Shake Shack Inc. 10-Q

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. This section and other parts of this Quarterly Report on Form 10-Q ("Form 10-Q") contain forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995 ("PSLRA"), which are subject to known and unknown risks, uncertainties and other important factors that may cause actual results to be materially different from the statements made herein. All statements other than statements of historical fact are forward-looking statements. Forward-looking statements discuss our current expectations and projections relating to our financial position, results of operations, plans, objectives, future performance and business. You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as "aim," "anticipate," "believe," "estimate," "expect," "forecast," "future," "intend," "outlook," "potential," "project," "projection," "plan," "seek," "may," "could," "would," "will," "should," "can," "can have," "likely," the negatives thereof and other similar expressions. All forward-looking statements are expressly qualified in their entirety by these cautionary statements. You should evaluate all forward-looking statements made in this Form 10-Q in the context of the risks and uncertainties disclosed in our Annual Report on Form 10-K for the fiscal year ended December 28, 2022 ("2022 Form 10-K"). The forward-looking statements included in this Form 10-Q are made only as of the date hereof. We undertake no obligation to publicly update any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law. If we do update one or more forward-looking statements, no inference should be made that we will make additional updates with respect to those or other forward-looking statements. The following discussion should be read in conjunction with our 2022 Form 10-K and the Condensed Consolidated Financial Statements and notes thereto included in Part I, Item 1 of this Form 10-Q. All information presented herein is based on our fiscal calendar. Unless otherwise stated, references to particular years, quarters, months or periods refer to our fiscal years and the associated quarters, months and periods of those fiscal years. OVERVIEW Shake Shack serves modern, fun and elevated versions of American classics using only the best ingredients. We are known for our made-to-order Angus beef burgers, crispy chicken, hand-spun milkshakes, house-made lemonades, beer, wine, and more. Our fine dining roots and commitment to community building, hospitality and the sourcing of premium ingredients is what we call "fine casual." Fine casual couples the ease, value and convenience of fast casual concepts with the high standards of excellence grounded in our fine dining roots — thoughtful ingredient sourcing and preparation, hospitality and quality. Our mission is to Stand For Something Good in all aspects of our business, including the exceptional team we hire and train, the premium ingredients making up our menu, our community engagement and the design of our Shacks. Stand For Something Good is a call to action for all of our stakeholders — our team, guests, communities, suppliers and investors — and we actively invite them all to share in this philosophy with us. This commitment drives our integration into the local communities in which we operate and fosters a deep and lasting connection with our guests. As of June 28, 2023, there were 471 Shacks in operation system-wide, of which 270 were domestic Company-operated Shacks, 35 were domestic licensed Shacks and 166 were international licensed Shacks. Recent Business Trends Same-Shack sales for the thirteen weeks ended June 28, 2023 increased 3.0% compared to the same period last year, driven by a 4.3% increase in price mix and a 1.3% decrease in guest traffic. Compared to the same period last year, suburban Shacks increased 3.5% and urban Shacks increased 2.5%. Compared to the first quarter of 2023, same-Shack sales slowed with price mix offsetting negative guest traffic across urban and suburban Shacks during the thirteen weeks ended June 28, 2023. For the purpose of calculating same-Shack sales growth for the thirteen weeks ended June 28, 2023, Shack sales for 197 Shacks were included in the comparable Shack base. 26 | Shake Shack Inc. Form 10-Q Table of Contents Average weekly sales were $77,000 for the thirteen weeks ended June 28, 2023 compared to $76,000 in the same period last year primarily driven by higher menu prices. Average weekly sales increased 5.5%, compared to the thirteen weeks ended March 29, 2023 driven by an increase in traffic across all domestic Company-operated shacks . Shack system-wide sales for the thirteen weeks ended June 28, 2023 increased 21.2% to $426.3 million compared to the same period last year and increased 8.0% compared to the thirteen weeks ended March 29, 2023. Digital sales for the thirteen weeks ended June 28, 2023 increased 3.4% to $86.9 million compared to the same period last year and decreased 3.0% compared to the thirteen weeks ended March 29, 2023. Total digital sales includes orders placed on the Shake Shack app, website and third-party delivery platforms, which represented 33.2% of Shack sales during the thirteen weeks ended June 28, 2023. Development Highlights During the second quarter of 2023, we opened 10 new domestic Company-operated Shacks and 13 new international licensed Shacks. There was one permanent international licensed Shack closure in the second quarter of 2023. Location Type Opening Date Bangkok, Thailand — centralwOrld International Licensed 3/30/2023 Busan, Korea — Centum City International Licensed 4/6/2023 Fuzhou, China — MixC International Licensed 4/8/2023 Qinhuangdao, China — Aranya International Licensed 4/22/2023 Portland, OR — West End Portland Domestic Company-operated 4/24/2023 Jersey City, NJ — Jersey City Domestic Company-operated 4/27/2023 London, United Kingdom — Camden International Licensed 4/27/2023 Gaithersburg, MD — Kentlands Domestic Company-operated 5/3/2023 Mexico City, Mexico — Miyana International Licensed 5/18/2023 Quezon City, Philippines — North Edsa International Licensed 5/19/2023 Lancaster, PA — Lancaster Domestic Company-operated 5/22/2023 Irvine, CA — Irvine Spectrum Domestic Company-operated 5/26/2023 London, United Kingdom — Clapham International Licensed 6/1/2023 Istanbul, Turkey — Lotus International Licensed 6/1/2023 Westlake, OH — Westlake Domestic Company-operated 6/5/2023 Wuhan, China — Tiandi International Licensed 6/10/2023 Richmond, PA — Willow Place Domestic Company-operated 6/12/2023 Kuwait City, Kuwait — Dahia International Licensed 6/12/2023 Chongqing, China — Chongqing MixC International Licensed 6/18/2023 Sugar Land, TX — Sugar Land Domestic Company-operated 6/22/2023 National City, CA — Westfield Plaza Bonita Domestic Company-operated 6/23/2023 Dubai, UAE — Al Barsha International Licensed 6/26/2023 McKinney, TX — McKinney Domestic Company-operated 6/28/2023 Shake Shack Inc. Form 10-Q | 27 RESULTS OF OPERATIONS The following table summarizes our results of operations for the thirteen and twenty-six weeks ended June 28, 