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EX-32 - CERTIFICATIONS OF CEO AND CFO PURSUANT TO SECTION 906 - Shake Shack Inc.shak-20160928_exhibit32.htm
EX-31.2 - CERTIFICATION OF CFO PURSUANT TO SECTION 302 - Shake Shack Inc.shak-20160928_exhibit312.htm
EX-31.1 - CERTIFICATION OF CEO PURSUANT TO SECTION 302 - Shake Shack Inc.shak-20160928_exhibit311.htm

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 28, 2016
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to ______
Commission file number: 001-36823
 
shak-img_shakeshacklogo.jpg
SHAKE SHACK INC.
(Exact name of registrant as specified in its charter)
 
Delaware
47-1941186
(State or other jurisdiction of
incorporation or organization)
(IRS Employer
Identification No.)
24 Union Square East, 5th Floor
New York, New York
10003
(Address of principal executive offices)
(Zip Code)
(646) 747-7200
(Registrant's telephone number, including area code)
Not applicable
(Former name or former address, if changed since last report)
 

Indicate by check mark if the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule-405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). þ Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer  
o
 
Accelerated filer  
o
Non-accelerated filer  
þ
(Do not check if a smaller reporting company)
Smaller reporting company
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). o Yes þ No
As of November 2, 2016, there were 24,921,902 shares of Class A common stock outstanding and 11,432,080 shares of Class B common stock outstanding.
 



SHAKE SHACK INC.
TABLE OF CONTENTS





Cautionary Note Regarding Forward-Looking Information
This Quarterly Report on Form 10-Q ("Form 10-Q") contains 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. All statements other than statements of historical fact are forward-looking statements. Many of the forward-looking statements are located in Part I, Item 2 of this Form 10-Q under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations." 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," "outlook," "potential," "project," "projection," "plan," "intend," "seek," "may," "could," "would," "will," "should," "can," "can have," "likely," the negatives thereof and other similar expressions.
While we believe that our assumptions are reasonable, it is very difficult to predict the impact of known factors, and it is impossible to anticipate all factors that could affect our actual results. All forward-looking statements are expressly qualified in their entirety by these cautionary statements, except that the safe harbor provisions of the PSLRA do not apply to any forward-looking statements relating to the operations of any of our partnerships or limited liability companies. You should evaluate all forward-looking statements made in this Form 10-Q in the context of the risks and uncertainties disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 30, 2015 and subsequent Quarterly Reports on Form 10-Q filed with the U.S. Securities and Exchange Commission (the "SEC") under the heading "Risk Factors."
The forward-looking statements included in this Form 10-Q are made only as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law.

Shake Shack Inc. shak-img_burgersmall.jpg Form 10-Q | 1


PART I – FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited).

2 | Shake Shack Inc. shak-img_burgersmall.jpg Form 10-Q


SHAKE SHACK INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in thousands, except share and per share amounts)
 
 
 
 
September 28
2016

 
December 30
2015

ASSETS
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
$
12,227

 
$
70,849

 
Marketable securities
61,348

 
275

 
Accounts receivable
4,488

 
4,217

 
Inventories
828

 
543

 
Prepaid expenses and other current assets
3,057

 
3,050

 
Total current assets
81,948

 
78,934

Property and equipment, net
123,073

 
93,041

Deferred income taxes, net
301,654

 
201,957

Other assets
5,269

 
5,615

TOTAL ASSETS
$
511,944

 
$
379,547

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Current liabilities:
 
 
 
 
Accounts payable
$
5,845

 
$
6,786

 
Accrued expenses
8,228

 
6,801

 
Accrued wages and related liabilities
5,311

 
5,804

 
Other current liabilities
6,741

 
4,614

 
Total current liabilities
26,125

 
24,005

Note payable

 
313

Deferred rent
28,363

 
22,927

Liabilities under tax receivable agreement, net of current portion
261,902

 
170,933

Other long-term liabilities
4,132

 
4,350

Total liabilities
320,522

 
222,528

Commitments and contingencies

 

Stockholders' equity:
 
 
 
 
Preferred stock, no par value—10,000,000 shares authorized; none issued and outstanding as of September 28, 2016 and December 30, 2015.

 

 
Class A common stock, $0.001 par value—200,000,000 shares authorized; 24,597,759 and 19,789,259 shares issued and outstanding as of September 28, 2016 and December 30, 2015, respectively.
25

 
20

 
Class B common stock, $0.001 par value—35,000,000 shares authorized; 11,754,078 and 16,460,741 shares issued and outstanding as of September 28, 2016 and December 30, 2015, respectively.
11

 
16

 
Additional paid-in capital
129,650

 
96,311

 
Retained earnings
12,799

 
4,273

 
Accumulated other comprehensive loss
(15
)
 
(5
)
 
Total stockholders' equity attributable to Shake Shack Inc.
142,470

 
100,615

Non-controlling interests
48,952

 
56,404

Total equity
191,422

 
157,019

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$
511,944

 
$
379,547

See accompanying Notes to Condensed Consolidated Financial Statements.

Shake Shack Inc. shak-img_burgersmall.jpg Form 10-Q | 3


SHAKE SHACK INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(UNAUDITED)
(in thousands, except per share amounts)
 
 
 
 
Thirteen Weeks Ended
 
 
Thirty-Nine Weeks Ended
 
 
 
 
September 28
2016

 
September 30
2015

 
September 28
2016

 
September 30
2015

Shack sales
$
71,871

 
$
51,275

 
$
188,430

 
$
133,905

Licensing revenue
2,696

 
1,998

 
6,774

 
5,626

TOTAL REVENUE
74,567

 
53,273

 
195,204

 
139,531

Shack-level operating expenses:
 
 
 
 
 
 
 
 
Food and paper costs
20,393

 
14,929

 
53,529

 
39,650

 
Labor and related expenses
18,216

 
12,176

 
46,640

 
32,445

 
Other operating expenses
6,577

 
4,376

 
17,475

 
11,579

 
Occupancy and related expenses
6,009

 
4,206

 
15,541

 
11,248

General and administrative expenses
7,885

 
5,728

 
22,265

 
30,165

Depreciation expense
3,719

 
2,636

 
10,229

 
7,274

Pre-opening costs
2,598

 
1,401

 
6,708

 
4,054

Loss on disposal of property and equipment

 
17

 

 
17

TOTAL EXPENSES
65,397

 
45,469

 
172,387

 
136,432

OPERATING INCOME
9,170

 
7,804

 
22,817

 
3,099

Other income, net
151

 

 
197

 

Interest expense
(89
)
 
(83
)
 
(267
)
 
(245
)
INCOME BEFORE INCOME TAXES
9,232

 
7,721

 
22,747

 
2,854

Income tax expense
2,443

 
1,528

 
6,058

 
2,776

NET INCOME
6,789

 
6,193

 
16,689

 
78

Less: net income attributable to non-controlling interests
3,023

 
4,665

 
8,163

 
10,100

NET INCOME (LOSS) ATTRIBUTABLE TO SHAKE SHACK INC.
$
3,766

 
$
1,528

 
$
8,526

 
$
(10,022
)
Earnings (loss) per share of Class A common stock:
 
 
 
 
 
 
 
 
Basic
$
0.16

 
$
0.11

 
$
0.38

 
$
(0.80
)
 
Diluted
$
0.15

 
$
0.10

 
$
0.37

 
$
(0.80
)
Weighted-average shares of Class A common stock outstanding:
 
 
 
 
 
 
 
 
Basic
24,023

 
13,757

 
22,310

 
12,590

 
Diluted
24,554

 
14,785

 
22,805

 
12,590

See accompanying Notes to Condensed Consolidated Financial Statements.




4 | Shake Shack Inc. shak-img_burgersmall.jpg Form 10-Q


SHAKE SHACK INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
(in thousands)
 
 
 
 
Thirteen Weeks Ended
 
 
Thirty-Nine Weeks Ended
 
 
 
 
September 28
2016

 
September 30
2015

 
September 28
2016

 
September 30
2015

Net income
$
6,789

 
$
6,193

 
$
16,689

 
$
78

Other comprehensive (loss), net of tax:
 
 
 
 
 
 
 
 
Available-for-sale securities(1):
 
 
 
 
 
 
 
 
 
Change in net unrealized holding (losses)
(11
)
 

 
(19
)
 

 
 
Less: reclassification adjustments for net realized losses included in net income
3

 

 
3

 

 
 
Net change
(8
)
 

 
(16
)
 

OTHER COMPREHENSIVE (LOSS)
(8
)
 

 
(16
)
 

COMPREHENSIVE INCOME
6,781

 
6,193

 
16,673

 
78

Less: comprehensive income attributable to non-controlling interests
3,020

 
4,665

 
8,157

 
10,100

COMPREHENSIVE INCOME ATTRIBUTABLE TO SHAKE SHACK INC.
$
3,761

 
$
1,528

 
$
8,516

 
$
(10,022
)
(1) Net of tax benefit of $0 for the thirteen and thirty-nine weeks ended September 28, 2016 and September 30, 2015.
See accompanying Notes to Condensed Consolidated Financial Statements.



