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UNITED STATESSECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q(Mark One)
☑
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934
For the quarterly period ended March 25, 2020OR
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934
For the transition period from _______ to ______
Commissionfilenumber: 001-36823
SHAKE SHACK INC.(Exactnameofregistrantasspecifiedinitscharter)
Delaware 47-1941186
(Stateorotherjurisdictionofincorporationororganization)
(IRSEmployerIdentificationNo.)
225 Varick StreetSuite 301
New York, New York 10014
(Addressofprincipalexecutiveoffices) (ZipCode)
(646) 747-7200(Registrant'stelephonenumber,includingareacode)
SecuritiesregisteredpursuanttoSection12(b)oftheAct
Titleofeachclass Tradingsymbol(s) NameofeachexchangeonwhichregisteredClassACommonStock,parvalue$0.001 SHAK NewYorkStockExchange
Indicatebycheckmarkiftheregistrant(1)hasfiledallreportsrequiredtobefiledbySection13or15(d)oftheSecuritiesExchangeActof1934duringthepreceding12months(orforsuchshorterperiodthattheregistrantwasrequiredtofilesuchreports),and(2)hasbeensubjecttosuchfilingrequirementsforthepast90days.Yes☑oNo
IndicatebycheckmarkwhethertheregistranthassubmittedelectronicallyeveryInteractiveDataFilerequiredtobesubmittedandpostedpursuanttoRule-405ofRegulationS-Tduringthepreceding12months(orforsuchshorterperiodthattheregistrantwasrequiredtosubmitsuchfiles).þYesoNo
Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growthcompany. See thedefinitionsof"largeacceleratedfiler,""acceleratedfiler,""smallerreportingcompany,"and"emerginggrowthcompany"inRule12b-2oftheExchangeAct.
LargeAcceleratedFiler ☑ Acceleratedfiler ☐
Non-acceleratedfiler ☐ Smallerreportingcompany ☐
Emerginggrowthcompany ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any newor revised financial accountingstandardsprovidedpursuanttoSection13(a)oftheExchangeAct.☐
Indicatebycheckmarkwhethertheregistrantisashellcompany(asdefinedinRule12b-2oftheAct).☐Yes☑No
AsofApril22,2020,therewere38,173,087sharesofClassAcommonstockoutstandingand3,117,002sharesofClassBcommonstockoutstanding.
SHAKE SHACK INC.TABLE OF CONTENTS
Cautionary Note Regarding Forward-Looking Information 1
Part I 2 Item1. FinancialStatements(Unaudited) 2 Item2. Management'sDiscussionandAnalysisofFinancialConditionandResultsofOperations 28 Item3. QuantitativeandQualitativeDisclosuresAboutMarketRisk 43 Item4. ControlsandProcedures 44
Part II 45 Item1. LegalProceedings 45 Item1A. RiskFactors 45 Item2. UnregisteredSalesofEquitySecuritiesandUseofProceeds 47 Item3. DefaultsUponSeniorSecurities 47 Item4. MineSafetyDisclosures 47 Item5. OtherInformation 47 Item6. Exhibits 48
SIGNATURES 49
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Cautionary Note Regarding Forward-Looking InformationThisQuarterlyReportonForm10-Q("Form10-Q")containsforward-lookingstatements,withinthemeaningofthePrivateSecuritiesLitigationReformActof1995("PSLRA"),whicharesubjecttoknownandunknownrisks,uncertaintiesandotherimportantfactorsthatmaycauseactualresultstobemateriallydifferent.Allstatementsotherthanstatementsofhistoricalfactareforward-lookingstatements.Manyoftheforward-lookingstatementsarelocatedinPartI,Item2ofthisForm10-Qundertheheading"Management'sDiscussionandAnalysisofFinancialConditionandResultsofOperations."Forward-lookingstatementsdiscussourcurrentexpectationsandprojectionsrelatingtoourfinancialposition,resultsofoperations,plans,objectives,futureperformanceandbusiness.Youcanidentifyforward-lookingstatementsbythefactthattheydonotrelatestrictlytohistoricalorcurrentfacts.Thesestatementsmayincludewordssuchas"aim,""anticipate,""believe," "estimate," "expect," "forecast," "outlook," "potential," "project," "projection," "plan," "intend," "seek," "may," "could," "would," "will," "should,""can,""canhave,""likely,"thenegativesthereofandothersimilarexpressions.
Whilewebelievethatourassumptionsarereasonable,itisverydifficulttopredicttheimpactofknownfactors,anditisimpossibletoanticipateallfactorsthatcould affect our actual results. All forward-looking statements are expressly qualified in their entirety by these cautionary statements. You should evaluate allforward-lookingstatementsmadeinthisForm10-QinthecontextoftherisksanduncertaintiesdisclosedinPartI,Item1AofourAnnualReportonForm10-KforthefiscalyearendedDecember25,2019filedwiththeU.S.SecuritiesandExchangeCommission(the"SEC")undertheheading"RiskFactors"andinPartII,Item1AofthisQuarterlyReportonForm10-QforthequarterlyperiodendedMarch25,2020.
The forward-looking statements included in this Form10-Qare made only as of the date hereof. Weundertake no obligation to publicly update or revise anyforward-lookingstatementasaresultofnewinformation,futureeventsorotherwise,exceptasotherwiserequiredbylaw.
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PART I – FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited).
PageCondensedConsolidatedBalanceSheets 3CondensedConsolidatedStatementsofIncome(Loss) 4CondensedConsolidatedStatementsofComprehensiveIncome(Loss) 5CondensedConsolidatedStatementsofStockholders'Equity 6CondensedConsolidatedStatementsofCashFlows 7NotestoCondensedConsolidatedFinancialStatements 8
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SHAKE SHACK INC.CONDENSED CONSOLIDATED BALANCE SHEETS(UNAUDITED)(in thousands, except share and per share amounts)
March 25
2020 December 25
2019
ASSETS Currentassets: Cashandcashequivalents $ 87,806 $ 37,099
Marketablesecurities 16,423 36,508
Accountsreceivable 6,820 9,970
Inventories,net 2,045 2,221
Prepaidexpensesandothercurrentassets 2,316 1,877
Totalcurrentassets 115,410 87,675
Propertyandequipment,net 329,039 314,862
Operatingleaseassets 302,216 274,426
Deferredincometaxes,net 281,285 279,817
Otherassets 12,058 11,488
TOTAL ASSETS $ 1,040,008 $ 968,268
LIABILITIES AND STOCKHOLDERS' EQUITY Currentliabilities: Accountspayable $ 15,330 $ 14,300
Accruedexpenses 24,228 24,140
Accruedwagesandrelatedliabilities 6,338 11,451
Operatingleaseliabilities,current 43,197 30,002
Othercurrentliabilities 13,735 19,499
Totalcurrentliabilities 102,828 99,392
Long-termdebt 50,000 —
Long-termoperatingleaseliabilities 322,191 304,914
Liabilitiesundertaxreceivableagreement,netofcurrentportion 226,959 226,649
Otherlong-termliabilities 15,424 15,328
Totalliabilities 717,402 646,283
Commitmentsandcontingencies Stockholders'equity:
Preferredstock,noparvalue—10,000,000sharesauthorized;noneissuedandoutstandingasofMarch25,2020andDecember25,2019. — —
ClassAcommonstock,$0.001parvalue—200,000,000sharesauthorized;34,523,400and34,417,302sharesissuedandoutstandingasofMarch25,2020andDecember25,2019,respectively. 35 35
ClassBcommonstock,$0.001parvalue—35,000,000sharesauthorized;3,117,002and3,145,197sharesissuedandoutstandingasofMarch25,2020andDecember25,2019,respectively. 3 3
Additionalpaid-incapital 246,970 244,410
Retainedearnings 53,407 54,367
Accumulatedothercomprehensiveincome 3 2
Totalstockholders'equityattributabletoShakeShackInc. 300,418 298,817
Non-controllinginterests 22,188 23,168
Totalequity 322,606 321,985
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,040,008 $ 968,268
See accompanying Notes to Condensed Consolidated Financial Statements.
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SHAKE SHACK INC.CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)(UNAUDITED)(in thousands, except per share amounts)
Thirteen Weeks Ended
March 25
2020 March 27
2019
Shacksales $ 138,048 $ 128,569
Licensingrevenue 5,122 4,040
TOTAL REVENUE 143,170 132,609
Shack-leveloperatingexpenses: Foodandpapercosts 39,564 37,991
Laborandrelatedexpenses 41,766 37,093
Otheroperatingexpenses 17,779 15,568
Occupancyandrelatedexpenses 12,558 10,899
Generalandadministrativeexpenses 16,191 13,937
Depreciationexpense 11,768 8,966
Pre-openingcosts 2,243 2,642
Impairmentandlossondisposalofassets 2,088 351
TOTAL EXPENSES 143,957 127,447
OPERATING INCOME (LOSS) (787) 5,162
Otherincome(loss),net (93) 564
Interestexpense (112) (72)
INCOME (LOSS) BEFORE INCOME TAXES (992) 5,654
Incometaxexpense 87 2,047
NET INCOME (LOSS) (1,079) 3,607
Less:netincome(loss)attributabletonon-controllinginterests (119) 1,061
NET INCOME (LOSS) ATTRIBUTABLE TO SHAKE SHACK INC. $ (960) $ 2,546
Earnings(loss)pershareofClassAcommonstock: Basic $ (0.03) $ 0.09
Diluted $ (0.03) $ 0.08
Weighted-averagesharesofClassAcommonstockoutstanding: Basic 34,444 29,563
Diluted 34,444 30,392
See accompanying Notes to Condensed Consolidated Financial Statements.
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SHAKE SHACK INC.CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)(UNAUDITED)(in thousands)
Thirteen Weeks Ended
March 25
2020 March 27
2019
Netincome(loss) $ (1,079) $ 3,607
Othercomprehensiveincome,netoftax(1): Changeinforeigncurrencytranslationadjustment 1 —
Netchange 1 —
OTHER COMPREHENSIVE INCOME 1 —
COMPREHENSIVE INCOME (LOSS) (1,078) 3,607
Less:comprehensiveincome(loss)attributabletonon-controllinginterest (119) 1,061
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO SHAKE SHACK INC. $ (959) $ 2,546
(1) Net of tax expense of $0 for the thirteen weeks ended March 25, 2020andMarch 27, 2019.
See accompanying Notes to Condensed Consolidated Financial Statements.
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SHAKE SHACK INC.CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY(UNAUDITED)(in thousands, except share amounts)
For the Thirteen Weeks Ended March 25, 2020 and March 27, 2019
Class A
Common Stock Class B
Common Stock AdditionalPaid-InCapital
RetainedEarnings
Accumulated
OtherComprehensive
Income
Non-Controlling
Interest
Total
Equity Shares Amount Shares Amount BALANCE, DECEMBER 25, 2019 34,417,302 $ 35 3,145,197 $ 3 $ 244,410 $ 54,367 $ 2 $ 23,168 $321,985 Netloss (960) (119) (1,079)
Othercomprehensiveincome:
Netchangeinforeigncurrencytranslationadjustment 1 1
Equity-basedcompensation 1,313 1,313
Activityunderstockcompensationplans 77,903 — 424 (361) 63
RedemptionofLLCInterests 28,195 — (28,195) — 195 (195) —
Establishmentofliabilitiesundertaxreceivableagreementandrelatedchangestodeferredtaxassetsassociatedwithincreasesintaxbasis 628 628
Distributionspaidtonon-controllinginterestholders (305) (305)
BALANCE, MARCH 25, 2020 34,523,400 $ 35 3,117,002 $ 3 $ 246,970 $ 53,407 $ 3 $ 22,188 $322,606
BALANCE, DECEMBER 26, 2018 29,520,833 $ 30 7,557,347 $ 8 $ 195,633 $ 30,404 $ — $ 47,380 $273,455 Cumulativeeffectofaccountingchanges 4,136 1,059 5,195
Netincome 2,546 1,061 3,607
Equity-basedcompensation 1,747 1,747
Activityunderstockcompensationplans 73,563 — 975 502 1,477
RedemptionofLLCInterests 103,832 1 (103,832) (1) 594 (594) —
Establishmentofliabilitiesundertaxreceivableagreementandrelatedchangestodeferredtaxassetsassociatedwithincreasesintaxbasis 366 366
Distributionspaidtonon-controllinginterestholders (109) (109)
BALANCE, MARCH 27, 2019 29,698,228 $ 31 7,453,515 $ 7 $ 199,315 $ 37,086 $ — $ 49,299 $285,738
See accompanying Notes to Condensed Consolidated Financial Statements.
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SHAKE SHACK INC.CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(UNAUDITED)(in thousands)
Thirteen Weeks Ended
March 25
2020 March 27
2019
OPERATING ACTIVITIES Netincome(loss)(includingamountsattributabletonon-controllinginterests) $ (1,079) $ 3,607
Adjustmentstoreconcilenetincome(loss)tonetcashprovidedbyoperatingactivities Depreciationexpense 11,768 8,966
Amortizationofcloudcomputingasset 260 —
Non-cashoperatingleasecost 10,742 8,911
Equity-basedcompensation 1,300 1,692
Deferredincometaxes 3,775 95
Non-cashinterestexpense 69 —
Gainonsaleofmarketablesecurities (79) —
Impairmentandlossondisposalofassets 2,088 351
Unrealized(gain)lossonavailable-for-salesecurities 356 (157)
Othernon-cashexpense 183 2
Changesinoperatingassetsandliabilities: Accountsreceivable 3,150 5,976
Inventories 306 123
Prepaidexpensesandothercurrentassets (439) (474)
Otherassets (1,039) (2,335)
Accountspayable (4,449) (61)
Accruedexpenses (6,330) 880
Accruedwagesandrelatedliabilities (5,113) (3,025)
Othercurrentliabilities 273 963
Long-termoperatingleaseliabilities (8,755) (8,324)
Otherlong-termliabilities 497 9
NET CASH PROVIDED BY OPERATING ACTIVITIES 7,484 17,199
INVESTING ACTIVITIES Purchasesofpropertyandequipment (19,159) (24,985)
Purchasesofmarketablesecurities (192) (389)
Salesofmarketablesecurities 20,000 15,000
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 649 (10,374)
FINANCING ACTIVITIES Proceedsfromrevolvingcreditfacility 50,000 —
Paymentsonprincipaloffinanceleases (615) (339)
Distributionspaidtonon-controllinginterestholders (305) (109)
Paymentsundertaxreceivableagreement (6,569) (707)
Proceedsfromstockoptionexercises 1,032 1,452
Employeewithholdingtaxesrelatedtonetsettledequityawards (969) 25
NET CASH PROVIDED BY FINANCING ACTIVITIES 42,574 322
NET INCREASE IN CASH AND CASH EQUIVALENTS 50,707 7,147
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 37,099 24,750
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 87,806 $ 31,897
See accompanying Notes to Condensed Consolidated Financial Statements.
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SHAKE SHACK INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(in thousands, except share and per share amounts)
PageNote1 NatureofOperations 9Note2 SummaryofSignificantAccountingPolicies 9Note3 Revenue 10Note4 FairValueMeasurements 11Note5 Inventories 14Note6 PropertyandEquipment 14Note7 SupplementalBalanceSheetInformation 15Note8 Debt 15Note9 Leases 16Note10 Non-ControllingInterests 18Note11 Equity-BasedCompensation 20Note12 IncomeTaxes 20Note13 Earnings(Loss)PerShare 22Note14 SupplementalCashFlowInformation 24Note15 CommitmentsandContingencies 24Note16 RelatedPartyTransactions 25Note17 SubsequentEvents 27
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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 offacilitatinganinitialpublicofferingandotherrelatedtransactionsinordertocarryonthebusinessofSSEHoldings,LLCanditssubsidiaries("SSEHoldings").WearethesolemanagingmemberofSSEHoldingsand,assolemanagingmember,weoperateandcontrolallofthebusinessandaffairsofSSEHoldings.Asaresult,weconsolidatethefinancialresultsofSSEHoldingsandreportanon-controllinginterestrepresentingtheeconomicinterestinSSEHoldingsheldbytheother members of SSE Holdings. As ofMarch 25, 2020weowned 91.7%of SSEHoldings. Unless the context otherwise requires, "we," "us," "our," "ShakeShack,"the"Company"andothersimilarreferences,refertoShakeShackInc.and,unlessotherwisestated,allofitssubsidiaries,includingSSEHoldings.
WeoperateandlicenseShakeShackrestaurants("Shacks"),whichservehamburgers,hotdogs,chicken,crinkle-cutfries,shakes,frozencustard,beer,wineandmore.AsofMarch25,2020,therewere287Shacksinoperation,system-wide,ofwhich167weredomesticcompany-operatedShacks,22weredomesticlicensedShacksand98wereinternationallicensedShacks.AsofMarch25,2020,12domesticcompany-operatedShacksand37licensedShacksweretemporarilyclosedduetoCOVID-19.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of PresentationThe accompanying unaudited condensed consolidated financial statements include the accounts of Shake Shack Inc. and its subsidiaries. All intercompanyaccountsandtransactionshavebeeneliminatedinconsolidation.TheseinterimcondensedconsolidatedfinancialstatementshavebeenpreparedinaccordancewithaccountingprinciplesgenerallyacceptedintheUnitedStatesofAmerica("GAAP")andonabasisconsistentinallmaterialrespectswiththeaccountingpoliciesdescribedinourAnnualReportonForm10-KforthefiscalyearendedDecember25,2019("2019Form10-K").Inouropinion,alladjustments,whicharenormalandrecurringinnature,necessaryforafairpresentationofourfinancialpositionandresultsofoperationhavebeenincluded.Operatingresultsforinterimperiodsarenotnecessarilyindicativeoftheresultsthatmaybeexpectedforafullfiscalyear.
TheaccompanyingCondensedConsolidatedBalanceSheetasofDecember25,2019hasbeenderivedfromtheauditedfinancialstatementsatthatdatebutdoesnot include all of the disclosures required by GAAP. These interim condensed consolidated financial statements should be read in conjunction with theconsolidatedfinancialstatementsandrelatednotestheretoincludedinour2019Form10-K.
SSEHoldingsisconsideredavariableinterestentity.ShakeShackInc.istheprimarybeneficiaryaswehavethemajorityeconomicinterestinSSEHoldingsand,asthesolemanagingmember,havedecisionmakingauthoritythatsignificantlyaffectstheeconomicperformanceoftheentity,whilethelimitedpartnershavenosubstantivekick-outorparticipatingrights.Asaresult,weconsolidateSSEHoldings.TheassetsandliabilitiesofSSEHoldingsrepresentsubstantiallyallofourconsolidated assets and liabilities with the exception of certain deferred taxes and liabilities under the Tax Receivable Agreement. As ofMarch 25, 2020andDecember25,2019,thenetassetsofSSEHoldingswere$271,087and $270,542,respectively.TheassetsofSSEHoldingsaresubjecttocertainrestrictionsinSSEHoldings'revolvingcreditagreement.SeeNote8formoreinformation.
Fiscal YearWeoperateona52/53weekfiscalyearendingonthelastWednesdayinDecember.Fiscal2020contains53weeksandendsonDecember30,2020.Fiscal2019contained52weeksandendedonDecember25,2019.Unlessotherwisestated,referencestoyearsinthisreportrelatetofiscalyears.
Use of EstimatesThe preparation of these condensed consolidated financial statements in conformity with GAAPrequires us to make estimates and assumptions that affect thereportedamountsofassetsandliabilitiesanddisclosureofcontingentassetsandliabilitiesatthedateofthefinancialstatements,andthereportedamountsofsalesandexpensesduringthereportingperiod.Actualresultscoulddifferfromthoseestimates.
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Recently Adopted Accounting Pronouncements WeadoptedtheAccountingStandardsUpdates(“ASUs”)summarizedbelowinfiscal2020.
AccountingStandards Update(“ASU”) Description
DateAdopted
MeasurementofCreditLossesonFinancialInstruments
(ASU2016-13)
ThisstandardreplacestheincurredlossimpairmentmethodologyincurrentGAAPwithamethodologythatreflectsexpectedcreditlossesandrequiresconsiderationofabroaderrangeofreasonableandsupportableinformationtoinformcreditlossestimates.
Theadoptionofthisstandarddidnothaveamaterialimpacttoourconsolidatedfinancialstatements.
December26,2019
Recently Issued Accounting Pronouncements
Accounting StandardsUpdate (“ASU”) Description Expected Impact Effective Date
FacilitationoftheEffectsofReferenceRateReformonFinancialReporting
(ASU2020-04)
Thisstandardprovidesoptionalguidanceforalimitedtimetoeasethepotentialaccountingburdenassociatedwithtransitioningawayfromreferenceratesthatareexpectedtobediscontinued.
Wearecurrentlyevaluatingtheimpactthisstandardwillhaveonourconsolidatedfinancialstatements.
Effectiveuponissuance(March12,2020)andgenerallycanbeappliedthroughDecember31,2022.
SimplifyingtheAccountingforIncomeTaxes
(ASU2019-12)
Thisstandardremovescertainexceptionsforrecognizingdeferredtaxesforinvestments,performingintra-periodallocationandcalculatingincometaxesininterimperiods.Italsoaddsguidanceincertainareas,includingtherecognitionoffranchisetaxes,recognitionofdeferredtaxesfortaxgoodwill,allocationoftaxestomembersofaconsolidatedgroup,computationofannualeffectivetaxratesrelatedtoenactedchangesintaxlaws,andminorimprovementsrelatedtoemployeestockownershipplansandinvestmentsinqualifiedaffordablehousingprojectsaccountedforusingtheequitymethod.
Wearecurrentlyevaluatingtheimpactthisstandardwillhaveonourconsolidatedfinancialstatements.
December31,2020
Earlyadoptionispermitted.
NOTE 3: REVENUE
Revenue RecognitionRevenueconsists of Shacksales andlicensingrevenue. Generally, revenueis recognizedas promisedgoodsor services transfer to the guest or customer in anamountthatreflectstheconsiderationweexpecttobeentitledinexchangeforthosegoodsorservices.
RevenuefromShacksalesispresentednetofdiscountsandrecognizedwhenfood,beverageandretail productsaresold.SalestaxcollectedfromcustomersisexcludedfromShacksalesandtheobligationisincludedinsalestaxpayableuntilthetaxesareremittedtotheappropriatetaxingauthorities.Revenuefromourgiftcardsisdeferredandrecognizeduponredemption.
Licensingrevenuesincludeinitialterritoryfees,Shackopeningfees,andongoingsales-basedroyaltyfeesfromlicensedShacks.Generally,thelicensesgrantedtodevelop, open and operate each Shack in a specified territory are the predominant goods or services transferred to the licensee in our contracts, and representdistinctperformanceobligations.Ancillarypromisedservices,suchastrainingandassistanceduringtheinitialopeningofaShack,aretypicallycombinedwiththelicensesandconsideredasoneperformanceobligationperShack.Wedeterminethetransactionpriceforeachcontract,whichiscomprisedoftheinitialterritoryfee, and an estimate of the total Shack opening fees we expect to be entitled to. The calculation of total Shack opening fees included in the transaction pricerequiresjudgment,asit isbasedonanestimateofthenumberofShacksweexpectthelicenseetoopen.ThetransactionpriceisthenallocatedequallytoeachShackexpectedtoopen.Theperformanceobligationsaresatisfiedovertime,startingwhenaShackopens,throughtheendofthetermofthelicensegrantedtotheShack.Becausewearetransferringlicensestoaccessourintellectual propertyduringacontractual term,revenueisrecognizedonastraight-linebasisoverthelicense
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term. Generally, payment for the initial territory fee is received upon execution of the licensing agreement, and payment for the restaurant opening fees arereceived either in advance of or upon opening the related restaurant. These payments are initially deferred and recognized as revenue as the performanceobligationsaresatisfied,whichoccursoveralong-termperiod.
