Shake Shack Inc. 10-Q

Item 1. Financial Statements (Unaudited). Page Condensed Consolidated Balance Sheets 3 Condensed Consolidated Statements of Income (Loss) 4 Condensed Consolidated Statements of Comprehensive Income (Loss) 5 Condensed Consolidated Statements of Stockholders' Equity 6 Condensed Consolidated Statements of Cash Flows 8 Notes to Condensed Consolidated Financial Statements 9 2 | Shake Shack Inc. Form 10-Q Table of Contents SHAKE SHACK INC. CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (in thousands, except share and per share amounts) September 27 2023 December 28 2022 ASSETS Current assets: Cash and cash equivalents $ 190,020 $ 230,521 Marketable securities 94,957 80,707 Accounts receivable, net 13,889 13,877 Inventories 4,608 4,184 Prepaid expenses and other current assets 19,762 14,699 Total current assets 323,236 343,988 Property and equipment, net of accumulated depreciation of $ 353,303 and $ 290,362 , respectively 525,557 467,031 Operating lease assets 397,870 367,488 Deferred income taxes, net 302,156 300,538 Other assets 16,037 15,817 TOTAL ASSETS $ 1,564,856 $ 1,494,862 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 21,251 $ 20,407 Accrued expenses 47,630 47,945 Accrued wages and related liabilities 18,164 17,576 Operating lease liabilities, current 47,610 42,238 Other current liabilities 17,522 19,552 Total current liabilities 152,177 147,718 Long-term debt 245,375 244,589 Long-term operating lease liabilities 463,370 427,227 Liabilities under tax receivable agreement, net of current portion 235,614 234,893 Other long-term liabilities 26,322 20,687 Total liabilities 1,122,858 1,075,114 Commitments and contingencies (Note 13) Stockholders' equity: Preferred stock, no par value—10,000,000 shares authorized; none issued and outstanding as of September 27, 2023 and December 28, 2022. — — Class A common stock, $0.001 par value—200,000,000 shares authorized; 39,466,268 and 39,284,998 shares issued and outstanding as of September 27, 2023 and December 28, 2022, respectively. 39 39 Class B common stock, $0.001 par value—35,000,000 shares authorized; 2,834,513 and 2,869,513 shares issued and outstanding as of September 27, 2023 and December 28, 2022, respectively. 3 3 Additional paid-in capital 423,811 415,611 Accumulated deficit ( 7,496 ) ( 20,537 ) Accumulated other comprehensive loss ( 3 ) — Total stockholders' equity attributable to Shake Shack Inc. 416,354 395,116 Non-controlling interests 25,644 24,632 Total equity 441,998 419,748 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,564,856 $ 1,494,862 See accompanying Notes to Condensed Consolidated Financial Statements. Shake Shack Inc. Form 10-Q | 3 Table of Contents SHAKE SHACK INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS) (UNAUDITED) (in thousands, except per share amounts) Thirteen Weeks Ended Thirty-Nine Weeks Ended September 27 2023 September 28 2022 September 27 2023 September 28 2022 Shack sales $ 264,980 $ 219,501 $ 771,044 $ 639,346 Licensing revenue 11,227 8,313 30,246 22,611 TOTAL REVENUE 276,207 227,814 801,290 661,957 Shack-level operating expenses: Food and paper costs 77,180 67,774 224,752 193,645 Labor and related expenses 76,233 64,638 225,655 190,954 Other operating expenses 37,307 33,680 108,352 96,002 Occupancy and related expenses 20,300 17,337 58,684 50,270 General and administrative expenses 30,939 26,931 93,726 87,804 Depreciation and amortization expense 23,130 18,647 66,704 53,589 Pre-opening costs 4,969 3,041 14,103 8,576 Impairment and loss on disposal of assets 492 592 2,098 1,697 TOTAL EXPENSES 270,550 232,640 794,074 682,537 INCOME (LOSS) FROM OPERATIONS 5,657 ( 4,826 ) 7,216 ( 20,580 ) Other income, net 3,441 1,482 9,505 1,731 Interest expense ( 433 ) ( 475 ) ( 1,241 ) ( 1,145 ) INCOME (LOSS) BEFORE INCOME TAXES 8,665 ( 3,819 ) 15,480 ( 19,994 ) Income tax expense (benefit) 529 ( 1,508 ) 1,743 ( 5,098 ) NET INCOME (LOSS) 8,136 ( 2,311 ) 13,737 ( 14,896 ) Less: Net income (loss) attributable to non-controlling interests 509 ( 287 ) 696 ( 1,522 ) NET INCOME (LOSS) ATTRIBUTABLE TO SHAKE SHACK INC. $ 7,627 $ ( 2,024 ) $ 13,041 $ ( 13,374 ) Earnings (loss) per share of Class A common stock: Basic $ 0.19 $ ( 0.05 ) $ 0.33 $ ( 0.34 ) Diluted $ 0.19 $ ( 0.05 ) $ 0.31 $ ( 0.34 ) Weighted average shares of Class A common stock outstanding: Basic 39,460 39,274 39,402 39,221 Diluted 43,978 39,274 43,884 39,221 See accompanying Notes to Condensed Consolidated Financial Statements. 4 | Shake Shack Inc. Form 10-Q Table of Contents SHAKE SHACK INC. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED) (in thousands) Thirteen Weeks Ended Thirty-Nine Weeks Ended September 27 2023 September 28 2022 September 27 2023 September 28 2022 Net income (loss) $ 8,136 $ ( 2,311 ) $ 13,737 $ ( 14,896 ) Other comprehensive income (loss), net of tax (1) : Change in foreign currency translation adjustment 1 — ( 3 ) ( 2 ) OTHER COMPREHENSIVE INCOME (LOSS) 1 — ( 3 ) ( 2 ) COMPREHENSIVE INCOME (LOSS) 8,137 ( 2,311 ) 13,734 ( 14,898 ) Less: Comprehensive income (loss) attributable to non-controlling interests 509 ( 287 ) 696 ( 1,522 ) COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO SHAKE SHACK INC. $ 7,628 $ ( 2,024 ) $ 13,038 $ ( 13,376 ) (1) Net of tax expense of $ 0 for the thirteen and thirty-nine weeks ended September 27, 2023 and September 28, 2022. See accompanying Notes to Condensed Consolidated Financial Statements. Shake Shack Inc. Form 10-Q | 5 Table of Contents SHAKE SHACK INC. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED) (in thousands, except share amounts) For the Thirteen Weeks Ended September 27, 2023 and September 28, 2022 Class A Common Stock Class B Common Stock Additional Paid-In Capital Retained Earnings (Accumulated Deficit) Accumulated Other Comprehensive Income (Loss) Non- Controlling Interest Total Equity Shares Amount Shares Amount BALANCE, JUNE 28, 2023 39,449,246 $ 39 2,844,513 $ 3 $ 421,356 $ ( 15,123 ) $ ( 4 ) $ 25,088 $ 431,359 Net income — — — — — 7,627 — 509 8,136 Other comprehensive income (loss): Net change in foreign currency translation adjustment — — — — — — 1 — 1 Equity-based compensation — — — — 3,563 — — — 3,563 Activity under stock compensation plans 7,022 — — — ( 469 ) — — 197 ( 272 ) Redemption of LLC Interests 10,000 — ( 10,000 ) — 71 — — ( 71 ) — Establishment of liabilities under tax receivable agreement and related changes to deferred tax assets associated with increases in tax basis — — — — ( 710 ) — — — ( 710 ) Distributions paid to non-controlling interest holders — — — — — — — ( 79 ) ( 79 ) BALANCE, SEPTEMBER 27, 2023 39,466,268 $ 39 2,834,513 $ 3 $ 423,811 $ ( 7,496 ) $ ( 3 ) $ 25,644 $ 441,998 BALANCE, JUNE 29, 2022 39,266,670 $ 39 2,871,513 $ 3 $ 410,520 $ ( 7,796 ) $ ( 1 ) $ 24,871 $ 427,636 Net loss — — — — — ( 2,024 ) — ( 287 ) ( 2,311 ) Other comprehensive income (loss): Net change in foreign currency translation adjustment — — — — — — — — — Equity-based compensation — — — — 3,570 — — — 3,570 Activity under stock compensation plans 11,029 — — — ( 182 ) — — 245 63 Redemption of LLC Interests 2,000 — ( 2,000 ) — 7 — — ( 7 ) — Establishment of liabilities under tax receivable agreement and related changes to deferred tax assets associated with increases in tax basis — — — — ( 641 ) — — — ( 641 ) Distributions paid to non-controlling interest holders — — — — — — — ( 65 ) ( 65 ) BALANCE, SEPTEMBER 28, 2022 39,279,699 $ 39 2,869,513 $ 3 $ 413,274 $ ( 9,820 ) $ ( 1 ) $ 24,757 $ 428,252 6 | Shake Shack Inc. Form 10-Q Table of Contents For the Thirty-Nine Weeks Ended September 27, 2023 and September 28, 2022 Class A Common Stock Class B Common Stock Additional Paid-In Capital Retained Earnings (Accumulated Deficit) Accumulated Other Comprehensive Income (Loss) Non- Controlling Interest Total Equity Shares Amount Shares Amount BALANCE, DECEMBER 28, 2022 39,284,998 $ 39 2,869,513 $ 3 $ 415,611 $ ( 20,537 ) $ — $ 24,632 $ 419,748 Net income — — — — — 13,041 — 696 13,737 Other comprehensive income (loss): Net change in foreign currency translation adjustment — — — — — — ( 3 ) — ( 3 ) Equity-based compensation — — — — 11,438 — — — 11,438 Activity under stock compensation plans 146,270 — — — ( 3,023 ) — — 712 ( 2,311 ) Redemption of LLC Interests 35,000 — ( 35,000 ) — 265 — — ( 265 ) — Establishment of liabilities under tax receivable agreement and related changes to deferred tax assets associated with increases in tax basis — — — — ( 480 ) — — — ( 480 ) Distributions paid to non-controlling interest holders — — — — — — — ( 131 ) ( 131 ) BALANCE, SEPTEMBER 27, 2023 39,466,268 $ 39 2,834,513 $ 3 $ 423,811 $ ( 7,496 ) $ ( 3 ) $ 25,644 $ 441,998 BALANCE, DECEMBER 29, 2021 39,142,397 $ 39 2,921,587 $ 3 $ 405,940 $ 3,554 $ 1 $ 26,063 $ 435,600 Net loss — — — — — ( 13,374 ) — ( 1,522 ) ( 14,896 ) Other comprehensive income (loss): Net change in foreign currency translation adjustment — — — — — — ( 2 ) — ( 2 ) Equity-based compensation — — — — 10,295 — — — 10,295 Activity under stock compensation plans 85,228 — — — ( 2,790 ) — — 918 ( 1,872 ) Redemption of LLC Interests 52,074 — ( 52,074 ) — 313 — — ( 313 ) — Establishment of liabilities under tax receivable agreement and related changes to deferred tax assets associated with increases in tax basis — — — — ( 484 ) — — — ( 484 ) Distributions paid to non-controlling interest holders — — — — — — — ( 389 ) ( 389 ) BALANCE, SEPTEMBER 28, 2022 39,279,699 $ 39 2,869,513 $ 3 $ 413,274 $ ( 9,820 ) $ ( 1 ) $ 24,757 $ 428,252 See accompanying Notes to Condensed Consolidated Financial Statements. Shake Shack Inc. Form 10-Q | 7 Table of Contents SHAKE SHACK INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (in thousands) Thirty-Nine Weeks Ended September 27 2023 September 28 2022 OPERATING ACTIVITIES Net income (loss) (including amounts attributable to non-controlling interests) $ 13,737 $ ( 14,896 ) Adjustments to reconcile net income (loss) to net cash provided by operating activities Depreciation and amortization expense 66,704 53,589 Amortization of debt issuance costs 786 786 Amortization of cloud computing asset 1,320 1,080 Non-cash operating lease cost 49,775 43,159 Equity-based compensation 11,220 10,155 Deferred income taxes 7,092 12,215 Non-cash interest expense 94 181 Gain on sale of equity securities ( 81 ) — Net amortization of discount on held-to-maturity securities ( 939 ) — Impairment and loss on disposal of assets 2,098 1,697 Unrealized loss on equity securities — 400 Changes in operating assets and liabilities: Accounts receivable ( 12 ) 1,840 Inventories ( 424 ) ( 146 ) Prepaid expenses and other current assets ( 3,056 ) ( 4,767 ) Other assets ( 4,750 ) ( 5,966 ) Accounts payable ( 5,064 ) ( 2,069 ) Accrued expenses ( 6,424 ) ( 17,783 ) Accrued wages and related liabilities 555 3,052 Other current liabilities ( 2,757 ) 4,376 Operating lease liabilities ( 41,725 ) ( 32,558 ) Other long-term liabilities 2,442 ( 10 ) NET CASH PROVIDED BY OPERATING ACTIVITIES 90,591 54,335 INVESTING ACTIVITIES Purchases of property and equipment ( 113,033 ) ( 94,797 ) Purchases of held-to-maturity securities ( 94,019 ) — Purchases of equity securities ( 690 ) ( 415 ) Sales of equity securities 81,478 — NET CASH USED IN INVESTING ACTIVITIES ( 126,264 ) ( 95,212 ) FINANCING ACTIVITIES Payments on principal of finance leases ( 2,383 ) ( 2,260 ) Distributions paid to non-controlling interest holders ( 131 ) ( 389 ) Proceeds from stock option exercises 631 334 Employee withholding taxes related to net settled equity awards ( 2,942 ) ( 2,214 ) NET CASH USED IN FINANCING ACTIVITIES ( 4,825 ) ( 4,529 ) Effect of exchange rate changes on cash and cash equivalents ( 3 ) ( 2 ) DECREASE IN CASH AND CASH EQUIVALENTS ( 40,501 ) ( 45,408 ) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 230,521 302,406 CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 190,020 $ 256,998 See accompanying Notes to Condensed Consolidated Financial Statements. 8 | Shake Shack Inc. Form 10-Q Table of Contents SHAKE SHACK INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share amounts) Page Note 1 Nature of Operations 10 Note 2 Summary of Significant Accounting Policies 10 Note 3 Revenue 11 Note 4 Fair Value Measurements 12 Note 5 Supplemental Balance Sheet Information 13 Note 6 Debt 14 Note 7 Leases 15 Note 8 Non-Controlling Interests 18 Note 9 Equity-Based Compensation 20 Note 10 Income Taxes 21 Note 11 Earnings (Loss) Per Share 22 Note 12 Supplemental Cash Flow Information 23 Note 13 Commitments and Contingencies 24 Note 14 Related Party Transactions 24 Shake Shack Inc. Form 10-Q | 9 Table of Contents 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"). Shake Shack Inc. is the sole managing member of SSE Holdings and, as sole managing member, the Company operates and controls all of the business and affairs of SSE Holdings. As a result, the Company consolidates the financial results of SSE Holdings and reports a non-controlling interest representing the economic interest in SSE Holdings held by the other members of SSE Holdings. As of September 27, 2023 the Company owned 93.3 % 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. The Company operates and licenses Shake Shack restaurants ("Shacks"), which serve burgers, chicken, hot dogs, crinkle cut