Shake Shack Inc. shak-img_burgersmall.jpg Form 10-Q | 5


SHAKE SHACK INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
(in thousands, except share amounts)
 
 
 
Class A
Common Stock
 
 
Class B
Common Stock
 
 
Additional
Paid-In
Capital

 
Retained Earnings

 
Accumulated Other Comprehensive Loss

 
Non-
Controlling
Interest

 
Total
Equity

 
 
Shares

 
Amount

 
Shares

 
Amount

 
 
 
 
 
BALANCE, DECEMBER 30, 2015
19,789,259

 
$
20

 
16,460,741

 
$
16

 
$
96,311

 
$
4,273

 
$
(5
)
 
$
56,404

 
$
157,019

 
Net income

 

 

 

 

 
8,526

 

 
8,163

 
16,689

 
Other comprehensive loss:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net unrealized losses related to available-for-sale securities


 


 


 


 


 


 
(10
)
 
(6
)
 
(16
)
 
Equity-based compensation

 


 


 


 
3,924

 


 


 


 
3,924

 
Stock option exercises
101,837

 

 


 


 
390

 


 


 
1,682

 
2,072

 
Income tax effect of stock compensation plans


 


 


 


 
31

 


 


 
4

 
35

 
Redemption of LLC Interests
4,706,663

 
5

 
(4,706,663
)
 
(5
)
 
15,086

 


 


 
(15,086
)
 

 
Establishment of liabilities under tax receivable agreement and related changes to deferred tax assets associated with increases in tax basis


 


 


 


 
13,908

 


 


 


 
13,908

 
Distributions paid and payable to non-controlling interest holders
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(2,209
)
 
(2,209
)
BALANCE, SEPTEMBER 28, 2016
24,597,759

 
$
25

 
11,754,078

 
$
11

 
$
129,650

 
$
12,799

 
$
(15
)
 
$
48,952

 
$
191,422

See accompanying Notes to Condensed Consolidated Financial Statements.



6 | Shake Shack Inc. shak-img_burgersmall.jpg Form 10-Q


SHAKE SHACK INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
 
 
 
 
 
 
 
Thirty-Nine Weeks Ended
 
 
 
 
 
 
 
September 28
2016

 
September 30
2015

OPERATING ACTIVITIES
 
 
 
Net income (including amounts attributable to non-controlling interests)
$
16,689

 
$
78

Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
 
Depreciation expense
10,229

 
7,274

 
Equity-based compensation
3,817

 
15,509

 
Deferred income taxes
121

 

 
Non-cash interest expense
211

 
203

 
Excess tax benefits on equity-based compensation
(35
)
 

 
Loss on sale of marketable securities
3

 

 
Loss on disposal of property and equipment

 
17

 
Changes in operating assets and liabilities:
 
 
 
 
 
Accounts receivable
1,365

 
143

 
 
Inventories
(285
)
 
(78
)
 
 
Prepaid expenses and other current assets
196

 
(802
)
 
 
Other assets
(768
)
 
1,431

 
 
Accounts payable
(53
)
 
(240
)
 
 
Accrued expenses
4,503

 
1,260

 
 
Accrued wages and related liabilities
(493
)
 
2,342

 
 
Other current liabilities
1,448

 
421

 
 
Deferred rent
3,863

 
3,717

 
 
Other long-term liabilities
(289
)
 
(332
)
NET CASH PROVIDED BY OPERATING ACTIVITIES
40,522

 
30,943

INVESTING ACTIVITIES
 
 
 
Purchases of property and equipment
(39,268
)
 
(25,327
)
Purchases of marketable securities
(60,566
)
 

Sales of marketable securities
498

 

NET CASH USED IN INVESTING ACTIVITIES
(99,336
)
 
(25,327
)
FINANCING ACTIVITIES
 
 
 
Payments on promissory note
(313
)
 

Proceeds from revolving credit facility

 
4,000

Payments on revolving credit facility

 
(36,000
)
Deferred financing costs

 
(103
)
Proceeds from issuance of Class A common stock sold in initial public offering, net of underwriting discounts, commissions and offering costs

 
109,362

Proceeds from issuance of Class B common stock

 
30

Distributions paid to non-controlling interest holders
(1,602
)
 

Distributions paid to members prior to the initial public offering

 
(11,125
)
Proceeds from stock option exercises
2,072

 

Employee withholding taxes related to net settled equity awards

 
(4,636
)
Excess tax benefits from equity-based compensation
35

 

NET CASH PROVIDED BY FINANCING ACTIVITIES
192

 
61,528

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(58,622
)
 
67,144

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
70,849

 
2,677

CASH AND CASH EQUIVALENTS AT END OF PERIOD
$
12,227

 
$
69,821

See accompanying Notes to Condensed Consolidated Financial Statements.

Shake Shack Inc. shak-img_burgersmall.jpg Form 10-Q | 7


SHAKE SHACK INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
 


8 | Shake Shack Inc. shak-img_burgersmall.jpg Form 10-Q


NOTE 1: NATURE OF OPERATIONS
 
Shake Shack Inc. ("we," "us," "our," "Shake Shack" and the "Company") 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"). On February 4, 2015, we completed an initial public offering ("IPO") of 5,750,000 shares of our Class A common stock at a public offering price of $21.00 per share. We used the net proceeds from the IPO to purchase newly-issued membership interests from SSE Holdings ("LLC Interests"). Following the organizational transactions completed in connection with the IPO, we became the sole managing member of SSE Holdings. As sole managing member, we operate and control all of the business and affairs of SSE Holdings and, as a result, consolidate the financial results of SSE Holdings. We report a non-controlling interest representing the economic interest in SSE Holdings held by the other members of SSE Holdings. As of September 28, 2016 we owned 67.7% of SSE Holdings. Unless the context otherwise requires, "we," "us," "our," "Shake Shack," the "Company," and other similar references, refer to Shake Shack Inc. and, unless otherwise stated, all of its subsidiaries, including SSE Holdings.
We operate and license Shake Shack restaurants ("Shacks"), which serve hamburgers, hot dogs, crinkle-cut fries, shakes, frozen custard, beer, wine and more. As of September 28, 2016, there were 105 Shacks in operation, system-wide, of which 58 were domestic company-operated Shacks, six were domestic licensed Shacks and 41 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 our Annual Report on Form 10-K for the fiscal year ended December 30, 2015 ("2015 Form 10-K"). In our opinion, all adjustments, which are normal and recurring in nature, necessary for a fair presentation of our financial position and results of operation have been included. Certain reclassifications have been made to prior period amounts to conform to the current year presentation. Operating results for interim periods are not necessarily indicative of the results that may be expected for a full fiscal year.
The accompanying Condensed Consolidated Balance Sheet as of December 30, 2015 has been derived from the audited financial statements at that date but does not include all of the disclosures required by GAAP. These interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes thereto included in our 2015 Form 10-K.
In February 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update No. 2015-02, Amendments to the Consolidation Analysis ("ASU 2015-02"). ASU 2015-02 amended the existing guidance to, among other things, modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities (VIEs) or voting interest entities, and eliminate the presumption that a general partner should consolidate a limited partnership. We adopted ASU 2015-02 on December 31, 2015. Prior to the adoption of ASU 2015-02, we consolidated SSE Holdings as a voting interest entity. Pursuant to the provisions of ASU 2015-02, SSE Holdings is now considered a VIE. Shake Shack Inc. is the primary beneficiary as we have the majority economic interest in SSE Holdings and, as the sole managing member, have decision making authority that significantly affects the economic performance of the entity, while the limited partners have no substantive kick-out or participating rights. As a result, we will continue to consolidate SSE Holdings. The assets and liabilities of SSE Holdings represent substantially all of our consolidated assets and liabilities with the exception of certain deferred taxes and liabilities under the Tax Receivable Agreement. As of September 28, 2016 and December 30, 2015, the net assets of SSE Holdings were $151,500 and $124,214, respectively. The assets of SSE Holdings are subject to certain restrictions in SSE Holdings' revolving credit agreements. See Note 7 for more information.