2023 and June 29, 2022: Thirteen Weeks Ended Twenty-Six Weeks Ended (dollar amounts in thousands) June 28 2023 June 29 2022 June 28 2023 June 29 2022 Shack sales $ 261,810 96.3 % $ 223,054 96.7 % $ 506,064 96.4 % $ 419,845 96.7 % Licensing revenue 9,995 3.7 % 7,698 3.3 % 19,019 3.6 % 14,298 3.3 % TOTAL REVENUE 271,805 100.0 % 230,752 100.0 % 525,083 100.0 % 434,143 100.0 % Shack-level operating expenses (1) : Food and paper costs 75,800 29.0 % 65,987 29.6 % 147,572 29.2 % 125,871 30.0 % Labor and related expenses (2) 75,158 28.7 % 65,851 29.5 % 149,422 29.5 % 126,316 30.1 % Other operating expenses 36,109 13.8 % 32,151 14.4 % 71,045 14.0 % 62,322 14.8 % Occupancy and related expenses 19,801 7.6 % 16,657 7.5 % 38,384 7.6 % 32,933 7.8 % General and administrative expenses (2) 31,476 11.6 % 29,487 12.8 % 62,787 12.0 % 60,873 14.0 % Depreciation and amortization expense 22,252 8.2 % 18,087 7.8 % 43,574 8.3 % 34,942 8.0 % Pre-opening costs 5,577 2.1 % 2,823 1.2 % 9,134 1.7 % 5,535 1.3 % Impairment and loss on disposal of assets 884 0.3 % 528 0.2 % 1,606 0.3 % 1,105 0.3 % TOTAL EXPENSES 267,057 98.3 % 231,571 100.4 % 523,524 99.7 % 449,897 103.6 % INCOME (LOSS) FROM OPERATIONS 4,748 1.7 % (819) (0.4) % 1,559 0.3 % (15,754) (3.6) % Other income, net 3,227 1.2 % 538 0.2 % 6,064 1.2 % 249 0.1 % Interest expense (405) (0.1) % (315) (0.1) % (808) (0.2) % (670) (0.2) % INCOME (LOSS) BEFORE INCOME TAXES 7,570 2.8 % (596) (0.3) % 6,815 1.3 % (16,175) (3.7) % Income tax expense (benefit) 347 0.1 % 707 0.3 % 1,214 0.2 % (3,590) (0.8) % NET INCOME (LOSS) 7,223 2.7 % (1,303) (0.6) % 5,601 1.1 % (12,585) (2.9) % Less: Net income (loss) attributable to non-controlling interests 275 0.1 % (115) — % 187 — % (1,235) (0.3) % NET INCOME (LOSS) ATTRIBUTABLE TO SHAKE SHACK INC. $ 6,948 2.6 % $ (1,188) (0.5) % $ 5,414 1.0 % $ (11,350) (2.6) % (1) As a percentage of Shack sales. (2) The Company elected to reclassify certain marketing expenses for prior periods to conform with the presentation for the thirteen and twenty-six weeks ended June 28, 2023. These reclassifications had no effect on previously reported Net Loss. For the thirteen and twenty-six weeks ended June 29, 2022, the Company reclassified $412 and $478, respectively, from Other operating expenses to General and administrative expenses in the accompanying Condensed Consolidated Financial Statements. Shack Sales Shack sales represent the aggregate sales of food, beverages and Shake Shack branded merchandise at our domestic Company-operated Shacks and gift card breakage income. Shack sales in any period are directly influenced by the number of operating weeks in such period and the total number of open Shacks. Thirteen Weeks Ended Twenty-Six Weeks Ended (dollar amounts in thousands) June 28 2023 June 29 2022 June 28 2023 June 29 2022 Shack sales $ 261,810 $ 223,054 $ 506,064 $ 419,845 Percentage of Total revenue 96.3 % 96.7 % 96.4 % 96.7 % Dollar change compared to prior year $ 38,756 $ 86,219 Percentage change compared to prior year 17.4 % 20.5 % 28 | Shake Shack Inc. Form 10-Q Table of Contents Shack sales for the thirteen weeks ended June 28, 2023 increased 17.4% to $261.8 million versus the same period last year. Shack sales for the twenty-six weeks ended June 28, 2023 increased 20.5% to $506.1 million versus the same period last year. The increases in Shack sales for the thirteen and twenty-six weeks ended June 28, 2023 were primarily due to the opening of 40 new domestic Company-operated Shacks between June 29, 2022 and June 28, 2023, which contributed $31.2 million and $53.0 million, respectively, as well as increased menu prices, which contributed $17.2 million and $35.0 million, respectively, partially offset by a decline in items per check. Licensing Revenue Licensing revenue is comprised of license fees, opening fees for certain licensed Shacks and territory fees. License fees are calculated as a percentage of sales and territory fees are payments for the exclusive right to develop Shacks in a specific geographic area. Thirteen Weeks Ended Twenty-Six Weeks Ended (dollar amounts in thousands) June 28 2023 June 29 2022 June 28 2023 June 29 2022 Licensing revenue $ 9,995 $ 7,698 $ 19,019 $ 14,298 Percentage of Total revenue 3.7 % 3.3 % 3.6 % 3.3 % Dollar change compared to prior year $ 2,297 $ 4,721 Percentage change compared to prior year 29.8 % 33.0 % Licensing revenue for the thirteen weeks ended June 28, 2023 increased 29.8% to $10.0 million versus the same period last year. Licensing revenue for the twenty-six weeks ended June 28, 2023 increased 33.0% to $19.0 million versus the same period last year. The increases in Licensing revenue for the thirteen and twenty-six weeks ended June 28, 2023 were primarily due to the opening of 36 net new licensed Shacks between June 29, 2022 and June 28, 2023, which contributed $1.7 million and $2.9 million, respectively, as well as higher sales at existing licensed Shacks, particularly domestic airports. Food and Paper Costs Food and paper costs include the direct costs associated with food, beverage and packaging of our menu items. The components of Food and paper costs are variable by nature, change with sales volume, are impacted by menu mix, channel mix and fluctuations in commodity costs, as well as geographic scale and proximity. Thirteen Weeks Ended Twenty-Six Weeks Ended (dollar amounts in thousands) June 28 2023 June 29 2022 June 28 2023 June 29 2022 Food and paper costs $ 75,800 $ 65,987 $ 147,572 $ 125,871 Percentage of Shack sales 29.0 % 29.6 % 29.2 % 30.0 % Dollar change compared to prior year $ 9,813 $ 21,701 Percentage change compared to prior year 14.9 % 17.2 % Food and paper costs for the thirteen weeks ended June 28, 2023 increased 14.9% to $75.8 million versus the same period last year. Food and paper costs for the twenty-six weeks ended June 28, 2023 increased 17.2% to $147.6 million versus the same period last year. The increases for the thirteen and twenty-six weeks ended June 28, 2023 were primarily due to the opening of 40 new domestic Company-operated Shacks between June 29, 2022 and June 28, 2023 as well as increased commodity costs. As a percentage of Shack sales, the decreases in Food and paper costs for the thirteen and twenty-six weeks ended June 28, 2023 were primarily driven by menu price increases partially offset by increased commodity costs mentioned above. Shake Shack Inc. Form 10-Q | 29 Table of Contents Labor and Related Expenses Labor and related expenses include domestic Company-operated Shack-level hourly and management wages, bonuses, payroll taxes, equity-based compensation, workers' compensation expense and medical benefits. As we expect with other variable expense items, labor costs should grow as our Shack sales grow. Factors that influence labor costs include minimum wage and payroll tax legislation, health care costs, size and location of the Shack and the performance of our domestic Company-operated Shacks. Thirteen Weeks Ended Twenty-Six Weeks Ended (dollar amounts in thousands) June 28 2023 June 29 2022 June 28 2023 June 29 2022 Labor and related expenses $ 