NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
8
|
Shake Shack Inc.
Form 10-Q
NOTE 1: NATURE OF OPERATIONS
Shake Shack Inc. ("we," "us," "our," "Shake Shack" and the "Company") was formed on September 23, 2014 as a Delaware corporation for the purpose of facilitating an initial public offering and other related transactions in order to carry on the business of SSE Holdings, LLC and its subsidiaries ("SSE Holdings"). W
e are the sole managing member of SSE Holdings and, as sole managing member, we operate and control all of the business and affairs of SSE Holdings. As a result, we consolidate the financial results of SSE Holdings and report a non-controlling interest representing the economic interest in SSE Holdings held by the other members of SSE Holdings. As of
September 26, 2018
we owned
79.3%
of SSE Holdings. Unless the context otherwise requires, "we," "us," "our," "Shake Shack," the "Company" and other similar references, refer to Shake Shack Inc. and, unless otherwise stated, all of its subsidiaries, including SSE Holdings.
We operate and license Shake Shack restaurants ("Shacks"), which serve hamburgers, chicken sandwiches, hot dogs, crinkle-cut fries, shakes, frozen custard, beer, wine and more. As of
September 26, 2018
, there were
188
Shacks in operation, system-wide, of which
107
were domestic company-operated Shacks,
11
were domestic licensed Shacks and
70
were international licensed Shacks.
NOTE
2
: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include the accounts of Shake Shack Inc. and its subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. These interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") and on a basis consistent in all material respects with the accounting policies described in our Annual Report on Form 10-K for the fiscal year ended
December 27, 2017
("2017 Form 10-K"). In our opinion, all adjustments, which are normal and recurring in nature, necessary for a fair presentation of our financial position and results of operation have been included. Certain reclassifications have been made to prior period amounts to conform to the current year presentation. Operating results for interim periods are not necessarily indicative of the results that may be expected for a full fiscal year.
The accompanying Condensed Consolidated Balance Sheet as of
December 27, 2017
has been derived from the audited financial statements at that date but does not include all of the disclosures required by GAAP. These interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes thereto included in our 2017 Form 10-K.
SSE Holdings is considered a variable interest entity. Shake Shack Inc. is the primary beneficiary as we have the majority economic interest in SSE Holdings and, as the sole managing member, have decision making authority that significantly affects the economic performance of the entity, while the limited partners have no substantive kick-out or participating rights. As a result, we consolidate SSE Holdings. The assets and liabilities of SSE Holdings represent substantially all of our consolidated assets and liabilities with the exception of certain deferred taxes and liabilities under the Tax Receivable Agreement. As of
September 26, 2018
and
December 27, 2017
, the net assets of SSE Holdings were
$228,773
and
$197,301
, respectively. The assets of SSE Holdings are subject to certain restrictions in SSE Holdings' revolving credit agreements. See
Note 8
for more information.
Fiscal Year
We operate on a 52/53 week fiscal year ending on the last Wednesday in December. Fiscal
2018
contains
52
weeks and ends on
December 26, 2018
. Fiscal
2017
contained
52
weeks and ended on
December 27, 2017
. Unless otherwise stated, references to years in this report relate to fiscal years.
Use of Estimates
The preparation of these condensed consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date
Shake Shack Inc.
Form 10-Q
|
9
of the financial statements, and the reported amounts of sales and expenses during the reporting period. Actual results could differ from those estimates.
Recently Adopted Accounting Pronouncements
We adopted the Accounting Standards Updates (“ASUs”) summarized below in fiscal 2018.
|
|
|
|
Accounting Standards Update (“ASU”)
|
Description
|
Date
Adopted
|
Revenue from Contracts with Customers and related standards
(ASU’s 2014-09, 2015-14, 2016-08, 2016-10, 2016-12, 2016-20)
|
This standard supersedes the existing revenue recognition guidance and provides a new framework for recognizing revenue. The core principle of the standard is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. The new standard also requires significantly more comprehensive disclosures than the existing standard. Guidance subsequent to ASU 2014-09 has been issued to clarify various provisions in the standard, including principal versus agent considerations, identifying performance obligations, licensing transactions, as well as various technical corrections and improvements.
See Note 3 for more information.
|
December 28, 2017
|
Recognition and Measurement of Financial Assets and Financial Liabilities
(ASU 2016-01)
|
For public business entities, this standard requires: (i) certain equity investments to be measured at fair value with changes in fair value recognized in net income; (ii) a qualitative assessment to identify impairment of equity investments without readily determinable fair values; (iii) elimination of the requirement to disclose the method(s) and significant assumptions used to estimate the fair value for financial instruments measured at amortized cost on the balance sheet; (iv) use of the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (v) separate presentation in other comprehensive income of the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; (vi) separate presentation of financial assets and liabilities by measurement category and form of financial asset in the financial statements; and (vii) an entity to evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets.
The adoption of this standard did not have a material impact to our consolidated financial statements.
|
December 28, 2017
|
Statement of Cash Flows: Classification of Certain Cash Receipts and Payments
(ASU 2016-15)
|
This standard provides guidance on eight specific cash flow issues with the objective of reducing diversity in practice.
The adoption of this standard did not have a material impact to our consolidated financial statements.
|
December 28, 2017
|
10
|
Shake Shack Inc.
