45,477 ) $ 27,514 The components of Income tax expense (benefit) are as follows: 2021 2020 2019 Current income taxes: Federal $ — $ — $ 2,984 State and local 275 190 4,283 Foreign 2,880 1,223 2,183 Total current income taxes 3,155 1,413 9,450 Deferred income taxes: Federal ( 9,798 ) ( 12,638 ) ( 5,643 ) State and local ( 581 ) 11,282 ( 421 ) Total deferred income taxes ( 10,379 ) ( 1,356 ) ( 6,064 ) Income tax expense (benefit) $ ( 7,224 ) $ 57 $ 3,386 Reconciliations of Income tax expense (benefit) computed at the U.S. federal statutory income tax rate to the recognized Income tax expense (benefit) and the U.S. statutory income tax rate to our effective tax rates are as follows: 2021 2020 2019 Expected U.S. federal income taxes at statutory rate $ ( 3,641 ) 21.0 % $ ( 9,550 ) 21.0 % $ 5,778 21.0 % State and local income taxes, net of federal benefit 862 ( 5.0 ) % 5,776 ( 12.7 ) % 3,924 14.2 % Foreign withholding taxes 2,880 ( 16.6 ) % 1,223 ( 2.7 ) % 2,183 7.9 % Tax credits ( 3,655 ) 21.1 % ( 1,533 ) 3.4 % ( 3,007 ) ( 10.9 ) % Non-controlling interest 1,327 ( 7.7 ) % 537 ( 1.2 ) % ( 1,405 ) ( 5.1 ) % Remeasurement of deferred tax assets in connection with other tax rate changes 1,034 ( 6.0 ) % 5,433 ( 11.9 ) % 208 0.8 % Change in valuation allowance ( 6,059 ) 35.0 % ( 2,264 ) 5.0 % ( 4,669 ) ( 17.0 ) % Other 28 ( 0.2 ) % 435 ( 1.0 ) % 374 1.4 % Income tax expense (benefit) $ ( 7,224 ) 41.7 % $ 57 ( 0.1 ) % $ 3,386 12.3 % Our effective income tax rates for fiscal 2021 , fiscal 2020 and fiscal 2019 were 41.7 %, ( 0.1 )% and 12.3 %, respectively. The increase in our effective income tax rate from fiscal 2020 to fiscal 2021 was primarily driven by the increase in the income tax benefit from the release of the valuation allowance and higher tax credits, partially offset by higher foreign tax expense. The decrease in our effective income tax rate from fiscal 2019 to fiscal 2020 was primarily driven by lower tax rates for foreign and state taxes mainly in connection with lower pre-tax book income and remeasurement of deferred tax assets, partially offset by lower tax credit and an increase in valuation allowance. Shake Shack Inc. Form 10-K | 111 Deferred Tax Assets and Liabilities The components of deferred tax assets and liabilities are as follows: December 29 2021 December 30 2020 Deferred tax assets: Investment in partnership $ 116,639 $ 139,379 Tax Receivable Agreement 63,983 63,853 Operating lease liability 3,873 3,470 Financing lease liability 63 51 Deferred revenue 150 141 Equity-based compensation 263 331 Net operating loss carryforwards 108,207 75,522 Tax credits 13,297 9,610 Other assets 569 457 Total gross deferred tax assets 307,044 292,814 Valuation allowance ( 5,173 ) ( 2,656 ) Total deferred tax assets, net of valuation allowance 301,871 290,158 Deferred tax liabilities: Property and equipment ( 21 ) ( 300 ) Operating lease right-of-use asset ( 3,121 ) ( 2,802 ) Financing lease right-of-use asset ( 61 ) ( 49 ) Total gross deferred tax liabilities ( 3,203 ) ( 3,151 ) Net deferred tax assets $ 298,668 $ 287,007 As of December 29, 2021, our federal and state net operating loss carryforwards for income tax purposes were $ 448,833 and $ 237,691 . If not utilized, $ 396,966 of our federal net operating losses can be carried forward indefinitely, and the remainder will begin to expire in 2035. If not utilized $ 41,271 of our state net operating loss carryforwards can be carried forward indefinitely, and the remainder will begin to expire in 2023. As of December 29, 2021, we had federal tax credit carryforwards of $ 12,689 which will begin to expire in 2025 and gross state tax credits of $ 770 which will begin to expire in 2022. As described in Note 11, Stockholders' Equity, we acquired an aggregate of 424,607 LLC Interests during fiscal 2021 through redemptions of LLC Interests and activity under stock-based compensation plans. We recognized a deferred tax asset in the amount of $ 9,609 associated with the basis difference in our investment in SSE Holdings upon acquiring these LLC Interests. As of December 29, 2021, the total deferred tax asset related to the basis difference in our investment in SSE Holdings was $ 116,639 . However, a portion of the total basis difference will only reverse upon the eventual sale of our interest in SSE Holdings, which we expect would result in a capital loss. During fiscal 2021, the total valuation allowance established against this deferred tax asset to which it relates was $ 361 . During fiscal 2021, we also recognized other income of $2, related to additional tax basis changes generated from expected future payments under the Tax Receivable Agreement and related deductions for imputed interest on such payments. Refer to "Tax Receivable Agreement", herein for additional information. We evaluate the realizability of our deferred tax assets on a quarterly basis and establish valuation allowances when it is more likely than not that all or a portion of a deferred tax asset may not be realized. As of December 29, 