Shake Shack Inc. shak-img_burgersmall.jpg Form 10-Q | 9


Fiscal Year
We operate on a 52/53 week fiscal year ending on the last Wednesday in December. Fiscal 2016 contains 52 weeks and ends on December 28, 2016. Fiscal 2015 contained 52 weeks and ended on December 30, 2015. Unless otherwise stated, references to years in this report relate to fiscal years.
Use of Estimates
The preparation of these condensed consolidated financial statements in conformity with GAAP requires us 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 Adopted Accounting Pronouncements       
In April 2015, the FASB issued Accounting Standards Update No. 2015-05, Customers' Accounting for Fees Paid in a Cloud Computing Arrangement ("ASU 2015-05"). ASU 2015-05 provides guidance in evaluating whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the software license element of the arrangement should be accounted for as an acquisition of a software license. If the arrangement does not contain a software license, it should be accounted for as a service contract. We adopted ASU 2015-05 on December 31, 2015 and elected to adopt the standard on a prospective basis. The adoption of ASU 2015-05 did not have a material impact on our consolidated financial statements.
In August 2015, the FASB issued Accounting Standards Update No. 2015-15, Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements ("ASU 2015-15"), which clarifies the guidance set forth in Accounting Standards Update No. 2015-03, Simplifying the Presentation of Debt Issuance Costs ("ASU 2015-03"), issued in April 2015. ASU 2015-03 requires that debt issuance costs related to a recognized liability be presented on the balance sheet as a direct reduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected. ASU 2015-15 provides additional guidance regarding debt issuance costs associated with line-of-credit arrangements, stating that the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred issuance costs ratably over the term of the line-of-credit arrangement. We adopted ASU 2015-03 and ASU 2015-15 on December 31, 2015 and the adoption did not have a material effect our consolidated financial statements.
Recently Issued Accounting Pronouncements       
In August 2016, the FASB issued Accounting Standards Update No. 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Payments ("ASU 2016-15"). ASU 2016-15 provides guidance on eight specific cash flow issues with the objective of reducing diversity in practice. ASU 2016-15 is effective for reporting periods beginning after December 15, 2017 and is to be applied retrospectively to each period presented. Early adoption is permitted. We are currently evaluating the impact ASU 2016-15 will have on our consolidated financial statements.
In March 2016, the FASB issued Accounting Standards Update No. 2016-09, Improvements to Employee Share-Based Payment Accounting ("ASU 2016-09"). ASU 2016-09 simplifies certain aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, an option to recognize gross stock compensation expense with actual forfeitures recognized as they occur, as well as certain classifications on the statement of cash flows. ASU 2016-09 is effective for reporting periods beginning after December 15, 2016 and can be applied either retrospectively or prospectively. Early adoption is permitted. We are currently evaluating the impact ASU 2016-09 will have on our consolidated financial statements.
In March 2016, the FASB issued Accounting Standards Update No. 2016-04, Recognition of Breakage for Certain Prepaid Stored-Value Products ("ASU 2016-04"). ASU 2016-04 entitles a company to derecognize amounts related to expected breakage in proportion to the pattern of rights expected to be exercised by the product holder to the extent that it is probable a significant reversal of the recognized breakage amount will not subsequently occur. ASU 2016-04 is effective for reporting periods beginning after December 15, 2017 and is to be applied retrospectively. Early adoption is permitted. We are currently evaluating the impact ASU 2016-04 will have on our consolidated financial statements.

10 | Shake Shack Inc. shak-img_burgersmall.jpg Form 10-Q


In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases ("ASU 2016-02"). ASU 2016-02 establishes a new lease accounting model, that, for many companies, eliminates the concept of operating leases and requires entities to record assets and liabilities related to leases on the balance sheet for certain types of leases. ASU 2016-02 is effective for reporting periods beginning after December 15, 2018 and requires the entity to apply a modified retrospective transition method for existing leases subject to certain transition relief. Early adoption will be permitted for all entities. We are currently evaluating the impact ASU 2016-02 will have on our consolidated financial statements.
In January 2016, the FASB issued Accounting Standards Update No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities ("ASU 2016-01"). ASU 2016-01 requires: (i) equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; (ii) simplification of the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; (iii) elimination of the requirement for public entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; (iv) public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (v) an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; (vi) separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements; and (vii) clarification that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. ASU 2016-01 is effective for reporting periods beginning after December 15, 2017 and amendments should be applied by means of a cumulative-effect adjustment to the balance sheet at the beginning of the fiscal year of adoption. Early adoption is permitted, subject to certain conditions. We are currently evaluating the impact ASU 2016-01 will have on our consolidated financial statements.
In July 2015, the FASB issued Accounting Standards Update No. 2015-11, Simplifying the Measurement of Inventory ("ASU 2015-11"). Under ASU 2015-11 entities should measure inventory that is not measured using last-in, first-out (LIFO) or the retail inventory method, including inventory that is measured using first-in, first-out (FIFO) or average cost, at the lower of cost or net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. ASU 2015-11 is effective for reporting periods beginning after December 15, 2016 and is to be applied prospectively. The adoption of ASU 2015-11 is not expected to have a material effect on our consolidated financial statements.
In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers ("ASU 2014-09"). ASU 2014-09 supersedes the existing revenue recognition guidance and clarifies the principles for recognizing revenue. The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. In March 2016, the FASB issued an amendment to ASU 2014-09 clarifying the implementation guidance on principal versus agent considerations. In April 2016, the FASB issued an amendment to ASU 2014-09 clarifying the considerations for identifying performance obligations and the implementation guidance for revenue recognized from licensing arrangements. In August 2015, the FASB issued an update to ASU 2014-09 deferring the effective date for public entities, on a retrospective basis, to annual reporting periods beginning after December 15, 2017. Early adoption is permitted, subject to certain conditions. We are currently evaluating the impact ASU 2014-09 will have on our consolidated financial statements, as well as the expected timing and method of adoption.

Shake Shack Inc. shak-img_burgersmall.jpg Form 10-Q | 11


NOTE 3: FAIR VALUE MEASUREMENTS
 
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following tables present information about our financial assets and liabilities measured at fair value on a recurring basis as of September 28, 2016 and December 30, 2015, and indicate the classification within the fair value hierarchy.
Cash, Cash Equivalents and Marketable Securities
The following tables summarize our cash, cash equivalents and marketable securities by significant investment categories as of September 28, 2016 and December 30, 2015:
 
 
September 28, 2016
 
 
Cost Basis

 
 Gross Unrealized Gains

 
 Gross Unrealized Losses

 
 Fair Value

 
 Cash and Cash Equivalents

 
Marketable Securities

Cash
$
7,111

 
$

 
$

 
$
7,111

 
$
7,111

 
$

Level 1:
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
5,116

 

 

 
5,116

 
5,116

 

 
Mutual funds
60,083

 

 

 
60,083

 

 
60,083

Level 2:
 
 
 
 
 
 
 
 
 
 
 
 
Corporate debt securities(1)
2,428

 
3

 
(30
)
 
2,401

 

 
2,401

Total
$
74,738

 
$
3

 
$
(30
)
 
$
74,711

 
$
12,227

 
$
62,484

 
 
December 30, 2015
 
 
Cost Basis

 
 Gross Unrealized Gains

 
 Gross Unrealized Losses

 
 Fair Value

 
 Cash and Cash Equivalents

 
Marketable Securities

Cash
$
70,816

 
$

 
$

 
$
70,816

 
$
70,816

 
$

Level 1:
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
33

 

 

 
33

 
33

 

Level 2:
 
 
 
 
 
 
 
 
 
 
 
 
Corporate debt securities(1)
2,397

 
1

 
(12
)
 
2,386

 

 
2,386

Total
$
73,246

 
$
1

 
$
(12
)
 
$
73,235

 
$
70,849

 
$
2,386

(1)
The fair value of marketable securities with contractual maturity dates within one year are included in marketable securities and those with contractual maturity dates greater than one year are included in other assets on the Condensed Consolidated Balance Sheets. Corporate debt securities were measured at fair value using a market approach utilizing observable prices for identical securities or securities with similar characteristics and inputs that are observable or can be corroborated by observable market data.

The gross aggregate fair value of investments in an unrealized loss position as of September 28, 2016 was $1,526. All investments that were in an unrealized loss position as of September 28, 2016 have been in a continuous loss position for less than 12 months. Net unrealized losses on available-for-sale securities totaling $27 were included in accumulated other comprehensive loss on the Condensed Consolidated Balance Sheet as of September 28, 2016. There were no unrealized gains or losses on available-for-sale securities for the thirty-nine weeks ended September 30, 2015.



12 | Shake Shack Inc. shak-img_burgersmall.jpg Form 10-Q


A summary of other income from available-for-sale securities recognized during the thirteen and thirty-nine weeks ended September 28, 2016 and September 30, 2015 is as follows:
 
 
Thirteen Weeks Ended
 
 
Thirty-Nine Weeks Ended
 
 
September 28
2016

 
September 30
2015

 
September 28
2016

 
September 30
2015

Available-for-sale securities:
 
 
 
 
 
 
 
 
Dividend income
$
133

 
$

 
$
133

 
$

 
Interest income
22

 

 
68

 

 
Loss on investments
(4
)
 

 
(4
)
 

Total other income, net
$
151

 
$

 
$
197

 
$

A summary of available-for-sale securities sold and gross realized gains and losses recognized during the thirteen and thirty-nine weeks ended September 28, 2016 and September 30, 2015 is as follows:
 
 
Thirteen Weeks Ended
 
 
Thirty-Nine Weeks Ended
 
 
September 28
2016

 
September 30
2015

 
September 28
2016

 
September 30
2015

Available-for-sale securities:
 
 
 
 
 
 
 
 
Gross proceeds from sales and redemptions
$
176

 
$

 
$
498

 
$

 
Cost basis of sales and redemptions
180

 

 
502

 

 
Gross realized gains included in net income

 

 
1

 

 
Gross realized losses included in net income
(4
)
 

 
(5
)
 

 
Amounts reclassified out of accumulated other comprehensive loss
3

 

 
3

 

Realized gains and losses are determined on a specific identification method and are included in other income,net on the Condensed Consolidated Statements of Income (Loss).
The following table summarizes, by contractual maturity date, the estimated fair value of our investments in marketable debt securities that are accounted for as available-for-sale securities:
 
September 28
2016

Due within one year
$
1,265

Due after one year through 5 years
1,136

Due after 5 years through 10 years

Due after 10 years

Total
$
2,401

We periodically review our marketable securities for other-than-temporary impairment. We consider factors such as the duration, severity and the reason for the decline in value, the potential recovery period and our intent to sell. For our debt securities, we also consider whether (i) it is more likely than not that we will be required to sell the debt securities before recovery of their amortized cost basis, and (ii) the amortized cost basis cannot be recovered as a result of credit losses. As of September 28, 2016 and December 30, 2015, the declines in the market value of our marketable securities investment portfolio were considered to be temporary in nature.
Other Financial Instruments
The carrying value of our other financial instruments, including accounts receivable, accounts payable, and accrued expenses as of September 28, 2016 and December 30, 2015 approximated their fair value due to the short-term nature of these financial instruments.