fries, shakes, frozen custard, beer, wine and more. As of September 27, 2023, there were 495 Shacks in operation system-wide, of which 280 were domestic Company-operated Shacks, 39 were domestic licensed Shacks and 176 were international licensed Shacks. NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accompanying unaudited Condensed Consolidated Financial Statements include the accounts of Shake Shack Inc. and its subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. These interim Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") and on a basis consistent in all material respects with the accounting policies described in its Annual Report on Form 10-K for the fiscal year ended December 28, 2022 ("2022 Form 10-K"). Certain information and footnote disclosures normally presented in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. These interim Condensed Consolidated Financial Statements should be read in conjunction with the consolidated financial statements and related notes thereto included in its 2022 Form 10-K. In the Company's opinion, all adjustments, which are normal and recurring in nature, necessary for a fair presentation of the financial position and results of operation have been included. Operating results for interim periods are not necessarily indicative of the results that may be expected for a full fiscal year. The Company has elected to reclassify certain marketing expenses for prior periods to conform with the presentation for the thirteen and thirty-nine weeks ended September 27, 2023. These reclassifications had no effect on previously reported Net Loss. For the thirteen and thirty-nine weeks ended September 28, 2022, the Company reclassified $ 286 and $ 764 , respectively from Other operating expenses to General and administrative expenses in the accompanying Condensed Consolidated Statements of Income (Loss). SSE Holdings is considered a variable interest entity. Shake Shack Inc. is the primary beneficiary as the Company has the majority economic interest in SSE Holdings and, as the sole managing member, has 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, the Company consolidates SSE Holdings. The assets and liabilities of SSE Holdings represent substantially all of the Company's consolidated assets and liabilities with the exception of certain deferred taxes and liabilities under the Tax Receivable Agreement. As of September 27, 2023 and December 28, 2022, the net assets of SSE Holdings were $ 384,222 and $ 362,571 , respectively. The assets of SSE Holdings are subject to certain restrictions in SSE Holdings' revolving credit agreement. Fiscal Year The Company operates on a 52/53 week fiscal year ending on the last Wednesday of December. Fiscal 2023 contains 52 weeks and ends on December 27, 2023. Fiscal 2022 contained 52 weeks and ended on December 28, 2022. Unless otherwise stated, references to years in this report relate to fiscal years. 10 | Shake Shack Inc. Form 10-Q Table of Contents Use of Estimates The preparation of these Condensed 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. Recently Issued Accounting Pronouncements The Company reviewed all recently issued accounting pronouncements and concluded that they were not applicable or not expected to have a significant impact on its Condensed Consolidated Financial Statements . NOTE 3: REVENUE Revenue Recognition Revenue primarily 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 the Company expects 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 at that time. 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. Delivery services are fulfilled by third-party delivery partners whether ordered through the Shack app and website ("Company-owned platforms") or through third-party delivery platforms. Revenue from orders through Company-owned platforms includes delivery fees and is recognized when the delivery partner transfers the order to the guest as the Company controls the delivery. For these sales, the Company receives payment directly from the guest at the time of sale. Revenue from orders through third-party delivery platforms is recognized when the order is transferred to the third-party delivery partner and excludes delivery fees collected by the delivery partner as the Company does not control the delivery. The Company receives payment from the delivery partner subsequent to the transfer of the order and the payment terms are short-term in nature. For all delivery sales, the Company is considered the principal and recognizes the revenue on a gross basis. The Company sells gift cards which do not have expiration dates. Revenue from gift cards is recognized when gift cards are redeemed by the customer or, in the event a gift card is not expected to be redeemed, in proportion to actual redemptions of gift cards ("gift card breakage"). The gift card breakage rate is determined from historical gift card redemption patterns. Gift card breakage income for the thirteen weeks ended September 27, 2023 and September 28, 2022 was $ 60 and $ 47 , respectively. Gift card breakage income for the thirty-nine weeks ended September 27, 2023 and September 28, 2022 was $ 238 and $ 1,415 , respectively. The thirty-nine weeks ended September 28, 2022 included a cumulative catch-up adjustment of $ 1,281 . Gift card breakage income is included in Shack sales in the Condensed Consolidated Statements of Income (Loss). Licensing revenue includes 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 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 license and considered one performance obligation per Shack. The Company determines the transaction price for each contract, which is comprised of the initial territory fee and an estimate of the total Shack opening fees the Company expects to be entitled to. The calculation of total Shack opening fees included in the transaction price requires judgment, as it is based on an estimated number of Shacks the Company expects the licensee to open. The transaction price is then allocated equally to each Shack expected to open. The performance obligation is satisfied over time, starting when a Shack opens through the end of the license term for the related Shack, therefore 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 license agreement and payment for the Shack opening fees is received either in advance of or upon Shake Shack Inc. Form 10-Q | 11 Table of Contents opening the related Shack. These payments are initially deferred and recognized in revenue as the performance obligations are satisfied. Revenue from sales-based royalties is recognized as the related sales