Form 10-Q
Recently Issued Accounting Pronouncements
|
|
|
|
|
Accounting Standards Update (“ASU”)
|
Description
|
Expected Impact
|
Effective Date
|
Leases
(ASU's 2016-02, 2018-01, 2018-10, 2018-11)
|
This standard establishes a new lease accounting model, which introduces the recognition of lease assets and liabilities for those leases classified as operating leases under previous GAAP. It should be applied using a modified retrospective approach applied either at the beginning of the earliest period presented, or at the adoption date, with the option to elect various practical expedients. Early adoption is permitted.
|
We plan to adopt the standard on December 27, 2018, electing the optional transition method to apply the standard as of the transition date. As a result, we will not apply the standard to the comparative periods presented.
We plan to elect the transition package of three practical expedients permitted under the new standard, which among other things, allows us to carryforward our historical lease classifications. We also made certain preliminary accounting policy elections for new leases post-transition, including the election to combine components. We are further evaluating other optional practical expedients and policy elections, as well as the impact of the standard to our processes, disclosures and internal control over financial reporting.
It is likely that the adoption will have a significant impact to our consolidated balance sheet given the extent of our real estate lease portfolio. We are completing our estimate of the impact, which is dependent on a number of key assumptions and factors, such as the discount rate as of the transition date, and the number of leases we will take possession of by the end of the year. Additionally, we expect that substantially all of our landlord funded assets and deemed landlord financing liabilities will be fully derecognized upon transition.
While we are continuing to assess all impacts of the standard, we currently do not expect our existing operating leases to have a material impact on our statement of income. For those leases where we are involved in construction and deemed to be the accounting owner, we will determine their lease classification. If they result in operating leases, we expect an increase to occupancy and related expenses, and a decrease to interest and depreciation expense post-transition.
We believe our real estate portfolio represents a significant portion of our overall lease portfolio, however, we are still in the process of evaluating other leases, such as equipment and embedded leases.
|
December 27, 2018
|
Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract
(ASU 2018-15)
|
This standard provides additional guidance on accounting for costs of implementation activities performed in a cloud computing arrangement that is a service contract. The standard aligns the requirements for capitalizing implementation costs of such arrangements with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The standard also clarifies the presentation and classification of the capitalized costs, amortization expense, and the associated treatment in the statement of cash flows by aligning these items with the same treatment for costs of the hosting service itself. Early adoption is permitted, including adoption in any interim period, utilizing either a prospective or retrospective adoption methodology.
|
We intend on early adopting this standard during the fourth quarter 2018, on a prospective basis. We are in the early stages of an implementation of an enterprise-wide system initiative, therefore, we expect to be able to capitalize some implementation costs related to this initiative that previously would have been expensed as incurred.
|
September 27, 2018
|
Shake Shack Inc.
Form 10-Q
|
11
On December 28, 2017 we adopted ASU 2014-09,
Revenue from Contracts with Customers (Topic 606)
, using the modified retrospective method applied to those contracts which were not completed as of December 28, 2017. We elected a practical expedient to aggregate the effect of all contract modifications that occurred before the adoption date, which did not have a material impact to our consolidated financial statements. Results for reporting periods beginning on or after December 28, 2017 are presented under Accounting Standards Codification Topic 606 ("ASC 606"). Prior period amounts were not revised and continue to be reported in accordance with ASC Topic 605 ("ASC 605"), the accounting standard then in effect.
Upon transition, on December 28, 2017, we recorded a decrease to opening equity of
$1,574
, net of tax, of which
$1,135
was recognized in retained earnings and
$439
in non-controlling interest, with a corresponding increase of
$1,769
in other long-term liabilities, a decrease of
$68
in other current liabilities, and an increase of
$100
to accounts receivable.
Revenue Recognition
Revenue consists of Shack sales and licensing revenue. Generally, revenue is recognized as promised goods or services transfer to the guest or customer in an amount that reflects the consideration we expect to be entitled in exchange for those goods or services.
Revenue from Shack sales is presented net of discounts and recognized when food, beverage and retail products are sold. Sales tax collected from customers is excluded from Shack sales and the obligation is included in sales tax payable until the taxes are remitted to the appropriate taxing authorities. Revenue from our gift cards is deferred and recognized upon redemption.
Licensing revenues include initial territory fees, Shack opening fees, and ongoing sales-based royalty fees from licensed Shacks. Generally, the licenses granted to develop, open, and operate each Shack in a specified territory are the predominant goods or services transferred to the licensee in our contracts, and represent distinct performance obligations. Ancillary promised services, such as training and assistance during the initial opening of a Shack, are typically combined with the licenses and considered as one performance obligation per Shack. We determine the transaction price for each contract, which is comprised of the initial territory fee, and an estimate of the total Shack opening fees we expect to be entitled to. The calculation of total Shack opening fees included in the transaction price requires judgment, as it is based on an estimate of the number of Shacks we expect the licensee to open. The transaction price is then allocated equally to each Shack expected to open. The performance obligations are satisfied over time, starting when a Shack opens, through the end of the term of the license granted to the Shack. Because we are transferring licenses to access our intellectual property during a contractual term, revenue is recognized on a straight-line basis over the license term. Generally, payment for the initial territory fee is received upon execution of the licensing agreement, and payment for the restaurant opening fees are received either in advance of or upon opening the related restaurant. These payments are initially deferred and recognized as revenue as the performance obligations are satisfied, which occurs over a long-term period.
Revenue from sales-based royalties is recognized as the related sales occur.
Prior to the adoption of ASC 606, Shack opening fees were recorded as deferred revenue when received and proportionate amounts were recognized as revenue when a licensed Shack opened and all material services and conditions related to the fee were substantially performed. Territory fees were recorded as deferred revenue when received and recognized as revenue on a straight-line basis over the term of the license agreement, which generally began upon execution of the contract.
Shake Shack Inc.