Revenuefromsales-basedroyaltiesisrecognizedastherelatedsalesoccur.
RevenuerecognizedduringthethirteenweeksendedMarch25,2020andMarch27,2019,disaggregatedbytypeisasfollows:
Thirteen Weeks Ended
March 25
2020 March 27
2019
Shacksales $ 138,048 $ 128,569
Licensingrevenue: Sales-basedroyalties 4,944 3,904
Initialterritoryandopeningfees 178 136
Total revenue $ 143,170 $ 132,609
Theaggregateamountofthetransactionpriceallocatedtoperformanceobligationsthatareunsatisfied(orpartiallyunsatisfied)asofMarch25,2020was$15,929.Weexpecttorecognizethisamountasrevenueoveralong-termperiod,asthelicensetermforeachShackrangesfrom5to20years.Thisamountexcludesanyvariableconsiderationrelatedtosales-basedroyalties.
Contract BalancesOpeningandclosingbalancesofcontractliabilitiesandreceivablesfromcontractswithcustomersisasfollows:
March 25
2020 December 26
2019
Shacksalesreceivables $ 1,799 $ 4,265
Licensingreceivables 4,079 4,510
Giftcardliability 2,134 2,258
Deferredrevenue,current 545 511
Deferredrevenue,long-term 11,299 11,310
RevenuerecognizedduringthethirteenweeksendedMarch25,2020andMarch27,2019thatwasincludedintheirrespectiveliabilitybalancesatthebeginningoftheperiodisasfollows:
Thirteen Weeks Ended
March 25
2020 March 27
2019
Giftcardliability $ 300 $ 278
Deferredrevenue 175 134
NOTE 4: FAIR VALUE MEASUREMENTS
Assets and Liabilities Measured at Fair Value on a Recurring BasisThefollowingtablespresentinformationaboutourfinancialassetsandliabilitiesmeasuredatfairvalueonarecurringbasisasofMarch25,2020andDecember25,2019,andindicatetheclassificationwithinthefairvaluehierarchy.
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Cash, Cash Equivalents and Marketable SecuritiesThefollowingtablessummarizeourcash,cashequivalentsandmarketablesecuritiesbysignificantinvestmentcategoriesasofMarch25,2020andDecember25,2019:
March 25, 2020
Cost Basis
GrossUnrealized
Gains
GrossUnrealized
Losses Fair Value Cash and Cash
Equivalents Marketable
Securities
Cash $ 87,806 $ — $ — $ 87,806 $ 87,806 $ —
Level1: Moneymarketfunds — — — — — —
Mutualfunds 16,707 — (284) 16,423 — 16,423
Total $ 104,513 $ — $ (284) $ 104,229 $ 87,806 $ 16,423
December 25, 2019
Cost Basis
GrossUnrealized
Gains
GrossUnrealized
Losses Fair Value
Cash andCash
Equivalents Marketable
Securities
Cash $ 32,094 $ — $ — $ 32,094 $ 32,094 $ —
Level1: Moneymarketfunds 5,005 — — 5,005 5,005 —
Mutualfunds 36,436 72 — 36,508 — 36,508
Total $ 73,535 $ 72 $ — $ 73,607 $ 37,099 $ 36,508
Netunrealized losses on equity securities totaling$356were included on the Condensed Consolidated Statements of Income(Loss)during thethirteenweeksendedMarch25,2020.Netunrealizedgainsonequitysecuritiestotaling$157wereincludedontheCondensedConsolidatedStatementsofIncome(Loss)duringthethirteenweeksendedMarch27,2019.
AsummaryofotherincomefromequitysecuritiesrecognizedduringthethirteenweeksendedMarch25,2020andMarch27,2019isasfollows:
Thirteen Weeks Ended
March 25
2020 March 27
2019
Equitysecurities: Dividendincome $ 184 $ 392
Interestincome — —
Realizedgain(loss)onsaleofinvestments 79 (14)
Unrealizedgain(loss)onequitysecurities (356) 157
Total $ (93) $ 535
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Asummaryofequitysecuritiessoldandgrossrealizedgainsandlossesrecognizedduringthe thirteenweeksendedMarch25,2020andMarch27,2019isasfollows:
Thirteen Weeks Ended
March 25
2020 March 27
2019
Equitysecurities: Grossproceedsfromsalesandredemptions $ 20,000 $ 15,000
Costbasisofsalesandredemptions 19,921 15,014
Grossrealizedgainsincludedinnetincome(loss) 79 —
Grossrealizedlossesincludedinnetincome(loss) — (14)
Realizedgainsandlossesaredeterminedonaspecificidentificationmethodandareincludedinotherincome,netontheCondensedConsolidatedStatementsofIncome(Loss).AsofMarch25,2020andDecember25,2019,thedeclineinthemarketvalueofourmarketablesecuritiesinvestmentportfoliowasconsideredtobetemporaryinnature.
Other Financial InstrumentsThecarryingvalueofourotherfinancialinstruments,includingaccountsreceivable,accountspayable,andaccruedexpensesasofMarch25,2020andDecember25,2019approximatedtheirfairvalueduetotheshort-termnatureofthesefinancialinstruments.
Assets and Liabilities Measured at Fair Value on a Non-Recurring BasisAssetsandliabilitiesthataremeasuredatfairvalueonanon-recurringbasisincludeourlong-livedassets,operatingleaseright-of-useassetsandindefinite-livedintangible assets. During the thirteen weeks endedMarch 25, 2020,we recognized an impairment charge of $1,132at onelocation. Of the total impairmentcharge,$736wasattributedtopropertyandequipmentheldandused,$383wasattributedtooperatingleaseright-of-useassets,and$13wasattributedtofinanceleaseright-of-useassets.TheassetimpairmentchargeisincludedinimpairmentandlossondisposalofassetsontheCondensedConsolidatedStatementofIncome(Loss).Thefairvaluesofassetsweredeterminedusinganincome-basedapproachandareclassifiedasLevel3withinthefairvaluehierarchy.Significantinputsincludeprojectionsoffuturecashflows,discountrates,Shacksalesandprofitability.TherewerenoimpairmentchargesrecordedduringthethirteenweeksendedMarch27,2019.
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NOTE 5: INVENTORIES
Inventoriesarestatedatthelowerofcostornetrealizablevaluewithcostdeterminedonafirst-in, first-outbasis. AsofMarch25,2020,werecorded$130ininventory reserve for inventories that were deemedto be obsolete or slowmoving. As ofDecember25,2019, no adjustment was deemednecessary to reduceinventorytonetrealizablevalueduetotherapidturnoverandhighutilizationofinventory.InventoriesasofMarch25,2020andDecember25,2019consistedofthefollowing:
March 25
2020 December 25
2019
Food $ 1,323 $ 1,738
Wine 97 107
Beer 119 114
Beverages 247 233
Retailmerchandise 23 29
Papergoods 366 —
Inventoriesbeforeinventoryreserve 2,175 2,221
Less:inventoryreserve 130 —
Inventories, net $ 2,045 $ 2,221
NOTE 6: PROPERTY AND EQUIPMENT
PropertyandequipmentasofMarch25,2020andDecember25,2019consistedofthefollowing:
March 25
2020 December 25
2019
Leaseholdimprovements $ 312,524 $ 302,204
Equipment 56,482 54,404
Furnitureandfixtures 18,497 18,082
Computerequipmentandsoftware 25,091 24,226
Financingequipmentleaseassets 8,079 7,442
Constructioninprogress 39,469 30,290
Propertyandequipment,gross 460,142 436,648
Less:accumulateddepreciation 131,103 121,786
Property and equipment, net $ 329,039 $ 314,862
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NOTE 7: SUPPLEMENTAL BALANCE SHEET INFORMATION
ThecomponentsofothercurrentliabilitiesasofMarch25,2020andDecember25,2019areasfollows:
March 25
2020 December 25
2019
Salestaxpayable $ 3,814 $ 4,086
Currentportionofliabilitiesundertaxreceivableagreement 1,207 7,777
Giftcardliability 2,134 2,258
Currentportionoffinancingequipmentleaseliabilities 1,876 1,873
Other 4,704 3,505
Other current liabilities $ 13,735 $ 19,499
Thecomponentsofotherlong-termliabilitiesasofMarch25,2020andDecember25,2019areasfollows:
March 25
2020 December 25
2019
Deferredlicensingrevenue $ 11,299 $ 11,310
Long-termportionoffinancingequipmentleaseliabilities 3,772 3,643
Other 353 375
Other long-term liabilities $ 15,424 $ 15,328
NOTE 8: DEBT
In August 2019, we terminated our previous revolving credit facility and entered into a newrevolving credit facility agreement ("Revolving Credit Facility"),whichpermitsborrowingsupto$50,000,ofwhichtheentireamountisavailableimmediately,withtheabilitytoincreaseavailableborrowingsuptoanadditional$100,000,tobemadeavailablesubjecttosatisfactionofcertainconditions.TheRevolvingCreditFacilitywillmatureandallamountsoutstandingwillbedueandpayable in August 2024. The Revolving Credit Facility also permits the issuance of letters of credit uponour request of up to $15,000. Borrowings under theRevolvingCreditFacilitywillbearinterestateither:(i)LIBORplusapercentagerangingfrom1.0%to1.5%or(ii)thebaserateplusapercentagerangingfrom0.0%to0.5%,ineachcasedependingonournetleaseadjustedleverageratio.TotheextenttheLIBORreferencerateisnolongeravailable,theadministrativeagent,inconsultationwithus,willdetermineareplacementratewhichwillbegenerallyinaccordancewithsimilartransactionsinwhichitservesasadministrativeagent.
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 theguarantors.TheobligationsundertheRevolvingCreditFacilityareguaranteedbyeachofSSEHoldings'directandindirectsubsidiaries(withcertainexceptions).
The Revolving Credit Facility requires us to comply with maximum net lease adjusted leverage and minimum fixed charge coverage ratios. In addition, theRevolvingCreditFacilitycontainsothercustomaryaffirmativeandnegativecovenants,includingthosewhich(subjecttocertainexceptionsanddollarthresholds)limitourabilitytoincurdebt;incurliens;makeinvestments;engageinmergers,consolidations,liquidationsoracquisitions;disposeofassets;makedistributionsonorrepurchaseequitysecurities;engageintransactionswithaffiliates;andprohibitsus,withcertainexceptions,fromengaginginanylineofbusinessnotrelatedtoourcurrentlineofbusiness.AsofMarch25,2020,wewereincompliancewithallcovenants.
In March 2020, wedrewdownthe full $50,000available under the Revolving Credit Facility to enhance liquidity and financial flexibility given the uncertainmarketconditionscreatedbytheCOVID-19pandemic.AsofMarch25,2020,totalamountsoutstandingunderourRevolvingCreditFacilitywere$50,000,whichwasclassifiedaslong-termdebtontheCondensedConsolidatedBalanceSheet.
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InMay2020,weenteredintoafirstamendmenttotheRevolvingCreditFacility("FirstAmendment"),which,amongotherthings,providesformodifiedfinancialcovenant compliance requirements for a periodof time. TheFirst Amendment requires us tomaintain minimumliquidity of$25,000throughJuly1, 2021andoutstandingborrowingsduringtheapplicableperiodcoveredbytheFirstAmendmentbearinterestateither:(i)LIBORplusapercentagerangingfrom1.0%to2.5%or(ii)thebaserateplusapercentagerangingfrom0.0%to1.50%,ineachcasedependingonournetleaseadjustedleverageratio.
Totalinterestcostsincurredwere$112and$72forthethirteenweeksendedMarch25,2020andMarch27,2019,respectively.NoamountswerecapitalizedintopropertyandequipmentforthethirteenweeksendedMarch25,2020andMarch27,2019,respectively.
NOTE 9: LEASES
Nature of LeasesWeleaseall of our domestic company-operatedShacks, our HomeOffice andcertain equipment undervariousnon-cancelable leaseagreements that expire onvarious dates through 2035. We evaluate contracts entered into to determine whether the contract involves the use of property or equipment, which is eitherexplicitly or implicitly identified in the contract. We evaluate whether we control the use of the asset, which is determined by assessing whether we obtainsubstantiallyall economicbenefits fromtheuseoftheasset, andwhetherwehavetherighttodirect theuseoftheasset. If thesecriteria aremetandwehaveidentifiedalease,weaccountforthecontractundertherequirementsofAccountingStandardsCodificationTopic842("ASC842").
Uponthepossessionofaleasedasset,wedetermineitsclassificationasanoperatingorfinancelease.Ourrealestateleasesareclassifiedasoperatingleasesandmost of our equipment leases are classified as finance leases. Generally, our real estate leases have initial terms ranging from 10to 15years and typicallyincludetwofive-yearrenewaloptions.Renewaloptionsaregenerallynotrecognizedaspartoftheright-of-useassetsandleaseliabilitiesasitisnotreasonablycertainatcommencementdatethatwewouldexercisetheoptionstoextendthelease.Ourrealestateleasestypicallyprovideforfixedminimumrentpaymentsand/or contingent rent payments based uponsales in excess of specified thresholds. Whenthe achievement of such sales thresholds is deemedto be probable,contingentrentisaccruedinproportiontothesalesrecognizedduringtheperiod.Foroperatingleasesthatincluderentholidaysandrentescalationclauses,werecognizeleaseexpenseonastraight-linebasisovertheleasetermfromthedatewetakepossessionoftheleasedproperty.LeaseexpenseincurredbeforeaShackopens is recorded in pre-opening costs. Once a domestic company-operated Shack opens, we record the straight-line lease expense and any contingent rent, ifapplicable,inoccupancyandrelatedexpensesontheCondensedConsolidatedStatementsofIncome(Loss).Manyofourleasesalsorequireustopayrealestatetaxes, common area maintenance costs and other occupancy costs which are included in occupancy and related expenses on the Condensed ConsolidatedStatementsofIncome(Loss).
Asthere were noexplicit rates providedin our leases, weusedour incremental borrowingrate in determiningthe present value of future lease payments. Thediscountrateusedtomeasuretheleaseliabilityatthetransitiondatewasderivedfromtheaverageoftheyieldcurvesobtainedfromusingthenotchingmethodandthe recovery rate method. The most significant assumption in calculating the incremental borrowing rate is our credit rating and subject to judgment. WedeterminedourcreditratingbasedonacomparisonofthefinancialinformationofSSEHoldingstootherpubliccompaniesandthenusedtheirrespectivecreditratingstodevelopourown.
Weexpendcashforleaseholdimprovementstobuildoutandequipourleasedpremises.Generally,aportionoftheleaseholdimprovementsandbuildingcostsarereimbursedbyourlandlordsaslandlordincentivespursuanttoagreed-upontermsinourleaseagreements.Ifobtained,landlordincentivesusuallytaketheformofcash,fullorpartialcreditsagainstourfutureminimumorcontingentrentsotherwisepayablebyus,oracombinationthereof.Inmostcases,landlordincentivesarereceived after we take possession of the property, as we meet required milestones during the construction of the property. We include these amounts in themeasurementoftheinitialoperatingleaseliability,whicharealsoreflectedasareductiontotheinitialmeasurementoftheright-of-useasset.
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Asummaryoffinanceandoperatingleaseright-of-useassetsandliabilitiesasofMarch25,2020andDecember25,2019isasfollows:
ClassificationMarch 25
2020 December 25
2019
Financeleases Propertyandequipment,net $ 5,546 $ 5,444
Operatingleases Operatingleaseassets 302,216 274,426
Total right-of-use assets $ 307,762 $ 279,870
Financeleases: Othercurrentliabilities 1,876 1,873
Otherlong-termliabilities 3,772 3,643
Operatingleases: Operatingleaseliabilities,current 43,197 30,002
Long-termoperatingleaseliabilities 322,191 304,914
Total lease liabilities $ 371,036 $ 340,432
ThecomponentsofleaseexpenseforthethirteenweeksendedMarch25,2020andMarch27,2019wasasfollows:
Thirteen Weeks Ended
ClassificationMarch 25
2020 March 27
2019
Financeleasecost: Amortizationofright-of-useassets Depreciationexpense $ 577 $ 334
Interestonleaseliabilities Interestexpense 55 41
OperatingleasecostOccupancyandrelatedexpensesGeneralandadministrativeexpensesPre-openingcosts
10,742
8,910
Short-termleasecost Occupancyandrelatedexpenses 124 17
VariableleasecostOccupancyandrelatedexpensesGeneralandadministrativeexpensesPre-openingcosts
3,730
3,462
Total lease cost $ 15,228 $ 12,764
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AsofMarch25,2020,futureminimumleasepaymentsforfinanceandoperatingleasesconsistedofthefollowing:
Finance Leases Operating Leases
2020 $ 1,610 $ 30,448
2021 1,661 47,877
2022 1,180 52,029
2023 800 52,176
2024 489 50,893
Thereafter 337 257,135
Totalminimumpayments 6,077 490,557
Less:imputedinterest 429 125,169
Total lease liabilities $ 5,648 $ 365,388
As ofMarch 25, 2020we had additional operating lease commitments of $55,222for non-cancelable leases without a possession date, which will begin tocommencein2020.Theseleasecommitmentsareconsistentwiththeleasesthatwehaveexecutedthusfarandincludeanumberofrealestateleaseswhereweareinvolvedintheconstructionanddesign.
AsummaryofleasetermsanddiscountratesforfinanceandoperatingleasesasofMarch25,2020andDecember25,2019isasfollows:
March 25
2020 December 25
2019
Weighted-averageremainingleaseterm(years): Financeleases 5.2 5.1
Operatingleases 10.1 10.1
Weighted-averagediscountrate: Financeleases 3.6% 3.7%
Operatingleases 4.2% 5.4%
SupplementalcashflowinformationrelatedtoleasesasofMarch25,2020andMarch27,2019isasfollows:
March 25
2020 March 27
2019
Cashpaidforamountsincludedinthemeasurementofleaseliabilities: Operatingcashflowsfromfinanceleases $ 55 $ 41
Operatingcashflowsfromoperatingleases 11,329 8,324
Financingcashflowsfromfinanceleases 559 339
Right-of-useassetsobtainedinexchangeforleaseobligations: Financeleases 716 230
Operatingleases 28,035 14,789
NOTE 10: 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 interestrepresentingtheeconomicinterestinSSEHoldingsheldbytheothermembersofSSEHoldings.The
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ThirdAmendedandRestatedLimitedLiabilityCompanyAgreement,asfurtheramended,(the"LLCAgreement")ofSSEHoldingsprovidesthatholdersofLLCInterestsmay,fromtimetotime,requireSSEHoldingstoredeemalloraportionoftheirLLCInterestsfornewly-issuedsharesofClassAcommonstockonaone-for-one basis. In connection with any redemption or exchange, we will receive a corresponding number of LLC Interests, increasing our total ownershipinterestinSSEHoldings.ChangesinourownershipinterestinSSEHoldingswhileweretainourcontrollinginterestinSSEHoldingswillbeaccountedforasequity transactions. Assuch, future redemptions or direct exchanges of LLCInterests in SSEHoldings bythe other members of SSEHoldingswill result in achangeinownershipandreducetheamountrecordedasnon-controllinginterestandincreaseadditionalpaid-incapital.
ThefollowingtablesummarizestheownershipinterestinSSEHoldingsasofMarch25,2020andDecember25,2019.
March 25, 2020 December 25, 2019 LLC Interests Ownership% LLC Interests Ownership %
NumberofLLCInterestsheldbyShakeShackInc. 34,523,400 91.7% 34,417,302 91.6%
NumberofLLCInterestsheldbynon-controllinginterestholders 3,117,002 8.3% 3,145,197 8.4%
TotalLLCInterestsoutstanding 37,640,402 100.0% 37,562,499 100.0%
Theweightedaverageownershippercentagesfortheapplicablereportingperiodsareusedtoattributenetincome(loss)andothercomprehensiveincome(loss)toShake Shack Inc. and the non-controlling interest holders. The non-controlling interest holders' weighted average ownership percentage for the thirteenweeksendedMarch25,2020was8.4%.Thenon-controllinginterestholders'weightedaverageownershippercentageforthethirteenweeksendedMarch27,2019was20.3%.
ThefollowingtablesummarizestheeffectsofchangesinownershipofSSEHoldingsonourequityduringthethirteenweeksendedMarch25,2020andMarch27,2019.
Thirteen Weeks EndedMarch 25
2020March 27
2019
Netincome(loss)attributabletoShakeShackInc. $ (960) $ 2,546
Transfers(to)fromnon-controllinginterests: Increaseinadditionalpaid-incapitalasaresultoftheredemptionofLLCInterests 195 594
Increaseinadditionalpaid-incapitalasaresultofactivityunderstockcompensationplansandtherelatedincometaxeffect 424 975
Total effect of changes in ownership interest on equity attributable to Shake Shack Inc. $ (341) $ 4,115
ThefollowingtablesummarizesredemptionsofLLCInterestsactivityduringthethirteenweeksendedMarch25,2020andMarch27,2019.
Thirteen Weeks Ended
March 25
2020 March 27
2019
RedemptionandacquisitionofLLCInterests NumberofLLCInterestsredeemedbynon-controllinginterestholders 28,195 103,832
NumberofLLCInterestsreceivedbyShakeShackInc. 28,195 103,832
IssuanceofClassAcommonstock SharesofClassAcommonstockissuedinconnectionwithredemptionsofLLCInterests 28,195 103,832
CancellationofClassBcommonstock SharesofClassBcommonstocksurrenderedandcanceled 28,195 103,832
DuringthethirteenweeksendedMarch25,2020andMarch27,2019,wereceivedanaggregateof77,903and73,563LLCInterests,respectively,inconnectionwiththeactivityunderourstockcompensationplan.
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NOTE 11: EQUITY-BASED COMPENSATION
Asummaryofequity-basedcompensationexpenserecognizedduringthethirteenweeksendedMarch25,2020andMarch27,2019isasfollows:
Thirteen Weeks Ended
March 25
2020 March 27
2019
Stockoptions $ 261 $ 682
Performancestockunits 413 712
Restrictedstockunits 626 298
Equity-based compensation expense $ 1,300 $ 1,692
Total income tax benefit recognized related to equity-based compensation $ 36 $ 42
Equity-basedcompensationexpenseisincludedingeneralandadministrativeexpensesandlaborandrelatedexpensesontheCondensedConsolidatedStatementsofIncome(Loss)duringthethirteenweeksendedMarch25,2020andMarch27,2019asfollows:
Thirteen Weeks Ended
March 25
2020 March 27
2019
Generalandadministrativeexpenses $ 1,214 $ 1,642
Laborandrelatedexpenses 86 50
Equity-based compensation expense $ 1,300 $ 1,692
NOTE 12: INCOME TAXES
WearethesolemanagingmemberofSSEHoldingsand,asaresult,consolidatethefinancialresultsofSSEHoldings.SSEHoldingsistreatedasapartnershipforU.S. federal andmost applicable state andlocal incometaxpurposes. Asa partnership, SSEHoldingsis not subject to U.S. federal andcertain state andlocalincometaxes.AnytaxableincomeorlossgeneratedbySSEHoldingsispassedthroughtoandincludedinthetaxableincomeorlossofitsmembers,includingus,ona pro rata basis. Weare subject to U.S. federal incometaxes, in addition to state andlocal incometaxes with respect to our allocable share of anytaxableincomeorlossof SSEHoldings, aswell asanystand-aloneincomeorloss generatedbyShakeShackInc. Wearealsosubject towithholdingtaxesinforeignjurisdictions.