2021, we concluded, based on the weight of all available positive and negative evidence, that all of our deferred tax assets (except for those deferred tax assets described above relating to basis differences that expected to result in a capital loss upon the eventual sale of our interest in SSE Holdings) are more likely than not to be realized, except for tax credits related to New York City UBT and certain foreign Shake Shack Inc. Form 10-K | 112 tax credits no longer expected to be utilized before expiration. As such, a valuation allowance in the amount of $ 5,173 was recognized. The net change in valuation allowance for fiscal 2021 was an increase of $ 2,517 . See "Schedule II " for details. Uncertain Tax Positions There were no reserves for uncertain tax positions as of December 29, 2021 and December 30, 2020. Shake Shack Inc. was formed in September 2014 and did not engage in any operations prior to the IPO and Organizational Transactions. The statute of limitations remains open for tax years beginning in 2015 for Shake Shack Inc. Additionally, although SSE Holdings is treated as a partnership for U.S. federal and state income taxes purposes, it is still required to file an annual U.S. Return of Partnership Income, which is subject to examination by the Internal Revenue Service ("IRS"). The statute of limitations has expired for tax years through 2017 for SSE Holdings. Tax Receivable Agreement Pursuant to our election under Section 754 of the Internal Revenue Code (the "Code"), we expect to obtain an increase in our share of the tax basis in the net assets of SSE Holdings when LLC Interests are redeemed or exchanged by the non-controlling interest holders and other qualifying transactions. We plan to make an election under Section 754 of Code for each taxable year in which a redemption or exchange of LLC Interest occurs. We intend to treat any redemptions and exchanges of LLC Interests by the non-controlling interest holders as direct purchases of LLC Interests for U.S. federal income tax purposes. These increases in tax basis may reduce the amounts that we would otherwise pay in the future to various tax authorities. They may also decrease gains (or increase losses) on future dispositions of certain capital assets to the extent tax basis is allocated to those capital assets. On February 4, 2015, we entered into a tax receivable agreement with the then-existing non-controlling interest holders (the "Tax Receivable Agreement") that provides for the payment by us to the non-controlling interest holders of 85 % of the amount of any tax benefits that we actually realize, or in some cases are deemed to realize, as a result of (i) increases in our share of the tax basis in the net assets of SSE Holdings resulting from any redemptions or exchanges of LLC Interests, (ii) tax basis increases attributable to payments made under the Tax Receivable Agreement, and (iii) deductions attributable to imputed interest pursuant to the Tax Receivable Agreement (the "TRA Payments"). We expect to benefit from the remaining 15 % of any tax benefits that we may actually realize. The TRA Payments are not conditioned upon any continued ownership interest in SSE Holdings or us. The rights of each non-controlling interest holder under the Tax Receivable Agreement are assignable to transferees of its LLC Interests. During fiscal 2021, we acquired an aggregate of 29,601 LLC Interests in connection with the redemption of LLC Interests that resulted in an increase in the tax basis of our investment in SSE Holdings subject to the provisions of the Tax Receivable Agreement. We recognized an additional liability in the amount of $ 1,093 for the TRA Payments due to the redeeming members, representing 85 % of the aggregate tax benefits we expect to realize from the tax basis increases related to the redemption of LLC Interests, after concluding it was probable that such TRA Payments would be paid based on our estimates of future taxable income. During fiscal 2021, inclusive of interest, no payments were made to the members of SSE Holdings pursuant to the Tax Receivable Agreement. Payments of $ 6,643 were made to members of SSE Holdings pursuant to the Tax Receivable Agreement during fiscal 2020. As of December 29, 2021, the total amount of TRA Payments due under the Tax Receivable Agreement was $ 234,045 , of which no amount was included in Other current liabilities on the Consolidated Balance Sheet. Refer to Note 17, Commitments and Contingencies, for additional information relating to our liabilities under the Tax Receivable Agreement. CARES Act On March 27, 2020, the U.S. government enacted the CARES Act to provide certain relief as a result of the COVID-19 pandemic. The CARES Act provides tax relief, along with other stimulus measures, including a retroactive technical correction of prior tax legislation for tax depreciation of certain qualified improvement property, among other changes. The CARES Act allows for a five-year carryback of federal NOLs generated in 2018 through 2020 