Form 10-Q
|
12
Revenue recognized for the
thirteen and thirty-nine weeks ended
September 26, 2018
under ASC 606 and revenue that would have been recognized for the
thirteen and thirty-nine weeks ended
September 26, 2018
had ASC 605 been applied is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended September 26, 2018
|
|
|
Thirty-Nine Weeks Ended September 26, 2018
|
|
|
As reported under ASC 606
|
|
|
If reported under ASC 605
|
|
|
Increase (decrease)
|
|
|
As reported under ASC 606
|
|
|
If reported under ASC 605
|
|
|
Increase (decrease)
|
|
Shack sales
|
$
|
115,882
|
|
|
$
|
115,882
|
|
|
$
|
—
|
|
|
$
|
324,869
|
|
|
$
|
324,869
|
|
|
$
|
—
|
|
Licensing revenue
|
3,765
|
|
|
3,909
|
|
|
(144
|
)
|
|
10,176
|
|
|
10,581
|
|
|
(405
|
)
|
Total revenue
|
$
|
119,647
|
|
|
$
|
119,791
|
|
|
$
|
(144
|
)
|
|
$
|
335,045
|
|
|
$
|
335,450
|
|
|
$
|
(405
|
)
|
Revenue recognized during the
thirteen and thirty-nine weeks ended
September 26, 2018
(under ASC 606) and
thirteen and thirty-nine weeks ended
September 27, 2017
(under ASC 605) disaggregated by type is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
|
Thirty-Nine Weeks Ended
|
|
|
September 26
2018
|
|
|
September 27
2017
|
|
|
September 26
2018
|
|
|
September 27
2017
|
|
Shack sales
|
$
|
115,882
|
|
|
$
|
91,100
|
|
|
$
|
324,869
|
|
|
$
|
253,258
|
|
Licensing revenue:
|
|
|
|
|
|
|
|
Sales-based royalties
|
3,660
|
|
|
3,318
|
|
|
9,951
|
|
|
8,918
|
|
Initial territory and opening fees
|
105
|
|
|
191
|
|
|
225
|
|
|
498
|
|
Total revenue
|
$
|
119,647
|
|
|
$
|
94,609
|
|
|
$
|
335,045
|
|
|
$
|
262,674
|
|
The aggregate amount of the transaction price allocated to performance obligations that are unsatisfied (or partially unsatisfied) as of
September 26, 2018
is
$11,332
. We expect to recognize this amount as revenue over a long-term period, as the license term for each Shack ranges from 5 to 20 years. This amount excludes any variable consideration related to sales-based royalties.
Contract Balances
Opening and closing balances of contract liabilities and receivables from contracts with customers is as follows:
|
|
|
|
|
|
|
|
|
|
|
September 26
2018
|
|
|
December 28
2017
|
|
Shack sales receivables
|
$
|
2,460
|
|
|
$
|
2,184
|
|
Licensing receivables
|
3,187
|
|
|
1,522
|
|
Gift card liability
|
1,358
|
|
|
1,472
|
|
Deferred revenue, current
|
291
|
|
|
265
|
|
Deferred revenue, long-term
|
7,027
|
|
|
3,742
|
|
Revenue recognized during the
thirteen and thirty-nine weeks ended
September 26, 2018
that was included in their respective liability balances at the beginning of the period is as follows:
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
September 26 2018
|
|
|
Thirty-Nine Weeks Ended
September 26 2018
|
|
Gift card liability
|
$
|
59
|
|
|
$
|
467
|
|
Deferred revenue, current
|
67
|
|
|
185
|
|
Shake Shack Inc.
Form 10-Q
|
13
NOTE
4
: FAIR VALUE MEASUREMENTS
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following tables present information about our financial assets and liabilities measured at fair value on a recurring basis as of
September 26, 2018
and
December 27, 2017
, and indicate the classification within the fair value hierarchy.
Cash, Cash Equivalents and Marketable Securities
The following tables summarize our cash, cash equivalents and marketable securities by significant investment categories as of
September 26, 2018
and
December 27, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 26, 2018
|
|
|
Cost Basis
|
|
|
Gross Unrealized Gains
|
|
|
Gross Unrealized Losses
|
|
|
Fair Value
|
|
|
Cash and Cash Equivalents
|
|
|
Marketable Securities
|
|
Cash
|
$
|
24,290
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
24,290
|
|
|
$
|
24,290
|
|
|
$
|
—
|
|
Level 1:
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
5,005
|
|
|
—
|
|
|
—
|
|
|
5,005
|
|
|
5,005
|
|
|
—
|
|
|
Mutual funds
|
61,860
|
|
|
—
|
|
|
(60
|
)
|
|
61,800
|
|
|
—
|
|
|
61,800
|
|
Level 2:
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities
(1)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
91,155
|
|
|
$
|
—
|
|
|
$
|
(60
|
)
|
|
$
|
91,095
|
|
|
$
|
29,295
|
|
|
$
|
61,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 27, 2017
|
|
|
Cost Basis
|
|
|
Gross Unrealized Gains
|
|
|
Gross Unrealized Losses
|
|
|
Fair Value
|
|
|
Cash and Cash Equivalents
|
|
|
Marketable Securities
|
|
Cash
|
$
|
16,138
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
16,138
|
|
|
$
|
16,138
|
|
|
$
|
—
|
|
Level 1:
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
5,369
|
|
|
—
|
|
|
—
|
|
|
5,369
|
|
|
5,369
|
|
|
—
|
|
|
Mutual funds
|
60,985
|
|
|
—
|
|
|
(61
|
)
|
|
60,924
|
|
|
—
|
|
|
60,924
|
|
Level 2:
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities
(1)
|
2,125
|
|
|
2
|
|
|
(15
|
)
|
|
2,112
|
|
|
—
|
|
|
2,112
|
|
Total
|
$
|
84,617
|
|
|
$
|
2
|
|
|
$
|
(76
|
)
|
|
$
|
84,543
|
|
|
$
|
21,507
|
|
|
$
|
63,036
|
|
|
|
(1)
|
Corporate debt securities were measured at fair value using a market approach utilizing observable prices for identical securities or securities with similar characteristics and inputs that are observable or can be corroborated by observable market data.