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Income Tax ExpenseAreconciliationofincometaxexpensecomputedattheU.S.federalstatutoryincometaxratetotherecognizedincometaxexpenseisasfollows:
Thirteen Weeks Ended
March 25
2020 March 27
2019ExpectedU.S.federalincometaxesatstatutoryrate $ (208) 21.0% $ 1,188 21.0%
Stateandlocalincometaxes,netoffederalbenefit (125) 12.6% 418 7.4%
Foreignwithholdingtaxes 534 (53.8)% 342 6.0%
Taxcreditsandadjustmentstoforecastedrate (34) 3.4% (376) (6.6)%
Returntoprovisionadjustment — —% — —%
Non-controllinginterest (80) 8.0% (323) (5.7)%
TaxeffectofchangeinbasisrelatedtotheadoptionofASC842 — —% 1,161 20.5%
Changeinvaluationallowance — —% (365) (6.5)%
Other — —% 2 0.1%
Income tax expense $ 87 (8.8)% $ 2,047 36.2%
OureffectiveincometaxratesforthethirteenweeksendedMarch25,2020andMarch27,2019were(8.8)%and36.2%,respectively.Thedecreasewasprimarilydrivenbylowerpre-taxbookincomeresultinginaloss,aswellashigherforeignwithholdingtaxeswhichmorethanoffsetthebenefitfromthepre-taxbooklossduringthe quarter. Additionally,anincrease in our ownership interest in SSEHoldings increases our share of the taxable income(loss) of SSEHoldings. Ourweighted-averageownershipinterestinSSEHoldingswas91.6%and79.7%forthethirteenweeksendedMarch25,2020andMarch27,2019,respectively.
Deferred Tax Assets and LiabilitiesDuringthethirteenweeksendedMarch25,2020,weacquiredanaggregateof106,098LLCInterestsinconnectionwiththeredemptionofLLCInterests, andactivityrelatingtoourstockcompensationplan.Werecognizedadeferredtaxassetintheamountof$851associatedwiththebasisdifferenceinourinvestmentinSSEHoldingsuponacquisitionoftheseLLCInterests.AsofMarch25,2020,thetotaldeferredtaxassetrelatedtothebasisdifferenceinourinvestmentinSSEHoldingswas$178,207.
DuringthethirteenweeksendedMarch25,2020,wealsorecognized$87ofdeferredtaxassetsrelatedtoadditionaltaxbasisincreasesgeneratedfromexpectedfuturepaymentsundertheTaxReceivableAgreementandrelateddeductionsforimputedinterestonsuchpayments.See"—TaxReceivableAgreement"formoreinformation.
Weevaluatetherealizabilityofourdeferredtaxassetsonaquarterlybasisandestablishvaluationallowanceswhenitismorelikelythannotthatalloraportionofadeferredtaxassetmaynotberealized.AsofMarch25,2020,weconcluded,basedontheweightofallavailablepositiveandnegativeevidence,thatallofourdeferredtaxassets(exceptforthosedeferredtaxassetsrelatingtoNewYorkCityUBTcredits) aremorelikelythannottoberealized. Assuch,noadditionalvaluationallowancewasrecognized.
Uncertain Tax PositionsNouncertaintaxpositionsexistedasofMarch25,2020.ShakeShackInc.wasformedinSeptember2014anddidnotengageinanyoperationspriortoourinitialpublicofferinginFebruaryof2015andrelatedorganizationaltransactions.ShakeShackInc.firstfiledtaxreturnsfortaxyear2014,whichisthefirsttaxyearsubjecttoexaminationbytaxingauthoritiesforU.S.federalandstateincometaxpurposes.Additionally,althoughSSEHoldingsistreatedasapartnershipforU.S.federal andstateincometaxespurposes, it isstill requiredtofileanannualU.S.ReturnofPartnershipIncome,whichissubjecttoexaminationbytheInternalRevenueService("IRS").Thestatuteoflimitationshasexpiredfortaxyearsthrough2015forSSEHoldings.
Tax Receivable AgreementPursuanttoourelectionunderSection754oftheInternalRevenueCode(the"Code"),weexpecttoobtainanincreaseinourshareofthetaxbasisinthenetassetsofSSEHoldingswhenLLCInterestsareredeemedorexchangedbytheothermembersofSSE
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Holdings.WeplantomakeanelectionunderSection754oftheCodeforeachtaxableyearinwhicharedemptionorexchangeofLLCInterestoccurs.WeintendtotreatanyredemptionsandexchangesofLLCInterestsasdirectpurchasesofLLCInterestsforU.S.federalincometaxpurposes.Theseincreasesintaxbasismay reduce the amounts that we would otherwise pay in the future to various tax authorities. They may also decrease gains (or increase losses) on futuredispositionsofcertaincapitalassetstotheextenttaxbasisisallocatedtothosecapitalassets.
OnFebruary4,2015,weenteredintoataxreceivableagreementwithcertainofthethen-existingmembersofSSEHoldings(the"TaxReceivableAgreement")that provides for the payment by us of85%of the amount of any tax benefits that we actually realize, or in some cases are deemed to realize, as a result of(i)increasesinourshareofthetaxbasisinthenetassetsofSSEHoldingsresultingfromanyredemptionsorexchangesofLLCInterests,(ii)taxbasisincreasesattributabletopaymentsmadeundertheTaxReceivableAgreement,and(iii)deductionsattributabletoimputedinterestpursuanttotheTaxReceivableAgreement(the"TRAPayments").Weexpecttobenefitfromtheremaining15%ofanytaxbenefitsthatwemayactuallyrealize. TheTRAPaymentsarenotconditioneduponanycontinuedownershipinterestinSSEHoldingsorus.TherightsofeachmemberofSSEHoldings,thatisapartytotheTaxReceivableAgreement,areassignabletotransfereesoftheirrespectiveLLCInterests.
DuringthethirteenweeksendedMarch25,2020,weacquiredanaggregateof28,195LLCInterestsinconnectionwiththeredemptionofLLCInterests,whichresultedinanincreaseinthetaxbasisofourinvestmentinSSEHoldingssubjecttotheprovisionsoftheTaxReceivableAgreement.Werecognizedanadditionalliabilityintheamountof$310fortheTRAPaymentsduetotheredeemingmembers,representing85%oftheaggregatetaxbenefitsweexpecttorealizefromthetaxbasisincreasesrelatedtotheredemptionofLLCInterests,afterconcludingitwasprobablethatsuchTRAPaymentswouldbepaidbasedonourestimatesoffuturetaxableincome.DuringthethirteenweeksendedMarch25,2020andMarch27,2019,paymentsof$6,569and$707,inclusiveofinterest,weremadetothepartiestotheTaxReceivableAgreement,respectively.AsofMarch25,2020,thetotalamountofTRAPaymentsdueundertheTaxReceivableAgreement,was$228,166,ofwhich$1,207wasincludedinothercurrentliabilitiesontheCondensedConsolidatedBalanceSheet.SeeNote15formoreinformationrelatingtoourliabilitiesundertheTaxReceivableAgreement.
NOTE 13: EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share of Class Acommonstock is computed bydividing net income(loss)attributable to ShakeShackInc. by the weighted-averagenumberofsharesofClassAcommonstockoutstandingduringtheperiod.Dilutedearnings(loss)pershareofClassAcommonstockiscomputedbydividingnetincome (loss)attributable to Shake Shack Inc. by the weighted-average number of shares of Class A common stock outstanding adjusted to give effect topotentiallydilutivesecurities.
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Thefollowingtablesetsforthreconciliationsofthenumeratorsanddenominatorsusedtocomputebasicanddilutedearnings(loss)pershareofClassAcommonstockforthethirteenweeksendedMarch25,2020andMarch27,2019.
Thirteen Weeks Ended
March 25
2020 March 27
2019
Numerator: Netincome(loss) $ (1,079) $ 3,607
Less:netincome(loss)attributabletonon-controllinginterests (119) 1,061
Netincome(loss)attributabletoShakeShackInc. $ (960) $ 2,546
Denominator: Weighted-averagesharesofClassAcommonstockoutstanding—basic 34,444 29,563
Effectofdilutivesecurities: Stockoptions — 731
Performancestockunits — 76
Restrictedstockunits — 22
Weighted-averagesharesofClassAcommonstockoutstanding—diluted 34,444 30,392
Earnings(loss)pershareofClassAcommonstock—basic $ (0.03) $ 0.09
Earnings(loss)pershareofClassAcommonstock—diluted $ (0.03) $ 0.08
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, separatepresentationofbasicanddilutedearnings(loss)pershareofClassBcommonstockunderthetwo-classmethodhasnotbeenpresented.
Thefollowingtablepresentspotentiallydilutivesecurities,asoftheendoftheperiod,excludedfromthecomputationsofdilutedearnings(loss)pershareofClassAcommonstockforthethirteenweeksendedMarch25,2020andMarch27,2019.
Thirteen Weeks Ended
March 25
2020 March 27
2019 Stock options 847,207 (1) 3,785 (2)Performance stock units 179,253 (1) 69,772 (3)
Restricted stock units 264,431 (1) — Shares of Class B common stock 3,117,002 (4) 7,453,515 (4)
(1) Represents number of instruments outstanding at the end of the period that were excluded from the computation of diluted earnings per share of Class A common stockbecause the effect would have been anti-dilutive.
(2) Number of securities excluded from the computation of diluted earnings per share of Class A common stock because the exercise price of the stock options exceeded theaverage market price of our Class A common stock during the period ("out-of-the-money").
(3) Excluded from the computation of diluted earnings per share of Class A common stock because the performance conditions associated with these awards were not metassuming the end of the reporting period was the end of the performance period.
(4) Shares of our Class B common stock outstanding as of the end of the period are considered potentially dilutive shares of Class A common stock. Amounts have been excludedfrom 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-classmethods.
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NOTE 14: SUPPLEMENTAL CASH FLOW INFORMATION
ThefollowingtablesetsforthsupplementalcashflowinformationforthethirteenweeksendedMarch25,2020andMarch27,2019:
Thirteen Weeks Ended
March 25
2020 March 27
2019
Cashpaidfor: Incometaxes,netofrefunds $ 801 $ 617
Interest,netofamountscapitalized 61 72
Non-cashinvestingactivities: Accruedpurchasesofpropertyandequipment 13,715 15,763
Capitalizedequity-basedcompensation 13 27
ClassAcommonstockissuedinconnectionwiththeredemptionofLLCInterests — 1
CancellationofClassBcommonstockinconnectionwiththeredemptionofLLCInterests — (1)
Establishmentofliabilitiesundertaxreceivableagreement 310 1,636
NOTE 15: COMMITMENTS AND CONTINGENCIES
Lease CommitmentsWeareobligatedundervariousoperatingleasesforShacksandourhomeofficespace,expiringinvariousyearsthrough2035.Undercertainoftheseleases,weareliableforcontingentrentbasedonapercentageofsalesinexcessofspecifiedthresholdsandaretypicallyresponsibleforourproportionateshareofrealestatetaxes,commonareamaintenancechargesandutilities.SeeNote9,Leases.
Assecurityunderthetermsofoneofourleases,weareobligatedunderaletterofcredittotaling$130asofMarch25,2020,whichexpiresinFebruary2026.Additionally,inSeptember2017,weenteredintoaletterofcreditinconjunctionwithournewHomeOfficeleaseintheamountof$603,whichexpiresinAugust2020andrenewsautomaticallyforone-yearperiodsthroughJanuary31,2034.
Purchase CommitmentsPurchase obligations include legally binding contracts, including commitments for the purchase, construction or remodeling of real estate and facilities, firmminimum commitments for inventory purchases, equipment purchases, marketing-related contracts, software acquisition/license commitments and servicecontracts. Theseobligationsaregenerallyshort-terminnatureandarerecordedasliabilities whentherelatedgoodsarereceivedorservicesrendered. Wealsoenterintolong-term,exclusivecontractswithcertainvendorstosupplyuswithfood,beveragesandpapergoods,obligatingustopurchasespecifiedquantities.
Legal ContingenciesInFebruary2018,aclaimwasfiledagainstShakeShackinCaliforniastatecourtallegingcertainviolationsoftheCaliforniaLaborCode.Atamediationbetweenthe parties, we agreed to settle the matter with the plaintiff and all other California employees who elect to participate in the settlement for $1,200. As ofMarch25,2020,anaccrualintheamountof$1,200wasrecordedforthismatterandrelatedexpenses.
Wearesubjecttovariouslegalproceedings,claimsandliabilities,suchasemployment-relatedclaimsandslipandfallcases,whichariseintheordinarycourseofbusinessandaregenerallycoveredbyinsurance.AsofMarch25,2020,theamountoftheultimateliabilitywithrespecttothesematterswasnotmaterial.
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Liabilities under Tax Receivable AgreementAsdescribedinNote12, weare a party to the TaxReceivable Agreement under whichweare contractually committed to paycertain of the members of SSEHoldings85%oftheamountofanytaxbenefitsthatweactuallyrealize, orinsomecasesaredeemedtorealize, asaresult ofcertaintransactions. Wearenotobligatedto makeanypayments under theTaxReceivable Agreement until the taxbenefits associatedwiththe transactions that gaverise to the payments arerealized.AmountspayableundertheTaxReceivableAgreementarecontingentupon,amongotherthings,(i)generationoffuturetaxableincomeoverthetermofthe 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 TaxReceivableAgreementtoutilizethetaxbenefits,thenwewouldnotberequiredtomaketherelatedTRAPayments.DuringthethirteenweeksendedMarch25,2020andMarch27,2019,werecognizedliabilitiestotaling$310and$1,636,respectively,relatingtoourobligationsundertheTaxReceivableAgreement,afterconcluding that it was probable that we would have sufficient future taxable income over the termof the Tax Receivable Agreement to utilize the related taxbenefits.AsofMarch25,2020andDecember25,2019,ourtotal obligationsundertheTaxReceivableAgreement were$228,166and $234,426,respectively.TherewerenotransactionssubjecttotheTaxReceivableAgreementforwhichwedidnotrecognizetherelatedliability, asweconcludedthatwewouldhavesufficientfuturetaxableincometoutilizealloftherelatedtaxbenefits.
NOTE 16: RELATED PARTY TRANSACTIONS
Union Square Hospitality GroupTheChairmanofourBoardofDirectorsservesastheChiefExecutiveOfficerofUnionSquareHospitalityGroup,LLC.Asaresult, UnionSquareHospitalityGroup,LLCanditssubsidiaries,setforthbelow,areconsideredrelatedparties.
USHG, LLCEffective January 2015, we entered into an Amended and Restated Management Services Agreement with USHG, LLC("USHG"), in which USHGagreed toprovide,atourelection,certainmanagementservicestoSSEHoldings.TheinitialtermoftheAmendedandRestatedManagementServicesAgreementisthroughDecember31,2019,andSSEHoldingsnotifiedUSHGofitsintentionnottorenewthetermthereafter.
Hudson Yards Sports and EntertainmentInfiscal2011,weenteredintoaMasterLicenseAgreement(asamended,"MLA")withHudsonYardsSportsandEntertainmentLLC("HYSE")tooperateShakeShack branded limited menu concession stands in sports and entertainment venues within the United States. In February 2019, the agreement was assigned toHudsonYardsCatering("HYC"),theparentofHYSE.TheagreementexpiresinJanuary2027andincludesfiveconsecutivefive-yearrenewaloptionsatHYC'soption.Asconsiderationfortheserights,HYCpaysusalicensefeebasedonapercentageofnetfoodsales,asdefinedintheMLA.HYCalsopaysusapercentageofprofitsonsalesofbrandedbeverages,asdefinedintheMLA.
Thirteen Weeks Ended
ClassificationMarch 25
2020 March 27
2019
AmountsreceivedfromHYC Licensingrevenue $ 22 $ 66
ClassificationMarch 25
2020 December 25
2019
AmountsduefromHYC AccountsReceivable $ 27 $ 47
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Madison Square Park ConservancyThe Chairman of our Board of Directors serves as a director of the Madison Square Park Conservancy ("MSP Conservancy"), with which we have a licenseagreementandpaylicensefeestooperateourMadisonSquareParkShack.
Thirteen Weeks Ended
ClassificationMarch 25
2020 March 27
2019
AmountspaidtoMSPConservancy Occupancyandrelatedexpenses $ 219 $ 278
ClassificationMarch 25
2020 December 25
2019
AmountsduetoMSPConservancy Accruedexpenses $ — $ 53
Olo, Inc.TheChairmanofourBoardofDirectorsservesasadirectorofOlo,Inc.(formerlyknownas"MoboSystems,Inc."),aplatformweuseinconnectionwithourmobileorderingapplication.NoamountswereduetoOloasofMarch25,2020andDecember25,2019,respectively.
Thirteen Weeks Ended
ClassificationMarch 25
2020 March 27
2019
AmountspaidtoOlo Otheroperatingexpenses $ 52 $ 38
Square, Inc.Our Chief Executive Officer is a member of the Board of Directors of Square, Inc. ("Square").We currently use certain point-of-sale applications, paymentprocessingservices,hardwareandotherenterpriseplatformservicesinconnectionwiththeprocessingofalimitedamountofsalesatcertainofourlocations,salesfor certain off-site events and in connection with our kiosk technology. Noamounts were due to Square as of March 25, 2020and December 25, 2019,respectively.
Thirteen Weeks Ended
ClassificationMarch 25
2020 March 27
2019
AmountspaidtoSquare Otheroperatingexpenses $ 571 $ 266
Tax Receivable AgreementAsdescribedinNote12,weenteredintoataxreceivableagreementwithcertainmembersofSSEHoldingsthatprovidesforthepaymentbyusof85%oftheamountoftaxbenefits,ifany,thatShakeShackactuallyrealizesorinsomecasesisdeemedtorealizeasaresultofcertaintransactions.
Thirteen Weeks Ended
ClassificationMarch 25
2020 March 27
2019
Amountspaidtomembers(inclusiveofinterest)
Othercurrentliabilities $ 6,569$ 707
ClassificationMarch 25
2020 December 25
2019
AmountsdueundertheTaxReceivableAgreement
OthercurrentliabilitiesLiabilitiesundertaxreceivableagreement,netofcurrentportion
$ 228,166$ 234,426
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Distributions to Members of SSE HoldingsUnderthetermsoftheSSEHoldingsLLCAgreement,SSEHoldingsisobligatedtomaketaxdistributionstoitsmembers.Notaxdistributionswerepayabletonon-controllinginterestholdersasofMarch25,2020andDecember25,2019,respectively.
Thirteen Weeks Ended
ClassificationMarch 25
2020 March 27
2019
Amountspaidtonon-controllinginterestholders
Netincomeattributabletonon-controllinginterests $ 305$ 109
NOTE 17: SUBSEQUENT EVENTS
COVID-19 PandemicAnovelstrainofcoronavirus(“COVID-19”)wasfirstidentifiedinWuhan,ChinainDecember2019andsubsequentlydeclaredapandemicbytheWorldHealthOrganizationonMarch11,2020.Inresponsetothepandemic,manystatesandlocalitiesinwhichweoperatehaveissuedstay-at-homeordersandothersocialdistancing measures. Effective March 16, 2020, we closed all dining rooms and temporarily shifted to a "to-go" only operating model in all of our domesticcompany-operated Shacks. As mandated shutdowns and stay-at-home orders went into effect across the country, we experienced an immediate and drasticreductioninsaleslevels comparedtotheprior year. AsofApril 29, 2020,17domestic company-operatedShacksweretemporarily closedandthemajorityofShackswereoperatingwithreducedhoursandinalimitedcapacity.AsofApril29,2020,61ofour120licensedShacksweretemporarilyclosed,includingallShackswithinJapananddomesticstadiumvenues.U.S.airportlocationshavealsoeitherfullyclosedorsignificantlyslowedasairtravelhasdiminishedtoanearstandstill. Aswestarttoplanfordiningroomstore-opendomestically,albeitinarestrictedandmodifiedcapacity,wewillworkcloselywithlocalauthorities,Centers for Disease Control ("CDC") guidelines and our landlords during the process, and will clearly follow any and all social distancing and other safetyrestrictionsandrecommendations.
InresponsetotheuncertainmarketconditionscreatedbytheCOVID-19pandemic,weenteredintothefollowingtransactionstoenhanceourliquidityposition.
OnApril17,2020,weannouncedan“at-the-market”equityofferingprogram(the“ATMProgram”),underwhichwemayofferandsellsharesofourClassAcommonstockhavinganaggregatepriceofupto$75,000fromtimetotime.OnApril21,2020,wecompletedthesaleof233,467sharesofourClassAcommonstockpursuanttotheATMProgramandreceived$9,794ofproceeds,netofcommissions.Theproceedswereusedtopurchasenewly-issuedLLCInterests.
On April 21, 2020, we completed an underwritten offering of 3,416,070shares of our Class A common stock, resulting in $135,857of proceeds, net ofunderwritingdiscountsandcommissions.Theproceedswereusedtopurchasenewly-issuedLLCInterests.
In May 2020, we entered into a First Amendment to the Revolving Credit Facility, which, among other things, provides for modified financial covenantcompliancerequirementsforaperiodoftime.TheFirstAmendmentrequiresustomaintainminimumliquidityof$25,000throughJuly1,2021andoutstandingborrowingsduringtheapplicableperiodcoveredbytheFirstAmendmentbearinterestateither:(i)LIBORplusapercentagerangingfrom1.0%to2.5%or(ii)thebaserateplusapercentagerangingfrom0.0%to1.5%,ineachcasedependingonournetleaseadjustedleverageratio.
Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”)OnMarch27,2020,CongressenactedtheCARESActtoprovidecertainreliefasaresultoftheCOVID-19pandemic.TheCARESActprovidesnumeroustaxprovisionsandotherstimulusmeasures,includingtemporarychangesregardingthepriorandfutureutilizationofnetoperatinglosses,temporarychangestotheprior and future limitations on interest deductions, temporary suspension of certain payment requirements for the employer portion of Social Security taxes,technical corrections fromprior tax legislation for tax depreciation of certain qualified improvement property, and the creation of certain refundable employeeretentioncredits.
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Wearecurrentlyevaluatingtheimpactonourfinancialstatementsandhavenotyetquantifiedwhatmaterialimpactstothefinancialstatements,ifany,thatmayresultfromtheCARESAct.
OnApril10,2020,weenteredintoa$10,000notepayablewithJ.P.MorganpursuanttothePaycheckProtectionProgram(“PPPLoan”)undertheCARESAct.OnApril27,2020,wereturnedtheentireoutstandingbalanceof$10,005,inclusiveofinterest.
Item 2. Management's Discussion and Analysis of Financial Conditionand 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 PrivateSecurities Litigation Reform Act of 1995 ("PSLRA"), which are subject to known and unknown risks, uncertainties and other important factors that may causeactual results to be materially different. All statements other than statements of historical fact are forward-looking statements. Forward-looking statements providecurrent expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact, such asour expected financial outlook for fiscal 2020, our expected operating performance for fiscal 2020, expected Shack construction and openings, expected same-Shack sales growth and trends in our business, including statements relating to the effects of COVID-19 and our mitigation efforts. Forward-looking statementscan 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. Forward-looking statements are notguarantees of future performance and actual results may differ significantly from the results discussed in the forward-looking statements. All forward-lookingstatements are expressly qualified in their entirety by these cautionary statements. Factors that might cause such differences include, but are not limited to, thosediscussed in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 25, 2019 ("2019 Form 10-K") and Part II, Item 1A of thisQuarterly Report on Form 10-Q. The following discussion should be read in conjunction with our 2019 Form 10-K and the condensed consolidated financialstatements 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 otherwisestated, 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, chicken sandwiches, hot dogs, crinkle cut fries,shakes,frozencustard,beerandwine.AsofMarch25,2020,therewere287Shacksinoperationsystem-wide,ofwhich 167weredomesticcompany-operatedShacks,22weredomesticlicensedShacksand98wereinternationallicensedShacks.