75,158 $ 65,851 $ 149,422 $ 126,316 Percentage of Shack sales 28.7 % 29.5 % 29.5 % 30.1 % Dollar change compared to prior year $ 9,307 $ 23,106 Percentage change compared to prior year 14.1 % 18.3 % Labor and related expenses for the thirteen weeks ended June 28, 2023 increased 14.1% to $75.2 million versus the same period last year. Labor and related expenses for the twenty-six weeks ended June 28, 2023 increased 18.3% to $149.4 million versus the same period last year. The increases for the thirteen and twenty-six weeks ended June 28, 2023 were primarily due to the opening of 40 new domestic Company-operated Shacks between June 29, 2022 and June 28, 2023. As a percentage of Shack sales, the decreases in Labor and related expenses for the thirteen and twenty-six weeks ended June 28, 2023 were primarily due to labor efficiencies and sales leverage partially offset by increased wages. Other Operating Expenses Other operating expenses consist of delivery commissions, Shack-level marketing expenses, repairs and maintenance, utilities and other operating expenses incidental to operating our domestic Company-operated Shacks, such as non-perishable supplies, credit card fees and property insurance. Thirteen Weeks Ended Twenty-Six Weeks Ended (dollar amounts in thousands) June 28 2023 June 29 2022 June 28 2023 June 29 2022 Other operating expenses $ 36,109 $ 32,151 $ 71,045 $ 62,322 Percentage of Shack sales 13.8 % 14.4 % 14.0 % 14.8 % Dollar change compared to prior year $ 3,958 $ 8,723 Percentage change compared to prior year 12.3 % 14.0 % Other operating expenses for the thirteen weeks ended June 28, 2023 increased 12.3% to $36.1 million versus the same period last year. Other operating expenses for the twenty-six weeks ended June 28, 2023 increased 14.0% to $71.0 million versus the same period last year. The increases for the thirteen and twenty-six weeks ended June 28, 2023 were primarily due to higher facilities costs, mainly utilities. As a percentage of Shack sales, the decrease in Other operating expenses for the thirteen weeks ended June 28, 2023 was primarily driven by lower delivery commissions as a result of a shift in channel mix and lower glove costs, partially offset by higher utility costs. As a percentage of Shack sales, the decrease in Other operating expenses for the twenty-six weeks ended June 28, 2023 was primarily driven by lower delivery commissions as a result of a shift in channel mix, sales leverage, and lower marketing spend, partially offset by higher utility costs. 30 | Shake Shack Inc. Form 10-Q Table of Contents Occupancy and Related Expenses Occupancy and related expenses consist of Shack-level occupancy expenses (including rent, common area expenses and certain local taxes), and exclude occupancy expenses associated with unopened Shacks, which are recorded separately in Pre-opening costs. Thirteen Weeks Ended Twenty-Six Weeks Ended (dollar amounts in thousands) June 28 2023 June 29 2022 June 28 2023 June 29 2022 Occupancy and related expenses $ 19,801 $ 16,657 $ 38,384 $ 32,933 Percentage of Shack sales 7.6 % 7.5 % 7.6 % 7.8 % Dollar change compared to prior year $ 3,144 $ 5,451 Percentage change compared to prior year 18.9 % 16.6 % Occupancy and related expenses for the thirteen weeks ended June 28, 2023 increased 18.9% to $19.8 million versus the same period last year. Occupancy and related expenses for the twenty-six weeks ended June 28, 2023 increased 16.6% to $38.4 million versus the same period last year. The increases for the thirteen and twenty-six weeks ended June 28, 2023 were primarily due to the opening of 40 new domestic Company-operated Shacks between June 29, 2022 and June 28, 2023. As a percentage of Shack sales, the increase in Occupancy and related expenses for the thirteen weeks ended June 28, 2023 was primarily due to an increase in common area maintenance charges, partially offset by sales leverage. As a percentage of Shack sales, the decrease in Occupancy and related expenses for the twenty-six weeks ended June 28, 2023 was primarily due to sales leverage. General and Administrative Expenses General and administrative expenses consist of costs associated with corporate and administrative functions that support Shack development and operations, as well as equity-based compensation expense. Thirteen Weeks Ended Twenty-Six Weeks Ended (dollar amounts in thousands) June 28 2023 June 29 2022 June 28 2023 June 29 2022 General and administrative expenses $ 31,476 $ 29,487 $ 62,787 $ 60,873 Percentage of Total revenue 11.6 % 12.8 % 12.0 % 14.0 % Dollar change compared to prior year $ 1,989 $ 1,914 Percentage change compared to prior year 6.7 % 3.1 % General and administrative expenses for the thirteen weeks ended June 28, 2023 increased 6.7% to $31.5 million versus the same period last year. General and administrative expenses for the twenty-six weeks ended June 28, 2023 increased 3.1% to $62.8 million versus the same period last year. The increase in General and administrative expenses for the thirteen weeks ended June 28, 2023 was primarily due to professional fees related to a non-recurring matter of $1.7 million, an increase in wages and other team costs as well as investments in marketing and technology initiatives, partially offset by the absence of expenses related to the Company's retreat in the prior year period. The increase in General and administrative expenses for the twenty-six weeks ended June 28, 2023 was primarily due to an increase in wages and other team costs, professional fees related to a non-recurring matter of $2.3 million as well as investments in marketing and technology initiatives, partially offset by the absence of accruals related to legal matters in the prior year period. As a percentage of Total revenue, the decreases in General and administrative expenses for the thirteen and twenty-six weeks ended June 28, 2023 were primarily due to sales leverage partially offset by the aforementioned items. Shake Shack Inc. Form 10-Q | 31 Table of Contents Depreciation and Amortization Expense Depreciation and amortization expense primarily consists of the depreciation of fixed assets, including leasehold improvements and equipment. Thirteen Weeks Ended Twenty-Six Weeks Ended (dollar amounts in thousands) June 28 2023 June 29 2022 June 28 2023 June 29 2022 Depreciation and amortization expense $ 22,252 $ 18,087 $ 43,574 $ 34,942 Percentage of Total revenue 8.2 % 7.8 % 8.3 % 8.0 % Dollar change compared to prior year $ 4,165 $ 8,632 Percentage change compared to prior year 23.0 % 24.7 % Depreciation and amortization expense for the thirteen weeks ended June 28, 2023 increased 23.0% to $22.3 million versus the same period last year. Depreciation and amortization expense for the twenty-six weeks ended June 28, 2023 increased 24.7% to $43.6 million versus the same period last year. The increases in Depreciation and amortization expense for the thirteen and twenty-six weeks ended June 28, 2023 were predominantly due to incremental depreciation of capital expenditures related to the opening of 40 new domestic Company-operated Shacks and