|
On December 28, 2017, we adopted ASU 2016-01, which
requires certain equity investments to be measured at fair value with changes in fair value recognized in net income. Net un
realized gains on available-for-sale equity securities totaling
$62
and
$1
were included
on the Condensed Consolidated Statements of
Income
during
the
thirteen and thirty-nine weeks ended
September 26, 2018
, respectively. Net unrealized losses on available-for-sale securities totaling
$74
were included in accumulated other comprehensive income on the Condensed Consolidated Balance Sheet as of
December 27, 2017
.
14
|
Shake Shack Inc.
Form 10-Q
The following tables summarize the gross unrealized losses and fair values for those investments that were in an unrealized loss position as of
September 26, 2018
and
December 27, 2017
, aggregated by investment category and the length of time that individual securities have been in a continuous loss position:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 26, 2018
|
|
|
|
Less than 12 Months
|
|
|
12 Months or Greater
|
|
|
Total
|
|
|
Fair Value
|
|
|
Unrealized Loss
|
|
|
Fair Value
|
|
|
Unrealized Loss
|
|
|
Fair Value
|
|
|
Unrealized Loss
|
|
|
Money market funds
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Mutual funds
|
61,800
|
|
|
(60
|
)
|
|
—
|
|
|
—
|
|
|
61,800
|
|
|
(60
|
)
|
|
Corporate debt securities
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
61,800
|
|
|
$
|
(60
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
61,800
|
|
|
$
|
(60
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 27, 2017
|
|
|
|
Less than 12 Months
|
|
|
12 Months or Greater
|
|
|
Total
|
|
|
Fair Value
|
|
|
Unrealized Loss
|
|
|
Fair Value
|
|
|
Unrealized Loss
|
|
|
Fair Value
|
|
|
Unrealized Loss
|
|
|
Money market funds
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Mutual funds
|
60,924
|
|
|
(61
|
)
|
|
—
|
|
|
—
|
|
|
60,924
|
|
|
(61
|
)
|
|
Corporate debt securities
|
1,675
|
|
|
(12
|
)
|
|
162
|
|
|
(3
|
)
|
|
1,837
|
|
|
(15
|
)
|
Total
|
$
|
62,599
|
|
|
$
|
(73
|
)
|
|
$
|
162
|
|
|
$
|
(3
|
)
|
|
$
|
62,761
|
|
|
$
|
(76
|
)
|
A summary of other income from available-for-sale securities recognized during the
thirteen and thirty-nine weeks ended
September 26, 2018
and
September 27, 2017
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
|
Thirty-Nine Weeks Ended
|
|
|
September 26
2018
|
|
|
September 27
2017
|
|
|
September 26
2018
|
|
|
September 27
2017
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
Dividend income
|
$
|
373
|
|
|
$
|
222
|
|
|
$
|
977
|
|
|
$
|
591
|
|
|
Interest income
|
—
|
|
|
19
|
|
|
7
|
|
|
58
|
|
|
Realized gain (loss) on sale of investments
|
1
|
|
|
(12
|
)
|
|
(15
|
)
|
|
(27
|
)
|
|
Unrealized gain (loss) on available-for-sale equity securities
|
62
|
|
|
—
|
|
|
1
|
|
|
—
|
|
Total other income, net
|
$
|
436
|
|
|
$
|
229
|
|
|
$
|
970
|
|
|
$
|
622
|
|
A summary of available-for-sale securities sold and gross realized gains and losses recognized during the
thirteen and thirty-nine weeks ended
September 26, 2018
and
September 27, 2017
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
|
Thirty-Nine Weeks Ended
|
|
|
September 26
2018
|
|
|
September 27
2017
|
|
|
September 26
2018
|
|
|
September 27
2017
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
Gross proceeds from sales and redemptions
|
$
|
—
|
|
|
$
|
584
|
|
|
$
|
2,144
|
|
|
$
|
1,212
|
|
|
Cost basis of sales and redemptions
|
—
|
|
|
597
|
|
|
2,160
|
|
|
1,239
|
|
|
Gross realized gains included in net income
|
—
|
|
|
1
|
|
|
2
|
|
|
1
|
|
|
Gross realized losses included in net income
|
—
|
|
|
(13
|
)
|
|
(18
|
)
|
|
(28
|
)
|
|
Amounts reclassified out of accumulated other comprehensive loss
|
—
|
|
|
14
|
|
|
16
|
|
|
28
|
|
Shake Shack Inc.
Form 10-Q
|
15
Realized gains and losses are determined on a specific identification method and are included in other income, net on the Condensed Consolidated Statements of
Income
.
We periodically review our marketable securities for other-than-temporary impairment. We consider factors such as the duration, severity and the reason for the decline in value, the potential recovery period and our intent to sell. As of
September 26, 2018
and
December 27, 2017
, the declines in the market value of our marketable securities investment portfolio were considered to be temporary in nature.