Shake Shack Inc. shak-img_burgersmall.jpg Form 10-Q | 13


Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
Assets and liabilities that are measured at fair value on a non-recurring basis include our long-lived assets and indefinite-lived intangible assets. There were no impairments recognized during the thirteen and thirty-nine weeks ended September 28, 2016 and September 30, 2015.
NOTE 4: INVENTORIES
 
Inventories as of September 28, 2016 and December 30, 2015 consisted of the following:
 
September 28
2016

 
December 30
2015

Food
$
580

 
$
328

Wine
38

 
30

Beer
51

 
46

Beverages
84

 
57

Retail merchandise
75

 
82

Inventories
$
828

 
$
543

NOTE 5: PROPERTY AND EQUIPMENT
 
Property and equipment as of September 28, 2016 and December 30, 2015 consisted of the following:
 
September 28
2016

 
December 30
2015

Leasehold improvements
$
110,550

 
$
82,904

Equipment
22,072

 
16,903

Furniture and fixtures
6,735

 
4,965

Computer equipment and software
7,094

 
5,197

Construction in progress
10,370

 
6,591

Property and equipment, gross
156,821

 
116,560

Less: accumulated depreciation
33,748

 
23,519

Property and equipment, net
$
123,073

 
$
93,041


14 | Shake Shack Inc. shak-img_burgersmall.jpg Form 10-Q


NOTE 6: SUPPLEMENTAL BALANCE SHEET INFORMATION
 
The components of other current liabilities as of September 28, 2016 and December 30, 2015 are as follows:
 
September 28
2016

 
December 30
2015

Sales tax payable
$
1,355

 
$
1,073

Current portion of liabilities under tax receivable agreement
1,979

 
2,157

Gift card liability
816

 
833

Other
2,591

 
551

Other current liabilities
$
6,741

 
$
4,614

NOTE 7: DEBT
 
In January 2015, we executed a Third Amended and Restated Credit Agreement, which became effective on February 4, 2015 (together with the prior agreements and amendments, and as further amended, the "Revolving Credit Facility"), which provides for a revolving total commitment amount of $50,000, of which $20,000 is available immediately. The Revolving Credit Facility will mature and all amounts outstanding will be due and payable five years from the effective date. The Revolving Credit Facility permits the issuance of letters of credit upon our request of up to $10,000. In May 2016, the Revolving Credit Facility was amended to, among other things, lower the borrowing rates. Borrowings under the Revolving Credit Facility bear interest at either: (i) LIBOR plus a percentage ranging from 2.3% to 3.3% or (ii) the prime rate plus a percentage ranging from 0.0% to 0.8%, depending on the type of borrowing made under the Revolving Credit Facility. As of September 28, 2016 and December 30, 2015, there were no amounts outstanding under the Revolving Credit Facility. As of September 28, 2016, we had $19,920 of availability under the Revolving Credit Facility, after giving effect to $80 in outstanding letters of credit.
The Revolving Credit Facility is 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' wholly-owned domestic subsidiaries (with certain exceptions).
The Revolving Credit Facility contains a number of covenants that, among other things, limit our ability to, subject to specified exceptions, incur additional debt; incur additional liens and contingent liabilities; sell or dispose of assets; merge with or acquire other companies; liquidate or dissolve ourselves; pay dividends or make distributions; engage in businesses that are not in a related line of business; make loans, advances or guarantees; engage in transactions with affiliates; and make investments. In addition, the Revolving Credit Facility contains certain cross-default provisions. We are required to maintain a specified consolidated fixed-charge coverage ratio and a specified funded net debt to adjusted EBITDA ratio, both as defined under the Revolving Credit Facility. As of September 28, 2016, we were in compliance with all covenants.
In March 2013, we entered into a promissory note in the amount of $313 in connection with the purchase of a liquor license. Interest on the outstanding principal balance of this note is due and payable on a monthly basis from the effective date at a rate of 5.0% per year. The entire principal balance and interest is due and payable on the earlier of the maturity date, which is the expiration of the lease in June 2023, or the date of the sale of the license. As of December 30, 2015 the outstanding balance of the promissory note was $313. During the thirty-nine weeks ended September 28, 2016, we repaid the entire outstanding balance of the promissory note. No amounts were outstanding as of September 28, 2016.
Total interest costs incurred were $89 and $267 for the thirteen and thirty-nine weeks ended September 28, 2016, respectively, and $83 and $353 for the thirteen and thirty-nine weeks ended September 30, 2015, respectively. Total amounts capitalized into property and equipment were $108 for the thirty-nine weeks ended September 30, 2015. No amounts were capitalized for the thirty-nine weeks ended September 28, 2016.

Shake Shack Inc. shak-img_burgersmall.jpg Form 10-Q | 15


NOTE 8: NON-CONTROLLING INTERESTS
 
We are the sole managing member of SSE Holdings and, as a result, consolidate the financial results of SSE Holdings. We report a non-controlling interest representing the economic interest in SSE Holdings held by the other members of SSE Holdings. The Third Amended and Restated Limited Liability Company Agreement (the "LLC Agreement") of SSE Holdings provides that holders of LLC Interests may, from time to time, require SSE Holdings to redeem all or a portion of their LLC Interests for newly-issued shares of Class A common stock on a one-for-one basis. In connection with any redemption or exchange, we will receive a corresponding number of LLC Interests, increasing our total ownership interest in SSE Holdings. Changes in our ownership interest in SSE Holdings while we retain our controlling interest in SSE Holdings will be accounted for as equity transactions. As such, future redemptions or direct exchanges of LLC Interests in SSE Holdings by the other members of SSE Holdings will result in a change in ownership and reduce the amount recorded as non-controlling interest and increase additional paid-in capital.
The following table summarizes the ownership interest in SSE Holdings as of September 28, 2016 and December 30, 2015.
 
September 28, 2016
 
 
December 30, 2015
 
 
LLC Interests

 
Ownership %

 
LLC Interests

 
Ownership %

Number of LLC Interests held by Shake Shack Inc.
24,597,759

 
67.7
%
 
19,789,259

 
54.6
%
Number of LLC Interests held by non-controlling interest holders
11,754,078

 
32.3
%
 
16,460,741

 
45.4
%
Total LLC Interests outstanding
36,351,837

 
100.0
%
 
36,250,000

 
100.0
%
The weighted average ownership percentages for the applicable reporting periods are used to attribute net income and other comprehensive loss to Shake Shack Inc. and the non-controlling interest holders. The non-controlling interest holders' weighted average ownership percentage for the thirteen and thirty-nine weeks ended September 28, 2016 was 33.9% and 38.5%, respectively. For the thirteen and thirty-nine weeks ended September 30, 2015, net income was attributed to non-controlling interest holders only for the period subsequent to the IPO and the organizational transactions completed in connection with our IPO, based on a weighted-average ownership percentage of 62.5% and 65.1%, respectively.

16 | Shake Shack Inc. shak-img_burgersmall.jpg Form 10-Q


The following table summarizes the effects of changes in ownership in SSE Holdings on our equity during the thirteen and thirty-nine weeks ended September 28, 2016 and September 30, 2015.
 