technology projects placed into service between June 29, 2022 and June 28, 2023. As a percentage of Total revenue, the increases in Depreciation and amortization expense for the thirteen and twenty-six weeks ended June 28, 2023 were primarily due to new Shack openings as well as additional depreciation related to technology projects placed into service between June 29, 2022 and June 28, 2023. Pre-Opening Costs Pre-opening costs consist primarily of occupancy, manager and team member wages, cookware, travel and lodging costs for our opening training team and other supporting team members, marketing expenses, legal fees and inventory costs incurred prior to the opening of a Shack. All such costs incurred prior to the opening of a domestic Company-operated Shack are expensed in the period in which the expense was incurred. Pre-opening costs can fluctuate significantly from period to period, based on the number and timing of domestic Company-operated Shack openings and the specific pre-opening costs incurred for each domestic Company-operated Shack. Additionally, domestic Company-operated Shack openings in new geographic markets may initially experience higher pre-opening costs than our established geographic markets, such as the New York City metropolitan area, where we have greater economies of scale and incur lower travel and lodging costs for our training team. Thirteen Weeks Ended Twenty-Six Weeks Ended (dollar amounts in thousands) June 28 2023 June 29 2022 June 28 2023 June 29 2022 Pre-opening costs $ 5,577 $ 2,823 $ 9,134 $ 5,535 Percentage of Total revenue 2.1 % 1.2 % 1.7 % 1.3 % Dollar change compared to prior year $ 2,754 $ 3,599 Percentage change compared to prior year 97.6 % 65.0 % Pre-opening costs for the thirteen weeks ended June 28, 2023 increased 97.6% to $5.6 million versus the same period last year. Pre-opening costs for the twenty-six weeks ended June 28, 2023 increased 65.0% to $9.1 million versus the same period last year. The increases in Pre-opening costs for the thirteen and twenty-six weeks ended June 28, 2023 were primarily due to more Shack openings compared to the prior year periods, as well as increased wages for our Shack teams and increased occupancy expense related to the timing of Shack openings throughout the year, compared to the prior-year periods. Impairment and Loss on Disposal of Assets Impairment and loss on disposal of assets consist of impairment charges related to our long-lived assets, which includes property and equipment, as well as operating and finance lease assets. Additionally, Impairment and loss on disposal of assets includes 32 | Shake Shack Inc. Form 10-Q Table of Contents the net book value of assets that have been retired which primarily consists of furniture, equipment and fixtures that were replaced in the normal course of business. Thirteen Weeks Ended Twenty-Six Weeks Ended (dollar amounts in thousands) June 28 2023 June 29 2022 June 28 2023 June 29 2022 Impairment and loss on disposal of assets $ 884 $ 528 $ 1,606 $ 1,105 Percentage of Total revenue 0.3 % 0.2 % 0.3 % 0.3 % Dollar change compared to prior year $ 356 $ 501 Percentage change compared to prior year 67.4 % 45.3 % Impairment and loss on disposal of assets for the thirteen weeks ended June 28, 2023 increased 67.4% to $0.9 million versus the same period last year. Impairment and loss on disposal of assets for the twenty-six weeks ended June 28, 2023 increased 45.3% to $1.6 million versus the same period last year. The increases in Impairment and loss on disposal of assets for the thirteen and twenty-six weeks ended June 28, 2023 were primarily due to the number of Shacks maturing in our base. Other Income, Net Other income, net consists primarily of interest income, adjustments to liabilities under our tax receivable agreement, dividend income and net unrealized and realized gains and losses from marketable securities. Thirteen Weeks Ended Twenty-Six Weeks Ended (dollar amounts in thousands) June 28 2023 June 29 2022 June 28 2023 June 29 2022 Other income, net $ 3,227 $ 538 $ 6,064 $ 249 Percentage of Total revenue 1.2 % 0.2 % 1.2 % 0.1 % Dollar change compared to prior year $ 2,689 $ 5,815 Percentage change compared to prior year 499.8 % 2,335.3 % Other income, net for the thirteen weeks ended June 28, 2023 increased to $3.2 million. Other income, net for the twenty-six weeks ended June 28, 2023 increased to $6.1 million. The increases in Other income, net for the thirteen and twenty-six weeks ended June 28, 2023 were primarily due to an increase in income from cash equivalents of $2.8 million and $5.0 million, respectively, which related to an increase in interest rates. Interest Expense Interest expense generally consists of interest on the current portion of our liabilities under the Tax Receivable Agreement, imputed interest related to our financing equipment leases, amortization of deferred financing costs, interest and fees on our Revolving Credit Facility and amortization of debt issuance costs. Thirteen Weeks Ended Twenty-Six Weeks Ended (dollar amounts in thousands) June 28 2023 June 29 2022 June 28 2023 June 29 2022 Interest expense $ (405) $ (315) $ (808) $ (670) Percentage of Total revenue (0.1) % (0.1) % (0.2) % (0.2) % Dollar change compared to prior year $ (90) $ (138) Percentage change compared to prior year 28.6 % 20.6 % Interest expense for the thirteen weeks ended June 28, 2023 increased 28.6% to $0.4 million versus the same period last year. Interest expense for the twenty-six weeks ended June 28, 2023 increased 20.6% to $0.8 million versus the same period last year. The increases in Interest expense for the thirteen and twenty-six weeks ended June 28, 2023 were primarily due to an increase in various sales tax audit assessment charges. Shake Shack Inc. Form 10-Q | 33 Table of Contents Income Tax Expense (Benefit) We are the sole managing member of SSE Holdings and, as a result, consolidate the financial results of SSE Holdings. SSE Holdings is treated as a partnership for U.S. federal and most applicable state and local income tax purposes. As a partnership, SSE Holdings is not subject to U.S. federal and certain state and local income taxes. Any taxable income or loss generated by SSE Holdings is passed through to and included in the taxable income or loss of its members, including us, on a pro rata basis. We are subject to U.S. federal income taxes, in addition to state and local income taxes with respect to our allocable share of any taxable income or loss of SSE Holdings, as well as any stand-alone income or loss generated by us. We are also subject to withholding taxes in foreign jurisdictions. Thirteen Weeks Ended Twenty-Six Weeks Ended (dollar amounts in thousands) June 28 2023 June 29 2022 June 28 2023 June 29 2022 Income tax expense (benefit) $ 347 $ 707 $ 1,214 $ (3,590) Percentage of Total revenue 0.1 % 0.3 % 0.2 % (0.8) % Dollar change compared to prior year $ (360) $ 4,804 Percentage change compared to prior year (50.9) % (133.8) % Our effective income tax rates for the thirteen weeks ended June 28, 2023 and June 29, 2022 were 4.6% and (118.6)%, respectively. The increase was primarily driven by the change in pre-tax income, and the impact of permanent differences and discrete expense on pre-tax income compared to pre-tax loss in the same period last year. The Company's ownership interest in SSE Holdings is directly related to its share of the taxable income (loss) of SSE Holdings. Our weighted average ownership interest in SSE Holdings was 93.3% and 93.1% for the thirteen weeks ended June 28, 2023 and June 29, 2022, respectively. Our effective income tax rates for the twenty-six weeks ended June 28, 2023 and June 29, 2022 were 17.8% and 22.2%, respectively. The decrease was primarily driven by the change in pre-tax income and the effect of permanent differences, primarily tax credits, on pre-tax income for the period compared to pre-tax loss in the same period last year, as well as a decrease in expense due to tax benefits related to certain windfalls in equity based compensation. The decrease was partially offset by an increase in the Company's ownership interest in SSE Holdings which increased its share of the taxable income (loss) of SSE Holdings. Our weighted average ownership interest in SSE Holdings was 93.3% and 93.1% for the twenty-six weeks ended June 28, 2023 and June 29, 2022, respectively. Net Income (Loss) Attributable to Non-Controlling Interests We are the sole managing member of SSE Holdings and have the sole voting power in, and control the management of, SSE Holdings. Accordingly, we consolidate the financial results of SSE Holdings and report a non-controlling interest on our Condensed Consolidated Statements of Income (Loss), representing the portion of net income (loss) attributable to the other members of SSE Holdings. The Third Amended and Restated Limited Liability Company Agreement of SSE Holdings provides that holders of LLC Interests may, from time to time, require SSE Holdings to redeem all or a portion of their LLC Interests for newly-issued shares of Class A common stock on a one-for-one basis. In connection with any redemption or exchange, we will receive a corresponding number of LLC Interests, increasing our total ownership interest in SSE Holdings. The weighted average ownership percentages for the applicable reporting periods are used to attribute net income (loss) and other comprehensive income (loss) to Shake Shack Inc. and the non-controlling interest holders. Thirteen Weeks Ended Twenty-Six Weeks Ended (dollar amounts in thousands) June 28 2023 June 29 2022 June 28 2023 June 29 2022 Net income (loss) attributable to non-controlling interests $ 275 $ (115) $ 187 $ (1,235) Percentage of Total revenue 0.1 % — % — % (0.3) % Net income (loss) attributable to non-controlling interests for the thirteen weeks ended June 28, 2023 improved to income of $0.3 million from a loss of $0.1 million in the same period last year. Net income (loss) attributable to non-controlling interests for the twenty-six weeks ended June 28, 2023 improved to income of $0.2 million from a loss of $1.2 million in the same period last year. The improvements in Net income (loss) attributable to non-controlling interests for the thirteen and twenty-six weeks ended June 28, 2023 were primarily due to an increase in net results compared to the same periods last year, partially offset by a decrease in the non-controlling interest holders' weighted average ownership, which was 6.7% for the thirteen and twenty-six weeks ended June 28, 2023 and 6.9% for the thirteen and twenty-six weeks ended June 29, 2022. 34 | Shake Shack Inc. Form 10-Q Table of Contents NON-GAAP FINANCIAL MEASURES To supplement the Condensed Consolidated Financial Statements, which are prepared and presented in accordance with accounting principles generally accepted in the United States of America ("GAAP"), we use the following non-GAAP financial measures: Shack-level operating profit, Shack-level operating profit margin, EBITDA, adjusted EBITDA, adjusted EBITDA margin, adjusted pro forma net income (loss) and adjusted pro forma earnings (loss) per fully exchanged and diluted share (collectively the "non-GAAP financial measures"). Shack-Level Operating Profit Shack-level operating profit, also referred to as restaurant profit, is defined as Shack sales less Shack-level operating expenses including Food and paper costs, Labor and related expenses, Other operating expenses and Occupancy and related expenses. How This Measure Is Useful When used in conjunction with GAAP financial measures, Shack-level operating profit and Shack-level operating profit margin are supplemental measures of operating performance that we believe are useful measures to evaluate the performance and profitability of our Shacks. Additionally, Shack-level operating profit and Shack-level operating profit margin are key metrics used internally by our management to develop internal budgets and forecasts, as well as assess the performance of our Shacks relative to budget and against prior periods. It is also used to evaluate team member compensation as it serves as a metric in certain of our performance-based team member bonus arrangements. We believe presentation of Shack-level operating profit and Shack-level operating profit margin provides investors with a supplemental view of our operating performance that can provide meaningful insights to the underlying operating performance of our Shacks, as these measures depict the operating results that are directly impacted by our Shacks and exclude items that may not be indicative of, or are unrelated to, the ongoing operations of our Shacks. It may also assist investors to evaluate our performance relative to peers of various sizes and maturities and provides greater transparency with respect to how our management evaluates our business, as well as our financial and operational decision-making. Limitations of the Usefulness of this Measure Shack-level operating profit and Shack-level operating profit margin may differ from similarly titled measures used by other companies due to different methods of calculation. Presentation of Shack-level operating profit and Shack-level operating profit margin is not intended to be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP. Shack-level operating profit excludes certain costs, such as General and administrative expenses and Pre-opening costs, which are considered normal, recurring cash operating expenses and are essential to support the operation and development of our Shacks. Therefore, this measure may not provide a complete understanding of the operating results of our Company as a whole and Shack-level operating profit and Shack-level operating profit margin should be reviewed in conjunction with our GAAP financial results. A reconciliation of Shack-level operating profit to Income (loss) from Operations, the most directly comparable GAAP financial measure, is as follows. Shake Shack Inc. Form 10-Q | 35 Table of Contents Thirteen Weeks Ended Twenty-Six Weeks Ended (dollar amounts in thousands) June 28 2023 June 29 2022 June 28 2023 June 29 2022 Income (loss) from operations $ 4,748 $ (819) $ 