occur. Revenue disaggregated by type was as follows: Thirteen Weeks Ended Thirty-Nine Weeks Ended September 27 2023 September 28 2022 September 27 2023 September 28 2022 Shack sales $ 264,980 $ 219,501 $ 771,044 $ 639,346 Licensing revenue: Sales-based royalties 10,898 8,050 29,388 21,936 Initial territory and opening fees 329 263 858 675 Total revenue $ 276,207 $ 227,814 $ 801,290 $ 661,957 The aggregate amount of the transaction price allocated to performance obligations that were unsatisfied or partially unsatisfied as of September 27, 2023 was $ 23,608 . The Company expects 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 Contract liabilities and receivables from contracts with customers were as follows: September 27 2023 December 28 2022 Shack sales receivables $ 7,531 $ 8,779 Licensing receivables, net of allowance for doubtful accounts 4,871 3,918 Gift card liability 1,972 2,285 Deferred revenue, current 1,180 969 Deferred revenue, long-term 16,709 14,340 Revenue recognized that was included in the respective liability balances at the beginning of the period was as follows: Thirteen Weeks Ended Thirty-Nine Weeks Ended September 27 2023 September 28 2022 September 27 2023 September 28 2022 Gift card liability (1) $ 83 $ 82 $ 560 $ 1,725 Deferred revenue 311 234 829 638 (1) For the thirty-nine weeks ended September 28, 2022, amount includes the cumulative catch-up adjustment of $ 1,281 for gift card breakage income. NOTE 4: FAIR VALUE MEASUREMENTS Assets and Liabilities Measured at Fair Value on a Recurring Basis The carrying values of the Company's Cash and cash equivalents, Accounts receivable, net, Accounts payable and Accrued expenses approximate fair value due to the short-term nature of these financial instruments. 12 | Shake Shack Inc. Form 10-Q Table of Contents The Company's investments were as follows: September 27 2023 December 28 2022 Equity securities $ — $ 80,707 Held-to-maturity securities 94,957 — Total investments $ 94,957 $ 80,707 The Company classified its available-for-sale and held-to-maturity securities as Level 1 measurements within the fair value hierarchy. Refer to Note 6, Debt, for additional information relating to the fair value of the Company's outstanding debt instruments. The Company's held-to-maturity securities were as follows: September 27, 2023 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value U.S. Treasuries $ 94,957 $ 256 $ — $ 95,213 As of September 27, 2023, the contractual maturities of held-to-maturity securities were less than 12 months. Any expected credit losses would not be material to the Condensed Consolidated Statements of Income (Loss). A summary of other income (expense) from investments was as follows: Thirteen Weeks Ended Thirty-Nine Weeks Ended September 27 2023 September 28 2022 September 27 2023 September 28 2022 Income from investments $ 1,225 $ 290 $ 1,846 $ 502 Realized gain on sale of equity securities — — 81 — Unrealized gain (loss) on equity securities — 161 — ( 400 ) Total $ 1,225 $ 451 $ 1,927 $ 102 Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis Assets and liabilities measured at fair value on a non-recurring basis include long-lived assets, operating lease right-of-use assets and indefinite-lived intangible assets. The Company performs its impairment analysis at least annually or whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. There were no impairment charges recognized during the thirteen and thirty-nine weeks ended September 27, 2023 and September 28, 2022. NOTE 5: SUPPLEMENTAL BALANCE SHEET INFORMATION The components of Prepaid expenses and other current assets were as follows: September 27 2023 December 28 2022 Prepaid expenses $ 6,689 $ 3,815 Tenant allowance receivables 12,128 10,121 Other 945 763 Prepaid expenses and other current assets $ 19,762 $ 14,699 Shake Shack Inc. Form 10-Q | 13 Table of Contents The components of Other current liabilities were as follows: September 27 2023 December 28 2022 Sales tax payable $ 5,521 $ 5,363 Gift card liability 1,972 2,285 Current portion of financing equipment lease liabilities 3,235 2,546 Legal reserve 2,620 6,285 Other 4,174 3,073 Other current liabilities $ 17,522 $ 19,552 The components of Other long-term liabilities were as follows: September 27 2023 December 28 2022 Deferred licensing revenue $ 16,709 $ 14,340 Long-term portion of financing equipment lease liabilities 8,215 3,909 Other 1,398 2,438 Other long-term liabilities $ 26,322 $ 20,687 NOTE 6: DEBT Convertible Notes The Company's $ 250,000 aggregate principal amount of 0 % Convertible Senior Notes due 2028 (“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. The fair value of the Convertible Notes was approximately $ 181,408 and $ 162,500 , respectively, as of September 27, 2023 and December 28, 2022, 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. 14 | Shake Shack Inc. Form 10-Q Table of Contents Thirteen Weeks Ended Thirty-Nine Weeks Ended Classification September 27 2023 September 28 2022 September 27 2023 September 28 2022 Amortization expense on Convertible Notes Interest expense $ 262 $ 262 $ 786 $ 786 September 27 2023 December 28 2022 Convertible Notes $ 250,000 $ 250,000 Discount and debt issuance costs, net of amortization ( 4,625 ) ( 5,411 ) Long-term debt $ 245,375 $ 244,589 Revolving Credit Facility The Company maintains a revolving credit facility agreement ("Revolving Credit Facility") which permits borrowings up to $ 50,000 with the ability to increase available borrowings up to an additional $ 100,000 , subject to satisfaction of certain conditions. The Revolving Credit Facility has a maturity date of March 5, 2026. During the thirteen weeks ended September 27, 2023, the Company entered into the fourth amendment to the Revolving Credit Facility ("Fourth Amendment"), which, among other things, modifies the benchmark interest rate to either: (i) the base rate plus applicable margin ranging from 0.0 % to 1.5 % or (ii) the Secured Overnight Financing Rate (“SOFR”) plus applicable margin ranging from 1.0 % to 2.5 %, in each case depending on the net lease adjusted leverage ratio. As of September 27, 2023 and December 28, 2022, 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, as well as other customary affirmative and negative covenants. As of September 27, 2023, the Company was in compliance with all covenants. The Revolving Credit Facility also permits the issuance of letters of credit upon our request of up to $ 15,000 . As of September 27, 2023, the Company had outstanding letters of credit of $ 3,348 in connection with the Revolving Credit Facility. The Company had outstanding letters