 
Thirteen Weeks Ended
 
 
Thirty-Nine Weeks Ended
 
 
September 28
2016

 
September 30
2015

 
September 28
2016

 
September 30
2015

Comprehensive income (loss) attributable to Shake Shack Inc.
$
3,761

 
$
1,528

 
$
8,516

 
$
(10,022
)
Transfers (to) from non-controlling interests:
 
 
 
 

 

 
Increase in additional paid-in capital as a result of the settlement of unit appreciation rights

 

 

 
987

 
Decrease in additional paid-in capital as a result of the organizational transactions completed in connection with our IPO

 

 

 
(75,182
)
 
Increase in additional paid-in capital as a result of the redemption of LLC Interests
4,708

 

 
15,086

 

 
Increase in additional paid-in capital as a result of stock option exercises and the related income tax effect
17

 

 
421

 

Total effect of changes in ownership interest on equity attributable to Shake Shack Inc.
$
8,486

 
$
1,528

 
$
24,023

 
$
(84,217
)
In February 2015, we used the net proceeds from our IPO to purchase 5,750,000 newly-issued LLC Interests. Additionally, in connection with our IPO, we acquired 5,968,841 LLC Interests through the acquisition, by merger, of two entities that were owned by former indirect members of SSE Holdings. Pursuant to the LLC Agreement, we received 339,306 LLC Interests as a result of the issuance of 339,306 shares of Class A common stock in settlement of the outstanding UARs.
During thirty-nine weeks ended September 28, 2016, an aggregate of 4,706,663 LLC Interests were redeemed by non-controlling interest holders for newly-issued shares of Class A common stock, and we received 4,706,663 LLC Interests in connection with these redemptions, increasing our total ownership interest in SSE Holdings. During the thirty-nine weeks ended September 30, 2015 3,155,273 LLC Interests were redeemed by the non-controlling interest holders in connection with the secondary offering.
During thirty-nine weeks ended September 28, 2016, we received an aggregate of 101,837 LLC Interests in connection with the exercise of employee stock options. No stock options were exercised during the thirty-nine weeks ended September 30, 2015.
NOTE 9: EQUITY-BASED COMPENSATION
 
A summary of equity-based compensation expense recognized during the thirteen and thirty-nine weeks ended September 28, 2016 and September 30, 2015 is as follows:
 
 
Thirteen Weeks Ended
 
 
Thirty-Nine Weeks Ended
 
 
 
September 28
2016

 
September 30
2015

 
September 28
2016

 
September 30
2015

Unit appreciation rights
$

 
$

 
$

 
$
11,762

Restricted Class B units

 

 

 
605

Stock options
1,085

 
1,172

 
3,168

 
3,142

Performance stock units
492

 

 
649

 

Equity-based compensation expense
$
1,577

 
$
1,172

 
$
3,817

 
$
15,509

Total income tax benefit recognized related to equity-based compensation
$
53

 
$
42

 
$
117

 
$
404

Amounts are included in general and administrative expense and labor and related expenses on the Condensed Consolidated Statements of Income (Loss).

Shake Shack Inc. shak-img_burgersmall.jpg Form 10-Q | 17


Unit Appreciation Rights
Prior to the IPO, we maintained a Unit Appreciation Rights Plan (the "UAR Plan"), effective in fiscal year 2012, and as amended, whereby we had the authority to grant up to 31,303 unit appreciation rights ("UARs") to employees. The UARs granted were subject to continued employment and were only exercisable upon a qualifying transaction, which was either a change of control or an initial public offering. Our IPO constituted a qualifying transaction under the terms of the UAR Plan, and as a result 339,306 shares of Class A common stock were issued upon the settlement of the 22,554 outstanding UARs, net of employee withholding taxes. We recognized compensation expense of $11,762 during the thirty-nine weeks ended September 30, 2015 upon settlement of the outstanding UARs.
There were no UARs outstanding as of September 28, 2016 or December 30, 2015. No compensation expense was recognized during the thirty-nine weeks ended September 28, 2016.
Restricted Class B Units
Prior to the IPO, we granted restricted Class B units to certain of our executive officers. These awards were to vest in equal installments over periods ranging from three to five years. If not already fully vested, these units would fully vest (i) upon the occurrence of a change in control event or (ii) upon the occurrence of an initial public offering. The IPO constituted a transaction under the terms of the restricted Class B unit award agreements that resulted in the accelerated vesting of all then-outstanding awards, and we recognized $605 of equity-based compensation expense upon the vesting of these awards during the thirty-nine weeks ended September 30, 2015.
There were no restricted Class B units outstanding as of September 28, 2016 or December 30, 2015. No compensation expense was recorded during the thirty-nine weeks ended September 28, 2016.
Stock Options
In January 2015, we adopted the 2015 Incentive Award Plan (the "2015 Plan") under which we may grant up to 5,865,522 stock options and other equity-based awards to employees, directors and officers. The stock options granted generally vest equally over periods ranging from one to five years. We do not use cash to settle any of our equity-based awards, and we issue new shares of Class A common stock upon the exercise of stock options.
The fair value of stock option awards was determined on the grant date using the Black-Scholes valuation model based on the following weighted-average assumptions:
 
Thirty-Nine Weeks Ended

 
September 28
2016

Expected term (years)(1)
5.5

Expected volatility(2)
50.8
%
Risk-free interest rate(3)
1.5
%
Dividend yield(4)
%
(1)
Expected term represents the estimated period of time until an award is exercised and was determined using the simplified method.
(2)
Expected volatility is based on a combination of our historical volatility and the historical volatility of a selected peer group over a period equivalent to the expected term.
(3)
The risk-free rate rate is an interpolation of yields on U.S. Treasury securities with maturities equivalent to the expected term.
(4)
We have assumed a dividend yield of zero as we have no plans to declare dividends in the foreseeable future.


18 | Shake Shack Inc. shak-img_burgersmall.jpg Form 10-Q


A summary of stock option activity for thirty-nine weeks ended September 28, 2016 is as follows:
 
 
Stock
Options

 
Weighted
Average
Exercise
Price

Outstanding at beginning of period
2,574,981

 
$
21.00

 
Granted
15,823

 
34.62

 
Exercised
(107,091
)
 
21.00

 
Forfeited
(39,310
)
 
(21.00
)
Outstanding at end of period
2,444,403

 
$
21.09

The weighted-average grant date fair value of stock options granted during the thirty-nine weeks ended September 28, 2016 was $34.62. As of September 28, 2016, there were 2,444,403 stock options outstanding, of which 453,760 were exercisable. As of September 28, 2016, total unrecognized compensation expense related to unvested stock options, including an estimate for pre-vesting forfeitures, was $13,707, which is expected to be recognized over a weighted-average period of 3.3 years.
Performance Stock Units
Under the 2015 Plan, we may grant performance stock units and other types of performance-based equity awards that vest based on the outcome of certain performance criteria that are established and approved by the Compensation Committee of the Board of Directors. The actual number of equity awards earned is based on the level of performance achieved over a predetermined performance period, relative to established financial goals, none of which are considered market conditions.
For performance stock units granted during the thirty-nine weeks ended September 28, 2016, the amount of awards that can be earned range from 0% to 125% of the number of performance stock units granted, based on the achievement of approved financial goals over a performance period that is approximately one year. In addition to the performance conditions, performance stock units are also subject to a requisite service period and the awards will vest ratably over three years. The fair value of performance stock units is determined based on the closing market price of our common stock on the date of grant. Compensation expense related to the performance stock units is recognized using a graded-vesting attribution method over the vesting period based on the most probable outcome of the performance conditions.
A summary of performance stock unit activity for thirty-nine weeks ended September 28, 2016 is as follows:
 
 
Performance
Stock
Units

 
Weighted
Average
Grant Value
Price

Outstanding at beginning of period

 
$

 
Granted
63,600

 
38.41

 
Vested

 

 
Forfeited
(800
)
 
(38.43
)
Outstanding at end of period
62,800

 
$
38.41

As of September 28, 2016, there were 62,800 performance stock units outstanding, of which none were exercisable. As of September 28, 2016, total unrecognized compensation expense related to unvested performance stock units, including an estimate for pre-vesting forfeitures, was $1,901, which is expected to be recognized over a weighted-average period of 2.6 years.

Shake Shack Inc. shak-img_burgersmall.jpg Form 10-Q | 19


NOTE 10: INCOME TAXES
 
We are the sole managing member of SSE Holdings, and as a result, consolidate the financial results of SSE Holdings. SSE Holdings is treated as a partnership for U.S. federal and most applicable state and local income tax purposes. As a partnership, SSE Holdings is not subject to U.S. federal and certain state and local income taxes. Any taxable income or loss generated by SSE Holdings is passed through to and included in the taxable income or loss of its members, including us, on a pro rata basis. We are subject to U.S. federal income taxes, in addition to state and local income taxes with respect to our allocable share of any taxable income or loss of SSE Holdings, as well as any stand-alone income or loss generated by Shake Shack Inc. We are also subject to withholding taxes in foreign jurisdictions.
Income Tax Expense
A reconciliation of income tax expense computed at the U.S. federal statutory income tax rate to the recognized income tax expense is as follows:
 
Thirteen Weeks Ended
 
 
Thirty-Nine Weeks Ended
 
 
September 28
2016

 
September 30
2015

 
September 28
2016

 
September 30
2015

Expected U.S. federal income taxes at statutory rate (34%)
$
3,139

 
$
2,625

 
$
7,734

 
$
970

State and local income taxes, net of federal benefit
533

 
476

 
1,277

 
502

Foreign withholding taxes
148

 
107

 
505

 
329

Non-deductible expenses

 
14

 

 
357

Tax credits
(243
)
 

 
(369
)
 

Non-controlling interest
(1,134
)
 
(1,694
)
 
(3,089
)
 