COVID-19 PandemicAnovelstrainofcoronavirus(“COVID-19”)wasfirstidentifiedinWuhan,ChinainDecember2019andsubsequentlydeclaredapandemicbytheWorldHealthOrganizationonMarch11,2020.Inresponsetothepandemic,manystatesandlocalitiesinwhichweoperatehaveissuedstay-at-homeordersandothersocialdistancing measures. Effective March 16, 2020, we closed all dining rooms and temporarily shifted to a "to-go" only operating model in all of our domesticcompany-operated Shacks. As mandated shutdowns and stay-at-home orders went into effect across the country, we experienced an immediate and drasticreductioninsaleslevels comparedtotheprior year. AsofApril 29, 2020,17domestic company-operatedShacksweretemporarily closedandthemajorityofShackswereoperatingwithreducedhoursandinalimitedcapacity.AsofApril29,2020,61ofour120licensedShacksweretemporarilyclosed,includingallShackswithinJapananddomesticstadiumvenues.U.S.airportlocationshavealsoeitherfullyclosedorsignificantlyslowedasairtravelhasdiminishedtoanearstandstill.
In response to the uncertainty of the circumstances described above, we continue to implement plans to adapt to changing circumstances arising from thispandemic. We have increased Shack cleaning, sanitizing and handwashing protocols, as well as providing masks, gloves, hand sanitizers and other protectiveequipmentnecessarytoensurethesafetyofouremployeesandguests.Wearecontinuouslymonitoringtheperformanceofourdomesticcompany-operatedShackstoensurethelocationsare
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sustainableduringthepandemic.Weareadaptingtochangesinfoodorderingbypivotingtomodifieddrive-through,curbsidepickupanddigitalorderingfortake-out.Toincreasedeliveryavailability,wehavealsoenteredintoanintegrateddeliverypartnershipwithUberEatsandexpandedourexistingintegrateddeliverypartnershipswithPostmates,DoorDashandCaviar,whilemovingtoanon-exclusivearrangementwithGrubhub.Wehavealsoincreasedmarketingonoursocial,mobileapplicationandwebchannels,aswellasincreasedpromotionalactivityoncertaindeliveryplatforms.Additionally,wehavepartneredwithGoldbellytooffercook-at-homeShackburgermealkitsavailablethroughnationwideshipping.
Wehavealsoenhancedourliquiditypositionthroughseveralactions.InMarch2020,wedrewdownthefull$50.0millionavailabletousunderourRevolvingCreditFacility.InApril2020,weraisedanaggregateof$145.7millionofproceeds,netofunderwritingdiscountsandcommissions,fromthesaleof3,649,537sharesofourClassAcommonstockinthecombinationofanunderwrittenofferingandsalesofsharesthroughan“at-the-market”equityofferingprogram.See“—LiquidityandCapitalResources”formoreinformation.Weusedtheproceedsfromthesaleofequitysecuritiestopurchasenewly-issuedLLCInterestsandintend to cause SSEHoldings to use the net proceeds to strengthen our balance sheet, which would include use for general corporate purposes, and to furtherenhanceourabilitytoresumeexecutionofourlong-termstrategicgrowthplan.
Tofurther improveourliquidity, wehavealsotakenthefollowingmeasurestoreducecosts: (i) suspendedall non-essential capital expenditures, includingthesuspension of all capital expenditures for design and construction of future Shacks; (ii) implemented salary reductions across all executives and Home Officeemployees;furloughedorlaidoffapproximately20%ofHomeOfficepersonnel;(iii)deferredcashcompensationforourBoardofDirectors;and(iv)undertooksignificant reductions in staffing and operating expenses across all Shacks. Additionally, we are undertaking conversations with landlords to discuss potentialdeferralorabatementofrentpayments.
Despitethechallenges,somepositivesignshavebeguntoemerge.Sincethelowpointduringthelastweekofthequarter,wehaveexperiencedsteadyincreasesindomesticsalesdrivenbygrowthinourowndigital channelsandtheexpansionofourintegrateddeliverypartnerships. Ourlicensedbusinessisalsostartingtoexperience small signs of recovery with dining rooms re-opening in Korea, Hong Kong and mainland China in a limited capacity. However, there can be noassuranceastothetimerequiredtofullyrecoveroperationsandsalestopre-pandemiclevels.Aswestarttoplanfordiningroomstore-opendomestically,albeitinarestrictedandmodifiedcapacity,wewillworkcloselywithlocalauthorities,CDCguidelinesandourlandlordsduringtheprocess,andwillclearlyfollowanyandallsocialdistancingandothersafetyrestrictionsandrecommendations.
Aswemovethroughthistransitionandsalesrampup,weexpecttoincursomelaborinefficienciesasweadjusttonewprotocolsandoperatingmodelswithagoaltoremainefficientaspossiblewhilestillofferingsafeandhighqualityservicetoourcommunities.Wewillalsoincuradditionalcostsandinvestmentsinsuppliesnecessary to keep our teams and guests safe, such as face coverings, gloves and additional secure packaging for all orders, directional signage and cleaningsupplies,whichareallexpectedtobeongoingforaperiodoftime.Giventhedynamicandunpredictablenatureofthissituation,wecannotreasonablyestimatetheimpactsofCOVID-19onourfinancialcondition,resultsofoperationsorcashflowsinthefuture.Wewillcontinuetomonitortherapidlyevolvingsituationandguidancefrominternationalanddomesticauthorities.
Current TrendsDomesticcompany-operatedShacksexperiencedsteadysalesincreasesoverthelastfewweeks.Thefollowingtablepresentsinformationaboutourcurrenttrendsinthesecondquarterof2020.
Week Ended(dollar amounts in thousands) March 11 March 18 March 25 April 1 April 8 April 15 April 22 April 29
Averageweeklysales* $ 70 $ 46 $ 24 $ 24 $ 27 $ 34 $ 45 $ 49
Totalyear-over-yearsalesgrowth(decline) 14% (32)% (67)% (66)% (62)% (57)% (41)% (34)%Same-Shacksales% (10)% (46)% (73)% (72)% (69)% (64)% (50)% (45)%
*Average weekly sales is calculated by dividing total Shack sales by the number of operating weeks for all Shacks in operation during the period. For Shacks thatare not open for the entire period, fractional adjustments are made to the number of operating weeks open such that it corresponds to the period of associatedsales.
AsofApril29,2020,wehad$246.8millionincashandmarketablesecuritiesonhand,excludingdepositsintransit,foreigncurrencyandotherreconcilingitems.
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CARES ActOnMarch27,2020,CongressenactedtheCARESActtoprovidecertainreliefasaresultoftheCOVID-19pandemic.TheCARESActprovidesnumeroustaxprovisionsandotherstimulusmeasures,includingtemporarychangesregardingthepriorandfutureutilizationofnetoperatinglosses,temporarychangestotheprior and future limitations on interest deductions, temporary suspension of certain payment requirements for the employer portion of Social Security taxes,technical corrections fromprior tax legislation for tax depreciation of certain qualified improvement property, and the creation of certain refundable employeeretentioncredits.ThislegislationwasenactedbeforethedateoffilingthisForm10-QandtheeffectivedateissubsequenttoMarch25,2020.Wearecurrentlyevaluatingtheimpactonourfinancialstatementsandhavenotyetquantifiedwhatmaterialimpactstothefinancialstatements, ifany,thatmayresultfromtheCARESAct.Weanticipatethatwemaybenefit fromthetechnicalcorrectionforqualifiedleaseholdimprovements, whichchanges39-yearpropertyto15-yearproperty,maybeeligiblefor100%taxbonusdepreciation,andpotentiallymaybenefitfromotherprovisionswithintheCARESAct.
OnApril10,2020,weenteredintoa$10.0millionnotepayablewithJ.P.MorganpursuanttothePPPLoanundertheCARESAct.OnApril27,2020,wereturnedtheentireoutstandingbalanceof$10.0million,inclusiveofinterest.
Development HighlightsDuringthequarter,weopenedfourdomesticcompany-operatedShacks,deepeningourrootsinNewYork,andfurtherexpandinginPhoenix,Dallas-FortWorth,andSanFrancisco.Additionally,weopenedninenewinternationallicensedShacks,whichincludedoursecondShackinSingaporeandourthirdShackinMexicoCity.Duringthequarter,weclosedoneinternationallicensedShackinJapan.
InresponsetoCOVID-19,themajorityofnewdesignandconstructionoffutureShackshasbeentemporarilysuspendedandopeningshavebeenputonpause.ThereareeightShacksthatwerenearcompletioninmid-March,thatweintendtocompleteandopenassoonaspossible.
Financial Highlights for the First Quarter 2020 compared to the First Quarter 2019:Totalrevenueincreased8.0%to$143.2million.
▪ Shacksalesincreased7.4%to$138.0million.▪ Same-Shacksalesdecreased12.8%,withapproximately2%decreaseinfiscalFebruaryyear-to-date,andapproximately29%decreaseinfiscalMarch.▪ Licensedrevenueincreased26.8%to$5.1million.▪ Shacksystem-widesalesincreased13.5%to$221.6million.▪ Operatinglossof$0.8million,whichincludedanon-cashassetimpairmentchargeof$1.1million,comparedtooperatingincomeof$5.2millioninthe
prioryearfirstquarter.▪ Shack-leveloperatingprofit*,anon-GAAPmeasure,decreased2.4%to$26.4million,or19.1%ofShacksales.▪ Netlosswas$1.1millionandadjustedEBITDA*,anon-GAAPmeasure,decreased20.1%to$14.3million.▪ NetlossattributabletoShakeShackInc.was$1.0millionandadjustedproformanetincome*,anon-GAAPmeasure,was$0.8million,or$0.02perfully
exchangedanddilutedshare.▪ Twelvenetsystem-wideShackopenings,comprisedoffourdomesticcompany-operatedShacksandeightnetlicensedShacks.
* Shack-level operating profit, adjusted EBITDA and adjusted pro forma net income are non-GAAP measures. Reconciliations of Shack-level operating profit tooperating income (loss) and adjusted EBITDA to net income (loss), the most directly comparable financial measures presented in accordance with GAAP, are setforth in the schedules accompanying this release. See “Non-GAAP Financial Measures.”
Our results for the first quarter of 2020 were adversely impacted by a 12.8%decline in same-Shack sales associated with the COVID-19 outbreak during thesecond half of March, as well as a non-cash asset impairment charge of $1.1millionin the first quarter of 2020. These impacts were partially offset by theincrementalsalesfromour38newdomesticcompany-operatedShacksopenedbetweenMarch27,2019andMarch25,2020.
NetlossattributabletoShakeShackInc.forthe firstquarterof 2020was $1.0million,or0.7%oftotal revenue,comparedtonetincomeattributabletoShakeShackInc. of$2.5million,or1.9%of total revenue, for the sameperiod last year. Loss per diluted share for the firstquarter of 2020was $0.03comparedtoearningsperdilutedshareof$0.08forthesameperiodlastyear.
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FISCAL 2020 OUTLOOK
GiventhesubstantialuncertaintyandsubsequentmaterialeconomicimpactcausedbytheCOVID-19pandemic,wehavewithdrawnourguidanceforthefiscalyearendingDecember30,2020.
RESULTS OF OPERATIONS
ThefollowingtablesummarizesourresultsofoperationsforthethirteenweeksendedMarch25,2020andMarch27,2019:
Thirteen Weeks Ended
(dollar amounts in thousands)March 25
2020 March 27
2019Shacksales $ 138,048 96.4% $ 128,569 97.0%
Licensingrevenue 5,122 3.6% 4,040 3.0%
TOTAL REVENUE 143,170 100.0% 132,609 100.0%
Shack-leveloperatingexpenses(1): Foodandpapercosts 39,564 28.7% 37,991 29.5%
Laborandrelatedexpenses 41,766 30.3% 37,093 28.9%
Otheroperatingexpenses 17,779 12.9% 15,568 12.1%
Occupancyandrelatedexpenses 12,558 9.1% 10,899 8.5%
Generalandadministrativeexpenses 16,191 11.3% 13,937 10.5%
Depreciationexpense 11,768 8.2% 8,966 6.8%
Pre-openingcosts 2,243 1.6% 2,642 2.0%
Impairmentandlossondisposalofassets 2,088 1.5% 351 0.3%
TOTAL EXPENSES 143,957 100.5% 127,447 96.1%
OPERATING INCOME (LOSS) (787) (0.5)% 5,162 3.9%
Otherincome(loss),net (93) (0.1)% 564 0.4%
Interestexpense (112) (0.1)% (72) (0.1)%
INCOME (LOSS) BEFORE INCOME TAXES (992) (0.7)% 5,654 4.3%
Incometaxexpense 87 0.1% 2,047 1.5%
NET INCOME (LOSS) (1,079) (0.8)% 3,607 2.7%
Less:netincome(loss)attributabletonon-controllinginterests (119) (0.1)% 1,061 0.8%
NET INCOME (LOSS) ATTRIBUTABLE TO SHAKE SHACK INC. $ (960) (0.7)% $ 2,546 1.9%
(1) As a percentage of Shack sales.
Shack SalesShacksalesrepresenttheaggregatesalesoffood,beveragesandShakeShackbrandedmerchandiseatourdomesticcompany-operatedShacks.Shacksalesinanyperiodaredirectlyinfluencedbythenumberofoperatingweeksinsuchperiod,thenumberofopenShacksandsame-Shacksales.Same-Shacksalesmeans,foranyreportingperiod,salesforthecomparableShackbase,whichwedefineasthenumberofdomesticcompany-operatedShacksopenfor24fullfiscalmonthsorlonger.
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Thirteen Weeks Ended
(dollar amounts in thousands)March 25
2020 March 27
2019
Shacksales $ 138,048 $ 128,569
Percentage of total revenue 96.4% 97.0%
Dollarchangecomparedtoprioryear $ 9,479 Percentagechangecomparedtoprioryear 7.4%
ThegrowthinShacksaleswasdrivenbytheopeningof38newdomesticcompany-operatedShacksbetweenMarch27,2019andMarch25,2020,partiallyoffsetbyadeclineinsame-Shacksales.AsofMarch25,2020,12ShacksweretemporarilyclosedduetoCOVID-19.
Same-Shacksalesdecreased12.8%forthefirstquarterof2020versusanincreaseof3.6%inthefirstquarterlastyear,primarilydrivenbytheadverseimpactofreduced traffic during the second half of March resulting from the COVID-19 pandemic. Same-Shack sales decreased approximately 2%during the first twomonthsofthefirstquarterin2020,andapproximately29%infiscalMarch2020.Thedecreaseinsame-Shacksalesforthequarterwasprimarilydrivenby14.9%decreaseinguesttrafficpartiallyoffsetbyacombinedincreaseof2.1%inpriceandsalesmix.ThecomparableShackbaseincludesthoserestaurantsopenfor24full fiscalmonthsorlonger. FordaysthatShacksweretemporarilyclosed,thecomparative2019periodwasalsoadjusted.Asoftheendofthefirstquarterof2020,thecomparableShackbaseincluded90Shacksversus66Shacksforthefirstquarterof2019.
Licensing RevenueLicensingrevenueiscomprisedofsales-basedroyaltyfeesandamortizationofcertainupfrontfees,includingopeningfeesforcertainlicensedShacksandinitialterritoryfeesreceivedfortheexclusiverighttodevelopShacksinaspecificgeographicarea.
Thirteen Weeks Ended
(dollar amounts in thousands)March 25
2020 March 27
2019
Licensingrevenue $ 5,122 $ 4,040
Percentage of total revenue 3.6% 3.0%
Dollarchangecomparedtoprioryear $ 1,082 Percentagechangecomparedtoprioryear 26.8%
Theincreaseinlicensingrevenuewasprimarilydrivenbyanetincreaseof31ShacksopeningbetweenMarch27,2019andMarch25,2020,partiallyoffsetbytheimpactsfromCOVID-19.AsofMarch25,2020,37ofour120licensedShacksweretemporarilyclosedduetoCOVID-19.
Food and Paper CostsFood and paper costs include the direct costs associated with food, beverage and packaging of our menu items. The components of food and paper costs arevariablebynature,changewithsalesvolume,areimpactedbymenumixandaresubjecttoincreasesordecreasesincommoditycosts.
Thirteen Weeks Ended
(dollar amounts in thousands)March 25
2020 March 27
2019
Foodandpapercosts $ 39,564 $ 37,991
Percentage of Shack sales 28.7% 29.5%
Dollarchangecomparedtoprioryear $ 1,573 Percentagechangecomparedtoprioryear 4.1%
TheincreaseinfoodandpapercostsforthethirteenweeksendedMarch25,2020wasprimarilyduetotheopeningof38newdomesticcompany-operatedShacksbetweenMarch27,2019andMarch25,2020.
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ThedecreaseinfoodandpapercostsasapercentageofShacksalesforthethirteenweeksendedMarch25,2020wasprimarilyduetomenupriceincreases,lowerchickencostsprimarilyfromlappingthepromotionallaunchofChick'nBiteswhichcarriedhighercostsandanon-recurringinventoryadjustment.
Labor and Related ExpensesLaborandrelatedexpensesincludedomesticcompany-operatedShack-levelhourlyandmanagementwages,bonuses,payrolltaxes,equity-basedcompensation,workers’compensationexpenseandmedical benefits. Asweexpectwithothervariableexpenseitems,weexpectlaborcoststogrowasourShacksalesgrow.Factors that influence labor costs include minimumwageandpayroll taxlegislation, health care costs andthe performance of our domestic company-operatedShacks.
Thirteen Weeks Ended
(dollar amounts in thousands)March 25
2020 March 27
2019
Laborandrelatedexpenses $ 41,766 $ 37,093
Percentage of Shack sales 30.3% 28.9%
Dollarchangecomparedtoprioryear $ 4,673 Percentagechangecomparedtoprioryear 12.6%
TheincreaseinlaborandrelatedexpensesforthethirteenweeksendedMarch25,2020wasprimarilyduetotheopeningof38newdomesticcompany-operatedShacksbetweenMarch27,2019andMarch25,2020.
Asa percentage of Shacksales, the increaseinlabor andrelatedexpensesfor the thirteenweeksendedMarch25,2020wasprimarilyduetosalesdeleverageassociatedwiththeimpactofCOVID-19and,toalesserextent,increasesinstartingwages.
Other Operating ExpensesOtheroperatingexpensesconsist ofShack-level marketingexpenses, repairs andmaintenance, utilities andotheroperatingexpensesincidental tooperatingourdomesticcompany-operatedShacks,suchasnon-perishablesupplies,creditcardfees,deliverycommissionsandbusinessinsurance.
Thirteen Weeks Ended
(dollar amounts in thousands)March 25
2020 March 27
2019
Otheroperatingexpenses $ 17,779 $ 15,568
Percentage of Shack sales 12.9% 12.1%
Dollarchangecomparedtoprioryear $ 2,211 Percentagechangecomparedtoprioryear 14.2%
Theincreaseinotheroperatingexpensesforthe thirteenweeksendedMarch25,2020wasprimarilyduetotheopeningof 38newdomesticcompany-operatedShacksbetweenMarch27,2019andMarch25,2020.
As a percentage of Shack sales, the increasein other operating expenses for the thirteen weeks endedMarch 25, 2020was primarily due to sales deleverageassociatedwiththeimpactofCOVID-19.
Occupancy and Related ExpensesOccupancyandrelatedexpensesconsistofShack-leveloccupancyexpenses(includingrent,commonareaexpensesandcertainlocaltaxes),excludingpre-openingcosts,whicharerecordedseparately.
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Thirteen Weeks Ended
(dollar amounts in thousands)March 25
2020 March 27
2019
Occupancyandrelatedexpenses $ 12,558 $ 10,899
Percentage of Shack sales 9.1% 8.5%
Dollarchangecomparedtoprioryear $ 1,659 Percentagechangecomparedtoprioryear 15.2%
Theincreaseinoccupancyandrelatedexpensesfor the thirteenweeksendedMarch25,2020wasprimarily duetotheopeningof 38newdomesticcompany-operatedShacksbetweenMarch27,2019andMarch25,2020.
AsapercentageofShacksales,theincreaseinoccupancyandrelatedexpensesforthethirteenweeksendedMarch25,2020wasprimarilyduetosalesdeleverageassociatedwiththeimpactofCOVID-19.
General and Administrative ExpensesGeneralandadministrativeexpensesconsistofcostsassociatedwithHomeOfficeandadministrativefunctionsthatsupportShackdevelopmentandoperations,aswellasequity-basedcompensationexpense.
Thirteen Weeks Ended
(dollar amounts in thousands)March 25
2020 March 27
2019
Generalandadministrativeexpenses $ 16,191 $ 13,937
Percentage of total revenue 11.3% 10.5%
Dollarchangecomparedtoprioryear $ 2,254 Percentagechangecomparedtoprioryear 16.2%
The increasein general and administrative expenses for the thirteen weeks endedMarch 25, 2020was primarily due to our investment across the business,particularly an increase in headcount to support our strategic growth plan, and increased investments in technology and marketing. As a percentage of totalrevenue,generalandadministrativeexpensesincreasedto11.3%forthefirstquarterof2020from10.5%inthefirstquarterlastyear.
As a percentage of total revenue, the increasein general and administrative expenses for the thirteen weeks endedMarch 25, 2020was primarily due to theaforementioneditemsandsalesdeleverageassociatedwiththeimpactofCOVID-19.
Depreciation ExpenseDepreciationexpenseconsistsofthedepreciationoffixedassets,includingleaseholdimprovementsandequipment,aswellasfinancingequipmentleaseassets.
Thirteen Weeks Ended
(dollar amounts in thousands)March 25
2020 March 27
2019
Depreciationexpense $ 11,768 $ 8,966
Percentage of total revenue 8.2% 6.8%
Dollarchangecomparedtoprioryear $ 2,802 Percentagechangecomparedtoprioryear 31.3%
TheincreaseindepreciationexpenseforthethirteenweeksendedMarch25,2020wasprimarilyduetoincrementaldepreciationofcapitalexpendituresrelatedtotheopeningof38newdomesticcompany-operatedShacksbetweenMarch27,2019andMarch25,2020.
As a percentage of total revenue, the increasein depreciation expense for the thirteen weeks endedMarch 25, 2020were primarily due to sales deleverageassociatedwiththeimpactofCOVID-19.
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Pre-Opening CostsPre-openingcostsconsistprimarilyof:(i)rent;(ii)managers’salaries;(iii)trainingcosts;(iv)employeepayrollandrelatedexpenses;(iv)allcoststorelocateandcompensateShackmanagementteamspriortoanopening;(v)wages,travelandlodgingcostsforouropeningtrainingteamandothersupportteammembers;(vi)marketing costs; (vii) attorney fees; and (viii) permits and licensing. All such costs incurred prior to the opening of a domestic company-operated Shack areexpensedintheperiodinwhichtheexpenseisincurred.Pre-openingcostscanfluctuatesignificantlyfromperiodtoperiod,basedonthenumberandtimingofdomestic company-operated Shack openings and the specific pre-opening costs recognized for each domestic company-operated Shack. Additionally, domesticcompany-operatedShackopeningsinnewgeographicmarketareaswillinitiallyexperiencehigherpre-openingcoststhanourestablishedgeographicmarketareas,suchastheNewYorkCitymetropolitanarea,wherewehavegreatereconomiesofscaleandtypicallyincurlowertravelandlodgingcostsforourtrainingteam.