and eliminates the 80% taxable income limitation by allowing corporate entities to fully utilize NOL carryforwards to offset taxable income in 2018 through 2020. Shake Shack Inc. Form 10-K | 113 Subsequent to the second quarter of 2020, we began deferring the employer-paid portion of social security taxes; 50% of this was recognized at the end of 2021 required by the CARES Act. NOTE 15: EARNINGS (LOSS) PER SHARE Basic earnings (loss) per share of Class A common stock is computed by dividing Net income (loss) attributable to Shake Shack Inc. by the weighted average number of shares of Class A common stock outstanding during the period. Diluted earnings (loss) per share of Class A common stock is computed by dividing Net income (loss) attributable to Shake Shack Inc. by the weighted average number of shares of Class A common stock outstanding adjusted to give effect to potentially dilutive securities. The following table sets forth reconciliations of the numerators and denominators used to compute basic and diluted earnings (loss) per share of Class A common stock (in thousands, except per share amounts) for fiscal 2021, fiscal 2020 and fiscal 2019. 2021 2020 2019 Numerator: Net income (loss) attributable to Shake Shack Inc.—basic $ ( 8,655 ) $ ( 42,158 ) $ 19,827 Net income (loss) attributable to Shake Shack Inc.—diluted $ ( 8,655 ) $ ( 42,158 ) $ 19,827 Denominator: Weighted average shares of Class A common stock outstanding—basic 39,085 37,129 31,381 Effect of dilutive securities: Stock options — — 743 Performance stock units — — 70 Restricted stock units — — 57 Weighted average shares of Class A common stock outstanding—diluted 39,085 37,129 32,251 Earnings (loss) per share of Class A common stock—basic $ ( 0.22 ) $ ( 1.14 ) $ 0.63 Earnings (loss) per share of Class A common stock—diluted $ ( 0.22 ) $ ( 1.14 ) $ 0.61 Shares of Class B common stock do not share in the earnings or losses of Shake Shack and are therefore not participating securities. As such, separate presentation of basic and diluted earnings (loss) per share of Class B common stock under the two-class method has not been presented. However, shares of Class B common stock outstanding for the period are considered potentially dilutive shares of Class A common stock under application of the if-converted method and are included in the computation of diluted earnings (loss) per share, except when the effect would be anti-dilutive. The effect of potential share settlement of the Convertible Notes outstanding for the period is included as potentially dilutive shares of Class A common stock under application of the if-converted method in the computation of diluted earnings (loss) per share, except when the effect would be anti-dilutive. Refer to Note 8, Debt, for additional information. Shake Shack Inc. Form 10-K | 114 The following table presents potentially dilutive securities, as of the end of the period, excluded from the computations of diluted earnings (loss) per share of Class A common stock for fiscal 2021, fiscal 2020 and fiscal 2019. 2021 2020 2019 Stock options 154,231 (1) 489,024 (1) 946 (2) Performance stock units 186,159 (1) 137,221 (1) 51,197 (3) Restricted stock units 231,429 (1) 258,493 (1) — Shares of Class B common stock 2,921,587 (1) 2,951,188 (1) 3,145,197 (1) Convertible notes 1,466,975 (1) — — (1) Number of securities outstanding at the end of the period that were excluded from the computation of diluted earnings (loss) per share of Class A common stock because the effect would have been anti-dilutive. (2) Weighted average number of securities excluded from the computation of diluted earnings per share of Class A common stock because the exercise price of the stock options exceeded the average market price of our Class A common stock during the period ("out-of-the-money"). (3) Weighted average number of securities excluded from the computation of diluted earnings per share of Class A common stock because the performance conditions associated with these awards were not met for a portion of the fiscal year. NOTE 16: SUPPLEMENTAL CASH FLOW INFORMATION The following table sets forth supplemental cash flow information for fiscal 2021, fiscal 2020 and fiscal 2019: 2021 2020 2019 Cash paid for: Income taxes, net of refunds $ 2,808 $ 1,612 $ 3,044 Interest, net of amounts capitalized 252 643 255 Non-cash investing activities: Accrued purchases of property and equipment 22,241 15,515 12,620 Capitalized equity-based compensation 66 37 101 Non-cash financing activities: Establishment of liabilities under tax receivable agreement 1,093 4,024 32,065 Class A common stock issued in connection with the redemption of LLC Interests — — 2 Class A common stock issued in connection with the GTC Merger — — 3 Cancellation of Class B common stock in connection with the redemption of LLC Interests — — ( 2 ) Cancellation of Class B common stock in connection with the GTC Merger — — ( 3 ) NOTE 17: COMMITMENTS AND CONTINGENCIES Lease Commitments We are obligated under various operating leases for