1,559 $ (15,754) Less: Licensing revenue 9,995 7,698 19,019 14,298 Add: General and administrative expenses (1) 31,476 29,487 62,787 60,873 Depreciation and amortization expense 22,252 18,087 43,574 34,942 Pre-opening costs 5,577 2,823 9,134 5,535 Impairment and loss on disposal of assets 884 528 1,606 1,105 Shack-level operating profit $ 54,942 $ 42,408 $ 99,641 $ 72,403 Total revenue $ 271,805 $ 230,752 $ 525,083 $ 434,143 Less: Licensing revenue 9,995 7,698 19,019 14,298 Shack sales $ 261,810 $ 223,054 $ 506,064 $ 419,845 Shack-level operating profit margin (2,3) 21.0 % 19.0 % 19.7 % 17.2 % (1) The Company has elected to reclassify certain marketing expenses from Other operating expenses to General and administrative expenses in the accompanying Condensed Consolidated Financial Statements for prior periods to be comparable with the classification for the thirteen and twenty-six weeks ended June 28, 2023. (2) For the twenty-six weeks ended June 29, 2022, Shack-level operating profit margin includes a $1,281 cumulative catch-up adjustment for gift card breakage income, recognized in Shack sales. (3) As a percentage of Shack sales. EBITDA and Adjusted EBITDA EBITDA is defined as Net income (loss) before Interest expense (net of interest income), Income tax expense (benefit) and Depreciation and amortization expense. Adjusted EBITDA is defined as EBITDA (as defined above) excluding equity-based compensation expense, Impairment and loss on disposal of assets, amortization of cloud-based software implementation costs, as well as certain non-recurring items that we do not believe directly reflect our core operations and may not be indicative of our recurring business operations. In the first quarter of 2023, the Company revised its definition of Adjusted EBITDA to exclude deferred lease costs and executive transition costs as adjustments to the measure. The Company believes excluding both of these items improves the usefulness of Adjusted EBITDA as these items are characteristic of the Company’s ongoing operations and such presentation is consistent with other companies in the restaurant industry. Previously reported periods have been revised to conform to the current period presentation. How These Measures Are Useful When used in conjunction with GAAP financial measures, EBITDA and adjusted EBITDA are supplemental measures of operating performance that we believe are useful measures to facilitate comparisons to historical performance and competitors' operating results. Adjusted EBITDA is a key metric used internally by our management to develop internal budgets and forecasts and also serves as a metric in our performance-based equity incentive programs and certain of our bonus arrangements. We believe presentation of EBITDA and adjusted EBITDA provides investors with a supplemental view of our operating performance that facilitates analysis and comparisons of our ongoing business operations because they exclude items that may not be indicative of our ongoing operating performance. 36 | Shake Shack Inc. Form 10-Q Table of Contents Limitations of the Usefulness of These Measures EBITDA and adjusted EBITDA may differ from similarly titled measures used by other companies due to different methods of calculation. Presentation of EBITDA and adjusted EBITDA is not intended to be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP. EBITDA and adjusted EBITDA exclude certain normal recurring expenses. Therefore, these measures may not provide a complete understanding of our performance and should be reviewed in conjunction with our GAAP financial measures. A reconciliation of EBITDA and adjusted EBITDA to Net income (loss), the most directly comparable GAAP measure, is as follows. Thirteen Weeks Ended Twenty-Six Weeks Ended (dollar amounts in thousands) June 28 2023 June 29 2022 June 28 2023 June 29 2022 Net income (loss) $ 7,223 $ (1,303) $ 5,601 $ (12,585) Depreciation and amortization expense 22,252 18,087 43,574 34,942 Interest expense, net 278 315 681 670 Income tax expense (benefit) 347 707 1,214 (3,590) EBITDA 30,100 17,806 51,070 19,437 Equity-based compensation 3,932 3,452 7,734 6,640 Amortization of cloud-based software implementation costs 441 351 880 683 Impairment and loss on disposal of assets 884 528 1,606 1,105 Legal settlements — 750 1,004 6,750 Gift card breakage cumulative catch-up adjustment — — — (1,281) Other (1) 1,693 — 2,321 — Adjusted EBITDA $ 37,050 $ 22,887 $ 64,615 $ 33,334 Adjusted EBITDA margin (2) 13.6 % 9.9 % 12.3 % 7.7 % (1) Related to professional fees for a non-recurring matter. (2) Calculated as a percentage of Total revenue, which was $271.8 million and $525.1 million for the thirteen and twenty-six weeks ended June 28, 2023, respectively, and $230.8 million and $434.1 million for the thirteen and twenty-six weeks ended June 29, 2022, respectively. Adjusted Pro Forma Net Income (Loss) and Adjusted Pro Forma Earnings (Loss) Per Fully Exchanged and Diluted Share Adjusted pro forma net income (loss) represents Net income (loss) attributable to Shake Shack Inc. assuming the full exchange of all outstanding SSE Holdings, LLC membership interests ("LLC Interests") for shares of Class A common stock, adjusted for certain non-recurring items that we do not believe are directly related to our core operations and may not be indicative of our recurring business operations. Adjusted pro forma earnings (loss) per fully exchanged and diluted share is calculated by dividing adjusted pro forma net income (loss) by the weighted average shares of Class A common stock outstanding, assuming the full exchange of all outstanding LLC Interests, after giving effect to the dilutive effect of outstanding equity-based awards. In the first quarter of 2023, the Company revised its definition of Adjusted Pro Forma Net Income to exclude executive transition costs as an adjustment to the measure. Previously reported periods have been revised to conform to the current period presentation. See "EBITDA and Adjusted EBITDA" above for additional information. How These Measures Are Useful When used in conjunction with GAAP financial measures, adjusted pro forma net income (loss) and adjusted pro forma earnings (loss) per fully exchanged and diluted share are supplemental measures of operating performance that we believe are useful measures to evaluate our performance period over period and relative to our competitors. By assuming the full exchange of all outstanding LLC Interests, we believe these measures facilitate comparisons with other companies that have different organizational and tax structures, as well as comparisons period over period because it eliminates the effect of any changes in Net income (loss) attributable to Shake Shack Inc. driven by increases in our ownership of SSE Holdings, which are unrelated to our operating performance, and excludes items that are non-recurring or may not be indicative of our ongoing operating performance. Shake Shack Inc. Form 10-Q | 37 Table of Contents Limitations of the Usefulness of These Measures Adjusted pro forma net income (loss) and adjusted pro