Thirteen Weeks Ended
(dollar amounts in thousands)March 25
2020 March 27
2019
Pre-openingcosts $ 2,243 $ 2,642
Percentage of total revenue 1.6 % 2.0%
Dollarchangecomparedtoprioryear $ (399) Percentagechangecomparedtoprioryear (15.1)%
Thedecreaseinpre-openingcostsforthethirteenweeksendedMarch25,2020wasduetothetimingandtotalnumberofnewdomesticcompany-operatedShacksexpectedtoopen.
Impairment and Loss on Disposal of AssetsImpairmentandlossondisposalofassetsincludeimpairmentchargesrelatedtoourlong-livedassets,whichincludespropertyandequipment,aswellasoperatingandfinanceleaseassets.Additionally,impairmentandlossondisposalofassetsincludesthenetbookvalueofassetsthathavebeenretiredandconsistsprimarilyoffurniture,equipmentandfixturesthatwerereplacedinthenormalcourseofbusiness.
Thirteen Weeks Ended
(dollar amounts in thousands)March 25
2020 March 27
2019
Impairmentandlossondisposalofassets $ 2,088 $ 351
Percentage of total revenue 1.5% 0.3%
Dollarchangecomparedtoprioryear $ 1,737 Percentagechangecomparedtoprioryear 494.9%
Theincrease inimpairment andloss ondisposal of assets for the thirteenweeksendedMarch25,2020wasprimarily duetoasset impairment chargesof $1.1millioninthecurrentperiod,ofwhich$0.7millionwasattributedtopropertyandequipment,$0.4millionwasattributedtooperatingleaseright-of-useassets,and$13,000wasattributedtofinanceleaseassets.Inaddition,lossondisposalofassetsincreasedduetoseveralShackrenovations.
Other Income (Loss), NetOther income(loss) consists of interest income, dividendincome, adjustments to liabilities under our tax receivable agreement andnet realized andunrealizedgainsandlossesfromthesaleofmarketablesecurities.
Thirteen Weeks Ended
(dollar amounts in thousands)March 25
2020 March 27
2019
Otherincome(loss),net $ (93) $ 564
Percentage of total revenue (0.1)% 0.4%
Dollarchangecomparedtoprioryear $ (657) Percentagechangecomparedtoprioryear (116.5)%
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The decreasein other income (loss), net for the thirteen weeks endedMarch 25, 2020was primarily due to unrealized losses related to our investments inmarketablesecuritiesandadecreaseindividendincome.
Interest ExpenseInterestexpenseprimarilyconsistsofamortizationofdeferredfinancingcosts,imputedinterestondeferredcompensation,interestonthecurrentportionofourliabilitiesundertheTaxReceivableAgreement,interestandfeesonourRevolvingCreditFacility,andinterestexpenserelatedtofinanceleases.
Thirteen Weeks Ended
(dollar amounts in thousands)March 25
2020 March 27
2019
Interestexpense $ (112) $ (72)
Percentage of total revenue (0.1)% (0.1)%
Dollarchangecomparedtoprioryear $ (40) Percentagechangecomparedtoprioryear 55.6%
TheincreaseininterestexpensewasprimarilyduetoanincreaseininterestandfeesassociatedwithourRevolvingCreditFacilityinthecurrentyear.
Income Tax ExpenseWearethesolemanagingmemberofSSEHoldings,whichistreatedasapartnershipforU.S.federalandmostapplicablestateandlocalincometaxpurposes.Asa partnership, SSEHoldings is not subject to U.S. federal and certain state and local incometaxes. Anytaxable incomeor loss generated by SSEHoldings ispassedthroughtoandincludedinthetaxableincomeorlossofits members, includingus, onaproratabasis. Wearesubject toU.S.federal incometaxes, inadditiontostateandlocalincometaxeswithrespecttoourallocableshareofanytaxableincomeorlossgeneratedbySSEHoldings.
Thirteen Weeks Ended
(dollar amounts in thousands)March 25
2020 March 27
2019
Incometaxexpense $ 87 $ 2,047
Percentage of total revenue 0.1 % 1.5%
Dollarchangecomparedtoprioryear $ (1,960) Percentagechangecomparedtoprioryear (95.7)%
ThedecreaseinincometaxexpenseforthethirteenweeksendedMarch25,2020wasprimarilydrivenbylowerpre-taxbookincomeresultinginalossaswellashigher foreign withholding taxes whichmore than offset the benefit fromthe pre-tax bookloss during the quarter. Asour ownership interest in SSEHoldingsincreases,ourshareofthetaxableincome(loss)ofSSEHoldingsalsoincreases.Ourweighted-averageownershipinterestinSSEHoldingsincreasedto91.6%from79.7%forthethirteenweeksendedMarch25,2020andMarch27,2019,respectively.Oureffectiveincometaxratedecreasedto(8.8)%from36.2%forthethirteenweeksendedMarch25,2020andMarch27,2019,respectively,primarilyduetotheaforementioneditems.
Net Income (Loss) Attributable to Non-Controlling InterestsWe are the sole managing member of SSE Holdings and have the sole voting power in, and control the management of, SSE Holdings. Accordingly, weconsolidatethefinancialresultsofSSEHoldingsandreportanon-controllinginterestonourCondensedConsolidatedStatementsofIncome(Loss),representingtheportionofnetincome(loss)attributabletotheothermembersofSSEHoldings.TheThirdAmendedandRestatedLimitedLiabilityCompanyAgreementofSSEHoldingsprovidesthatholdersofLLCInterestsmay,fromtimetotime,requireSSEHoldingstoredeemalloraportionoftheirLLCInterestsfornewly-issuedsharesofClassAcommonstockonaone-for-onebasis.Inconnectionwithanyredemptionorexchange,wewillreceiveacorrespondingnumberofLLCInterests,increasingourtotalownershipinterestinSSEHoldings.
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Thirteen Weeks Ended
(dollar amounts in thousands)March 25
2020 March 27
2019
Netincome(loss)attributabletonon-controllinginterests $ (119) $ 1,061
Percentage of total revenue (0.1)% 0.8%
Dollarchangecomparedtoprioryear $ (1,180) Percentagechangecomparedtoprioryear (111.2)%
Thedecreaseinnetincome(loss)attributabletonon-controllinginterestsforthethirteenweeksendedMarch25,2020wasprimarilyduetoadeclineinnetincomeresultinginalossfortheperiod,partiallyoffsetbyanincreaseinourweighted-averageownershipinterestinSSEHoldingsto91.6%from79.7%forthethirteenweeksendedMarch27,2019asaresultofredemptionsofLLCInterests.
NON-GAAP FINANCIAL MEASURES
To supplement the consolidated financial statements, which are prepared and presented in accordance with U.S. generally accepted accounting principles(“GAAP”),weusethefollowingnon-GAAPfinancialmeasures:Shack-leveloperatingprofit,Shack-leveloperatingprofitmargin,EBITDA,adjustedEBITDA,adjusted EBITDAmargin, adjusted proformanet incomeandadjusted proformaearnings per fully exchangedanddiluted share (collectively the "non-GAAPfinancialmeasures").
Shack-Level Operating ProfitShack-level operating profit is defined as Shack sales less Shack-level operating expenses including food and paper costs, labor and related expenses, otheroperatingexpensesandoccupancyandrelatedexpenses.
How This Measure Is UsefulWhen used in conjunction with GAAPfinancial measures, Shack-level operating profit and Shack-level operating profit margin are supplemental measures ofoperatingperformancethatwebelieveareusefulmeasurestoevaluatetheperformanceandprofitabilityofourShacks.Additionally,Shack-leveloperatingprofitand Shack-level operating profit margin are key metrics used internally by our management to develop internal budgets and forecasts, as well as assess theperformanceofourShacksrelativetobudgetandagainstpriorperiods.Itisalsousedtoevaluateemployeecompensationasitservesasametricincertainofourperformance-based employee bonus arrangements. We believe presentation of Shack-level operating profit and Shack-level operating profit margin providesinvestorswithasupplementalviewofouroperatingperformancethatcanprovidemeaningfulinsightstotheunderlyingoperatingperformanceofourShacks,asthese measures depict the operating results that are directly impacted by our Shacks and exclude items that may not be indicative of, or are unrelated to, theongoingoperationsofourShacks.Itmayalsoassistinvestorstoevaluateourperformancerelativetopeersofvarioussizesandmaturitiesandprovidesgreatertransparencywithrespecttohowourmanagementevaluatesourbusiness,aswellasourfinancialandoperationaldecision-making.
Limitations of the Usefulness of this MeasureShack-leveloperatingprofitandShack-leveloperatingprofitmarginmaydifferfromsimilarlytitledmeasuresusedbyothercompaniesduetodifferentmethodsofcalculation.PresentationofShack-leveloperatingprofitandShack-leveloperatingprofitmarginisnotintendedtobeconsideredinisolationorasasubstitutefor,orsuperiorto,thefinancialinformationpreparedandpresentedinaccordancewithGAAP.Shack-leveloperatingprofitexcludescertaincosts,suchasgeneralandadministrative expenses and pre-opening costs, which are considered normal, recurring cash operating expenses and are essential to support the operation anddevelopmentofourShacks.Therefore,thismeasuremaynotprovideacompleteunderstandingoftheoperatingresultsofourcompanyasawholeandShack-leveloperating profit and Shack-level operating profit margin should be reviewed in conjunction with our GAAP financial results. A reconciliation of Shack-leveloperatingprofittooperatingincome,themostdirectlycomparableGAAPfinancialmeasure,isasfollows.
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Thirteen Weeks Ended
(dollar amounts in thousands)March 25
2020 March 27
2019
Operatingincome(loss) $ (787) $ 5,162
Less: Licensingrevenue 5,122 4,040
Add: Generalandadministrativeexpenses 16,191 13,937
Depreciationexpense 11,768 8,966
Pre-openingcosts 2,243 2,642
Impairmentandlossondisposalofassets 2,088 351
Shack-leveloperatingprofit $ 26,381 $ 27,018
Totalrevenue $ 143,170 $ 132,609
Less:licensingrevenue 5,122 4,040
Shacksales $ 138,048 $ 128,569
Shack-leveloperatingprofitmargin 19.1% 21.0%
EBITDA and Adjusted EBITDAEBITDAisdefinedasnetincome(loss)beforeinterestexpense(netofinterestincome),incometaxexpenseanddepreciationandamortizationexpense.AdjustedEBITDAis defined as EBITDA(as defined above) excluding equity-based compensation expense, deferred lease costs, impairment and losses on disposal ofassets, as well as certain non-recurring items that we don't believe directly reflect our core operations and may not be indicative of our recurring businessoperations.
How These Measures Are UsefulWhenusedinconjunctionwithGAAPfinancialmeasures,EBITDAandadjustedEBITDAaresupplementalmeasuresofoperatingperformancethatwebelieveareusefulmeasurestofacilitatecomparisonstohistoricalperformanceandcompetitors'operatingresults.AdjustedEBITDAisakeymetricusedinternallybyourmanagementtodevelopinternalbudgetsandforecastsandalsoservesasametricinourperformance-basedequityincentiveprogramsandcertainofourbonusarrangements. We believe presentation of EBITDA and adjusted EBITDA provides investors with a supplemental view of our operating performance thatfacilitates analysis and comparisons of our ongoing business operations because they exclude items that may not be indicative of our ongoing operatingperformance.
Limitations of the Usefulness of These MeasuresEBITDA and adjusted EBITDA may differ from similarly titled measures used by other companies due to different methods of calculation. Presentation ofEBITDAandadjustedEBITDAisnotintendedtobeconsideredinisolationorasasubstitutefor,orsuperiorto,thefinancialinformationpreparedandpresentedin accordance with GAAP.EBITDAandadjusted EBITDAexclude certain normal recurring expenses. Therefore, these measures maynot provide a completeunderstandingofourperformanceandshouldbereviewedinconjunctionwithourGAAPfinancialmeasures.AreconciliationofEBITDAandadjustedEBITDAtonetincome(loss),themostdirectlycomparableGAAPmeasure,isasfollows.
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Thirteen Weeks Ended
(dollar amounts in thousands)March 25
2020 March 27
2019
Netincome(loss) $ (1,079) $ 3,607
Depreciationexpense 11,768 8,966
Interestexpense,net 112 72
Incometaxexpense 87 2,047
EBITDA 10,888 14,692
Equity-basedcompensation 1,300 1,720
Amortizationofcloud-basedsoftwareimplementationcosts(1) 260 —
Deferredleasecosts(2) (330) 585
Impairmentandlossondisposalofpropertyandequipment(3) 2,088 351
Otherincomerelatedtoadjustmentofliabilitiesundertaxreceivableagreement — (14)
Executivetransitioncosts(4) 34 38
ProjectConcrete(5) (261) 472
COVID-19relatedexpenses(6) 285 —
ADJUSTED EBITDA $ 14,264 $ 17,844
Adjusted EBITDA margin(7) 10.0% 13.5%(1) Represents amortization of capitalized implementation costs related to cloud-based software arrangements that are included within general and administrative expenses.(2) Reflects the extent to which lease expense is greater than or less than cash lease payments.(3) Includes a non-cash impairment charge of $1.1 million related to one Shack and losses on disposals of property and equipment in the normal course of business.(4) Represents fees paid in connection with the search for certain of our executive and key management positions.(5) Represents consulting and advisory fees related to our enterprise-wide system upgrade initiative called Project Concrete.(6) Represents incremental expenses incurred as a result of the COVID-19 pandemic, including employee-related expenses and an inventory adjustment. Employee-related expenses include
accelerated personal time off payments and state-mandated paid sick leave. In the first quarter of 2020, we also recorded an inventory reserve for inventories that were deemed to beobsolete or slow moving.
(7) Calculated as a percentage of total revenue which was $143.2 million and $132.6 million for the thirteen weeks ended March 25, 2020 and March 27, 2019, respectively.
Adjusted Pro Forma Net Income (Loss) and Adjusted Pro Forma Earnings (Loss) Per Fully Exchanged and Diluted ShareAdjustedproformanetincome(loss)representsnetincome(loss)attributabletoShakeShackInc.assumingthefullexchangeofalloutstandingSSEHoldings,LLCmembershipinterests("LLCInterests")forsharesofClassAcommonstock,adjustedforcertainnon-recurringitemsthatwedon'tbelievedirectlyreflectourcore operations and may not be indicative of our recurring business operations. Adjusted pro forma earnings (loss) per fully exchanged and diluted share iscalculatedbydividingadjustedproformanetincome(loss)bytheweighted-averagesharesofClassAcommonstockoutstanding,assumingthefullexchangeofalloutstandingLLCInterests,aftergivingeffecttoanydilutivesecuritiessuchasoutstandingequity-basedawards.
How These Measures Are UsefulWhenusedinconjunctionwithGAAPfinancialmeasures,adjustedproformanetincome(loss)andadjustedproformaearnings(loss)perfullyexchangedanddilutedsharearesupplementalmeasuresofoperatingperformancethatwebelieveareusefulmeasurestoevaluateourperformanceperiodoverperiodandrelativetoourcompetitors.ByassumingthefullexchangeofalloutstandingLLCInterests,webelievethesemeasuresfacilitatecomparisonswithothercompaniesthathavedifferentorganizationalandtaxstructures,aswellascomparisonsperiodoverperiodbecauseiteliminatestheeffectofanychangesinnetincomeattributabletoShakeShackInc.drivenbyincreasesinourownershipofSSEHoldings,whichareunrelatedtoouroperatingperformance,andexcludesitemsthatarenon-recurringormaynotbeindicativeofourongoingoperatingperformance.
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Limitations of the Usefulness of These MeasuresAdjustedproformanetincomeandadjustedproformaearningsperfullyexchangedanddilutedsharearenotnecessarilycomparabletosimilarlytitledmeasuresusedbyothercompaniesduetodifferentmethodsofcalculation.Presentationofadjustedproformanetincome(loss)andadjustedproformaearnings(loss)perfullyexchangedanddilutedshareshouldnotbeconsideredalternativestonetincome(loss)andearnings(loss)pershare,asdeterminedunderGAAP.Whilethesemeasuresareusefulinevaluatingourperformance,itdoesnotaccountfortheearningsattributabletothenon-controllinginterestholdersandthereforedoesnotprovideacompleteunderstandingofthenetincome(loss)attributabletoShakeShackInc.Adjustedproformanetincome(loss)andadjustedproformaearnings(loss)perfullyexchangedanddilutedshareshouldbeevaluatedinconjunctionwithourGAAPfinancialresults.Areconciliationofadjustedproformanetincome(loss)tonetincome(loss)attributable toShakeShackInc., themost directly comparable GAAPmeasure, andthecomputationof adjustedproformaearnings(loss)perfullyexchangedanddilutedsharearesetforthbelow.
Thirteen Weeks Ended
(in thousands, except per share amounts)March 25
2020 March 27
2019
Numerator: Netincome(loss)attributabletoShakeShackInc. $ (960) $ 2,546
Adjustments: Reallocationofnetincome(loss)attributabletonon-controllinginterestsfromtheassumedexchangeofLLCInterests(1) (119) 1,061
Executivetransitioncosts(2) 34 38
ProjectConcrete(3) (261) 472
COVID-19relatedexpenses(4) 285 —
Otherincomerelatedtoadjustmentofliabilitiesundertaxreceivableagreement — (14)
Taxeffectofchangeintaxbasisrelatedtotheadoptionofnewaccountingpronouncements(5) — 1,161
Incometax(expense)benefit(6) 1,819 (315)
Adjustedproformanetincome $ 798 $ 4,949
Denominator: Weighted-averagesharesofClassAcommonstockoutstanding—diluted 34,444 30,392
Adjustments: AssumedexchangeofLLCInterestsforsharesofClassAcommonstock(1) 3,144 7,539
Dilutiveeffectofstockoptions 704 —
Adjustedproformafullyexchangedweighted-averagesharesofClassAcommonstockoutstanding—diluted 38,292 37,931
Adjustedproformaearningsperfullyexchangedshare—diluted $ 0.02 $ 0.13
Thirteen Weeks Ended
March 25
2020 March 27
2019
Earnings(loss)pershareofClassAcommonstock-diluted $ (0.03) $ 0.08
AssumedexchangeofLLCInterestsforsharesofClassAcommonstock(1) — 0.01
Non-GAAPadjustments(7) 0.05 0.04
Adjustedproformaearningsperfullyexchangedshare—diluted $ 0.02 $ 0.13(1) Assumes the exchange of all outstanding LLC Interests for shares of Class A common stock, resulting in the elimination of the non-controlling interest and recognition of the net income
attributable to non-controlling interests.(2) Represents fees paid in connection with the search for certain of the Company's executive and key management positions.(3) Represents consulting and advisory fees related to our enterprise-wide system upgrade initiative called Project Concrete.(4) Represents COVID-19 related expenses, including employee-related expenses and an inventory adjustment. Employee-related expenses include accelerated personal time off payments and
state-mandated paid sick leave. In the first quarter of 2020, we also recorded an inventory reserve for inventories that were deemed to be obsolete or slow moving.(5) Represents tax effect of change in tax basis related to the adoption of the new lease accounting standard for the thirteen weeks ended March 27, 2019.(6) Represents the tax effect of the aforementioned adjustments and pro forma adjustments to reflect corporate income taxes at assumed effective tax rates of 185.4% and 19.5% for the thirteen
weeks ended March 25, 2020 and March 27, 2019, respectively.
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(7) Represents the per share impact of non-GAAP adjustments for each period. Refer to the reconciliation of Adjusted Pro Forma Net Income above for further details.
LIQUIDITY AND CAPITAL RESOURCES
Sources and Uses of CashOurprimarysourcesofliquidityarecashfromoperations,cashandcashequivalentsonhand,short-terminvestmentsandavailabilityunderourRevolvingCreditFacility.AsofMarch25,2020,wemaintainedacashandcashequivalentsbalanceof$87.8millionandashort-terminvestmentsbalanceof$16.4million.
OnJune8,2018,wefiledaRegistrationStatementonFormS-3withtheSECwhichpermitsustoissueacombinationofsecuritiesdescribedintheprospectusinoneormoreofferingsfromtimetotime.Todate,wehavenotexperienceddifficultyaccessingthecapitalmarkets;however,futurevolatilityinthecapitalmarketsmayaffectourabilitytoaccessthosemarketsorincreasethecostsassociatedwithissuingdebtorequityinstruments.
Ourprimaryrequirementsforliquidityaretofundourworkingcapitalneeds,operatingandfinanceleaseobligations,capitalexpendituresandgeneralcorporateneeds.Ourrequirementsforworkingcapitalaregenerallynotsignificantbecauseourguestspayfortheirfoodandbeveragepurchasesincashorondebitorcreditcards at the time of the sale and we are able to sell many of our inventory items before payment is due to the supplier of such items. Our ongoing capitalexpendituresareprincipallyrelatedtoopeningnewShacks,existingShackcapitalinvestments(bothforremodelsandmaintenance),aswellasinvestmentsinourcorporateinfrastructure.
Inaddition,weareobligatedtomakepaymentstocertainmembersofSSEHoldingsundertheTaxReceivableAgreement.AsofMarch25,2020,suchobligationstotaled$228.2million.AmountspayableundertheTaxReceivableAgreementarecontingentupon,amongotherthings,(i)generationoffuturetaxableincomeoverthetermoftheTaxReceivableAgreementand(ii)futurechangesintaxlaws.Ifwedonotgeneratesufficienttaxableincomeintheaggregateoverthetermof the Tax Receivable Agreement to utilize the tax benefits, then we would not be required to make the related TRAPayments. Although the amount of anypaymentsthatmustbemadeundertheTaxReceivableAgreementmaybesignificant,thetimingofthesepaymentswillvaryandwillgenerallybelimitedtoonepaymentpermemberperyear. Theamountofsuchpaymentsarealsolimitedtotheextentweutilizetherelateddeferredtaxassets. ThepaymentsthatwearerequiredtomakewillgenerallyreducetheamountofoverallcashflowthatmighthaveotherwisebeenavailabletousortoSSEHoldings,butweexpectthecashtaxsavingswewillrealizefromtheutilizationoftherelateddeferredtaxassetstofundtherequiredpayments.
COVID-19 PandemicInresponsetotheuncertainmarketconditionsresultingfromtheCOVID-19pandemic,wehaveenhancedourliquiditypositionthroughseveralactions.
• InMarch2020,wedrewdownthefull$50.0millionavailabletousunderourRevolvingCreditFacility.AsofMarch25,2020,wewereincompliancewithallcovenants.InMay2020,weenteredintoanamendmenttoourrevolvingcreditfacilitythatprovidesforanumberofenhancedmodificationstoreflectthecurrentandongoingimpactfromCOVID-19.
• OnApril17,2020,weannouncedantheATMProgram,underwhichwemayofferandsellsharesofourClassAcommonstockhavinganaggregatepriceofupto$75.0millionfromtimetotime.OnApril21,2020,wecompletedthesaleof233,467sharesofourClassAcommonstockpursuanttotheATMProgramandreceived$9.8millionofproceeds,netofcommissions.Theproceedswereusedtopurchasenewly-issuedLLCInterests.
• OnApril21,2020,wecompletedanunderwrittenofferingof3,416,070sharesofourClassAcommonstock,resultingin$135.9millionofproceeds,netofunderwritingdiscountsandcommissions.Theproceedswereusedtopurchasenewly-issuedLLCInterests.
Webelieveourexistingcashandmarketablesecuritiesbalances,combinedwiththeactionswehavetakeninresponsetoCOVID-19,willbesufficienttofundouroperatingandfinanceleaseobligations,capitalexpenditures,taxreceivableagreementobligationsandworkingcapitalneedsforatleastthenext12monthsandtheforeseeablefuture.
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Summary of Cash FlowsThefollowingtablepresentsasummaryofourcashflowsfromoperating,investingandfinancingactivities.