Shacks and our home office space, expiring in various years through 2038. Under certain of these leases, we are liable for contingent rent based on a percentage of sales in excess of specified thresholds and are responsible for our proportionate share of real estate taxes, common area maintenance costs and other occupancy costs. Refer to Note 9, Leases, for additional information. Shake Shack Inc. Form 10-K | 115 As security under the terms of one of our leases, we are obligated under a letter of credit totaling $ 130 as of December 29, 2021, which expires in February 2026. Additionally, in September 2017, we entered into a letter of credit in conjunction with our new home office lease in the amount of $ 603 , which expires in August 2022 and renews automatically for one-year periods through January 31, 2034. Purchase Commitments Purchase obligations include legally binding contracts, including commitments for the purchase, construction or remodeling of real estate and facilities, firm minimum commitments for inventory purchases, equipment purchases, marketing-related contracts, software acquisition/license commitments and service contracts. These obligations are generally short-term in nature and are recorded as liabilities when the related goods are received or services rendered. We also enter into long-term, exclusive contracts with certain vendors to supply us with food, beverages and paper goods, obligating us to purchase specified quantities. Legal Contingencies We are involved with ongoing regulatory and private matters involving New York City's predictive scheduling laws. We intend to defend against these claims and it is not possible at this time to reasonably estimate the outcome of or any potential liability from these matters. No amounts have been accrued as of December 29, 2021 and December 30, 2020. In March 2020, a claim was filed against Shake Shack alleging certain violations of the Fair Labor Standards Act. At a mediation between the parties, we agreed to settle the matter with the plaintiff and other team members who elect to participate in the settlement for $ 560 . We initially accrued for this matter during the thirteen weeks ended March 31, 2021 with an additional accrual established during fiscal 2021, and paid in full as of December 29, 2021. In February 2018, a claim was filed against Shake Shack in California state court alleging certain violations of the California Labor Code. At a mediation between the parties, we agreed to settle the matter with the plaintiff and all other California team members who elected to participate in the settlement for $ 1,200 . We accrued for this matter during the fiscal 2018, and paid in full as of December 29, 2021. We are subject to various legal proceedings, claims and liabilities, such as employment-related claims and slip and fall cases, which arise in the ordinary course of business and are generally covered by insurance. As of December 29, 2021, the amount of the ultimate liability with respect to these matters was not material. Liabilities under Tax Receivable Agreement As described in Note 14, Income Taxes, we are a party to the Tax Receivable Agreement under which we are contractually committed to pay the non-controlling interest holders 85 % of the amount of any tax benefits that we actually realize, or in some cases are deemed to realize, as a result of certain transactions. We are not obligated to make any payments under the Tax Receivable Agreement until the tax benefits associated the transaction that gave rise to the payment are realized. Amounts payable under the Tax Receivable Agreement are contingent upon, among other things, (i) generation of future taxable income over the term of the Tax Receivable Agreement and (ii) future changes in tax laws. If we do not generate sufficient taxable income in the aggregate over the term of the Tax Receivable Agreement to utilize the tax benefits, then we would not be required to make the related TRA Payments. As of December 29, 2021, we recognized $ 234,045 of liabilities relating to our obligations under the Tax Receivable Agreement, after concluding that it was probable that we would have sufficient future taxable income to utilize the related tax benefits. There were no transactions subject to the Tax Receivable Agreement for which we did not recognize the related liability, as we concluded that we would have sufficient future taxable income to utilize all of the related tax benefits generated by all transactions that occurred in fiscal 2021. NOTE 18: RELATED PARTY TRANSACTIONS Union Square Hospitality Group The Chairman of our board of directors serves as the Chief Executive Officer of Union Square Hospitality Group, LLC. As a Shake Shack Inc. Form 10-K | 116 result, Union Square Hospitality Group, LLC and its subsidiaries, set forth below, are considered related parties. Hudson Yards Sports and Entertainment In fiscal 2011, we entered into a Master License Agreement (as amended, "MLA") with Hudson Yards Sports and Entertainment LLC ("HYSE") to operate Shake Shack branded limited menu concession stands in sports and entertainment venues within the United States. In February 2019, the agreement was assigned to Hudson Yards Catering ("HYC"), the parent of HYSE. The agreement expires in January 2027 and includes five consecutive five-year renewal options at HYC's option. As consideration for these rights, HYC pays us a license fee based on a percentage of net food sales, as defined in the MLA. HYC also pays us a percentage of profits on sales of branded beverages, as defined in the MLA. Classification 2021 2020 2019 Amounts received from HYC Licensing revenue $ 320 $ 67 $ 571 Classification December 29 2021 December 30 2020 Amounts due from HYC Accounts receivable, net $ 90 $ 8 Madison Square Park Conservancy The Chairman of our Board of Directors serves as a director of the Madison Square Park Conservancy ("MSP Conservancy"), with which we have a license agreement and pay license fees to operate our Madison Square Park Shack. No amounts were due to MSP Conservancy as of both December 29, 2021 and December 30, 2020. Classification 2021 2020 2019 Amounts paid to MSP Conservancy Occupancy and related expenses $ 863 $ 846 $ 964 Olo, Inc. The Chairman of our Board of Directors serves as a director of Olo, Inc. (formerly known as "Mobo Systems, Inc."), a platform we use in connection with our mobile ordering application. Classification 2021 2020 2019 Amounts paid to Olo, Inc. Other operating expenses $ 406 $ 242 $ 170 Classification December 29 2021 December 30 2020 Amounts due to Olo, Inc. Accounts payable $ 33 $ — Block, Inc. Our Chief Executive Officer is a member of the board of directors of Block, Inc. (formerly known as "Square, Inc."). We currently use certain point-of-sale applications, payment processing services, hardware and other enterprise platform services in connection with the processing of a limited amount of sales at certain of our locations, sales for certain off-site events and in connection with our kiosk technology. Classification 2021 2020 2019 Amounts paid to Block, Inc. Other operating expenses $ 2,844 $ 1,697 $ 1,692 Shake Shack Inc. Form 10-K | 117 Classification December 29 2021 December 30 2020 Amounts due to Block, Inc. Accounts payable $ 52 $ — USHG Acquisition Corp. Our Chief Executive Officer has been appointed to the board of directors of USHG Acquisition Corp. in which the Chairman of our Board of Directors serves as the chairman of the board of directors of USHG Acquisition Corp. USHG Acquisition Corp. is a newly organized blank check company incorporated for the purpose of effecting a merger, share exchange, asset acquisition, share purchase, reorganization or similar business combination with one or more businesses or entities. No amounts were due to or due from USHG Acquisition Corp as of both December 29, 2021 and December 30, 2020. No amounts were paid to USHG Acquisition Corp during fiscal 2021, fiscal 2020 and fiscal 2019. Tax Receivable Agreement As described in Note 14, Income Taxes, we entered into a Tax Receivable Agreement with certain members of SSE Holdings that provides for the payment by us of 85 % of the amount of tax benefits, if any, that Shake Shack actually realizes or in some cases is deemed to realize as a result of certain transactions. Classification 2021 2020 2019 Amounts paid to members (inclusive of interest) Other current liabilities $ — $ 6,643 $ 707 Classification December 29 2021 December 30 2020 Amounts due under the Tax Receivable Agreement Other current liabilities Liabilities under Tax Receivable Agreement, net of current portion $ 234,045 $ 232,954 Distributions to Members of SSE Holdings Under the terms of the SSE Holdings LLC Agreement, SSE Holdings is obligated to make tax distributions to its members. No tax distributions were payable to non-controlling interest holders as of December 29, 2021 and December 30, 2020. Classification 2021 2020 2019 Amounts paid to non-controlling interest holders Non-controlling interests $ 968 $ 478 $ 1,708 Share Our Strength The Chairman of our Board of Directors served as a director of Share Our Strength in fiscal 2019, for which Shake Shack held the "Great American Shake Sale" to raise money and awareness for childhood hunger. During the Great American Shake Sale, we encouraged guests to donate money to Share Our Strength's No Kid Hungry campaign in exchange for a coupon for a free shake. All of the guest donations we collected went directly to Share Our Strength. No amounts were due to Share Our Strength as of both December 29, 2021 and December 30, 2020. Classification 2021 2020 2019 Amounts raised through donations — $ — $ — $ 190 Costs incurred for free shakes redeemed General and administrative expenses $ — $ — $ 30 Shake Shack Inc. Form 10-K | 118 Gramercy Tavern Corp. Merger Pursuant to a Stockholders Agreement, dated as of February 4, 2015, as amended, by and among Daniel H. Meyer, the Daniel H. Meyer 2012 Gift Trust dtd 10/31/12 (the "Gift Trust"), other affiliates (collectively, the "Meyer Stockholders") and other parties thereto, the Meyer Stockholders had the right to cause all of the shares of Gramercy Tavern Corp. ("GTC") to be exchanged for shares of our Class A common stock pursuant to a tax-free reorganization. In August 2019, the Meyer Stockholders exercised their right with respect to GTC (the "GTC Merger"). To effect the GTC Merger, a newly-formed wholly-owned subsidiary of Shake Shack Inc. merged with and into GTC, with GTC as the surviving entity, which was then merged with and into Shake Shack Inc. The stockholders of GTC received on a one-for-one basis shares of Class A common stock based upon the amount of shares of GTC held by the stockholders; all of the shares of Class B common stock held by GTC were canceled; and all of the LLC Interests held by GTC were transferred to us. Refer to Note 11, Stockholders' Equity, for additional information. NOTE 19: GEOGRAPHIC INFORMATION Revenue by geographic area for fiscal 2021, fiscal 2020 and fiscal 2019 is as follows: 2021 2020 2019 United States $ 718,128 $ 508,292 $ 578,702 Other countries 21,765 14,575 15,817 Total revenue $ 739,893 $ 522,867 $ 594,519 Revenues are shown based on the geographic location of our customers and licensees. Our long-lived assets are primarily located in the United States. Shake Shack Inc. Form 10-K | 119 Schedule I: Condensed Financial Information of Registrant SHAKE SHACK INC. CONDENSED BALANCE SHEETS (PARENT COMPANY ONLY) (in thousands, except share and per share amounts) December 29 2021 December 30 2020 ASSETS Current assets: Cash $ 7,821 $ 9,469 Prepaid expenses 64 45 Total current assets 7,885 9,514 Due from SSE Holdings 2,035 2,103 Deferred income taxes, net 304,442 285,577 Investment in SSE Holdings 350,794 356,497 Note receivable from SSE Holdings 201,080 — Note receivable - conversion option 16,000 — TOTAL ASSETS $ 882,236 $ 653,691 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable 9 3 Accrued expenses 222 125 Due to SSE Holdings 14,109 13,288 Total current liabilities 14,340 13,416 Long-term debt 243,542 — Liabilities under tax receivable agreement, net of current portion 234,045 232,954 Total liabilities 491,927 246,370 Commitments and contingencies Stockholders' equity: Preferred stock, no par value—10,000,000 shares authorized; none issued and outstanding as of December 29, 2021 and December 30, 2020. — — Class A common stock, $0.001 par value—200,000,000 shares authorized; 39,142,397 and 38,717,790 shares issued and outstanding as of December 29, 2021 and December 30, 2020, respectively. 39 39 Class B common stock, $0.001 par value—35,000,000 shares authorized; 2,921,587 and 2,951,188 shares issued and outstanding as of December 29, 2021 and December 30, 2020, respectively. 3 3 Additional paid-in capital 405,940 395,067 Retained earnings (accumulated deficit) ( 15,674 ) 12,209 Accumulated other comprehensive income 1 3 Total stockholders' equity 390,309 407,321 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 882,236 $ 653,691 See accompanying Notes to Condensed Financial Statements. Shake Shack Inc. Form 10-K | 120 Schedule I: Condensed Financial Information of Registrant (continued) SHAKE SHACK INC. CONDENSED STATEMENTS OF INCOME (LOSS) (PARENT COMPANY ONLY) (in thousands) Fiscal Year Ended December 29 2021 December 30 2020 December 25 2019 Intercompany revenue $ 2,878 $ 1,560 $ 2,018 TOTAL REVENUE 2,878 1,560 2,018 General and administrative expenses 2,491 2,179 1,683 TOTAL EXPENSES 2,491 2,179 1,683 INCOME (LOSS) FROM OPERATIONS 387 ( 619 ) 335 Equity in net income (loss) from SSE Holdings ( 19,393 ) ( 41,152 ) 19,831 Other income (expense), net ( 25,593 ) ( 1,147 ) 808 Interest expense ( 867 ) — ( 150 ) INCOME (LOSS) BEFORE INCOME TAXES ( 45,466 ) ( 42,918 ) 20,824 Income tax expense (benefit) ( 17,583 ) ( 760 ) 997 NET INCOME (LOSS) $ ( 27,883 ) $ ( 42,158 ) $ 19,827 See accompanying Notes to Condensed Financial Statements. Shake Shack Inc. Form 10-K | 121 Schedule I: Condensed Financial Information of Registrant (continued) SHAKE SHACK INC. CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (PARENT COMPANY ONLY) (in thousands) Fiscal Year Ended December 29 2021 December 30 2020 December 25 2019 Net income (loss) $ ( 27,883 ) $ ( 42,158 ) $ 19,827 Other comprehensive income, net of tax (1) : Change in foreign currency translation adjustment ( 2 ) 1 — Change in net unrealized holding gains — — — Net change ( 2 ) 1 — OTHER COMPREHENSIVE INCOME (LOSS) ( 2 ) 1 — COMPREHENSIVE INCOME (LOSS) $ ( 27,885 ) $ ( 42,157 ) $ 19,827 (1) Net of tax benefit of $ 0 for fiscal years ended December 29, 2021, December 30, 2020 and December 25, 2019. See accompanying Notes to Condensed Financial Statements. Shake Shack Inc. Form 10-K | 122 Schedule I: Condensed Financial Information of Registrant (continued) SHAKE SHACK INC. CONDENSED STATEMENTS OF CASH FLOWS (PARENT COMPANY ONLY) (in thousands) Fiscal Year Ended December 29 2021 December 30 2020 December 25 2019 OPERATING ACTIVITIES Net income (loss) $ ( 27,883 ) $ ( 42,158 ) $ 19,827 Adjustments to reconcile net income (loss) to net cash used in operating activities: Equity in net (income) loss from SSE Holdings 19,393 41,152 ( 19,831 ) Amortization of debt issuance costs 867 — — Equity-based compensation 526 555 279 Deferred income taxes ( 17,583 ) ( 721 ) ( 5,317 ) Non-cash interest expense — — 151 Unrealized loss on Note receivable - conversion option 32,200 — — Other non-cash (income) expense ( 6,609 ) 1,147 ( 808 ) Changes in operating assets and liabilities: Accounts receivable — 1 ( 1 ) Prepaid expenses and other current assets ( 19 ) 161 ( 71 ) Due to SSE Holdings ( 8,229 ) ( 1,254 ) ( 5,190 ) Accounts payable 6 2 1 Accrued expenses 118 ( 29 ) 6,003 NET CASH USED IN OPERATING ACTIVITIES ( 7,213 ) ( 1,144 ) ( 4,957 ) INVESTING ACTIVITIES Purchases of LLC Interests from SSE Holdings ( 41,875 ) ( 171,180 ) ( 29,481 ) Loan to SSE Holdings ( 243,750 ) — — NET CASH USED IN INVESTING ACTIVITIES ( 285,625 ) ( 171,180 ) ( 29,481 ) FINANCING ACTIVITIES Proceeds from issuance of convertible notes, net of discount 243,750 — — Debt issuance costs ( 1,075 ) — — Proceeds from issuance of Class A common stock sold in equity offerings, net of underwriting discounts, commissions and offering costs — 144,861 — Proceeds from issuance of Class A common stock to SSE Holdings upon settlement of equity awards 41,875 26,319 29,481 Proceeds from stock option exercises 6,640 8,033 9,201 Payments under tax receivable agreement — ( 6,643 ) ( 707 ) NET CASH PROVIDED BY FINANCING ACTIVITIES 291,190 172,570 37,975 INCREASE (DECREASE) IN CASH ( 1,648 ) 246 3,537 CASH AT BEGINNING OF PERIOD 9,469 9,223 5,686 CASH AT END OF PERIOD $ 7,821 $ 9,469 $ 9,223 See accompanying Notes to Condensed Financial Statements. Shake Shack Inc. Form 10-K | 123 Schedule I: Condensed Financial Information of Registrant (continued) SHAKE SHACK INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (PARENT COMPANY ONLY) (in thousands, except share and per share amounts) NOTE 1: ORGANIZATION Shake Shack Inc. (the "Parent Company") was formed on September 23, 2014 as a Delaware corporation and is a holding company with no direct operations. The Parent Company's assets consist primarily of its equity interest in SSE Holdings, LLC ("SSE Holdings") and certain deferred tax assets. The Parent Company's cash inflows are primarily from cash dividends or distributions and other transfers from SSE Holdings. The amounts available to the Parent Company to fulfill cash commitments and pay cash dividends on its common stock are subject to certain restrictions in SSE Holdings' Revolving Credit Facility. Refer to Note 8, Debt, in the accompanying Consolidated Financial Statements, for additional information. NOTE 2: BASIS OF PRESENTATION These Condensed Parent Company financial statements should be read in conjunction with the Consolidated Financial Statements of Shake Shack Inc. and the accompanying notes thereto, included in this Annual Report on Form 10-K. For purposes of these condensed financial statements, the Parent Company's interest in SSE Holdings is recorded based upon its proportionate share of SSE Holdings' net assets (similar to presenting them on the equity method). The Parent Company is the sole managing member of SSE Holdings, and pursuant to the Third Amended and Restated LLC Agreement of SSE Holdings (the “SSE Holdings LLC Agreement”), receives compensation in the form of reimbursements for all costs associated with being a public company and maintaining its existence. Intercompany revenue consists of these reimbursement payments and is recognized when the corresponding expense to which it relates is recognized. Certain intercompany balances presented in these Condensed Parent Company financial statements are eliminated in the Company's Consolidated Financial Statements. The following table presents amounts in the Parent Company's Condensed Balance Sheets that were eliminated in consolidation as of December 29, 2021 and December 30, 2020: December 29 2021 December 30 2020 Due from SSE Holdings $ 2,035 $ 2,103 Deferred income taxes, net 7,234 — Note receivable from SSE Holdings 201,080 — Note receivable - conversion option 16,000 — Due to SSE Holdings 14,109 13,288 Related party amounts that were not eliminated in the Company's Consolidated Financial Statements include the Parent Company's liabilities under the tax receivable agreement, which totaled $ 234,045 and $ 232,954 as of December 29, 2021 and December 30, 2020, respectively. Shake Shack Inc. Form 10-K | 124 The following table presents amounts in the Parent Company's Condensed Statements of Income (Loss) that were eliminated in consolidation during fiscal 2021, fiscal 2020 and fiscal 2019: 2021 2020 2019 Intercompany revenue $ 2,878 $ 1,560 $ 2,018 Equity in net income (loss) from SSE Holdings ( 19,393 ) ( 41,152 ) 19,831 Other income (expense), net ( 25,595 ) — — Income tax expense (benefit) ( 7,234 ) — — NOTE 3: NOTE RECEIVABLE FROM SSE HOLDINGS In March 2021, contemporaneously with the