618

Income tax expense
$
2,443

 
$
1,528

 
$
6,058

 
$
2,776


Our effective income tax rates for the thirteen weeks ended September 28, 2016 and September 30, 2015 were 26.5% and 19.8%, respectively. The increase in our effective income tax rate for the period is primarily due to an increase in our ownership interest in SSE Holdings. As our ownership interest in SSE Holdings increases, our share of the taxable income of SSE Holdings also increases. Our weighted-average ownership interest in SSE Holdings was 66.1% and 37.5% for the thirteen weeks ended September 28, 2016 and September 30, 2015, respectively.
Our effective income tax rates for the thirty-nine weeks ended September 28, 2016 and September 30, 2015 were 26.6% and 97.3%, respectively. As the non-recurring compensation expenses and other IPO-related expenses recognized during the thirty-nine weeks ended September 30, 2015 were incurred in the period prior to the organizational transactions completed in connection with the IPO, and prior to our becoming a member of SSE Holdings, we are not entitled to any tax benefits related to those losses. We recognized tax expense on our allocable share of the pre-tax income generated in the period subsequent to becoming a member of SSE Holdings, which resulted in a very high effective tax rate when compared to our consolidated pre-tax income. Our weighted-average ownership interest in SSE Holdings was 61.5% and 34.9% for the thirty-nine weeks ended September 28, 2016 and September 30, 2015, respectively.
Deferred Tax Assets and Liabilities
During the thirty-nine weeks ended September 28, 2016, we acquired an aggregate of 4,808,500 LLC Interests in connection with the redemption of LLC Interests and the exercise of employee stock options. We recognized an additional deferred tax asset in the amount of $61,470 associated with the change in the basis difference in our investment in SSE Holdings upon acquisition of these LLC Interests. However, a portion of the total basis difference will only reverse upon the eventual sale of our interest in SSE Holdings, which we expect would result in a capital loss. As of September 28, 2016, we established a valuation allowance in the amount of $16,398 against the deferred tax asset to which this portion relates.
During the thirty-nine weeks ended September 28, 2016, we also recognized $36,456 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. See "—Tax Receivable Agreement" for more information.

20 | Shake Shack Inc. shak-img_burgersmall.jpg Form 10-Q


We evaluate the realizability of our deferred tax assets on a quarterly basis and establish valuation allowances when it is more likely than not that all or a portion of a deferred tax asset may not be realized. As of September 28, 2016, we concluded, based on the weight of all available positive and negative evidence, that all of our deferred tax assets (except for those deferred tax assets described above relating to basis differences that are expected to result in a capital loss upon the eventual sale of our interest in SSE Holdings) are more likely than not to be realized. As such, no additional valuation allowance was recognized.
Uncertain Tax Positions
No uncertain tax positions existed as of September 28, 2016. Shake Shack Inc. was formed in September 2014 and did not engage in any operations prior to the IPO and related organizational transactions. Shake Shack Inc. first filed tax returns for tax year 2014, which is the first tax year subject to examination by taxing authorities for U.S. federal and state income tax purposes. Additionally, although SSE Holdings is treated as a partnership for U.S. federal and state income taxes purposes, it is still required to file an annual U.S. Return of Partnership Income, which is subject to examination by the Internal Revenue Service ("IRS"). The statute of limitations has expired for tax years through 2012 for SSE Holdings.
Tax Receivable Agreement
Pursuant to our election under Section 754 of the Internal Revenue Code (the "Code"), we expect to obtain an increase in our share of the tax basis in the net assets of SSE Holdings when LLC Interests are redeemed or exchanged by the other members of SSE Holdings. We plan to make an election under Section 754 of Code for each taxable year in which a redemption or exchange of LLC Interest occurs. We intend to treat any redemptions and exchanges of LLC Interests as direct purchases of LLC Interests for U.S. federal income tax purposes. These increases in tax basis may reduce the amounts that we would otherwise pay in the future to various tax authorities. They may also decrease gains (or increase losses) on future dispositions of certain capital assets to the extent tax basis is allocated to those capital assets.
On February 4, 2015, we entered into a tax receivable agreement with certain of the then-existing members of SSE Holdings (the "Tax Receivable Agreement") that provides for the payment by us of 85% of the amount of any tax benefits that we actually realize, or in some cases are deemed to realize, as a result of (i) increases in our share of the tax basis in the net assets of SSE Holdings resulting from any redemptions or exchanges of LLC Interests, (ii) tax basis increases attributable to payments made under the Tax Receivable Agreement, and (iii) deductions attributable to imputed interest pursuant to the Tax Receivable Agreement (the "TRA Payments"). We expect to benefit from the remaining 15% of any tax benefits that we may actually realize. The TRA Payments are not conditioned upon any continued ownership interest in SSE Holdings or us. The rights of each SSE Holdings member party under the Tax Receivable Agreement are assignable to transferees of its LLC Interests.
During the thirty-nine weeks ended September 28, 2016, we acquired an aggregate of 4,706,663 LLC Interests in connection with the redemption of LLC Interests, which resulted in an increase in the tax basis of our investment in SSE Holdings subject to the provisions of the Tax Receivable Agreement. We recognized an additional liability in the amount of $90,776 for the TRA Payments due to the redeeming members, representing 85% of the aggregate tax benefits we expect to realize from the tax basis increases related to the redemption of LLC Interests, after concluding it was probable that such TRA Payments would be paid based on our estimates of future taxable income. As of September 28, 2016, the total amount of TRA Payments due under the Tax Receivable Agreement, including accrued interest, was $263,881, of which $1,979 was included in other current liabilities on the Condensed Consolidated Balance Sheet. See Note 13 for more information relating to our liabilities under the Tax Receivable Agreement.

Shake Shack Inc. shak-img_burgersmall.jpg Form 10-Q | 21


NOTE 11: EARNINGS PER SHARE
 
Basic earnings per share of Class A common stock is computed by dividing net income available to Shake Shack Inc. by the weighted-average number of shares of Class A common stock outstanding during the period. Diluted earnings per share of Class A common stock is computed by dividing net income available 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 per share of Class A common stock for the thirteen and thirty-nine weeks ended September 28, 2016 and September 30, 2015.
 
 
 
Thirteen Weeks Ended
 
 
Thirty-Nine Weeks Ended
 
 
 
 
September 28
2016

 
September 30
2015

 
September 28
2016

 
September 30
2015

Numerator:
 
 
 
 
 
 
 
 
Net income
$
6,789

 
$
6,193

 
$
16,689

 
$
78

 
Less: net income attributable to non-controlling interests
3,023

 
4,665

 
8,163

 
10,100

 
Net income (loss) attributable to Shake Shack Inc.
$
3,766

 
$
1,528

 
$
8,526

 
$
(10,022
)
Denominator:
 
 
 
 
 
 
 
 
Weighted-average shares of Class A common stock outstanding—basic
24,023

 
13,757

 
22,310

 
12,590

 
Effect of dilutive securities:
 
 
 
 
 
 
 
 
 
Stock options
531

 
1,028

 
495

 

 
Weighted-average shares of Class A common stock outstanding—diluted
24,554

 
14,785

 
22,805

 
12,590

 
 
 
 
 
 
 
 
 
 
Earnings (loss) per share of Class A common stock—basic
$
0.16

 
$
0.11

 
$
0.38

 
$
(0.80
)
Earnings (loss) per share of Class A common stock—diluted
$
0.15

 
$
0.10

 
$
0.37

 
$
(0.80
)
Shares of our 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 per share of Class B common stock under the two-class method has not been presented.

22 | Shake Shack Inc. shak-img_burgersmall.jpg Form 10-Q


The following table presents potentially dilutive securities excluded from the computations of diluted earnings per share of Class A common stock for the thirteen and thirty-nine weeks ended September 28, 2016 and September 30, 2015.
 
 
 
Thirteen Weeks Ended
 
Thirty-Nine Weeks Ended
 
 
 
September 28
2016
 
September 30
2015
 
September 28
2016
 
September 30
2015
Stock options

 
 

 
 

 
 
2,580,856

(1)
Performance stock units
62,800

(2)
 

 
 
62,800

(2)
 

 
Shares of Class B common stock
11,754,078

(3)
 
21,036,580

(3)
 
11,754,078

(3)
 
21,036,580

(3)
(1)
Excluded from the computation of diluted earnings per share of Class A common stock because the effect would have been anti-dilutive since we recognized a net loss for the period.
(2)
Excluded from the computation of diluted earnings per share of Class A common stock because the performance conditions associated with these awards were not met assuming the end of the reporting period was the end of the performance period.
(3)
Shares of our Class B common stock are considered potentially dilutive shares of Class A common stock. Amounts have been excluded from the computations of diluted earnings per share of Class A common stock because the effect would have been anti-dilutive under the if-converted and two-class methods.
NOTE 12: SUPPLEMENTAL CASH FLOW INFORMATION
 
The following table sets forth supplemental cash flow information for the thirty-nine weeks ended September 28, 2016 and September 30, 2015:
 
 
Thirty-Nine Weeks Ended
 
 
 
September 28
2016

 
September 30
2015

Cash paid for:
 
 
 