Other Financial Instruments
The carrying value of our other financial instruments, including accounts receivable, accounts payable, and accrued expenses as of
September 26, 2018
and
December 27, 2017
approximated their fair value due to the short-term nature of these financial instruments.
Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
Assets and liabilities that are measured at fair value on a non-recurring basis include our long-lived assets and indefinite-lived intangible assets. There were
no
impairments recognized during the
thirteen and thirty-nine weeks ended
September 26, 2018
and
September 27, 2017
.
Inventories as of
September 26, 2018
and
December 27, 2017
consisted of the following:
|
|
|
|
|
|
|
|
|
|
September 26
2018
|
|
|
December 27
2017
|
|
Food
|
$
|
977
|
|
|
$
|
874
|
|
Wine
|
72
|
|
|
69
|
|
Beer
|
95
|
|
|
85
|
|
Beverages
|
168
|
|
|
111
|
|
Retail merchandise
|
66
|
|
|
119
|
|
Inventories
|
$
|
1,378
|
|
|
$
|
1,258
|
|
16
|
Shake Shack Inc.
Form 10-Q
NOTE
6
: PROPERTY AND EQUIPMENT
Property and equipment as of
September 26, 2018
and
December 27, 2017
consisted of the following:
|
|
|
|
|
|
|
|
|
|
September 26
2018
|
|
|
December 27
2017
|
|
Leasehold improvements
|
$
|
197,565
|
|
|
$
|
166,963
|
|
Landlord funded assets
|
12,782
|
|
|
7,472
|
|
Equipment
|
36,325
|
|
|
31,608
|
|
Furniture and fixtures
|
12,381
|
|
|
10,128
|
|
Computer equipment and software
|
16,073
|
|
|
12,721
|
|
Construction in progress (includes landlord funded assets under construction)
|
44,302
|
|
|
16,458
|
|
Property and equipment, gross
|
319,428
|
|
|
245,350
|
|
Less: accumulated depreciation
|
77,726
|
|
|
58,255
|
|
Property and equipment, net
|
$
|
241,702
|
|
|
$
|
187,095
|
|
NOTE
7
: SUPPLEMENTAL BALANCE SHEET INFORMATION
The components of other current liabilities as of
September 26, 2018
and
December 27, 2017
are as follows:
|
|
|
|
|
|
|
|
|
|
September 26
2018
|
|
|
December 27
2017
|
|
Sales tax payable
|
$
|
2,787
|
|
|
$
|
1,813
|
|
Current portion of liabilities under tax receivable agreement
|
947
|
|
|
937
|
|
Gift card liability
|
1,358
|
|
|
1,472
|
|
Other
|
3,299
|
|
|
3,715
|
|
Other current liabilities
|
$
|
8,391
|
|
|
$
|
7,937
|
|
In January 2015, we executed a Third Amended and Restated Credit Agreement, which became effective on February 4, 2015 (together with the prior agreements and amendments, and as further amended, the "Revolving Credit Facility"), which provides for a revolving total commitment amount of
$50,000
, of which
$20,000
is available immediately. The Revolving Credit Facility will mature and all amounts outstanding will be due and payable
five
years from the effective date. The Revolving Credit Facility permits the issuance of letters of credit upon our request of up to
$10,000
. Borrowings under the Revolving Credit Facility bear interest at either: (i) LIBOR plus a percentage ranging from
2.3%
to
3.3%
or (ii) the prime rate plus a percentage ranging from
0.0%
to
0.8%
, depending on the type of borrowing made under the Revolving Credit Facility. As of
September 26, 2018
and
December 27, 2017
, there were
no
amounts outstanding under the Revolving Credit Facility. As of
September 26, 2018
, we had
$19,317
of availability under the Revolving Credit Facility, after giving effect to
$683
in outstanding letters of credit.
The Revolving Credit Facility is secured by a first-priority security interest in substantially all of the assets of SSE Holdings and the guarantors. The obligations under the Revolving Credit Facility are guaranteed by each of SSE Holdings' wholly-owned domestic subsidiaries (with certain exceptions).
Shake Shack Inc.
Form 10-Q
|
17
The Revolving Credit Facility contains a number of covenants that, among other things, limit our ability to, subject to specified exceptions, incur additional debt; incur additional liens and contingent liabilities; sell or dispose of assets; merge with or acquire other companies; liquidate or dissolve ourselves; pay dividends or make distributions; engage in businesses that are not in a related line of business; make loans, advances or guarantees; engage in transactions with affiliates; and make investments. In addition, the Revolving Credit Facility contains certain cross-default provisions. We are required to maintain a specified consolidated fixed-charge coverage ratio and a specified funded net debt to adjusted EBITDA ratio, both as defined under the Revolving Credit Facility. As of
September 26, 2018
, we were in compliance with all covenants.
As of
September 26, 2018
and
December 27, 2017
we had deemed landlord financing liabilities of
$19,867
and
$14,518
, respectively, for certain leases where we are involved in the construction of leased assets and are considered the accounting owner of the construction project.
Total interest costs incurred were
$633
and
$1,897
for the
thirteen and thirty-nine weeks ended
September 26, 2018
, respectively, and
$527
and
$1,260
for the
thirteen and thirty-nine weeks ended
September 27, 2017
, respectively. Total amounts capitalized into property and equipment were
$41
and
$127
for the
thirteen and thirty-nine weeks ended
September 26, 2018
, respectively, and
$51
and
$115
for the
thirteen and thirty-nine weeks ended
September 27, 2017
, respectively.
NOTE
9
: NON-CONTROLLING INTERESTS
We are the sole managing member of SSE Holdings and, as a result, consolidate the financial results of SSE Holdings. We report a non-controlling interest representing the economic interest in SSE Holdings held by the other members of SSE Holdings.