Thirteen Weeks Ended
(in thousands)March 25
2020 March 27
2019
Netcashprovidedbyoperatingactivities $ 7,484 $ 17,199
Netcashprovidedby(usedin)investingactivities 649 (10,374)
Netcashprovidedbyfinancingactivities 42,574 322
Increaseincash 50,707 7,147
Cashatbeginningofperiod 37,099 24,750
Cashatendofperiod $ 87,806 $ 31,897
Operating ActivitiesForthethirteenweeksendedMarch25,2020netcashprovidedbyoperatingactivitieswas$7.5millioncomparedto$17.2millionforthe thirteenweeksendedMarch27,2019,adecreaseof$9.7million.ThisdecreasewasprimarilydrivenbyadecreaseinShack-leveloperatingprofitduetotheimpactofCOVID-19,aswellashighergeneralandadministrativecostsincludinghigherannualbonuspayments.
Investing ActivitiesForthethirteenweeksendedMarch25,2020netcashprovidedbyinvestingactivitieswas$0.6millioncomparedto$10.4millionusedininvestingactivitiesforthethirteenweeksendedMarch27,2019,adecreaseof$11.0million.Thisdecreasewasprimarilyduetoanincreaseof$5.0millionofproceedsfromsalesofmarketablesecurities,aswellasadecreaseof$5.8millionincapitalexpenditures.
Financing ActivitiesForthethirteenweeksendedMarch25,2020netcashprovidedbyfinancingactivitieswas$42.6millioncomparedtonetcashprovidedbyfinancingactivitiesof$0.3millionforthethirteenweeksendedMarch27,2019,anincreaseof$42.3million.Thisincreaseisprimarilydueto$50.0millioningrosscashproceedsfromthedrawdownoffundsfromourRevolvingCreditFacilityinthecurrentyear,partiallyoffsetbyincreasedpaymentsmadeundertheTaxReceivableAgreementanddistributionstoournon-controllinginterestholders.
Revolving Credit FacilityInAugust2019,weterminatedourpreviousrevolvingcreditfacilityandenteredintoanewRevolvingCreditFacilityagreement,whichpermitsborrowingsupto$50.0million,ofwhichtheentireamountisavailableimmediately,withtheabilitytoincreaseavailableborrowingsuptoanadditional$100.0million,tobemadeavailablesubjecttosatisfactionofcertainconditions.TheRevolvingCreditFacilitywillmatureandallamountsoutstandingwillbedueandpayableinAugust2024.TheRevolvingCreditFacilityalsopermitstheissuanceoflettersofcredituponourrequestofupto$15.0million.BorrowingsundertheRevolvingCreditfacilitywillbearinterestateither:(i)LIBORplusapercentagerangingfrom1.0%to1.5%or(ii)thebaserateplusapercentagerangingfrom0.0%to0.5%,ineach case depending on our net lease adjusted leverage ratio. To the extent the LIBOR reference rate is no longer available, the administrative agent, inconsultationwithus,willdetermineareplacementratewhichwillbegenerallyinaccordancewithsimilartransactionsinwhichitservesasadministrativeagent.
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 theguarantors.TheobligationsundertheRevolvingCreditFacilityareguaranteedbyeachofSSEHoldings'directandindirectsubsidiaries(withcertainexceptions).
The Revolving Credit Facility requires us to comply with maximum net lease adjusted leverage and minimum fixed charge coverage ratios. In addition, theRevolvingCreditFacilitycontainsothercustomaryaffirmativeandnegativecovenants,includingthosewhich(subjecttocertainexceptionsanddollarthresholds)limitourabilitytoincurdebt;incurliens;makeinvestments;engageinmergers,consolidations,liquidationsoracquisitions;disposeofassets;makedistributionsonorrepurchaseequitysecurities;engagein
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transactions with affiliates; and prohibits us, with certain exceptions, from engaging in any line of business not related to our current line of business. As ofMarch25,2020,wewereincompliancewithallcovenants.
InMarch2020,wedrewdownthefull$50.0millionavailableundertheRevolvingCreditFacilitytoenhanceliquidityandfinancialflexibilitygiventheuncertainmarketconditionscreatedbytheCOVID-19pandemic.AsofMarch25,2020,amountsoutstandingunderourRevolvingCreditFacilitywere$50.0million,whichwasclassifiedaslong-termdebtontheCondensedConsolidatedBalanceSheet.
In May 2020, we entered into a First Amendment to the Revolving Credit Facility, which, among other things, provides for modified financial covenantcompliance requirements for a period of time. The First Amendment requires us to maintain minimum liquidity of $25.0 millionthrough July 1, 2021 andoutstandingborrowingsduringtheapplicableperiodcoveredbytheFirstAmendmentbearinterestateither:(i)LIBORplusapercentagerangingfrom1.0%to2.5%or(ii)thebaserateplusapercentagerangingfrom0.0%to1.50%,ineachcasedependingonournetleaseadjustedleverageratio.
CONTRACTUAL OBLIGATIONS
TherehavebeennomaterialchangestothecontractualobligationsasdisclosedinourAnnualReportonForm10-KforthefiscalyearendedDecember25,2019,otherthanthosemadeintheordinarycourseofbusiness.
OFF-BALANCE SHEET ARRANGEMENTS
There have been no material changes to our off-balance sheet arrangements as disclosed in our Annual Report on Form 10-K for the fiscal year endedDecember25,2019.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Ourdiscussionandanalysisofourconsolidatedfinancial conditionandresults ofoperationsisbasedupontheaccompanyingcondensedconsolidatedfinancialstatementsandnotesthereto,whichhavebeenpreparedinaccordancewithGAAP.Thepreparationofthecondensedconsolidatedfinancialstatementsrequiresustomakeestimates,judgmentsandassumptions,whichwebelievetobereasonable,basedontheinformationavailable.Theseestimatesandassumptionsaffectthereportedamountsofassets,liabilities,revenuesandexpenses,andrelateddisclosuresofcontingentassetsandliabilities.Variancesintheestimatesorassumptionsusedtoactualexperiencecouldyieldmateriallydifferentaccountingresults. Onanongoingbasis, weevaluatethecontinuedappropriatenessofouraccountingpolicies andresultingestimates tomakeadjustments weconsiderappropriate underthefacts andcircumstances. Therehavebeennosignificant changestoourcriticalaccountingpoliciesasdisclosedinourAnnualReportonForm10-KforthefiscalyearendedDecember25,2019.
Recently Issued Accounting Pronouncements
See"Note2:SummaryofSignificantAccountingPolicies—RecentlyIssuedAccountingPronouncements”underPartI,Item1ofthisForm10-Q.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
TherehavebeennomaterialchangestoourexposuretomarketrisksasdescribedinPartII,Item7AofourAnnualReportonForm10-KforthefiscalyearendedDecember25,2019.
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Item 4. Controls and Procedures.
DISCLOSURE CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, we conducted anevaluationoftheeffectivenessofourdisclosurecontrolsandprocedures(assuchtermisdefinedinRules13a-15(e)and15d-15(e)undertheExchangeAct)asofthe end of the period covered by this report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosurecontrolsandprocedureswereeffectiveasofsuchdate.OurdisclosurecontrolsandproceduresaredesignedtoensurethatinformationrequiredtobedisclosedinthereportswefileorsubmitundertheExchangeActisrecorded,processed,summarizedandreportedwithinthetimeperiodsspecifiedintheSEC'srulesandformsandthatsuchinformationisaccumulatedandcommunicatedtomanagement,includingtheChiefExecutiveOfficerandChiefFinancialOfficer,toallowtimelydecisionsregardingrequireddisclosure.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
TherewerenochangestoourinternalcontroloverfinancialreportingthatoccurredduringthequarterendedMarch25,2020thathavemateriallyaffected,orarereasonablylikelytomateriallyaffect,ourinternalcontroloverfinancialreporting.
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PART II – OTHER INFORMATION
Item 1. Legal Proceedings.
TheinformationrequiredbythisItemisincorporatedbyreferencetoPartI,Item1,Note15:CommitmentsandContingencies—LegalContingencies.
Item 1A. Risk Factors.
ThefollowingadditionalriskfactorsshouldbereadinconjunctionwiththeriskfactorsinourAnnualReportonForm10-KforthefiscalyearendedDecember25,2019,whicharemodifiedandupdatedbytheriskfactorssetforthbelow.
Pandemics or disease outbreaks, such as the recent outbreak of the novel coronavirus (COVID-19 virus), have disrupted, and may continue to disrupt, ourbusiness, and have materially affected our operations and results of operations.
Pandemics or disease outbreaks such as the novel coronavirus (COVID-19virus) have and maycontinue to have a negative impact on customer traffic at ourrestaurants, maymakeit moredifficult tostaff ourrestaurants and, inmoreseverecases, maycauseatemporaryinability toobtainsuppliesand/or increasetocommodity costs and have caused closures of affected restaurants, sometimes for prolonged periods of time. We have temporarily shifted to a “to-go” onlyoperatingmodelinourdomesticcompany-operatedShacks,suspendingsit-downdining.Wehavealsoimplementedclosures,modifiedhoursorreductionsinon-site staff, resulting in cancelled shifts for some of our employees. COVID-19 may also materially adversely affect our ability to implement our growth plans,including delays in construction of newrestaurants, or adversely impact our overall ability to successfully execute our plans to enter into newmarkets. Thesechanges have negatively impacted our results of operations, and these and any additional changes may materially adversely affect our business or results ofoperationsinthefuture,andmayimpactourliquidityorfinancialcondition,particularlyifthesechangesareinplaceforasignificantamountoftime.
Inaddition,ouroperationscouldbefurtherdisruptedifanyofouremployeesoremployeesofourbusinesspartnersweresuspectedofhavingcontractedCOVID-19orotherillnessessincethiscouldrequireusorourbusinesspartnerstoquarantinesomeorallsuchemployeesorcloseanddisinfectourimpactedrestaurantfacilities. If a significant percentage of our workforce or the workforce of our business partners are unable to work, including because of illness or travel orgovernmentrestrictionsinconnectionwithpandemicsordiseaseoutbreaks,ouroperationsmaybenegativelyimpacted,potentiallymateriallyadverselyaffectingourbusiness,liquidity,financialconditionorresultsofoperations.
Furthermore, suchvirusesmaybetransmittedthroughhumancontact, andtheriskofcontractingvirusescouldcontinuetocauseemployeesorgueststoavoidgatheringinpublicplaces,whichhashad,andcouldfurtherhave,adverseeffectsonourrestaurantguesttrafficortheabilitytoadequatelystaffrestaurants, inadditionto the measures wehavealreadytakenwith respect to shiftingto a “to-go” onlyoperatingmodel. Wecouldalsobeadversely affected if governmentauthorities continue to impose restrictions on public gatherings, human interactions, operations of restaurants or mandatory closures, seek voluntary closures,restrict hours of operations or impose curfews, restrict the import or export of products or if suppliers issue mass recalls of products. Additional regulation orrequirementswithrespecttothecompensationofouremployeescouldalsohaveanadverseeffectonourbusiness.Evenifsuchmeasuresarenotimplementedandavirusor other diseasedoesnot spreadsignificantly withinaspecific area, theperceivedriskof infectionorhealthriskinsuchareamayadverselyaffect ourbusiness,liquidity,financialconditionandresultsofoperations.
TheCOVID-19pandemicandmitigationmeasureshavealsohadanadverseimpactonglobaleconomicconditions, whichcouldhaveanadverseeffect onourbusiness and financial condition. Our revenue and operating results may be affected by uncertain or changing economic and market conditions arising inconnectionwithandinresponsetotheCOVID-19pandemic,includingprolongedperiodsofhighunemployment,inflation,deflation,prolongedweakconsumerdemand,adecreaseinconsumerdiscretionaryspending,politicalinstabilityorotherchanges.Thesignificanceoftheoperationalandfinancialimpacttouswilldependonhow
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longandwidespreadthedisruptionscausedbyCOVID-19,andthecorrespondingresponsetocontainthevirusandtreatthoseaffectedbyit,provetobe.
Currently,manystatesandmunicipalitiesintheU.S.andabroadhavetemporarilysuspendedtheoperationofrestaurantsinlightofCOVID-19.TheabilityoflocalandinternationalauthoritiesincontainingCOVID-19andlimitingthespreadofinfectionswillimpactourbusinessoperations.Wearebeginningtoseerecoveryinrestaurants locatedincertainAsiancountries, suchasKorea, HongKongandmainlandChina. However, thesemarkets mayfail tofullycontainCOVID-19orsufferaresurgenceinCOVID-19,whichcouldhaveanadverseeffectonourbusinessandresultsofoperations.WhilesomestateandlocalgovernmentsintheU.S.havestartedtoremoveoreaserestrictionsoncertainbusinesses,includingrestaurants,thereisnoguaranteewhenotherjurisdictionswillchangetheircurrentpolicies,andjurisdictionsthathavereducedrestrictionsmayreintroducerestrictionsinthefutureifcircumstanceschange.
Our ability to use our net operating loss carryforwards may be subject to limitation.As of December 25, 2019, our federal and state net operating loss (“NOL”) carryforwards, for income tax purposes were $104.8 million and $67.4 million,respectively.Ifnotutilized,$53.0millionofourfederalNOLscanbecarriedforwardindefinitely,andtheremainderwillbegintoexpirein2035.Ifnotutilized,$6.2millionofourstateNOLcarryforwardscanbecarriedforwardindefinitely,andtheremainderwillbegintoexpirein2023.FederalNOLsincurredintaxableyearsbeginningafterDecember31,2017canbecarriedforwardindefinitely,butthedeductibilityoffederalNOLsintaxableyearsbeginningafterDecember31,2020,issubjecttocertainlimitations.
In addition, under Section 382 of the Internal Revenue Code of 1986, as amended, and corresponding provisions of state law, if a corporation undergoes an“ownershipchange,”itsabilitytouseitspre-changeNOLstooffsetitspost-changeincomemaybelimited.ASection382“ownershipchange”generallyoccursifoneormorestockholdersorgroupsofstockholderswhoownatleast5%ofourstockincreasetheirownershipbymorethan50percentagepointsovertheirlowestownershippercentagewithinarollingthree-yearperiod.Similarrulesmayapplyunderstatetaxlaws.WehavenotconductedaSection382studytodeterminewhether the use of our NOLs is limited. We may have experienced ownership changes in the past, and we may experience ownership changes in the future,includingasaresultofthisofferingorsubsequentchangesinourstockownership,someofwhichareoutsideourcontrol.ThiscouldlimittheamountofNOLsthatwecanutilizeannuallytooffsetfuturetaxableincomeortaxliabilities.SubsequentstatutoryorregulatorychangesinrespectoftheutilizationofNOLsforfederalorstatepurposes,suchassuspensionsontheuseofNOLsorlimitationsonthedeductibilityofNOLscarriedforward,orotherunforeseenreasons,mayresultinourexistingNOLsexpiringorotherwisebeingunavailabletooffsetfutureincometaxliabilities.
If we are unable to maintain compliance with the covenants contained in our current credit facility, we may be unable to make additional borrowings on anyundrawn amounts and may be required to repay our then outstanding debt under the facility. In addition, global economic conditions may make it moredifficult to access new credit facilities. Ourliquiditypositionis, inpart, dependentuponourabilitytoborrowunderourcurrentcredit facility. AsdisclosedinPart I, Item1,Note8:Debt,inAugust2019,weenteredintoacreditfacilitywithWellsFargoBank,NationalAssociation(“WellsFargo”),providingfora$50.0millionseniorsecuredRevolvingCreditFacilitywiththeabilitytoincreaseavailableborrowingsunderthecreditfacilitybyuptoanadditional$100.0millionthroughincrementaltermand/orrevolvingcreditcommitments,subjecttothesatisfactionofcertainconditionssetforthinthefacility.InMarch2020,wedrewdownthefull$50.0millionavailabletousunderthecreditfacilitytoincreaseliquidityandenhancefinancialflexibilitygiventheuncertainmarketconditionsasaresultoftheCOVID-19outbreak.Wearerequiredtocomplywithmaximumnetleaseadjustedleverageandminimumfixedchargecoverageratios,inadditiontoothercustomaryaffirmativeandnegativecovenants, including those which (subject to certain exceptions and dollar thresholds) limit our ability to incur debt; incur liens; make investments; engage inmergers,consolidations,liquidationsoracquisitions;disposeofassets;makedistributionsonorrepurchaseequitysecurities;engageintransactionswithaffiliates;andprohibits us, with certain exceptions, fromengagingin anyline of business not related to our current line of business. AsofMarch25,2020, wewere incompliancewithallcovenants.However,asaresultoftheCOVID-19outbreak,ourtotalrevenueshavedecreasedsignificantlyandwehaveimplementedcertainoperationalchangesinordertoaddresstheevolvingchallengespresentedbytheglobalpandemiconourdomesticandlicensedoperations.DuetotheimpactsofCOVID-19,ourfinancialperformanceinfuturefiscalquarterswillbe,negativelyimpacted.InMay2020,weenteredintoaFirstAmendmenttotheRevolvingCreditFacility,which,amongotherthings,providesformodifiedfinancialcovenantcompliancerequirementsforaperiodoftime.However,thereisnoguaranteethatourfinancialperformancewillimproveinthisperiod.Afailuretocomplywiththefinancialcovenantsunderourcreditfacilitywouldgiverisetoaneventofdefault underthetermofthecredit facility, allowingthelenderstorefusetolendadditional availableamountstousandgivingthemtherighttoterminatethefacilityandacceleraterepaymentofanyoutstandingdebtunderthecreditfacility.
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Asaresult,wemayneedtoaccessothercapitaltoaddressourliquidityneedsratherthanrelyingonourcreditfacility.Ourcashresourcesandliquiditywouldbesubstantiallyimpairedbyanaccelerationofthedebtunderourcreditfacility.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Notapplicable.
Item 5. Other Information.
None.
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Item 6. Exhibits.
ExhibitNumber
Incorporated by Reference FiledHerewith Exhibit Description Form Exhibit Filing Date
3.1
AmendedandRestatedCertificateofIncorporationofShakeShackInc.,effectiveFebruary4,2015
8-K
3.1
2/10/2015
3.2 SecondAmendedandRestatedBylawsofShackShakeInc.,datedOctober1,2019 8-K 3.1 10/4/2019 4.1 FormofClassACommonStockCertificate S-1/A 4.1 1/28/2015 10.1
DistributionAgreementdatedApril17,2020byandamongShakeShackInc.,J.P.MorganSecuritiesLLC,BofASecurities,Inc.,andWellsFargoSecuritiesLLC
8-K
1.1
4/17/2020
10.2
UnderwritingAgreementdatedApril17,2020betweenShakeShackInc.andJ.P.MorganSecuritiesLLC
8-K
1.1
4/21/2020
10.3
FirstAmendmenttoCreditAgreement,datedasofMay4,2020,byandamongSSEHoldings,LLC,theGuarantorspartythereto,theLenderspartythereto,andWellsFargoBank,NationalAssociation,asAdministrativeAgent
*
31.1
CertificationofthePrincipalExecutiveOfficerpursuanttoSection302oftheSarbanes-OxleyActof2002
*
31.2
CertificationofthePrincipalFinancialOfficerpursuanttoSection302oftheSarbanes-OxleyActof2002
*
32
CertificationofPrincipalExecutiveOfficerandPrincipalFinancialOfficerpursuantto18U.S.C.Section1350,asadoptedpursuanttoSection906oftheSarbanes-OxleyActof2002
#
101.INS
XBRLInstanceDocument-theinstancedocumentdoesnotappearintheinteractivedatafilebecauseitsXBRLtagsareembeddedwithintheInlineXBRLdocument
*
101.SCH XBRLTaxonomyExtensionSchemaDocument *
101.CAL XBRLTaxonomyExtensionCalculationLinkbaseDocument *
101.DEF XBRLTaxonomyExtensionDefinitionLinkbaseDocument *
101.LAB XBRLTaxonomyExtensionLabelLinkbaseDocument *
101.PRE XBRLTaxonomyExtensionPresentationLinkbaseDocument *
104
CoverPageInteractiveDataFile-thecoverpageinteractivedatafiledoesnotappearintheInteractiveDataFilebecauseitsXBRLtagsareembeddedwithintheInlineXBRLdocument
*
# Furnished herewith.
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SIGNATURESPursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned,thereuntodulyauthorized.
Shake Shack Inc. (Registrant)
Date:May4,2020 By: /s/RandyGarutti RandyGarutti
ChiefExecutiveOfficer(PrincipalExecutiveOfficerandDulyAuthorizedOfficer)
Date:May4,2020 By: /s/TaraComonte TaraComonte
PresidentandChiefFinancialOfficer(PrincipalFinancialOfficerandDulyAuthorizedOfficer)
Shake Shack Inc. Form10-Q|49
Exhibit 10.3
FIRSTAMENDMENTTOCREDITAGREEMENT
THISFIRSTAMENDMENTTOCREDITAGREEMENT(this “Amendment”), dated as of May 4, 2020, is by and among SSEHOLDINGS, LLC, a Delaware limited liability company (the “Borrower”), the Guarantors party hereto, the Lenders party hereto, andWELLSFARGOBANK, NATIONALASSOCIATION, a national banking association, as administrative agent on behalf of the LendersundertheCreditAgreement(ashereinafterdefined)(insuchcapacity,the“AdministrativeAgent”).
WITNESSETH
WHEREAS,theBorrower,theGuarantors,theLendersfromtimetotimepartythereto,andtheAdministrativeAgentarepartiestothatcertainCreditAgreementdatedasofAugust2,2019(asamended,modified,extended,restated,replaced,orsupplementedfromtimetotime,the“CreditAgreement”;capitalizedtermsusedhereinandnototherwisedefinedhereinshallhavethemeaningsascribedtheretointheCreditAgreement,asamendedhereby);
WHEREAS,theCreditPartieshaverequestedthattheLendersmakecertainamendmentstotheCreditAgreementassetforthherein;and
WHEREAS,theLendershaveagreedtoamendtheCreditAgreementsubjecttothetermsandconditionssetforthherein.
NOW,THEREFORE, in consideration of the agreements hereinafter set forth, and for other good and valuable consideration, thereceiptandadequacyofwhichareherebyacknowledged,thepartiesheretoagreeasfollows:
ARTICLEIAMENDMENTSTOCREDITAGREEMENT
1.1Amendmentto“ApplicableMargin”.Thedefinitionof“ApplicableMargin”inSection1.1oftheCreditAgreementisherebyamendedby:
(i)deletingthepricinggridthereinandreplacingitwiththefollowingpricinggrid:
PricingLevel
Consolidated Total Net Lease AdjustedLeverage Ratio Commitment Fee
LIBOR+ Base Rate +
I Lessthanorequalto2.00to1.00 0.10% 1.00% 0.00%II Greaterthan2.00to1.00,butlessthanor
equalto3.00to1.000.10% 1.25% 0.25%
III Greaterthan3.00to1.00,butlessthanorequalto3.50to1.00
0.15% 1.50% 0.50%
IV Greaterthan3.50to1.00 0.25% 2.50% 1.50%
(ii)amendingandrestatingclause(a)initsentiretytoreadasfollows:
(a)theApplicableMarginshallbebasedonPricingLevelIVfromtheFirstAmendmentClosingDateuntiltheCalculationDatewithrespecttotheFiscalQuarteroftheBorrowerendingonoraboutMarch31,2021and,thereafterthePricingLevelshallbedeterminedbyreferencetotheConsolidatedTotalNetLeaseAdjustedLeverageRatioasofthelastdayofthemostrecentlyendedFiscalQuarteroftheBorrowerprecedingtheapplicableCalculationDate,and
and(iii)replacing“PricingLevelIII”inclause(b)with“PricingLevelIV”.