 
Income taxes, net of refunds
$
1,292

 
$
338

 
Interest, net of amounts capitalized
40

 
75

Non-cash investing activities:
 
 
 
 
Accrued purchases of property and equipment
5,792

 
3,682

 
Accrued purchases of marketable securities
51

 

 
Capitalized equity-based compensation
107

 

 
Class A common stock issued in connection with the acquisition of two former indirect members of SSE Holdings

 
6

Non-cash financing activities:
 
 
 
 
Cancellation of Class B common stock in connection with certain organizational transactions completed in connection with our IPO

 
(6
)
 
Class A common stock issued in connection with the redemption of LLC Interests
5

 
3

 
Cancellation of Class B common stock in connection with the redemption of LLC Interests
(5
)
 
(3
)
 
Establishment of liabilities under tax receivable agreement
90,776

 
103,356

 
Accrued distributions payable to non-controlling interest holders
607

 


Shake Shack Inc. shak-img_burgersmall.jpg Form 10-Q | 23


NOTE 13: COMMITMENTS AND CONTINGENCIES
 
Lease Commitments
We are obligated under various operating leases for Shacks and our home office space, expiring in various years through 2035. Under certain of these leases, we are liable for contingent rent based on a percentage of sales in excess of specified thresholds and are typically responsible for our proportionate share of real estate taxes, common area maintenance charges and utilities.
As security under the terms of several of our leases, we are obligated under letters of credit totaling $160 as of September 28, 2016. The letters of credit expire on April 23, 2017 and February 28, 2026. In addition, in December 2013, we entered into an irrevocable standby letter of credit in conjunction with our home office lease in the amount of $80. The letter of credit expires in September 2017 and renews automatically for one-year periods through September 30, 2019.
Purchase Commitments
Purchase obligations include legally binding contracts, including commitments for the purchase, construction or remodeling of real estate and facilities, firm minimum commitments for inventory purchases, equipment purchases, marketing-related contracts, software acquisition/license commitments and service contracts. These obligations are generally short-term in nature and are recorded as liabilities when the related goods are received or services rendered. We also enter into long-term, exclusive contracts with certain vendors to supply us with food, beverages and paper goods, obligating us to purchase specified quantities.
Legal Contingencies
In November 2015, we met with a law firm representing two former Shake Shack managers who alleged that we improperly classified our restaurant managers as exempt.  Although we have always believed that our managers are properly classified as exempt under both federal and state laws, and have always intended to defend any allegations to the contrary vigorously, we agreed to mediate the matter. At the conclusion of the meeting, the parties entered into a Memorandum of Understanding, and we agreed to create a fund of $750 to settle the matter. In exchange, all managers who choose to participate (former and current), including the two former managers, will release Shake Shack from all federal and/or state wage and hour claims that may exist through the settlement date.  As part of the settlement process, the parties entered into a Settlement Agreement on March 11, 2016, and the law firm filed a Complaint on March 17, 2016 with the Supreme Court of the State of New York (the “Court”), a request for judicial intervention on March 19, 2016 and a motion seeking the Court’s preliminary approval of the class action settlement on May 20, 2016. On October 25, 2016, the Court issued its order granting the law firm's motion for preliminary approval of the class action settlement. As of September 28, 2016, an accrual in the amount of $770 was recorded for this matter and the related expenses.
We are subject to various legal and regulatory proceedings, claims and liabilities, such as employment-related claims and slip and fall cases, which arise in the ordinary course of business and are generally covered by insurance. As of September 28, 2016, the amount of ultimate liability with respect to these matters was not material.
Liabilities under Tax Receivable Agreement
As described in Note 10, we are a party to the Tax Receivable Agreement under which we are contractually committed to pay certain of the members of SSE Holdings 85% of the amount of any tax benefits that we actually realize, or in some cases are deemed to realize, as a result of certain transactions. We are not obligated to make any payments under the Tax Receivable Agreement until the tax benefits associated 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 we do not generate sufficient taxable income in the aggregate over the term of the Tax Receivable Agreement to utilize the tax benefits, then we would not be required to make the related TRA Payments. During the thirty-nine weeks ended September 28, 2016 and September 30, 2015, we recognized liabilities totaling $90,776 and $103,356, respectively, relating to our obligations under the Tax Receivable Agreement, after concluding that it was probable that we would have sufficient future taxable income to utilize the related tax benefits. As of September 28, 2016 and December 30, 2015, our total obligations under the Tax Receivable Agreement, including accrued interest, were $263,881 and $173,090, respectively. There were no transactions subject to the Tax Receivable Agreement for which we did not recognize the related liability, as we concluded that we would have sufficient future taxable income to utilize all of the related tax benefits.

24 | Shake Shack Inc. shak-img_burgersmall.jpg Form 10-Q


NOTE 14: RELATED PARTY TRANSACTIONS
 
Union Square Hospitality Group
Union Square Hospitality Group, LLC is a stockholder and a party to the Stockholders Agreement dated February 4, 2015, as amended, that we entered into in connection with our IPO. The Chairman of our Board of Directors serves as the Chief Executive Officer of Union Square Hospitality Group, LLC. As a result, Union Square Hospitality Group, LLC and its subsidiaries (collectively, "USHG") are considered related parties.
Previously, our employees were included in USHG's self-insurance health plan and we paid our portion of the plan costs on a monthly basis to USHG. In February 2015, we established our own self-funded health insurance plan for our employees and ceased payments to USHG. Amounts paid to the USHG for these health insurance costs were $146 for the thirty-nine weeks ended September 30, 2015. No amounts were paid to USHG for health insurance costs for the thirteen and thirty-nine weeks ended September 28, 2016. These amounts are included in labor and related expenses and general and administrative expenses on the Condensed Consolidated Statements of Income (Loss). Additionally, our employees are eligible participants under USHG's 401(k) plan. We pay our share of the employer's matching contributions directly to the third-party plan trustee.
We also pay USHG for certain miscellaneous general operating expenses incurred by them on our behalf. Total amounts paid to USHG for general corporate expenses were $1 and $7 for the thirteen and thirty-nine weeks ended September 28, 2016. For the thirteen and thirty-nine weeks ended September 30, 2015 total amounts paid to USHG for general corporate expenses were $29 and $155, respectively. These amounts are included in general and administrative expenses on the Condensed Consolidated Statements of Income (Loss).
No amounts were payable to USHG as of September 28, 2016. Total amounts payable to USHG as of December 30, 2015 were $2. These amounts are included in other current liabilities on the Condensed Consolidated Balance Sheets. No amounts were due from USHG as of September 28, 2016 and December 30, 2015.
Hudson Yards Sports and Entertainment
In fiscal 2011, we entered into a Master License Agreement (as amended, "MLA") with Hudson Yards Sports and Entertainment LLC ("HYSE"), a subsidiary of USHG and a related party, to operate Shake Shack branded limited menu concession stands in sports and entertainment venues within the United States. The agreement expires on December 31, 2027 and includes five consecutive five-year renewal options at HYSE's option. As consideration for these rights, HYSE pays us a license fee based on a percentage of net food sales, as defined in the MLA. HYSE also pays us a percentage of profits on sales of branded beverages, as defined in the MLA. Amounts paid to us by HYSE for the thirteen and thirty-nine weeks ended September 28, 2016 were $174 and $277, respectively, and $157 and $252 for the thirteen and thirty-nine weeks ended September 30, 2015, respectively. Total amounts due from HYSE as of September 28, 2016 were $66, which is included in prepaid expenses and other current assets on the Condensed Consolidated Balance Sheets. No amounts were due from HYSE as of December 30, 2015 due to the seasonal nature of the concession stands.
Madison Square Park Conservancy
The Chairman of our Board of Directors serves as a director of the Madison Square Park Conservancy ("MSP Conservancy"), with which we have a license agreement and pay license fees to operate our Madison Square Park Shack. Amounts paid to Madison Square Park Conservancy as rent amounted to $195 and $585, respectively, for the thirteen and thirty-nine weeks ended September 28, 2016. We paid $331 and $442 to Madison Square Park Conservancy as rent for the thirteen and thirty-nine weeks ended September 30, 2015, respectively. These amounts are included in occupancy and related expenses on the Condensed Consolidated Statements of Income (Loss). Total amounts due to the MSP Conservancy as of September 28, 2016 and December 30, 2015 were $246 and $17, respectively, which is included in accrued expenses on the Condensed Consolidated Balance Sheets.
Share Our Strength
The Chairman of our Board of Directors serves as a director of Share Our Strength, for which Shake Shack holds the "Great American Shake Sale" every year during the month of May to raise money and awareness for childhood hunger. During the Great American Shake Sale, we encourage guests to donate money to Share Our Strength's No Kid Hungry campaign in exchange for a coupon