of credit of $ 1,863 in connection with the Revolving Credit Facility as of December 28, 2022. Thirteen Weeks Ended Thirty-Nine Weeks Ended Classification September 27 2023 September 28 2022 September 27 2023 September 28 2022 Interest expense on Revolving Credit Facility Interest expense $ 14 $ 28 $ 60 $ 101 Classification September 27 2023 December 28 2022 Unamortized deferred financing costs on Revolving Credit Facility Other assets $ 47 $ 62 NOTE 7: LEASES Nature of Leases Shake Shack currently leases all of its domestic Company-operated Shacks, the home office and certain equipment under various non-cancelable lease agreements that expire on various dates through 2044. The Company evaluates contracts entered into to determine whether the contract involves the use of property or equipment, which is either explicitly or implicitly identified in Shake Shack Inc. Form 10-Q | 15 Table of Contents the contract. The Company evaluates whether it controls the use of the asset, which is determined by assessing whether substantially all economic benefit from the use of the asset is obtained, and whether the Company has the right to direct the use of the asset. If these criteria are met, the Company has identified a lease within the contract, and therefore a right of use asset and lease liability are recorded on the Condensed Consolidated Balance Sheet. Upon possession of a leased asset, the Company determines whether the lease is an operating or finance lease. All of the Company's real estate leases are classified as operating leases and most equipment leases are classified as finance leases. Generally, 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 the Company would exercise the renewal options. Real estate leases typically contain fixed minimum rent payments and/or contingent rent payments which are 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. For operating leases, fixed lease payments are recognized as operating lease costs on a straight-line basis over the lease term within the Condensed Consolidated Statements of Income (Loss) in the following line items. Lease expense incurred before a Shack opens is recorded in Pre-opening costs. Once a domestic Company-operated Shack opens, the straight-line lease expense and contingent rent, if applicable, are recorded in Occupancy and related expenses. Many of these leases also require the Company to pay real estate taxes, common area maintenance costs and other occupancy costs which are included in Occupancy and related expenses. 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 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 costs for both operating and finance leases, if any, are recognized as incurred. Leases with a term of 12 months or less are deemed short-term and are not recognized on the Condensed Consolidated Balance Sheets. Fixed lease payments for short-term leases are recognized on a straight-line basis over the lease term. The Company calculates 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. The Company uses its incremental borrowing rate ("IBR") in determining the present value of future lease payments as there are no explicit rates provided in the leases. 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 the Company's 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. The Company expends cash for leasehold improvements to build out and equip leased properties. Generally, a portion of the leasehold improvements and building costs are reimbursed by the landlords through landlord incentives pursuant to agreed-upon terms in the lease agreements. Landlord incentives usually take the form of cash, full or partial credits against future minimum or contingent rents otherwise payable by the Company, or a combination thereof. In most cases, landlord incentives are received after the Company takes possession of the property and as milestones are met during the construction of the property. The Company includes these amounts in the measurement of the initial operating lease liability, and lease asset. 16 | Shake Shack Inc. Form 10-Q Table of Contents A summary of operating and finance lease assets and lease liabilities were as follows: Classification September 27 2023 December 28 2022 Operating leases Operating lease assets $ 397,870 $ 367,488 Finance leases Property and equipment, net 11,155 6,152 Total right-of-use assets $ 409,025 $ 373,640 Operating leases: Operating lease liabilities, current $ 47,610 $ 42,238 Long-term operating lease liabilities 463,370 427,227 Finance leases: Other current liabilities 3,235 2,546 Other long-term liabilities 8,215 3,909 Total lease liabilities $ 522,430 $ 475,920 The components of lease expense were as follows: Thirteen Weeks Ended Thirty-Nine Weeks Ended Classification September 27 2023 September 28 2022 September 27 2023 September 28 2022 Operating lease cost Occupancy and related expenses Pre-opening costs General and administrative expenses $ 17,177 $ 15,178 $ 49,775 $ 43,188 Finance lease cost: Amortization of right-of-use assets Depreciation and amortization expense 936 750 2,376 2,275 Interest on lease liabilities Interest expense 163 55 305 162 Variable lease cost Occupancy and related expenses Pre-opening costs General and administrative expenses 4,488 3,887 12,940 10,994 Short-term lease cost Occupancy and related expenses 206 264 719 395 Total lease cost $ 22,970 $ 20,134 $ 66,115 $ 57,014 Shake Shack Inc. Form 10-Q | 17 Table of Contents As of September 27, 2023, future minimum lease payments for operating and finance leases consisted of the following: Operating Leases Finance Leases 2023 (1) $ 7,463 $ 1,014 2024 76,359 3,654 2025 80,780 3,010 2026 77,336 2,240 2027 73,003 1,893 Thereafter 342,416 1,106 Total minimum payments 657,357 12,917 Less: imputed interest 158,505 1,467 Total lease liabilities $ 498,852 $ 11,450 (1) Operating leases are net of certain tenant allowance receivables that were reclassified to Other current assets as of September 27, 2023. As of September 27, 2023 the Company had additional operating lease commitments of $ 129,245 for non-cancelable leases without a possession date, which commence in 2023 or later. These lease commitments are materially consistent with the leases that have been executed thus far. A summary of lease terms and discount rates for operating and finance leases were as follows: September 27 2023 December 28 2022 Weighted average remaining lease term (years): Operating leases 8.9 8.9 Finance leases 4.9 5.1 Weighted average discount rate: Operating leases 6.0 % 5.7 % Finance leases 5.4 % 4.0 % Supplemental cash flow information related to