The Third Amended and Restated Limited Liability Company Agreement, as further amended, (the "LLC Agreement") of SSE Holdings provides that holders of LLC Interests may, from time to time, require SSE Holdings to redeem all or a portion of their LLC Interests for newly-issued shares of Class A common stock on a one-for-one basis. In connection with any redemption or exchange, we will receive a corresponding number of LLC Interests, increasing our total ownership interest in SSE Holdings.
Changes in our ownership interest in SSE Holdings while we retain our controlling interest in SSE Holdings will be accounted for as equity transactions. As such, future redemptions or direct exchanges of LLC Interests in SSE Holdings by the other members of SSE Holdings will result in a change in ownership and reduce the amount recorded as non-controlling interest and increase additional paid-in capital.
The following table summarizes the ownership interest in SSE Holdings as of
September 26, 2018
and
December 27, 2017
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 26, 2018
|
|
|
December 27, 2017
|
|
|
LLC Interests
|
|
|
Ownership%
|
|
|
LLC Interests
|
|
|
Ownership %
|
|
Number of LLC Interests held by Shake Shack Inc.
|
29,371,355
|
|
|
79.3
|
%
|
|
26,527,477
|
|
|
72.1
|
%
|
Number of LLC Interests held by non-controlling interest holders
|
7,688,921
|
|
|
20.7
|
%
|
|
10,250,007
|
|
|
27.9
|
%
|
Total LLC Interests outstanding
|
37,060,276
|
|
|
100.0
|
%
|
|
36,777,484
|
|
|
100.0
|
%
|
The weighted average ownership percentages for the applicable reporting periods are used to attribute net income and other comprehensive income to Shake Shack Inc. and the non-controlling interest holders. The non-controlling interest holders' weighted average ownership percentage for the
thirteen and thirty-nine weeks ended
September 26, 2018
was
21.8%
and
24.4%
, respectively.
The non-controlling interest holders' weighted average ownership percentage for the
thirteen and thirty-nine weeks ended
September 27, 2017
was
29.1%
and
29.7%
, respectively.
18
|
Shake Shack Inc.
Form 10-Q
The following table summarizes the effects of changes in ownership of SSE Holdings on our equity during the
thirteen and thirty-nine weeks ended
September 26, 2018
and
September 27, 2017
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
|
Thirty-Nine Weeks Ended
|
|
|
September 26
2018
|
|
|
September 27
2017
|
|
|
September 26
2018
|
|
|
September 27
2017
|
|
Net income attributable to Shake Shack Inc.
|
$
|
5,025
|
|
|
$
|
4,997
|
|
|
$
|
16,137
|
|
|
$
|
12,143
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
Net change related to available-for-sale securities
|
—
|
|
|
47
|
|
|
10
|
|
|
45
|
|
Transfers (to) from non-controlling interests:
|
|
|
|
|
|
|
|
|
Increase in additional paid-in capital as a result of the redemption of LLC Interests
|
7,274
|
|
|
841
|
|
|
14,633
|
|
|
2,883
|
|
|
Increase in additional paid-in capital as a result of activity under stock compensation plans
|
215
|
|
|
78
|
|
|
2,318
|
|
|
3,580
|
|
Total effect of changes in ownership interest on equity attributable to Shake Shack Inc.
|
$
|
12,514
|
|
|
$
|
5,963
|
|
|
$
|
33,098
|
|
|
$
|
18,651
|
|
During the
thirty-nine weeks ended
September 26, 2018
and
September 27, 2017
, an aggregate of
2,561,086
and
685,800
LLC Interests, respectively, were redeemed by non-controlling interest holders for newly-issued shares of Class A common stock, and we received
2,561,086
and
685,800
LLC Interests in connection with these redemptions for the
thirty-nine weeks ended
September 26, 2018
and
September 27, 2017
, respectively, increasing our total ownership interest in SSE Holdings.
During the
thirty-nine weeks ended
September 26, 2018
and
September 27, 2017
, we received an aggregate of
282,792
and
323,927
LLC Interests, respectively, in connection with the activity under our stock compensation plan.
NOTE
10
: EQUITY-BASED COMPENSATION
A summary of equity-based compensation expense recognized during the
thirteen and thirty-nine weeks ended
September 26, 2018
and
September 27, 2017
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
|
Thirty-Nine Weeks Ended
|
|
|
|
September 26
2018
|
|
|
September 27
2017
|
|
|
September 26
2018
|
|
|
September 27
2017
|
|
Stock options
|
$
|
719
|
|
|
$
|
816
|
|
|
$
|
2,319
|
|
|
$
|
2,643
|
|
Performance stock units
|
750
|
|
|
345
|
|
|
1,668
|
|
|
1,029
|
|
Restricted stock units
|
167
|
|
|
128
|
|
|
483
|
|
|
151
|
|
Equity-based compensation expense
|
$
|
1,636
|
|
|
$
|
1,289
|
|
|
$
|
4,470
|
|
|
$
|
3,823
|
|
Total income tax benefit recognized related to equity-based compensation
|
$
|
46
|
|
|
$
|
47
|
|
|
$
|
126
|
|
|
$
|
142
|
|
Amounts are included in general and administrative expense and labor and related expenses on the Condensed Consolidated Statements of
Income
.
Shake Shack Inc.