1.2 Amendmentto“AssetDisposition”. Thedefinitionof “AssetDisposition”in Section1.1 of the Credit Agreement is herebyamendedbyinsertingthefollowingnewsentenceattheendthereof:
For the avoidance of doubt, none of (a) the sale of any Permitted Convertible Indebtedness, (b) the sale of any PermittedWarrantTransaction,(c)thepurchaseofanyPermittedBondHedgeTransaction,(d)theperformancebyBorrowerorHoldingsofitsobligations under any Permitted Convertible Indebtedness, any Permitted Warrant Transaction or any Permitted Bond HedgeTransaction(includingthesettlementorterminationofanyPermittedBondHedgeTransactionorPermittedWarrantTransaction)nor(e) thesale, transfer, redemptionor other dispositionof Equity Interests of Holdingsor theBorroweras necessaryor advisable tomaintain the one-for-one ratio described in Section 3.04(a) of the LLC Agreement, to reduce or eliminate ownership of EquityInterestsofHoldingsbytheBorrowerortoaddressanyothersimilarTaxinefficiencies,ineachcasearisingasaresultofsettlementor termination of any Permitted Convertible Indebtedness, Permitted Bond Hedge Transaction or Permitted Warrant Transaction,shallconstituteanAssetDisposition.
1.3 Amendment to “Base Rate”. The definition of “Base Rate” in Section 1.1 of the Credit Agreement is hereby amended byinsertingthefollowingnewsentenceattheendthereof:
Notwithstandingtheforegoing,innoeventshalltheBaseRatebelessthanzero.
1.4 Amendmentto“ChangeinControl”.Thedefinitionof“ChangeinControl”inSection1.1oftheCreditAgreementisherebyamendedbyinsertingthefollowingnewsentenceattheendthereof:
Notwithstanding anything to the contrary in the foregoing, for the avoidance of doubt, an underwriter, initial purchaser,investororholderofanyPermittedConvertibleIndebtednessorPermittedWarrantTransaction,ineachcase,shallbedeemedtonotdirectly or indirectly own the Equity Interests of Holdings underlying such transactions unless and until such Equity Interests ofHoldingsaredelivereduponsettlementthereof.
1.5 Amendment to “Consolidated Total Net Lease Adjusted Leverage Ratio”. The definition of “Consolidated Total Net LeaseAdjustedLeverageRatio” in Section 1.1 of the Credit Agreement is hereby amended by inserting the following newsentence at the endthereof:
Notwithstanding the foregoing, for purposes of calculating the Consolidated Total Net Lease Adjusted Leverage Ratio todeterminecompliancewithSection8.14(a)asoftheendoftheFiscalQuartersendingonoraboutMarch31,2021andJune30,2021,ConsolidatedEBITDAincludedinclause(b) aboveshall becalculatedas(x)inthecaseoftheFiscal Quarter endingonoraboutMarch31,2021,actualConsolidatedEBITDAforsuchFiscalQuartermultiplied by4.76,and(y)inthecaseoftheFiscalQuarterendingonoraboutJune30,2021,actualConsolidatedEBITDAfortheperiodoftwo(2)consecutiveFiscalQuartersthenendingmultiplied by1.96.
1.6 Amendment to “Equity Interests”. The definition of “Equity Interests” in Section 1.1 of the Credit Agreement is herebyamendedbyinsertingthefollowingprovisoimmediatelypriortothefinalperiodthereof:
; provided that Permitted Convertible Indebtedness, or other debt securities that are or by their terms may be convertible orexchangeableintoorforEquityInterests,PermittedBondHedgeTransactionsorPermittedWarrantTransactions,ineachcase,shallnotconstitutecapitalstockorEquityInterests.
1.7 Amendmentto“HedgeAgreement”.Thedefinitionof“HedgeAgreement”inSection1.1oftheCreditAgreementisherebyamendedbyinsertingthefollowingsentenceattheendthereof:
Notwithstandinganythingtothecontraryintheforegoing,neitheranyPermittedBondHedgeTransactionnoranyPermittedWarrantTransactionshallbeaHedgeAgreement.
1.8 Amendment to “Investment”. Thedefinitionof “Investment” in Section 1.1 of the Credit Agreement is hereby amendedbyinsertingthefollowingsentenceattheendthereof:
Notwithstandinganythingtothecontraryintheforegoing,neitherthepurchaseofanyPermittedBondHedgeTransactionbythe Borrower or any of its Subsidiaries, the performance of its obligations thereunder and the acquisition of Equity Interests ofHoldingsuponterminationorsettlementthereof,northeacquisitionofEquityInterestsofHoldingsortheBorrowerasnecessaryoradvisabletomaintaintheone-for-oneratiodescribedinSection3.04(a)oftheLLCAgreement,toreduceoreliminateownershipofEquityInterestsofHoldingsbytheBorrower,ortoaddressanyothersimilarTaxinefficiencies,ineachcasearisingasaresultofsettlement or termination of any Permitted Convertible Indebtedness, Permitted Bond Hedge Transaction, or Permitted WarrantTransactionshallbeanInvestment.
1.9 Amendment to “LIBOR”. The last sentence of the definition of “LIBOR”in Section1.1 of the Credit Agreement is herebyamendedandrestatedinitsentiretytoreadasfollows:
Notwithstanding the foregoing, (x) in no event shall LIBOR (including, without limitation, any Replacement Rate withrespectthereto)belessthan1.0%and(y)unlessotherwisespecifiedinanyamendmenttothisAgreemententeredintoinaccordancewithSection4.8(c),intheeventthataReplacementRatewithrespecttoLIBORisimplementedthenallreferenceshereintoLIBORshallbedeemedreferencestosuchReplacementRate.
1.10 Amendmentto“MaterialContract”.Thedefinitionof“MaterialContract”inSection1.1oftheCreditAgreementisherebyamendedandrestatedinitsentiretytoreadasfollows:
“MaterialContract” means any written contract or agreement of any Credit Party (other than any lease agreement of anyCreditParty)oranyofitsSubsidiaries,thebreach,non‑performance,cancellationorfailuretorenewofwhichcouldreasonablybeexpectedtohaveaMaterialAdverseEffect.
1.11AmendmenttoSection1.1.Section1.1oftheCreditAgreementisherebyamendedbyinsertingthefollowingnewdefinitionsintheappropriatealphabeticalordertherein:
“FirstAmendmentClosingDate”shallmeanMay4,2020.
“PermittedBondHedgeTransaction”meansanycallorcappedcalloption(orsubstantivelyequivalentderivativetransaction)relatingtoHoldings’commonstock(orothersecuritiesorpropertyfollowingamergerevent,reclassificationorotherchangeofthecommonstockofHoldings)purchasedbytheBorrowerorHoldingsinconnectionwiththeissuanceofanyPermittedConvertibleIndebtednessandsettleduponexerciseincommonstockofHoldings(orsuchothersecurities orproperty), cashor acombinationthereof (such amount of cash determined by reference to the price of the Holdings’ common stock or such other securities orproperty),andcashinlieuoffractionalsharesofcommonstockofHoldings;providedthattheotherterms,conditionsandcovenantsofeachsuchtransactionshallbesuchasarecustomaryfortransactionsofsuchtype(asdeterminedbytheboardofdirectorsoftheBorrower,oracommitteethereof,ingoodfaith).
“PermittedConvertibleIndebtedness”meansunsecuredIndebtednessoftheBorrowerorHoldingsthat(a)asofthedateofissuancethereofcontainscustomaryconversionorexchangerights(asapplicable)andoffertorepurchaserightsfortransactionsofsuchtype(asdeterminedbytheboardofdirectorsoftheBorrower,oracommitteethereof,ingoodfaith)and(b)isconvertibleorexchangeableintosharesofcommonstockofHoldings(orothersecuritiesorpropertyfollowingamergerevent,reclassificationorotherchangeofthecommonstockofHoldings),cashoracombinationthereof(suchamountofcashdeterminedbyreferencetotheprice of Holdings’ common stock or such other securities or property), and cash in lieu of fractional shares of common stock ofHoldings(it beingunderstoodthatanysuchIndebtednessofHoldingsforwhichanyCredit PartyorSubsidiaryhascorrespondingobligations with Holdings shall be deemed, without duplication, to be Indebtedness of the Credit Parties and their Subsidiarieshereunder).
“PermittedWarrantTransaction”meansanycalloption,warrantorrighttopurchase(orsubstantivelyequivalentderivativetransaction)relatingtoHoldings’commonstock(orothersecuritiesorpropertyfollowingamergerevent, reclassificationorotherchange of the commonstock of Holdings) sold by the Borrower or Holdings substantially concurrently with any purchase by theBorrowerof aPermittedBondHedgeTransactionandsettledincommonstockofHoldings(orsuchothersecurities orproperty),cashoracombinationthereof(suchamountofcashdeterminedbyreferencetothepriceofHoldings’commonstockorsuchothersecuritiesorproperty), andcashinlieuoffractionalsharesofcommonstockofHoldings;providedthattheterms,conditionsandcovenants of each such transaction shall be such as are customary for transactions of such type (as determined by the board ofdirectorsoftheBorrower,oracommitteethereof,ingoodfaith).
1.12 Amendment to Section 6.16. Section 6.16 of the Credit Agreement is hereby amended by inserting the following textimmediatelypriortothefinalperiodtherein:
; provided that, for purposes of this Section 6.16, the impacts of the COVID-19 pandemic on the properties, business,operations,orfinancialconditionoftheBorroweranditsSubsidiariesthat(x)occurredpriortotheFirstAmendmentClosingDateand (y) were disclosed in public filings or in writing to the Administrative Agent and the Lenders prior to the First AmendmentClosingDateshallbedisregarded(totheextentthescopeofsuchimpactsarenotgreaterthansodisclosed).
1.13 AmendmenttoSection6.18.Section6.18oftheCreditAgreementisherebyamendedandrestatedinitsentiretytoreadasfollows:
AsoftheClosingDate, thereal propertylistedonSchedule6.18constitutesall of thereal propertythat is owned,leased,subleasedorusedbyanyCreditPartyoranyofitsSubsidiaries(otherthanleasedrealpropertywithnoimprovementsthereon).Eachofsuchleasesandsubleasesisvalidandenforceableinaccordancewithitstermsandisinfullforceandeffect,andnodefaultbyanypartytoanysuchleaseorsubleaseexistsotherthansuchdefaultsthatcouldnotreasonablybeexpectedtohaveaMaterialAdverseEffect. Each Credit Party and each Subsidiary thereof has such title to the real property owned or leased by it as is necessary ordesirabletotheconductofitsbusinessandvalidandlegaltitletoallofitspersonalpropertyandassets,exceptthosewhichhavebeendisposedofbytheCreditPartiesandtheirSubsidiariessubsequenttosuchdatewhichdispositionshavebeenintheordinarycourseofbusinessorasotherwiseexpresslypermittedhereunder.
1.14AmendmenttoSection7.1.Section7.1oftheCreditAgreementisherebyamendedby:
(i)insertingthephrase“(orinthecaseofthelastFiscalQuarterofanyFiscalYear,onehundredtwenty(120)days)”immediatelyafterthephrase“forty-five(45)days”appearinginclause(b)thereof
and(ii)insertingthefollowingnewclause(d)attheendthereof:
(d)SalesandLiquidityReports.(i)TotheextentthefinancialcovenantinSection8.14(c)isthenineffect,withintwenty(20)daysaftertheendofeachmonth,asummaryofLiquidityasoftheendofsuchmonthand(ii)duringtheperiodcommencingMay 1, 2020 through and including December 31, 2020 only, within twenty (20) days after the end of each month, a monthlysummaryofsame-storesalesfortherestaurantsoftheBorroweranditsSubsidiariesfortheapplicablemonth,ineachcaseinformanddetailreasonablyacceptabletotheAdministrativeAgent.
1.15AmendmenttoSection7.2.Section7.2oftheCreditAgreementisherebyamendedbyamendingandrestatingclause(a)(iii)thereininitsentiretytoreadasfollows:
(iii)exceptinthecaseoffinancialstatementsdeliveredpursuanttoSection7.1(b)forthelastFiscalQuarterofaFiscalYear,settingforthreasonablydetailedcalculationsdemonstratingcompliancewithSection8.14
1.16AmendmenttoSection8.2.Section8.2oftheCreditAgreementisherebyamendedby(i)deletingthefinal“and”attheendofclause(q)therein,(ii)replacingthefinalperiodinclause(r)thereinwith“;and”and(iii)insertingthefollowingnewclause(s)attheendthereof:
(s)duringtheperiodcommencingApril1,2020throughandincludingDecember31,2020only,statutoryandcommonlawlandlordLiensattributabletothefailuretopayrentunderanyleaseagreement;providedthat(i)noactionshallhavebeentakenbyanyPersontoenforcesuchLiens,(ii)adequatereservesinrespectthereofhavebeenestablishedonthebooksoftheBorrowerorsuchCreditPartytotheextentrequiredbyGAAPand(iii)suchLiensdonot,individuallyorintheaggregate,materiallyimpairtheuseofsuchpropertyintheoperationofthebusinessoftheBorroweroranyofitsSubsidiaries.
1.17AmendmenttoSection8.3.Section8.3oftheCreditAgreementisherebyamendedby:
(i)amendingandrestatingclause(b)thereoftoreadasfollows:
(b) Investments in cash, Cash Equivalents and other readily marketable debt and equity securities as part of the CreditParties’andtheirSubsidiaries’cashmanagementandtreasurystrategy;
(ii)insertingthefollowingtextattheendofclause(g)thereof:
providedthat no Permitted Acquisitions may be made under this clause (g) during the period commencing on the FirstAmendmentClosingDateandendingonSeptember30,2021;
and(iii)insertingthefollowingtextimmediatelypriortothefinal“and”inclause(p)thereof:
provided furtherthat no Investments may be made under this clause (p) during the period commencing on the FirstAmendmentClosingDateandendingonSeptember30,2021;
1.18AmendmenttoSection8.6.Section8.6oftheCreditAgreementisherebyamendedby:
(i)insertingthefollowingtextattheendofclause(e)thereof:
providedfurtherthat,(x)duringtheperiodcommencingontheFirstAmendmentClosingDateandendingonSeptember30,2021, (I) no distributions maybe made under clause (e)(i) unless required by the LLCAgreement or Applicable Lawand (II) nodistributionsmaybemadeunderclause(e)(ii)unlessrequiredbytheTaxReceivableAgreementorApplicableLawand(y)duringthe period commencing on the First Amendment Closing Date and ending on March 31, 2021, distributions may be made underclause(e)(iii)onlyinanamountnottoexceed$75,000,000intheaggregateandprovidedthataftergivingeffecttoanysuchEarlyTerminationPayment(andanyincurrenceofIndebtednessinconnectiontherewith)onaproformabasis,(I)theCreditPartiesshallhaveminimumLiquidityof$50,000,000and(II)noDefaultorEventofDefaultshallhaveoccurredorwouldresulttherefrom;
(ii)insertingthefollowingtextattheendofclause(g)thereof:
providedfurtherthat during the period commencing on the First Amendment Closing Date and ending on September 30,2021,(x)theBorrowershallnotberequiredtobeinproformacompliancewithSection8.14asaconditiontomakingadistributionunderthisclause(g)and(y)distributionsunderthisclause(g)shallnotexceedintheaggregate$5,000,000;
(iii)insertingthefollowingtextimmediatelypriortothefinal“and”inclause(h)thereof:
providedfurtherthat during the period commencing on the First Amendment Closing Date and ending on September 30,2021,(x)theBorrowershallnotberequiredtobeinproformacompliancewithSection8.14asaconditiontomakingadistributionunderthisclause(h)and(y)distributionsunderthisclause(h)shallnotexceedintheaggregate$5,000,000;
(iv)insertingthefollowingtextimmediatelypriortothefinalperiodinclause(i)thereof:
;providedfurtherthatnoRestrictedPaymentsmaybemadeunderthisclause(i)duringtheperiodcommencingontheFirstAmendmentClosingDateandendingonSeptember30,2021
and(v)insertingthefollowingtextattheendofSection8.6:
Notwithstandinganythingtothecontraryintheforegoing,theissuanceof,entryinto(includinganypaymentsofpremiumsinconnectiontherewith), performanceof obligationsunder (includinganypayments of interest), andconversion, exchange, exercise,repurchase,redemption,settlementorterminationorcancellationof(whetherinwholeorinpartandincludingbynettingorset-off)(in each case, whether in cash, commonstock of Holdings or, following a merger event or other change of the commonstock ofHoldings, other securities or property), or the satisfactionof anyconditionthat wouldpermit or require anyof the foregoing, anyPermitted Convertible Indebtedness, any Permitted Bond Hedge Transaction, any Permitted Warrant Transaction and anycorresponding or related transaction as between Holdings and the Borrower in respect of the foregoing, in each case, shall notconstituteaRestrictedPaymentbytheBorrower.
1.19AmendmenttoSection8.7.Section8.7oftheCreditAgreementisherebyamendedby(i)deleting“and”attheendofclause(a)(v) thereof, (ii) replacingthefinal periodin clause(a)(vi) thereof with“; and”and(iii) insertingthe followingas a newclause(a)(vii)immediatelyfollowingclause(a)(vi)thereof:
(vii)transactionsbetweentheBorrowerandHoldingsinconnectionwithanyPermittedConvertibleIndebtedness,PermittedBondHedgeTransactionorPermittedWarrantTransaction,includingthesale,transfer,redemptionordispositionofEquityInterestsof Holdings or the Borrower as necessary or advisable to maintain the one-for-one ratio described in Section 3.04(a) of the LLCAgreement,toreduceoreliminateownershipofEquityInterestsofHoldingsbytheBorrower,ortoaddressanyothersimilarTaxinefficiencies,ineachcasearisingasaresultofsettlementorterminationofanyPermittedConvertibleIndebtedness,PermittedBondHedgeTransaction,orPermittedWarrantTransaction.
1.20AmendmenttoSection8.9.Section8.9oftheCreditAgreementisherebyamendedby(i)deleting“and”attheendofclause(a)(v)thereof,(ii)replacingthefinalperiodinclause(a)(vi)thereofwiththefollowingtext:
; provided furtherthat no payments may be made under this clause (vi) during the period commencing on the FirstAmendmentClosingDateandendingonSeptember30,2021;and
and(iii)insertingthefollowingasanewclause(a)(vii)immediatelyfollowingclause(a)(vi)thereof:
(vii)theconversionorexchangeofanyPermittedConvertibleIndebtedness,andifsuchPermittedConvertibleIndebtednesswasissuedbyHoldings,anycorrespondingIndebtednessoftheBorrowerissuedtoHoldings.
1.21 AmendmenttoSection8.14.Section8.14oftheCreditAgreementisherebyamendedandrestatedinitsentiretytoreadasfollows:
Section8.14FinancialCovenants.
(a)ConsolidatedTotalNetLeaseAdjustedLeverageRatio.Asofthelastdayof(i)theFiscalQuarterendingonoraboutMarch31,2021,permittheConsolidatedTotalNetLeaseAdjustedLeverageRatiotobegreaterthan4.50to1.00,(ii)theFiscalQuarterendingonoraboutJune30,2021,permittheConsolidatedTotalNetLeaseAdjustedLeverageRatiotobegreater than 4.25 to 1.00 and (iii) each other Fiscal Quarter, permit the Consolidated Total Net Lease Adjusted LeverageRatiotobegreaterthan4.00to1.00;provided,thatforeachofthesix(6)FiscalQuartersimmediatelyfollowingaQualifiedTransaction,commencingwiththeFiscalQuarterinwhichsuchQualified
Transactionwasconsummated(suchperiodofincrease,the“LeverageIncreasePeriod”),therequiredConsolidatedTotalNetLeaseAdjustedLeverageRatioshallbeincreasedbyupto0.50;provided,further,that(i)thereshallbenomorethanthree(3)LeverageIncreasePeriodsduringthetermofthisAgreement,(ii)thereshallbenomorethanone(1)LeverageIncreasePeriod in effect at any time, (iii) the maximumConsolidated Total Net Lease Adjusted Leverage Ratio shall revert to thethen-permittedratio(withoutgivingeffecttosuchincrease)foratleastone(1)fiscalquarterbeforeanewLeverageIncreasePeriod may be invoked and (iv) the Leverage Increase Period shall only apply (A) with respect to the calculation of theConsolidatedTotalNetLeaseAdjustedLeverageRatioforpurposesofdeterminingcompliancewiththisSection8.14(a)asoftheendofanyFiscalQuarteroftheBorrowerduringsuchperiod,(B)forpurposesofdeterminingcompliancewiththisSection8.14(a)onproformabasistodeterminecompliancewithclause(e)ofthedefinitionof“PermittedAcquisition”orwithSection8.6(e)(iii)(A)(1)and(C)forpurposesofdeterminingcompliancewiththisSection8.14(a)onaproformabasistodetermineifanIncrementalLoanispermittedtobeincurred.Notwithstandingtheforegoing,thecovenantinthisSection8.14(a)shall notbetestedasoftheendoftheFiscal QuartersendingonoraboutJune30,2020,September30,2020andDecember 31, 2020 (but otherwise shall be deemed to be in effect with respect to each such Fiscal Quarter end for allprovisions under this Agreement and the other Loan Documents that refer to compliance or pro forma compliance withSection8.14orSection8.14(a)).
(b) ConsolidatedFixedChargeCoverageRatio.AsofthelastdayofanyFiscalQuarter,permittheConsolidatedFixedChargeCoverageRatiofortheperiodoffour(4)consecutiveFiscal Quartersof theBorrowerthenendedtobelessthan1.25to1.00.Notwithstandingtheforegoing,(i)thecovenantinthisSection8.14(b)shallnotbetestedasoftheendoftheFiscalQuartersendingonoraboutJune30,2020,September30,2020andDecember31,2020(butotherwiseshallbedeemedto bein effect with respect to eachsuchFiscal Quarter endfor all provisions under this Agreement andthe otherLoan Documents that refer to compliance or pro forma compliance withSection8.14or Section8.14(b)) and (ii) for theFiscalQuartersendingonoraboutMarch31,2021andJune30,2021,theConsolidatedFixedChargeCoverageRatioshallbedeterminedforonlythesingleFiscalQuarteroftheBorrowerthenended(ratherthantheperiodoffour(4)consecutiveFiscalQuartersoftheBorrowerthenended).
(c)Liquidity.AsofthelastdayofanymonthendingduringtheperiodcommencingMay1,2020andendingJuly1,2021,permitLiquiditytobelessthan$25,000,000.
1.22 Amendment to Article VIII. Article VIII of the Credit Agreement is hereby amended by inserting a new Section 8.16immediatelyfollowingSection8.15toreadasfollows:
Section8.16 CapitalExpenditures. DuringtheperiodcommencingontheFirst AmendmentClosingDateandendingonMarch31,2021,makeCapitalExpenditures(otherthanConsolidatedMaintenanceCapitalExpenditures)inanamountthatexceeds$202,000,000intheaggregatefortheCreditPartiesandtheirSubsidiariesduringsuchperiod.
1.23 AmendmenttoSection9.1.Section9.1oftheCreditAgreementisherebyamendedbyinsertingthefollowingimmediatelypriortothefinalperiodattheendofclause(f)thereof:
;provided,thatthisclause(f)shall notapplytoanyconversionorexchangeofanyPermittedConvertibleIndebtednessorsatisfaction of any condition giving rise to or permitting a conversion or exchange of any Permitted Convertible Indebtedness, ineithercase,intocash,EquityInterestsoftheBorrowerorHoldings(andnominalcashpaymentsinrespectoffractionalshares)oranycombination thereof in accordance with the express terms or conditions thereof, unless such conversion, satisfaction or paymentresultsfromadefaultthereunder,fundamentalchangeorchangeofcontrol(orequivalenttermthereunder)oraneventofthetypethatconstitutesanEventofDefault.