Shake Shack Inc. shak-img_burgersmall.jpg Form 10-Q | 25


for a free cake-themed shake. All of the guest donations we collect go directly to Share Our Strength. We raised a total of $587 and $504 during the thirty-nine weeks ended September 28, 2016 and September 30, 2015, respectively. No amounts were raised during the thirteen weeks ended September 28, 2016 and September 30, 2015, respectively. All proceeds were remitted to Share Our Strength in the respective years. We incurred costs of approximately $17 and $115 for the thirteen and thirty-nine weeks ended September 28, 2016, respectively. For the thirteen and thirty-nine weeks ended September 30, 2015 we incurred costs of $12 and $101, respectively. These costs represent the cost of the free shakes redeemed and are included in general and administrative expense and other operating expenses on the Consolidated Statements of Income (Loss). Additionally, we held a promotional event during the thirteen weeks ended September 28, 2016 in which we donated a total of $20 to the Share Our Strength's No Kid Hungry campaign, which is included in general and administrative expense on the Consolidated Statements of Income (Loss).
Mobo Systems, Inc.
The Chairman of our Board of Directors serves as a director of Mobo Systems, Inc. (also known as "Olo"), a platform we use in connection with our mobile ordering application. No amounts were paid to Olo for both the thirteen and thirty-nine weeks ended September 28, 2016. Amounts paid to Olo for the thirty-nine weeks ended September 30, 2015 were $8. No amounts were paid to Olo for the thirteen weeks ended September 30, 2015. No amounts were payable to Olo as of September 28, 2016 and December 30, 2015.
Tax Receivable Agreement
As described in Note 10, we entered into a tax receivable agreement with certain members of SSE Holdings that provides for the payment by us of 85% of the amount of tax benefits, if any, that Shake Shack actually realizes or in some cases is deemed to realize as a result of certain transactions. No amounts were paid to any members of SSE Holdings pursuant to the Tax Receivable Agreement during the thirteen and thirty-nine weeks ended September 28, 2016 and September 30, 2015. As of September 28, 2016 and December 30, 2015, total amounts due to members of SSE Holdings under the under the Tax Receivable Agreement were $263,881 and $173,090, respectively.
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. During the thirty-nine weeks ended September 28, 2016 tax distributions of $1,602 were paid to non-controlling interest holders. No tax distributions were paid to non-controlling interest holders during the thirteen weeks ended September 28, 2016. A special distribution was paid to certain of the members of SSE Holdings in the amount of $11,125 on February 4, 2015. No tax distributions were paid to non-controlling interest holders during the thirteen and thirty-nine weeks ended September 30, 2015. As of September 28, 2016, $607 was payable to non-controlling interest holders and no distributions were payable to non-controlling interest holders as of December 30, 2015.



26 | Shake Shack Inc. shak-img_burgersmall.jpg Form 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. All statements other than statements of historical fact are forward-looking statements. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact, such as our expected financial outlook for fiscal 2016, preliminary financial outlook for fiscal 2017, expected Shack openings, expected same-Shack sales growth and trends in our business. Forward-looking statements can also be identified by words such as "aim," "anticipate," "believe," "estimate," "expect," "forecast," "future," "intend," "outlook," "plan," "potential," "predict," "project," "seek," "may," "can," "will," "would," "could," "should," the negatives thereof and other similar expressions. All forward-looking statements are expressly qualified in their entirety by these cautionary statements, except that the safe harbor provisions of the PSLRA do not apply to any forward-looking statements relating to the operations of any of our partnerships or limited liability companies. Forward-looking statements are not guarantees of future performance and actual results may differ materially from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 30, 2015 ("2015 Form 10-K") and Part II, Item 1A of this Form 10-Q. The following discussion should be read in conjunction with our 2015 Form 10-K, our subsequent Quarterly Reports on Form 10-Q 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. We undertake no obligation to revise or update any forward-looking statements for any reason, except as required by law.
OVERVIEW
 
Shake Shack is a modern day "roadside" burger stand serving a classic American menu of premium burgers, hot dogs, crinkle cut fries, shakes, frozen custard, beer and wine. As of September 28, 2016, there were 105 Shacks in operation, system-wide, of which 58 were domestic company-operated Shacks, six were domestic licensed Shacks and 41 were international licensed Shacks.
Development Highlights
During the quarter, the Company opened seven domestic company-operated Shacks, including the Company's 100th opening at the Boston Seaport, its first Shack in Dallas at The Crescent, a second Shack in the Los Angeles market at The Americana in Glendale. Additionally, the Company opened three net new licensed Shacks, including its first Shack in South Korea in Seoul's Gangnam district, as well a third Shack in the Japan market at the Tokyo International Forum.
Financial Highlights for the Third Quarter 2016
Total revenue increased 40.0% to $74.6 million.
Shack sales increased 40.2% to $71.9 million.
Same-Shack sales increased 2.9%.
Net income was $3.8 million, or $0.15 per diluted share.
Operating income increased 17.5% to $9.2 million.
Shack-level operating profit*, a non-GAAP measure, increased 32.6% to $20.7 million, or 28.8% of Shack sales.
Adjusted EBITDA*, a non-GAAP measure, increased 26.3% to $15.2 million.
Adjusted pro forma net income*, a non-GAAP measure, increased 25.1% to $5.5 million, or $0.15 per fully exchanged and diluted share.

* Shack-level operating profit, adjusted EBITDA and adjusted pro forma net income are non-GAAP measures. See "—Non-GAAP Financial Measures" for reconciliations of Shack-level operating profit to operating income, adjusted EBITDA to net income, and

Shake Shack Inc. shak-img_burgersmall.jpg Form 10-Q | 27


adjusted pro forma net income to net income (loss) attributable to Shake Shack Inc., the most directly comparable financial measures presented in accordance with GAAP.
We continued to execute on our growth strategies in 2016 and the third quarter of 2016 was positively impacted by the following: (i) an approximate 1.5% menu price increase implemented at the end of December 2015, (ii) menu innovation and positive mix shifts from the Chick'n Shack and the Bacon CheddarShack, and (iii) lower commodity prices, primarily in beef and dairy.
Net income attributable to Shake Shack Inc. was $3.8 million, or $0.15 per diluted share, for the third quarter of 2016, compared to $1.5 million, or $0.10 per diluted share, for the same period last year. On an adjusted pro forma basis, which excludes certain non-recurring items and assumes that all outstanding LLC Interests were exchanged for shares of Class A common stock as of the beginning of the period, we would have recognized net income of $5.5 million, or $0.15 per fully exchanged and diluted share, for the third quarter of 2016 compared to $4.4 million, or $0.12 per fully exchanged and diluted share for the the third quarter of 2015, an increase of 25.1%.
FISCAL 2016 OUTLOOK
 
For the fiscal year ending December 28, 2016, we revised our financial outlook to the following:
 
Current Outlook

 
Previous Outlook

Total revenue
$264 to $265 million

 
$253 to $256 million

Same-Shack sales growth (%)
4% to 5% increase

 
4% to 5% increase

Domestic company-operated Shack openings
19

 
18

Licensed Shack openings
10, net

 
7, net

Labor and related expenses (as a percentage of total revenue) (basis points)
50 to 60 basis points of
deleverage

 
50 basis points of
deleverage

Adjusted pro forma effective tax rate (%)
40% to 41%

 
40% to 41%

PRELIMINARY FISCAL 2017 OUTLOOK
 
For the fiscal year ending December 27, 2017, we are providing the following preliminary financial outlook:
 
 
 
Current Outlook
Total revenue
 
 
$348 to $352 million
Same-Shack sales growth (%)(1)
 
 
2% to 3% increase
Domestic company-operated Shack openings(2)
 
 
21 to 22
Licensed Shack openings
 
 
10, net
Shack-level operating profit margin
 
 
26.5% to 27.5%
General and administrative expenses
 
 
$37 to $39 million
Depreciation expense
 
 
$21 million
Adjusted pro forma effective tax rate (%)
 
 
40% and 41%
(1) Includes approximately 1.5% to 2.0% of menu price increases to be taken in early January and nominal traffic and mix increases.
(2)
The average annual sales volume for the domestic company-operated Shacks to be opened in fiscal 2017 is expected to be at least $3.2 million with Shack-level operating profit margins of at least 21%.


28 | Shake Shack Inc. shak-img_burgersmall.jpg Form 10-Q


RESULTS OF OPERATIONS
 
The following table summarizes our results of operations for the thirteen and thirty-nine weeks ended September 28, 2016 and September 30, 2015:
 
 
 
Thirteen Weeks Ended
 
 
Thirty-Nine Weeks Ended
 
(dollar amounts in thousands)
September 28
2016
September 30
2015
September 28
2016
September 30
2015
 
Shack sales
$
71,871

96.4
 %
 
$
51,275

96.2
 %
 
$
188,430

96.5
 %
 
$
133,905

96.0
 %
Licensing revenue
2,696

3.6
 %
 
1,998

3.8
 %
 
6,774

3.5
 %
 
5,626

4.0
 %
TOTAL REVENUE
74,567

100.0
 %
 
53,273

100.0
 %
 
195,204

100.0
 %
 
139,531

100.0
 %
Shack-level operating expenses(1):
 
 
 
 
 
 
 
 
 
 
 
 
Food and paper costs
20,393

28.4
 %
 
14,929

29.1
 %
 
53,529

28.4
 %
 
39,650

29.6
 %
 
Labor and related expenses