Form 10-Q
|
19
We are the sole managing member of SSE Holdings and, as a result, consolidate the financial results of SSE Holdings. SSE Holdings is treated as a partnership for U.S. federal and most applicable state and local income tax purposes. As a partnership, SSE Holdings is not subject to U.S. federal and certain state and local income taxes. Any taxable income or loss generated by SSE Holdings is passed through to and included in the taxable income or loss of its members, including us, on a pro rata basis. We are subject to U.S. federal income taxes, in addition to state and local income taxes with respect to our allocable share of any taxable income or loss of SSE Holdings, as well as any stand-alone income or loss generated by Shake Shack Inc. We are also subject to withholding taxes in foreign jurisdictions.
Income Tax Expense
A reconciliation of income tax expense computed at the U.S. federal statutory income tax rate to the recognized income tax expense is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
|
Thirty-Nine Weeks Ended
|
|
|
September 26
2018
|
|
|
September 27
2017
|
|
|
September 26
2018
|
|
|
September 27
2017
|
|
Expected U.S. federal income taxes at statutory rate
|
$
|
1,930
|
|
21.0
|
%
|
|
$
|
3,627
|
|
35.0
|
%
|
|
$
|
5,917
|
|
21.0
|
%
|
|
$
|
9,609
|
|
35.0
|
%
|
State and local income taxes, net of federal benefit
|
643
|
|
7.0
|
%
|
|
630
|
|
6.1
|
%
|
|
1,885
|
|
6.7
|
%
|
|
1,638
|
|
6.0
|
%
|
Foreign withholding taxes
|
298
|
|
3.2
|
%
|
|
292
|
|
2.8
|
%
|
|
1,100
|
|
3.9
|
%
|
|
705
|
|
2.6
|
%
|
Tax credits
|
(181
|
)
|
(2.0
|
)%
|
|
(399
|
)
|
(3.8
|
)%
|
|
(1,378
|
)
|
(4.9
|
)%
|
|
(777
|
)
|
(2.8
|
)%
|
Non-controlling interest
|
(430
|
)
|
(4.7
|
)%
|
|
(1,132
|
)
|
(10.9
|
)%
|
|
(1,615
|
)
|
(5.7
|
)%
|
|
(3,114
|
)
|
(11.3
|
)%
|
Other
|
(19
|
)
|
(0.1
|
)%
|
|
(524
|
)
|
(5.1
|
)%
|
|
(230
|
)
|
(0.8
|
)%
|
|
(524
|
)
|
(2.0
|
)%
|
Income tax expense
|
$
|
2,241
|
|
24.4
|
%
|
|
$
|
2,494
|
|
24.1
|
%
|
|
$
|
5,679
|
|
20.2
|
%
|
|
$
|
7,537
|
|
27.5
|
%
|
Our effective income tax rates for the
thirteen weeks ended
September 26, 2018
and
September 27, 2017
were
24.4%
and
24.1%
, respectively. The increase was primarily driven by
an
increase in our ownership interest in SSE Holdings, which increases our share of the taxable income of SSE Holdings,
as well as decreases in tax credits, which were partially offset by the decrease in the U.S. federal corporate income tax rate from 35% to 21% due to the enactment of the
Tax Cuts and Jobs Act of 2017 (the "TCJA")
.
Our weighted-average ownership interest in SSE Holdings was
78.2%
and
70.9%
for the
thirteen weeks ended
September 26, 2018
and
September 27, 2017
, respectively.
Our effective income tax rates for
thirty-nine weeks ended
September 26, 2018
and
September 27, 2017
were
20.2%
and
27.5%
, respectively. The decrease was primarily driven by the reduction of the U.S. federal corporate income tax rate from 35% to 21% due to the enactment of the TCJA, partially offset by the increase in our ownership interest in SSE Holdings, which increases our share of the taxable income of SSE Holdings, and higher foreign withholding taxes. Our weighted-average ownership interest in SSE Holdings was
75.6%
and
70.3%
for the
thirty-nine weeks ended
September 26, 2018
and
September 27, 2017
, respectively.
Deferred Tax Assets and Liabilities
During the
thirty-nine weeks ended
September 26, 2018
, we acquired an aggregate of
2,843,878
LLC Interests in connection with the redemption of LLC Interests and activity relating to our stock compensation plan. We recognized a deferred tax asset in the amount o
f
$37,498
associated with the basis difference in our investment in SSE Holdings upon acquisition of these LLC Interests. As
of
September 26, 2018
, the total deferred tax asset related to the basis difference in our investment in SSE Holdings was
$179,767
. However, a portion of the total basis difference will only reverse upon the eventual sale of our interest in SSE Holdings, which we expect would result in a capital loss. As of
September 26, 2018
, the total valuation allowance established against the deferred tax asset to which this portion relates was
$7,732
.
During the
thirty-nine weeks ended
September 26, 2018
, we also recognized
$11,996
of deferred tax assets related to additional tax basis increases generated from expected future payments under the Tax Receivable Agreement and related deductions for imputed interest on such payments. See "—Tax Receivable Agreement" for more information.
20
|
Shake Shack Inc.
Form 10-Q
We evaluate the realizability of our deferred tax assets on a quarterly basis and establish valuation allowances when it is more likely than not that all or a portion of a deferred tax asset may not be realized. As of
September 26, 2018
, we concluded, based on the weight of all available positive and negative evidence, that all of our deferred tax assets (except for those deferred tax assets described above relating to basis differences that are expected to result in a capital loss upon the eventual sale of our interest in SSE Holdings) are more likely than not to be realized. As such, no additional valuation allowance was recognized.