leases was as follows: Thirty-Nine Weeks Ended September 27 2023 September 28 2022 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 52,913 $ 45,398 Operating cash flows from finance leases 305 162 Financing cash flows from finance leases 2,383 2,260 Right-of-use assets obtained in exchange for lease obligations: Operating leases 60,560 45,927 Finance leases 7,379 1,376 NOTE 8: NON-CONTROLLING INTERESTS Shake Shack is the primary beneficiary and sole managing member of SSE Holdings and, as a result, consolidates the financial results of SSE Holdings. The Company reports 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 18 | Shake Shack Inc. Form 10-Q Table of Contents 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, the Company will receive a corresponding number of LLC Interests, increasing the total ownership interest in SSE Holdings. Changes in the ownership interest in SSE Holdings while the Company retains its 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: September 27, 2023 December 28, 2022 LLC Interests Ownership % LLC Interests Ownership % Number of LLC Interests held by Shake Shack Inc. 39,466,268 93.3 % 39,284,998 93.2 % Number of LLC Interests held by non-controlling interest holders 2,834,513 6.7 % 2,869,513 6.8 % Total LLC Interests outstanding 42,300,781 100.0 % 42,154,511 100.0 % The weighted average ownership percentages for the applicable reporting periods are used to attribute Net income (loss) and Other comprehensive income (loss) to the non-controlling interest holders. Thirteen Weeks Ended Thirty-Nine Weeks Ended September 27 2023 September 28 2022 September 27 2023 September 28 2022 Non-controlling interest holders' weighted average ownership percentages 6.7 % 6.8 % 6.7 % 6.9 % The following table summarizes the effects of changes in ownership of SSE Holdings on the Company's equity: Thirteen Weeks Ended Thirty-Nine Weeks Ended September 27 2023 September 28 2022 September 27 2023 September 28 2022 Net income (loss) attributable to Shake Shack Inc. $ 7,627 $ ( 2,024 ) $ 13,041 $ ( 13,374 ) Other comprehensive income (loss): Unrealized gain (loss) on foreign currency translation adjustment 1 — ( 3 ) ( 2 ) Transfers (to) from non-controlling interests: Increase in additional paid-in capital as a result of the redemption of LLC Interests 71 7 265 313 Decrease in additional paid-in capital as a result of activity under its stock compensation plan and the related income tax effects ( 469 ) ( 182 ) ( 3,023 ) ( 2,790 ) Total effect of changes in ownership interest on equity (loss) attributable to Shake Shack Inc. $ 7,230 $ ( 2,199 ) $ 10,280 $ ( 15,853 ) Shake Shack Inc. Form 10-Q | 19 Table of Contents The following table summarizes the LLC Interests activity: Thirteen Weeks Ended Thirty-Nine Weeks Ended September 27 2023 September 28 2022 September 27 2023 September 28 2022 LLC Interests activity under the Company's stock compensation plan Number of LLC Interests received by Shake Shack Inc. 7,022 11,029 146,270 85,228 Redemption and acquisition of LLC Interests Number of LLC Interests redeemed by non-controlling interest holders 10,000 2,000 35,000 52,074 Number of LLC Interests received by Shake Shack Inc. 10,000 2,000 35,000 52,074 Issuance of Class A common stock Shares of Class A common stock issued in connection with redemptions of LLC Interests 10,000 2,000 35,000 52,074 Cancellation of Class B common stock Shares of Class B common stock surrendered and canceled 10,000 2,000 35,000 52,074 NOTE 9: EQUITY-BASED COMPENSATION A summary of equity-based compensation expense by award type was as follows: Thirteen Weeks Ended Thirty-Nine Weeks Ended September 27 2023 September 28 2022 September 27 2023 September 28 2022 Performance stock units $ 391 $ 1,053 $ 2,450 $ 3,476 Restricted stock units 3,095 2,462 8,770 6,679 Equity-based compensation expense $ 3,486 $ 3,515 $ 11,220 $ 10,155 Total income tax benefit recognized related to equity-based compensation $ 105 $ 107 $ 305 $ 224 Equity-based compensation expense recognized was as follows: Thirteen Weeks Ended Thirty-Nine Weeks Ended September 27 2023 September 28 2022 September 27 2023 September 28 2022 General and administrative expenses $ 3,163 $ 3,245 $ 10,254 $ 9,390 Labor and related expenses 323 270 966 765 Equity-based compensation expense $ 3,486 $ 3,515 $ 11,220 $ 10,155 20 | Shake Shack Inc. Form 10-Q Table of Contents NOTE 10: INCOME TAXES Shake Shack is the sole managing member of SSE Holdings and, as a result, consolidates the financial results of SSE Holdings. SSE Holdings is treated as a partnership for U.S. federal and most applicable state and local income tax purposes. As a partnership, SSE Holdings is not subject to U.S. federal and certain state and local income taxes. Any taxable income or loss generated by SSE Holdings is passed through to and included in the taxable income or loss of its members, including the Company, on a pro rata basis. The Company is subject to U.S. federal income taxes, in addition to state and local income taxes with respect to its allocable share of any taxable income or loss of SSE Holdings, as well as any stand-alone income or loss generated by Shake Shack Inc. The Company is also subject to withholding taxes in foreign jurisdictions. The effective income tax rates for the thirteen weeks ended September 27, 2023 and September 28, 2022 were 6.1 % and 39.5 %, respectively. The decrease was primarily driven by the change in pre-tax income and the impact of permanent differences and discrete expense on pre-tax income for the period compared to pre-tax loss for 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. The weighted-average ownership interest in SSE Holdings was 93.3 % and 93.2 % for the thirteen weeks ended September 27, 2023 and September 28, 2022, respectively. The effective income tax rates for the thirty-nine weeks ended September 27, 2023 and September 28, 2022 were 11.3 % and 25.5 %, 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 for 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. The Company's weighted-average ownership interest in SSE Holdings was 93.3 % and 93.1 % for the thirty-nine weeks ended September 27, 2023 and September 28, 2022, respectively. Deferred Tax Assets and Liabilities During the thirty-nine weeks ended September 27, 2023, the Company acquired an aggregate of 181,270 LLC Interests in connection with the redemption of LLC Interests and activity relating to its stock compensation plan. The Company recognized a deferred tax asset in the amount of $ 48 associated with the basis difference in its investment in SSE Holdings upon acquisition of