forma earnings (loss) per fully exchanged and diluted share may differ from similarly titled measures used by other companies due to different methods of calculation. Presentation of adjusted pro forma net income (loss) and adjusted pro forma earnings (loss) per fully exchanged and diluted share should not be considered alternatives to Net income (loss) and earnings (loss) per share, as determined under GAAP. While these measures are useful in evaluating our performance, they do not account for the earnings attributable to the non-controlling interest holders and therefore do not provide a complete understanding of the Net income (loss) attributable to Shake Shack Inc. Adjusted pro forma net income (loss) and adjusted pro forma earnings (loss) per fully exchanged and diluted share should be evaluated in conjunction with our GAAP financial results. A reconciliation of adjusted pro forma net income (loss) to Net income (loss) attributable to Shake Shack Inc., the most directly comparable GAAP measure, and the computation of adjusted pro forma earnings (loss) per fully exchanged and diluted share are set forth below. 38 | Shake Shack Inc. Form 10-Q Table of Contents Thirteen Weeks Ended Twenty-Six Weeks Ended (in thousands, except per share amounts) June 28 2023 June 29 2022 June 28 2023 June 29 2022 Numerator: Net income (loss) attributable to Shake Shack Inc. $ 6,948 $ (1,188) $ 5,414 $ (11,350) Adjustments: Reallocation of Net income (loss) attributable to non-controlling interests from the assumed exchange of LLC Interests (1) 275 (115) 187 (1,235) Legal settlements — 750 1,004 6,750 Gift card breakage cumulative catch-up adjustment — — — (1,281) Other (2) 1,693 — 2,321 — Tax impact of above adjustments (3) (1,036) 684 (1,336) (911) Adjusted pro forma net income (loss) $ 7,880 $ 131 $ 7,590 $ (8,027) Denominator: Weighted average shares of Class A common stock outstanding—diluted 43,886 39,227 43,837 39,195 Adjustments: Assumed exchange of LLC Interests for shares of Class A common stock (1) — 2,906 — 2,913 Dilutive effect of equity awards — 104 — — Dilutive effect of convertible notes — 1,467 — — Adjusted pro forma fully exchanged weighted average shares of Class A common stock outstanding—diluted 43,886 43,704 43,837 42,108 Adjusted pro forma earnings (loss) per fully exchanged share—diluted $ 0.18 $ — $ 0.17 $ (0.19) Thirteen Weeks Ended Twenty-Six Weeks Ended June 28 2023 June 29 2022 June 28 2023 June 29 2022 Earnings (loss) per share of Class A common stock—diluted $ 0.16 $ (0.03) $ 0.13 $ (0.29) Assumed exchange of LLC Interests for shares of Class A common stock (1) — — — (0.01) Non-GAAP adjustments (4) 0.02 0.03 0.04 0.11 Adjusted pro forma earnings (loss) per fully exchanged share—diluted $ 0.18 $ — $ 0.17 $ (0.19) (1) Assumes the exchange of all outstanding LLC Interests for shares of Class A common stock, resulting in the elimination of the non-controlling interest and recognition of the net income (loss) attributable to non-controlling interests. Refer to Note 11, Earnings (Loss) per Share, in the accompanying Condensed Consolidated Financial Statements , for additional information. (2) Related to professional fees for a non-recurring matter. (3) Represents the tax effect of the aforementioned adjustments and pro forma adjustments to reflect corporate income taxes at assumed effective tax rates of 14.9% and 25.1% for the thirteen and twenty-six weeks ended June 28, 2023, respectively, and 14.9% and 25.0% for the thirteen and twenty-six weeks ended June 29, 2022, respectively. Amounts include provisions for U.S. federal income taxes, certain LLC entity-level taxes and foreign withholding taxes, assuming the highest statutory rates apportioned to each applicable state, local and foreign jurisdiction. (4) Represents the per share impact of non-GAAP adjustments for each period. Refer to the reconciliation of Adjusted Pro Forma Net Income (Loss) above, for additional information. Shake Shack Inc. Form 10-Q | 39 Table of Contents LIQUIDITY AND CAPITAL RESOURCES Sources and Uses of Cash Our primary sources of liquidity are cash from operations, cash and cash equivalents on hand, and availability under our Revolving Credit Facility. As of June 28, 2023, we maintained a Cash and cash equivalents balance of $203.7 million. In March 2021, we issued 0% Convertible Senior Notes (“Convertible Notes”), and received $243.8 million of proceeds, net of discounts. Refer to Note 6, Debt, in the accompanying Condensed Consolidated Financial Statements, for additional information. On June 7, 2021, we filed a Registration Statement on Form S-3 with the SEC which permits us to issue a combination of securities described in the prospectus in one or more offerings from time to time. To date, we have not experienced difficulty accessing the capital markets; however, future volatility in the capital markets may affect our ability to access those markets or increase the costs associated with issuing debt or equity instruments. Our primary requirements for liquidity are to fund our working capital needs, operating and finance lease obligations, capital expenditures and general corporate needs. Our requirements for working capital are generally not significant because our guests pay for their food and beverage purchases in cash or on debit or credit cards at the time of the sale and we are able to sell many of our inventory items before payment is due to the supplier of such items. Our ongoing capital expenditures are principally related to opening new Shacks, existing Shack capital investments (both for remodels and maintenance), as well as investments in our corporate technology infrastructure to support our home office, Shake Shack locations, and digital strategy. In addition, we are obligated to make payments to certain members of SSE Holdings under the Tax Receivable Agreement. As of June 28, 2023, such obligations totaled $235.4 million. Amounts payable under the Tax Receivable Agreement are contingent upon, among other things, (i) generation of future taxable income over the term of the Tax Receivable Agreement and (ii) future changes in tax laws. If we do not generate sufficient taxable income in the aggregate over the term of the Tax Receivable Agreement to utilize the tax benefits, then we would not be required to make the related payments under the Tax Receivable Agreement. Although the amount of any payments that must be made under the Tax Receivable Agreement may be significant, the timing of these payments will vary and will generally be limited to one payment per member per year. The amount of such payments are also limited to the extent we utilize the related deferred tax assets. The payments that we are required to make will generally reduce the amount of overall cash flow that might have otherwise been available to us or to SSE Holdings, but we expect the cash tax savings we will realize from the utilization of the related deferred tax assets to fund the required payments. We believe our existing cash and cash equivalents balances and cash from operations will be sufficient to fund our