issuance of the Convertible Notes described in Note 4, Debt, below, the Parent Company entered into a $ 250,000 intercompany note with SSE Holdings (the "Intercompany Note"). SSE Holdings promises to pay the Parent Company, for value received, the principal amount with interest of the Intercompany Note in March 2028. The Parent Company 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, held by the Parent Company and the aggregate number of outstanding shares of Class A common stock. The Parent Company's right to convert the Intercompany Note into common units of SSE Holdings (the "Conversion Option") is required to be bifurcated from the Intercompany Note and shown separately on the Parent Company's Condensed Balance Sheets. The Conversion Option is to be recorded at fair value and remeasured at each subsequent reporting date. On the date of issuance, the Conversion Option was determined to be an asset with a fair value of $ 48,200 . As of December 29, 2021, the fair value of the Conversion Option was $ 16,000 . The Parent Company recorded an unrealized loss of $ 32,200 in fiscal 2021 within Other income (expense), net due to the change in fair value of the Conversion Option during the year. As of December 29, 2021, the balance of the Note receivable from SSE Holdings was $ 201,080 , net of accretion. The Parent Company recognized interest income of $ 6,605 in fiscal 2021 within Other income (expense), net associated primarily with the accretion of the Conversion Option value at issuance. NOTE 4: DEBT In March 2021, the Parent Company issued $ 225,000 aggregate principal amount of 0% Convertible Senior Notes due 2028 (“Convertible Notes”) in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933. The Parent Company granted an option to the initial purchasers to purchase up to an additional $ 25,000 aggregate principal amount of Convertible Notes to cover over-allotments, which was subsequently fully exercised during March 2021, resulting in a total issuance of $ 250,000 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, the Company pays or delivers, 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 the Company's election. Refer to Note 8, Debt, in the accompanying Consolidated Financial Statements, for additional information relating to the Convertible Notes. NOTE 5: COMMITMENTS AND CONTINGENCIES On February 4, 2015, the Parent Company entered into a tax receivable agreement with the non-controlling interest holders that provides for payments to the non-controlling interest holders of 85 % of the amount of any tax benefits that the Parent Company actually realizes, or in some cases is deemed to realize, as a result of certain transactions. Refer to Note 14, Income Taxes, to the Company's Consolidated Financial Statements for additional information relating to the Parent Company's Tax Receivable Agreement. As described in Note 17, Commitments and Contingencies, to the Company's Consolidated Financial Statements, amounts payable under the Tax Receivable Agreement are contingent upon, among other things, (i) generation of future taxable income of Shake Shack Inc. over the term of the Tax Receivable Agreement and (ii) future changes in tax laws. As of December 29, 2021 and December 30, 2020, liabilities under the tax receivable agreement totaled $ 234,045 and $ 232,954 , respectively. Shake Shack Inc. Form 10-K | 125 NOTE 6: SUPPLEMENTAL CASH FLOW INFORMATION The following table sets forth supplemental cash flow information for fiscal 2021, fiscal 2020 and fiscal 2019: 2021 2020 2019 Cash paid for: Income taxes $ 19 $ 124 $ 233 Non-cash investing activities: Accrued contribution related to stock option exercises 6,731 8,094 9,227 Class A common stock issued in connection with the acquisition of LLC Interests upon redemption by the non-controlling interest holders 33 1,723 11,934 Class A common stock issued in connection with the GTC merger — — 19,218 Non-cash contribution made in connection with equity awards granted to employees of SSE Holdings 11,468 5,193 4,402 Non-cash financing activities: Cancellation of Class B common stock in connection with the redemption of LLC Interests — — ( 2 ) Cancellation of Class B common stock in connection with the GTC merger — — ( 3 ) Establishment of liabilities under tax receivable agreement 1,093 4,024 32,065 Shake Shack Inc. Form 10-K | 126 Schedule II: Valuation and Qualifying Accounts Balance at beginning of period Additions Reductions Balance at end of period (in thousands) Charged to costs and expenses Charged to other accounts Deferred tax asset valuation allowance: Fiscal year ended December 25, 2019 $ 6,925 $ ( 4,654 ) $ — $ ( 1,317 ) $ 954 Fiscal year ended December 30, 2020 $ 954 $ ( 2,610 ) $ 4,312 $ — $ 2,656 Fiscal year ended December 29, 2021 $ 2,656 $ ( 6,063 ) $ 8,580 (1) $ — $ 5,173 (1) Amount relates to a valuation allowance established on deferred tax assets related to our investment in SSE Holdings. Shake Shack Inc. Form 10-K | 127 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None.