these LLC Interests. As of September 27, 2023, the total deferred tax asset related to the basis difference in the Company's investment in SSE Holdings was $ 83,023 . During the thirty-nine weeks ended September 27, 2023, the Company also recognized $ 200 of deferred tax assets related to additional tax basis increases 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. The Company evaluates the realizability of its deferred tax assets on a quarterly basis and establishes 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 September 27, 2023, the Company concluded, based on the weight of all available positive and negative evidence, that all of its deferred tax assets (except for those deferred tax assets relating to certain state tax credits and net operating losses and certain foreign tax credits) are more likely than not to be realized. As such, no additional valuation allowance was recognized. Tax Receivable Agreement Pursuant to the Company's election under Section 754 of the Internal Revenue Code (the "Code"), the Company expects to obtain an increase in its share of the tax basis in the net assets of SSE Holdings when LLC Interests are redeemed or exchanged by the other members of SSE Holdings. The Company plans to make an election under Section 754 of the Code for each taxable year in which a redemption or exchange of LLC Interest occurs. The Company intends to treat any redemptions and exchanges of LLC Interests as direct purchases of LLC Interests for U.S. federal income tax purposes. These increases in tax basis may reduce the amounts that would otherwise be paid 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, the Company entered into a tax receivable agreement with certain of the then-existing members of SSE Holdings (the "Tax Receivable Agreement") that provides for the payment by the Company of 85 % of the amount of any tax Shake Shack Inc. Form 10-Q | 21 Table of Contents benefits that are actually realized, or in some cases are deemed to realize, as a result of (i) increases in the Company's 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"). The Company expects to benefit from the remaining 15 % of any tax benefits that may actually realize. The TRA Payments are not conditioned upon any continued ownership interest in SSE Holdings or the Company. The rights of each member of SSE Holdings that is a party to the Tax Receivable Agreement, are assignable to transferees of their respective LLC Interests. During the thirty-nine weeks ended September 27, 2023, the Company acquired an aggregate of 35,000 LLC Interests in connection with the redemption of LLC Interests, which resulted in an increase in the tax basis of its investment in SSE Holdings subject to the provisions of the Tax Receivable Agreement. The Company recognized an additional liability in the amount of $ 721 for the TRA Payments due to the redeeming members, representing 85 % of the aggregate tax benefits the Company expects 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 estimates of future taxable income. During the thirty-nine weeks ended September 27, 2023 and September 28, 2022, inclusive of interest, no payments were made to the parties to the Tax Receivable Agreement. As of September 27, 2023, the total amount of TRA Payments due under the Tax Receivable Agreement, was $ 235,614 . Refer to Note 13, Commitments and Contingencies, for additional information relating to the liabilities under the Tax Receivable Agreement. NOTE 11: 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): Thirteen Weeks Ended Thirty-Nine Weeks Ended September 27 2023 September 28 2022 September 27 2023 September 28 2022 Numerator: Net income (loss) attributable to Shake Shack Inc.—basic $ 7,627 $ ( 2,024 ) $ 13,041 $ ( 13,374 ) Reallocation of net income attributable to non-controlling interests from the assumed conversion of Class B shares 509 — 696 — Net income (loss) attributable to Shake Shack Inc.—diluted $ 8,136 $ ( 2,024 ) $ 13,737 $ ( 13,374 ) Denominator: Weighted average shares of Class A common stock outstanding—basic 39,460 39,274 39,402 39,221 Effect of dilutive securities: Stock options 74 — 77 — Performance stock units 11 — 11 — Restricted stock units 129 — 82 — Convertible Notes 1,467 — 1,467 — Shares of Class B common stock 2,837 — 2,845 — Weighted average shares of Class A common stock outstanding—diluted 43,978 39,274 43,884 39,221 Earnings (loss) per share of Class A common stock—basic $ 0.19 $ ( 0.05 ) $ 0.33 $ ( 0.34 ) Earnings (loss) per share of Class A common stock—diluted $ 0.19 $ ( 0.05 ) $ 0.31 $ ( 0.34 ) 22 | Shake Shack Inc. Form 10-Q Table of Contents 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 6, Debt, for additional information. 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 following table presents potentially dilutive securities excluded from the computations of diluted earnings (loss) per share of Class A common stock: Thirteen Weeks Ended Thirty-Nine Weeks Ended September 27 2023 September 28 2022 September 27 2023 September 28 2022 Stock options — 138,306 (2) — 138,306 (2) Performance stock units 100,898 (1) 160,064 (2) 100,898 (1) 160,064 (2) Restricted stock units — 398,269 (2) — 398,269 (2) Shares of Class B common stock — 2,869,513 (2) — 2,869,513 (2) Convertible notes — 1,466,975 (2) — 1,466,975 (2) (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 performance conditions associated with these awards were not met assuming the end of the reporting period was the end of the performance period. (2) Number of securities outstanding at the end of the period that were excluded from the computation of diluted loss per share of Class A common stock because the effect would have been anti-dilutive. NOTE 12: SUPPLEMENTAL CASH FLOW INFORMATION The following table sets forth supplemental cash flow information: Thirty-Nine Weeks Ended September 27 2023 September 28 2022 Cash paid for: Income taxes, net of refunds $ 3,147 $ 2,904 Interest, net of amounts capitalized 343 179 Non-cash investing activities: Accrued purchases of property and equipment 30,096 31,593 Capitalized equity-based compensation 147 93 Non-cash financing activities: Establishment of liabilities under tax receivable agreement 721 847 Shake Shack Inc. Form 10-Q | 23 Table of Contents NOTE 13: COMMITMENTS AND CONTINGENCIES Lease Commitments The Company is obligated under various operating leases for Shacks and the home office space, expiring in various years through 2044. Under certain of these leases, the Company is liable for contingent rent based on a percentage of sales in excess of specified thresholds and typically