operating and finance lease obligations, capital expenditures, Tax Receivable Agreement obligations and working capital needs for at least the next 12 months and the foreseeable future. Summary of Cash Flows The following table presents a summary of our cash flows from operating, investing and financing activities. Twenty-Six Weeks Ended (in thousands) June 28 2023 June 29 2022 Net cash provided by operating activities $ 62,191 $ 35,164 Net cash used in investing activities (85,415) (55,454) Net cash used in financing activities (3,596) (3,782) Net decrease in Cash and cash equivalents (26,824) (24,074) Cash and cash equivalents at beginning of period 230,521 302,406 Cash and cash equivalents at end of period $ 203,697 $ 278,332 Operating Activities For the twenty-six weeks ended June 28, 2023, net cash provided by operating activities was $62.2 million compared to $35.2 million for the twenty-six weeks ended June 29, 2022, an increase of $27.0 million. The increase was primarily driven by a $27.0 million improvement in net results after excluding non-cash charges, as working capital remained flat period-over-period. 40 | Shake Shack Inc. Form 10-Q Table of Contents Investing Activities For the twenty-six weeks ended June 28, 2023, net cash used in investing activities was $85.4 million compared to $55.5 million for the twenty-six weeks ended June 29, 2022, an increase of $29.9 million. This increase was primarily due to a net increase in marketable securities activity as a result of the purchase of held-to-maturity debt securities of $91.4 million partially offset by the sale of equity securities of $81.5 million, and an increase of $19.4 million in capital expenditures to support our real estate development. Financing Activities For the twenty-six weeks ended June 28, 2023, net cash used in financing activities was $3.6 million compared to $3.8 million for the twenty-six weeks ended June 29, 2022, a decrease of $0.2 million. This decrease was primarily due to a decrease in distributions paid to non-controlling interest holders and an increase of proceeds from stock option exercises, partially offset by an increase in withholding taxes related to the vesting of equity awards. Convertible Notes In March 2021, we issued $250.0 million aggregate principal amount of 0% Convertible Senior Notes due 2028 in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933. The Convertible Notes will mature on March 1, 2028, unless earlier converted, redeemed or repurchased in certain circumstances. Upon conversion, we pay or deliver, as the case may be, cash, shares of Class A common stock or a combination of cash and shares of Class A common stock, at our election. Refer to Note 6, Debt, in the accompanying Condensed Consolidated Financial Statements, for additional information. Revolving Credit Facility In August 2019, we entered into a Revolving Credit Facility, which matures in March 2026 and permits borrowings up to $50.0 million, with the ability to increase available borrowings up to an additional $100.0 million, subject to satisfaction of certain conditions. The Revolving Credit Facility also permits the issuance of letters of credit upon our request of up to $15.0 million. Under the Revolving Credit Facility, outstanding borrowings bear interest at either: (i) LIBOR, or the Secured Overnight Financing Rate upon the discontinuance or unavailability of 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. As of June 28, 2023, no amounts were outstanding under the Revolving Credit Facility. The obligations under the Revolving Credit Facility are secured by a first-priority security interest in substantially all of the assets of SSE Holdings and the guarantors. The obligations under the Revolving Credit Facility are guaranteed by each of SSE Holdings' direct and indirect subsidiaries, with certain exceptions. The Revolving Credit Facility requires us to comply with maximum net lease adjusted leverage and minimum fixed charge coverage ratios, as well as other customary affirmative and negative covenants. As of June 28, 2023, we were in compliance with all covenants. Contractual Obligations Material contractual obligations arising in the normal course of business primarily consist of operating and finance lease obligations, long-term debt, liabilities under Tax Receivable Agreement and purchase obligations. The timing and nature of these commitments are expected to have an impact on our liquidity and capital requirements in future periods. Refer to Note 6, Debt and Note 7, Leases, in the accompanying Condensed Consolidated Financial Statements included in Part I, Item 1 for additional information relating to our long-term debt and operating and financing leases. Liabilities under Tax Receivable Agreement include amounts to be paid to the non-controlling interest holders, assuming we will have sufficient taxable income over the term of the Tax Receivable Agreement to utilize the related tax benefits. Refer to Note 10, Income Taxes, and Note 13, Commitments and Contingencies, in the accompanying Condensed Consolidated Financial Statements included in Part I, Item 1, for additional information relating to our Tax Receivable Agreement and related liabilities. Purchase obligations include all legally binding contracts, including commitments for the purchase, construction or remodeling of real estate and facilities, firm minimum commitments for inventory purchases, equipment purchases, marketing-related contracts, Shake Shack Inc. Form 10-Q | 41 Table of Contents software acquisition/license commitments and service contracts. The majority of our purchase obligations are due within the next 12 months. CRITICAL ACCOUNTING POLICIES AND ESTIMATES Our discussion and analysis of our consolidated financial condition and results of operations is based upon the accompanying Condensed Consolidated Financial Statements and notes thereto, which have been prepared in accordance with GAAP. The preparation of the Condensed Consolidated Financial Statements requires us to make estimates, judgments and assumptions, which we believe to be reasonable, based on the information available. These estimates and assumptions affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. Variances in the estimates or assumptions used to actual experience could yield materially different accounting results. On an ongoing basis, we evaluate the continued appropriateness of our accounting policies and resulting estimates to make adjustments we consider appropriate under the facts and circumstances. There have been no significant changes to our critical accounting policies as disclosed in our Annual Report on Form 10-K for the fiscal year ended December 28, 2022. Recently Issued Accounting Pronouncements Refer to Note 2, Summary of Significant Accounting Policies under Part I, Item 1 of this Form 10-Q. Item 3. Quantitative and Qualitative Disclosures About Market Risk. There have been no material changes to our exposure to market risks as described in Part II, Item 7A of our Annual Report on Form 10-K for the fiscal year ended December 28, 2022.