ARTICLEIICONDITIONS
2.1ClosingConditions.ThisAmendmentshallbecomeeffectiveuponthesatisfactionofthefollowingconditionsprecedent:
(a)ExecutionofAmendment.TheAdministrativeAgentshallhavereceivedacopyofthisAmendmentdulyexecutedbytheBorrower,theotherCreditParties,theAdministrativeAgentandtheLenders.
(b) AmendmentFee. The Administrative Agent shall have received, for the account of each Lender, upfront fees in anaggregateamountequalto0.10%oftheaggregateamountoftheCommitmentsontheFirstAmendmentEffectiveDate.
(c) OtherFeesandOutofPocketCosts. TheBorrowershallhavepaidormadearrangementstopaycontemporaneouslywith closing any and all reasonable, documented out-of-pocket costs incurred by the Administrative Agent (including the fees,chargesanddisbursementsofMoore&VanAllenPLLCaslegalcounseltotheAdministrativeAgent)andallotherfeesandamountsrequired to be paid to the Administrative Agent pursuant to Section 11.3(a) of the Credit Agreement in connection with thisAmendmenttotheextentinvoicedpriortothedatehereof.
ARTICLEIIIMISCELLANEOUS
3.1 AmendedTerms.Onandafterthedatehereof,all referencestotheCreditAgreementineachoftheCreditDocumentsshallhereaftermeantheCreditAgreementasamendedbythisAmendment.Exceptasspecificallyamendedherebyorotherwiseagreed,theCreditAgreementisherebyratifiedandconfirmedandshallremaininfullforceandeffectaccordingtoitsterms.
3.2RepresentationsandWarrantiesofCreditParties.EachoftheCreditPartiesrepresentsandwarrantsasfollows:
(a)SuchCreditPartyhastheright,powerandauthorityandhastakenallnecessarycorporateandotheractiontoauthorizetheexecution,deliveryandperformanceofthisAmendment.
(b) This Amendment has been duly executed and delivered on behalf of each of the Credit Parties. This Amendmentconstitutesalegal,validandbindingobligationofeachoftheCreditParties,enforceableagainstsuchCreditPartyinaccordancewithitsterms,exceptasenforceabilitymaybelimitedbyapplicablebankruptcy,insolvency,reorganization,moratoriumorsimilarstateorfederalDebtorReliefLawsfromtimetotimeineffectwhichaffecttheenforcementofcreditors’rightsingeneralandtheavailabilityofequitableremedies.
(c)Noconsentorauthorizationof,filingwith,noticetoorotheractbyorinrespectof,anyGovernmentalAuthorityoranyotherPersonisrequiredinconnectionwiththeexecution,deliveryorperformanceofthisAmendmentbytheCreditParties(otherthanthosewhichhavebeenobtained)orwiththevalidityorenforceabilityofthisAmendmentagainsttheCreditParties.
(d)TherepresentationsandwarrantiesmadebytheCreditPartiesintheCreditAgreementandtheotherLoanDocumentsaretrueandcorrectinallmaterialrespects,exceptforanyrepresentationandwarrantythatisqualifiedbymaterialityorreferencetoMaterialAdverseEffect,whichsuchrepresentationandwarrantyistrueandcorrectinallrespects,onandasofthedatehereofasifmadeonandasofsuchdate,(exceptforanysuchrepresentationandwarrantythatbyitstermsismadeonlyasofanearlierdate,whichrepresentationandwarrantyistrueandcorrectinallmaterialrespectsasofsuchearlierdate,exceptforanyrepresentationandwarrantythatisqualifiedbymaterialityorreferencetoMaterialAdverseEffect,whichsuchrepresentationandwarrantyistrueandcorrectinallrespectsasofsuchearlierdate).
(e)NoDefaultorEventofDefaulthasoccurredandiscontinuingonthedatehereof.
(f) TheSecurityDocuments continuetocreatea validsecurityinterest in, andLienupon, theCollateral purportedtobecovered thereby, in favor of the Administrative Agent, for the benefit of the holders of the Secured Obligations, which securityinterestsandLiensareperfectedinaccordancewiththetermsoftheSecurityDocumentsandpriortoallLiensotherthanPermittedLiens.
(g)TheObligationsoftheCreditPartiesarenotreducedormodifiedbythisAmendment(exceptassetforthherein)and,asofthedatehereof,arenotsubjecttoanyoffsets,defensesorcounterclaims.
3.3ReaffirmationofObligations.EachCreditPartyherebyratifiestheCreditAgreement,asamendedhereby,andeachotherCreditDocumenttowhichitisapartyandacknowledgesandreaffirms(a)thatitisboundbyalltermsoftheCreditAgreement,asamendedhereby,andeachotherCreditDocumenttowhichitisapartyapplicabletoitand(b)thatitisresponsiblefortheobservanceandfullperformanceofitsrespectiveobligationsundertheCreditDocuments.
3.4 Release.TheBorrowerandeachoftheotherCreditPartiesherebyreleasesandforeverdischargestheAdministrativeAgent,eachLender,theIssuingLender,theSwinglineLenderandtheirrespectivepredecessors,successors,assigns,attorneysandRelatedParties(each and every of the foregoing, a “Lender Party”) from any and all claims, counterclaims, demands, damages, debts, suits, liabilities,actions andcauses of actionof anynature whatsoever, in eachcaseto the extent arisingin connectionwithanyof theCredit Documentsthroughthedatehereof,whetherarisingatlaworinequity,whetherknownorunknown,whetherliabilitybedirectorindirect,liquidatedorunliquidated, whether absolute or contingent, foreseenor unforeseen, andwhether or not heretofore asserted, whichanyCredit Party mayhaveorclaimtohaveagainstanyLenderParty.
3.5CreditDocument.ThisAmendmentshallconstituteaCreditDocumentunderthetermsoftheCreditAgreement.
3.6 Entirety. This Amendment and the other Credit Documents embody the entire agreement among the parties hereto andsupersedeallprioragreementsandunderstandings,oralorwritten,ifany,relatingtothesubjectmatterhereof.
3.7Expenses.PursuanttoandsubjecttoSection11.3(a)oftheCreditAgreement,theBorroweragreestopayallreasonablecostsandexpensesoftheAdministrativeAgentinconnectionwiththepreparation,executionanddeliveryofthisAmendment,includingwithoutlimitationthereasonablefeesandexpensesoftheAdministrativeAgent’slegalcounsel.
3.8 Counterparts; Electronic Execution. This Amendment may be executed in counterparts (and by different parties hereto indifferent counterparts), each of which shall constitute an original, but all of which when taken together shall constitute a single contract.Delivery of an executed signature page of this Amendment by facsimile transmission or in electronic (i.e., “pdf” or “tif”) format shall beeffectiveasdeliveryofamanuallyexecutedcounterpartyhereof.
3.9 Governing Law. This AMENDMENT and ANY CLAIM, CONTROVERSY, DISPUTE OR CAUSE OF ACTION(WHETHER IN CONTRACT OR TORT OR OTHERWISE) BASED UPON, ARISING OUT OF OR RELATING TO THISaMENDMENT AND THE TRANSACTIONS CONTEMPLATED HEREBY SHALL BE GOVERNED BY, AND CONSTRUED INACCORDANCEWITH,THELAWOFTHESTATEOFNEWYORK.
3.10 Successors and Assigns. This Amendment shall be binding upon and inure to the benefit of the parties hereto and theirrespectivepermittedsuccessorsandassigns.
3.11ConsenttoJurisdiction;ServiceofProcess;WaiverofJuryTrial.Thejurisdiction,servicesofprocessandwaiverofjurytrialprovisionssetforthinSection11.5andSection11.6oftheCreditAgreementareherebyincorporatedbyreference,mutatis mutandis.
[Signaturepagestofollow]
INWITNESSWHEREOFthepartiesheretohavecausedthisAmendmenttobedulyexecutedonthedatefirstabovewritten.
BORROWER: SSEHOLDINGS,LLC, aDelawarelimitedliabilitycompany
By: /s/TaraComonte TaraComonteDate:May4,2020 Title:CFO
GUARANTORS: CUSTARD’SFIRSTSTAND,LLC, aNewYorklimitedliabilitycompany SHAKESHACK366COLUMBUSLLC, aNewYorklimitedliabilitycompany SHAKESHACK1111LINCOLNROADLLC, aNewYorklimitedliabilitycompany SHAKESHACK300WEST44THSTREETLLC, aNewYorklimitedliabilitycompany SHAKESHACK152E86LLC, aNewYorklimitedliabilitycompany
SHAKESHACK18THSTREETNWWASHINGTOND.C.LLC,
aDelawarelimitedliabilitycompany SHAKESHACK102NORTHENDAVELLC, aNewYorklimitedliabilitycompany SHAKESHACKWESTPORTLLC, aDelawarelimitedliabilitycompany SHAKESHACKFULTONSTREETBROOKLYNLLC aDelawarelimitedliabilitycompany SHAKESHACKSANSOMSTREETPHILADELPHIALLC aDelawarelimitedliabilitycompany SHAKESHACKCORALGABLES,LLC, aDelawarelimitedliabilitycompany SHAKESHACKWESTBURYLLC, aDelawarelimitedliabilitycompany SHAKESHACKNEWHAVENLLC, aDelawarelimitedliabilitycompany SHAKESHACKBOSTONCHESTNUTHILLLLC, aDelawarelimitedliabilitycompany SHAKESHACKBOCARATONLLC, aDelawarelimitedliabilitycompany SHAKESHACK800FSTREETLLC, aDelawarelimitedliabilitycompany SHAKESHACKGRANDCENTRALLLC, aDelawarelimitedliabilitycompany
By: /s/TaraComonte TaraComonte Title:CFOofeachoftheforegoing
SHAKESHACKUNIVERSITYCITYPHILADELPHIALLC, aDelawarelimitedliabilitycompany SHAKESHACKKINGOFPRUSSIALLC, aDelawarelimitedliabilitycompany SHAKESHACKPARAMUSLLC aDelawarelimitedliabilitycompany SHAKESHACKHARVARDSQUAREBOSTONLLC, Delawarelimitedliabilitycompany SHAKESHACKFLATBUSHBROOKLYNLLC, aDelawarelimitedliabilitycompany
SHAKESHACKUNIONSTATIONWASHINGTOND.C.LLC,
aDelawarelimitedliabilitycompany SHAKESHACKDUMBOBROOKLYNLLC, aDelawarelimitedliabilitycompany SHAKESHACKBUCKHEADATLANTALLC, aDelawarelimitedliabilitycompany
SHAKESHACKTYSONSCORNERFAIRFAXCOUNTYLLC,
aDelawarelimitedliabilitycompany SHAKESHACKWINTERPARKORLANDOLLC, aDelawarelimitedliabilitycompany SHAKESHACKCHICAGOOHIOSTREETLLC, aDelawarelimitedliabilitycompany SHAKESHACKSOUTHLAMARAUSTINLLC, aDelawarelimitedliabilitycompany SHAKESHACKLASVEGASPARKLLC, aDelawarelimitedliabilitycompany
SHAKESHACKGARDENSTATEPLAZAWESTFIELDLLC,
aDelawarelimitedliabilitycompany SHAKESHACKNEWBURYSTREETBOSTONLLC, aDelawarelimitedliabilitycompany SHAKESHACKTHEDOMAINAUSTINLLC, aDelawarelimitedliabilitycompany SHAKESHACK600THIRDAVENEWYORKCITYLLC, aDelawarelimitedliabilitycompany SHAKESHACKCAACHICAGOLLC, aDelawarelimitedliabilitycompany SHAKESHACKPRATTSTREETBALTIMORELLC, aDelawarelimitedliabilitycompany SHAKESHACKINTERNATIONALDRIVEORLANDOLLC, aDelawarelimitedliabilitycompany SHAKESHACKLAKESUCCESSLONGISLANDLLC, aDelawarelimitedliabilitycompany SHAKESHACKLEGACYPLACEDEDHAMLLC, aDelawarelimitedliabilitycompany
By: /s/TaraComonte TaraComonte Title:CFOofeachoftheforegoing
SHAKESHACK1333BROADWAYNYCLLC, aDelawarelimitedliabilitycompany SHAKESHACKSEAPORTBOSTONLLC, aDelawarelimitedliabilitycompany SHAKESHACKROUTE110MELVILLELLC, aDelawarelimitedliabilitycompany SHAKESHACKOLDORCHARDSKOKIELLC, aDelawarelimitedliabilitycompany SHAKESHACKBRIDGEWATERCOMMONSLLC, aDelawarelimitedliabilitycompany SHAKESHACKWOODBURYCOMMONSLLC, aDelawarelimitedliabilitycompany SHAKESHACKPENTAGONCENTERARLINGTONLLC, aDelawarelimitedliabilitycompany SHAKESHACKFASHIONSQUARESCOTTSDALELLC, aDelawarelimitedliabilitycompany SHAKESHACKFULTONCENTERNYCLLC, aDelawarelimitedliabilitycompany SHAKESHACKDOWNTOWNSUMMERLINLLC, aDelawarelimitedliabilitycompany SHAKESHACKQUEENSCENTERMALLLLC, aDelawarelimitedliabilitycompany SHAKESHACKWESTHOLLYWOODLALLC, aDelawarelimitedliabilitycompany SHAKESHACKTHEGALLERIAHOUSTONLLC, aDelawarelimitedliabilitycompany SHAKESHACKWOODFIELDMALLSCHAUMBURGLLC, aDelawarelimitedliabilitycompany SHAKESHACKLEGACYWESTPLANOLLC, aDelawarelimitedliabilitycompany SHAKESHACKKINGOFPRUSSIALLC, aDelawarelimitedliabilitycompany SHAKESHACKDELAWARELLC, aDelawarelimitedliabilitycompany SHAKESHACKASTORPLACELLC, aDelawarelimitedliabilitycompany SHAKESHACKARIZONALLC, aDelawarelimitedliabilitycompany SHAKESHACKGEORGIALLC, aDelawarelimitedliabilitycompany SHAKESHACKNEWYORKLLC, aDelawarelimitedliabilitycompany SHAKESHACKNEWJERSEYLLC, aDelawarelimitedliabilitycompany SHAKESHACKNORTHCAROLINALLC, aDelawarelimitedliabilitycompany
By: /s/TaraComonte TaraComonte Title:CFOofeachoftheforegoing
SHAKESHACKTEXASLLC, aDelawarelimitedliabilitycompany SHAKESHACKKENTUCKYLLC, aDelawarelimitedliabilitycompany SHAKESHACKCALIFORNIALLC, aDelawarelimitedliabilitycompany SHAKESHACKFLORIDALLC, aDelawarelimitedliabilitycompany SHAKESHACKCONNECTICUTLLC, aDelawarelimitedliabilitycompany SHAKESHACKMINNESOTALLC, aDelawarelimitedliabilitycompany SHAKESHACKMISSOURILLC, aDelawarelimitedliabilitycompany SHAKESHACKMARYLANDLLC, aDelawarelimitedliabilitycompany
SHAKESHACKMARYLANDMANAGEMENTCOMPANYLLC,
aDelawarelimitedliabilitycompany SHAKESHACKPOTOMACMARYLANDMANAGEMENT COMPANYLLC,aDelawarelimitedliabilitycompany SHAKESHACKMICHIGANLLC, aDelawarelimitedliabilitycompany SHAKESHACKALABAMALLC, aDelawarelimitedliabilitycompany SHAKESHACKTENNESSEELLC, aDelawarelimitedliabilitycompany SHAKESHACKILLINOISLLC, aDelawarelimitedliabilitycompany SHAKESHACKWASHINGTOND.C.LLC, aDelawarelimitedliabilitycompany SHAKESHACKNEVADALLC, aDelawarelimitedliabilitycompany SHAKESHACKRHODEISLANDLLC, aDelawarelimitedliabilitycompany SHAKESHACKCOLORADOLLC, aDelawarelimitedliabilitycompany SHAKESHACKOHIOLLC, aDelawarelimitedliabilitycompany SHAKESHACKPENNSYLVANIALLC, aDelawarelimitedliabilitycompany SHAKESHACKWASHINGTONLLC, aDelawarelimitedliabilitycompany SHAKESHACKWISCONSINLLC, aDelawarelimitedliabilitycompany SHAKESHACKENTERPRISES,LLC, aNewYorklimitedliabilitycompany
By: /s/TaraComonte TaraComonte Title:CFOofeachoftheforegoing
SHAKESHACKENTERPRISESINTERNATIONAL,LLC, aNewYorklimitedliabilitycompany SSEHOLDINGS,LLC, aDelawarelimitedliabilitycompany SSEIP,LLC, aDelawarelimitedliabilitycompany SHAKESHACKDOMESTICLICENSINGLLC, aDelawarelimitedliabilitycompany SHAKESHACKMIDDLEEASTLLC, aDelawarelimitedliabilitycompany SHAKESHACKRUSSIALLC, aDelawarelimitedliabilitycompany SHAKESHACKTURKEYLLC, aDelawarelimitedliabilitycompany SHAKESHACKUNITEDKINGDOMLLC, aDelawarelimitedliabilitycompany SHAKESHACKTEXASBEVERAGECOMPANYLLC, aTexaslimitedliabilitycompany SHAKESHACKTEXASHOLDINGCOMPANYLLC, aTexaslimitedliabilitycompany SHAKESHACKTEXASMANAGEMENTCOMPANYLLC, aDelawarelimitedliabilitycompany aTexaslimitedliabilitycompany aDelawarelimitedliabilitycompany SHAKESHACKMOBILELLC, aDelawarelimitedliabilitycompany SHAKESHACKLOUISIANALLC, aDelawarelimitedliabilitycompany SHAKESHACKMASSACHUSETTSLLC, aDelawarelimitedliabilitycompany SHAKESHACKUTAHLLC, aDelawarelimitedliabilitycompany SHAKESHACKTRUCKSLLC, aDelawarelimitedliabilitycompany SHAKESHACKVIRGINIALLC, aDelawarelimitedliabilitycompany SHAKESHACKKANSASLLC, aDelawarelimitedliabilitycompany SHAKESHACKKANSASDOMESTICLLC, aKansaslimitedliabilitycompany
By: /s/TaraComonte TaraComonte Title:CFOofeachoftheforegoing
ADMINISTRATIVEAGENTANDLENDERS: WELLSFARGOBANK,NATIONALASSOCIATION,
asAdministrativeAgent,SwinglineLender,IssuingLenderandLender
By: /s/DeniseCrouch DeniseCrouchDate:May4,2020 VicePresident
Exhibit 31.1
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I,RandyGarutti,certifythat:
1. IhavereviewedthisQuarterlyReportonForm10-QforthequarterlyperiodendedMarch25,2020ofShakeShackInc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatementsmade,inlightofthecircumstancesunderwhichsuchstatementsweremade,notmisleadingwithrespecttotheperiodcoveredbythisreport;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancialcondition,resultsofoperationsandcashflowsoftheregistrantasof,andfor,theperiodspresentedinthisreport;
4. Theregistrant'sothercertifyingofficerandIareresponsibleforestablishingandmaintainingdisclosurecontrolsandprocedures(asdefinedinExchangeAct Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for theregistrantandhave:
(a) Designedsuchdisclosurecontrolsandprocedures,orcausedsuchdisclosurecontrolsandprocedurestobedesignedunderoursupervision,toensurethat material informationrelatingtotheregistrant, includingits consolidatedsubsidiaries, is madeknowntousbyothers withinthoseentities,particularlyduringtheperiodinwhichthisreportisbeingprepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternalpurposesinaccordancewithgenerallyacceptedaccountingprinciples;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectivenessofthedisclosurecontrolsandprocedures,asoftheendoftheperiodcoveredbythisreportbasedonsuchevaluation;and
(d) Disclosedinthisreportanychangeintheregistrant’sinternalcontroloverfinancialreportingthatoccurredduringtheregistrant’smostrecentfiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely tomateriallyaffect,theregistrant’sinternalcontroloverfinancialreporting;and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’sauditorsandtheauditcommitteeoftheregistrant’sboardofdirectors(orpersonsperformingtheequivalentfunctions):
(a) Allsignificantdeficienciesandmaterialweaknessesinthedesignoroperationofinternalcontroloverfinancialreportingwhicharereasonablylikelytoadverselyaffecttheregistrant’sabilitytorecord,process,summarizeandreportfinancialinformation;and
(b) Anyfraud,whetherornotmaterial,thatinvolvesmanagementorotheremployeeswhohaveasignificantroleintheregistrant’sinternalcontroloverfinancialreporting.
Date:May4,2020 /s/RandyGarutti RandyGarutti
ChiefExecutiveOfficer
Exhibit 31.2
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I,TaraComonte,certifythat:
1. IhavereviewedthisQuarterlyReportonForm10-QforthequarterlyperiodendedMarch25,2020ofShakeShackInc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatementsmade,inlightofthecircumstancesunderwhichsuchstatementsweremade,notmisleadingwithrespecttotheperiodcoveredbythisreport;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancialcondition,resultsofoperationsandcashflowsoftheregistrantasof,andfor,theperiodspresentedinthisreport;
4. Theregistrant'sothercertifyingofficerandIareresponsibleforestablishingandmaintainingdisclosurecontrolsandprocedures(asdefinedinExchangeAct Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for theregistrantandhave:
(a) Designedsuchdisclosurecontrolsandprocedures,orcausedsuchdisclosurecontrolsandprocedurestobedesignedunderoursupervision,toensurethat material informationrelatingtotheregistrant, includingits consolidatedsubsidiaries, is madeknowntousbyothers withinthoseentities,particularlyduringtheperiodinwhichthisreportisbeingprepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternalpurposesinaccordancewithgenerallyacceptedaccountingprinciples;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectivenessofthedisclosurecontrolsandprocedures,asoftheendoftheperiodcoveredbythisreportbasedonsuchevaluation;and
(d) Disclosedinthisreportanychangeintheregistrant’sinternalcontroloverfinancialreportingthatoccurredduringtheregistrant’smostrecentfiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely tomateriallyaffect,theregistrant’sinternalcontroloverfinancialreporting;and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’sauditorsandtheauditcommitteeoftheregistrant’sboardofdirectors(orpersonsperformingtheequivalentfunctions):
(a) Allsignificantdeficienciesandmaterialweaknessesinthedesignoroperationofinternalcontroloverfinancialreportingwhicharereasonablylikelytoadverselyaffecttheregistrant’sabilitytorecord,process,summarizeandreportfinancialinformation;and
(b) Anyfraud,whetherornotmaterial,thatinvolvesmanagementorotheremployeeswhohaveasignificantroleintheregistrant’sinternalcontroloverfinancialreporting.
Date:May4,2020 /s/TaraComonte TaraComonte
PresidentandChiefFinancialOfficer
Exhibit 32
CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
InconnectionwiththeQuarterlyReportonForm10-QofShakeShackInc.(the“Company”),forthequarterlyperiodendedMarch25,2020,asfiledwiththeSecuritiesandExchangeCommissiononthedatehereof(the“Report”),eachoftheundersignedofficersoftheCompanycertifiespursuantto18U.S.C.Section1350,asadoptedpursuanttoSection906oftheSarbanes-OxleyActof2002,that:
1. TheReportfullycomplieswiththerequirementsofSection13(a)or15(d)oftheSecuritiesExchangeActof1934;and2. TheinformationcontainedintheReportfairlypresents,inallmaterialrespects,thefinancialconditionandresultsofoperationsoftheCompany.
Date:May4,2020 /s/RandyGarutti RandyGarutti ChiefExecutiveOfficer
Date:May4,2020 /s/TaraComonte TaraComonte PresidentandChiefFinancialOfficer