responsible for its proportionate share of real estate taxes, common area maintenance costs and other occupancy costs. Refer to Note 7, Leases, for additional information. Certain leases require the Company to obtain letters of credit. As of September 27, 2023, the Company held two letters of credit, one for $ 130 which expires in February 2026 and the second for $ 603 , which expires in August 2023 and renews automatically for one-year periods through January 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. The Company also enters into long-term, exclusive contracts with certain vendors to supply food, beverages and paper goods, obligating the Company to purchase specified quantities. Legal Contingencies The Company is subject to various legal proceedings, claims and liabilities, involving employees and guests alike, which arise in the ordinary course of business and are generally covered by insurance. As of September 27, 2023, the amount of the ultimate liability with respect to these matters was not material. Liabilities under Tax Receivable Agreement As described in Note 10, Income Taxes, the Company is a party to the Tax Receivable Agreement under which it is contractually committed to pay certain of the members of SSE Holdings 85 % of the amount of any tax benefits that are actually realized, or in some cases are deemed to realize, as a result of certain transactions. The Company is not obligated to make any payments under the Tax Receivable Agreement until the tax benefits associated with the transactions that gave rise to the payments 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 the Company does not generate sufficient taxable income in the aggregate over the term of the Tax Receivable Agreement to utilize the tax benefits, then it would not be required to make the related TRA Payments. During the thirty-nine weeks ended September 27, 2023 and September 28, 2022, the Company recognized liabilities totaling $ 721 and $ 847 , respectively, relating to the obligations under the Tax Receivable Agreement, after concluding that it was probable that it would have sufficient future taxable income over the term of the Tax Receivable Agreement to utilize the related tax benefits. As of September 27, 2023 and December 28, 2022, the total obligations under the Tax Receivable Agreement were $ 235,614 and $ 234,893 , respectively. There were no transactions subject to the Tax Receivable Agreement for which the Company did not recognize the related liability, as the Company concluded that it would have sufficient future taxable income to utilize all of the related tax benefits generated by all transactions that occurred during the thirty-nine weeks ended September 27, 2023. NOTE 14: RELATED PARTY TRANSACTIONS Union Square Hospitality Group The Chairman of the Board of Directors serves as the Executive Chairman of Union Square Hospitality Group, LLC. As a result, Union Square Hospitality Group, LLC and its subsidiary, set forth below, are considered related parties. 24 | Shake Shack Inc. Form 10-Q Table of Contents Hudson Yards Sports and Entertainment In fiscal 2011, Shake Shack 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 the Company a license fee based on a percentage of net food sales, as defined in the MLA. HYC also pays a percentage of profits on sales of branded beverages, as defined in the MLA. Thirteen Weeks Ended Thirty-Nine Weeks Ended Classification September 27 2023 September 28 2022 September 27 2023 September 28 2022 Amounts received from HYC Licensing revenue $ 419 $ 180 $ 728 $ 402 Classification September 27 2023 December 28 2022 Amounts due from HYC Accounts receivable, net $ 143 $ 69 Madison Square Park Conservancy The Chairman of the Board of Directors serves as a director of the Madison Square Park Conservancy ("MSP Conservancy"), with which Shake Shack has a license agreement and pays license fees to operate the Madison Square Park Shack. No amounts were due to MSP Conservancy as of September 27, 2023 and December 28, 2022. Thirteen Weeks Ended Thirty-Nine Weeks Ended Classification September 27 2023 September 28 2022 September 27 2023 September 28 2022 Amounts paid to MSP Conservancy Occupancy and related expenses $ 224 $ 383 $ 672 $ 859 Olo, Inc. The Chairman of the Board of Directors serves as a director of Olo, Inc. (formerly known as "Mobo Systems, Inc."), a platform the Company uses in connection with its mobile ordering application. Thirteen Weeks Ended Thirty-Nine Weeks Ended Classification September 27 2023 September 28 2022 September 27 2023 September 28 2022 Amounts paid to Olo, Inc. Other operating expenses $ 156 $ 110 $ 423 $ 316 Classification September 27 2023 December 28 2022 Amounts due to Olo, Inc. Accounts payable Accrued expenses $ 112 $ 39 Block, Inc. The Company's Chief Executive Officer is a member of the board of directors of Block, Inc. (formerly known as "Square, Inc."). The Company currently uses certain point-of-sale applications, payment processing services, hardware and other enterprise platform services in connection with its kiosk technology, sales for certain off-site events and the processing of a limited amount of sales at certain locations. Shake Shack Inc. Form 10-Q | 25 Table of Contents Thirteen Weeks Ended Thirty-Nine Weeks Ended Classification September 27 2023 September 28 2022 September 27 2023 September 28 2022 Amounts paid to Block, Inc. Other operating expenses $ 2,520 $ 1,092 $ 6,105 $ 2,952 Classification September 27 2023 December 28 2022 Amounts due to Block, Inc. Accounts payable Accrued expenses $ 40 $ 55 Tax Receivable Agreement The Company entered into a Tax Receivable Agreement that provides for the payment by the Company of 85 % of the amount of any tax benefits that are actually realized, or in some cases are deemed to realize, as a result of certain transactions. Refer to Note 10, Income Taxes, for additional information. No payments were made to the members of SSE Holdings pursuant to the Tax Receivable Agreement during the thirty-nine weeks ended September 27, 2023 and September 28, 2022. Classification September 27 2023 December 28 2022 Amounts due under the Tax Receivable Agreement Other current liabilities Liabilities under Tax Receivable Agreement, net of current portion $ 235,614 $ 234,893 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 September 27, 2023 and December 28, 2022, respectively. Thirteen Weeks Ended Thirty-Nine Weeks Ended Classification September 27 2023 September 28 2022 September 27 2023 September 28 2022 Amounts paid to non-controlling interest holders Non-controlling interests $ 79 $ 65 $ 131 $ 389