Uncertain Tax Positions
No
uncertain tax positions existed as of
September 26, 2018
. Shake Shack Inc. was formed in September 2014 and did not engage in any operations prior to the IPO and related organizational transactions. Shake Shack Inc. first filed tax returns for tax year 2014, which is the first tax year subject to examination by taxing authorities for U.S. federal and state income tax purposes. Additionally, although SSE Holdings is treated as a partnership for U.S. federal and state income taxes purposes, it is still required to file an annual U.S. Return of Partnership Income, which is subject to examination by the Internal Revenue Service ("IRS"). The statute of limitations has expired for tax years through 2014 for SSE Holdings.
Tax Receivable Agreement
Pursuant to our election under Section 754 of the Internal Revenue Code (the "Code"), we expect to obtain an increase in our share of the tax basis in the net assets of SSE Holdings when LLC Interests are redeemed or exchanged by the other members of SSE Holdings. We plan to make an election under Section 754 of the Code for each taxable year in which a redemption or exchange of LLC Interest occurs. We intend to treat any redemptions and exchanges of LLC Interests as direct purchases of LLC Interests for U.S. federal income tax purposes. These increases in tax basis may reduce the amounts that we would otherwise pay in the future to various tax authorities. They may also decrease gains (or increase losses) on future dispositions of certain capital assets to the extent tax basis is allocated to those capital assets.
On February 4, 2015, we entered into a tax receivable agreement with certain of the then-existing members of SSE Holdings (the "Tax Receivable Agreement") that provides for the payment by us of
85%
of the amount of any tax benefits that we actually realize, or in some cases are deemed to realize, as a result of (i) increases in our share of the tax basis in the net assets of SSE Holdings resulting from any redemptions or exchanges of LLC Interests, (ii) tax basis increases attributable to payments made under the Tax Receivable Agreement, and (iii) deductions attributable to imputed interest pursuant to the Tax Receivable Agreement (the "TRA Payments"). We expect to benefit from the remaining
15%
of any tax benefits that we may actually realize. The TRA Payments are not conditioned upon any continued ownership interest in SSE Holdings or us. The rights of each member of SSE Holdings, that is a party to the Tax Receivable Agreement, are assignable to transferees of their respective LLC Interests.
During the
thirty-nine weeks ended
September 26, 2018
, we acquired an aggregate of
2,561,086
LLC Interests in connection with the redemption of LLC Interests, which resulted in an increase in the tax basis of our investment in SSE Holdings subject to the provisions of the Tax Receivable Agreement. We recognized an additional liability in the amount of
$42,641
for the TRA Payments due to the redeeming members, representing
85%
of the aggregate tax benefits we expect to realize from the tax basis increases related to the redemption of LLC Interests, after concluding it was probable that such TRA Payments would be paid based on our estimates of future taxable income.
No
payments were made to the members of SSE Holdings pursuant to the Tax Receivable Agreement during the
thirty-nine weeks ended
September 26, 2018
. During the
thirty-nine weeks ended
September 27, 2017
, payments of
$1,471
, inclusive of interest, were made to the members of SSE Holdings pursuant to the Tax Receivable Agreement. As of
September 26, 2018
, the total amount of TRA Payments due under the Tax Receivable Agreement, was
$202,024
, of which
$947
was included in other current liabilities on the Condensed Consolidated Balance Sheet. See
Note 14
for more information relating to our liabilities under the Tax Receivable Agreement.
NOTE
12
: EARNINGS PER SHARE
Basic earnings per share of Class A common stock is computed by dividing net income attributable to Shake Shack Inc. by the weighted-average number of shares of Class A common stock outstanding during the period. Diluted earnings per share of Class A common stock is computed by dividing net income attributable to Shake Shack Inc. by the weighted-average number of shares of Class A common stock outstanding adjusted to give effect to potentially dilutive securities.
Shake Shack Inc.
Form 10-Q
|
21
The following table sets forth reconciliations of the numerators and denominators used to compute basic and diluted earnings per share of Class A common stock for the
thirteen and thirty-nine weeks ended
September 26, 2018
and
September 27, 2017
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
|
Thirty-Nine Weeks Ended
|
|
|
|
|
September 26
2018
|
|
|
September 27
2017
|
|
|
September 26
2018
|
|
|
September 27
2017
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net income
|
$
|
6,946
|
|
|
$
|
7,870
|
|
|
$
|
22,496
|
|
|
$
|
19,916
|
|
|
Less: net income attributable to non-controlling interests
|
1,921
|
|
|
2,873
|
|
|
6,359
|
|
|
7,773
|
|
|
Net income attributable to Shake Shack Inc.
|
$
|
5,025
|
|
|
$
|
4,997
|
|
|
$
|
16,137
|
|
|
$
|
12,143
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted-average shares of Class A common stock outstanding—basic
|
28,954
|
|
|
26,024
|
|
|
27,930
|
|
|
25,733
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
Stock options
|
857
|
|
|
411
|
|
|
809
|
|
|
486
|
|
|
|
Performance stock units
|
51
|
|
|
26
|
|
|
63
|
|
|
24
|
|
|
|
Restricted stock units
|
21
|
|
|
16
|
|
|
18
|
|
|
5
|
|
|
Weighted-average shares of Class A common stock outstanding—diluted
|
29,883
|
|
|
26,477
|
|
|
28,820
|
|
|
26,248
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share of Class A common stock—basic
|
$
|
0.17
|
|
|
$
|
0.19
|
|
|
$
|
0.58
|
|
|
$
|
0.47
|
|
Earnings per share of Class A common stock—diluted
|
$
|
0.17
|
|
|
$
|
0.19
|
|
|
$
|
0.56
|
|
|
$
|
0.46
|
|
Shares of our Class B common stock do not share in the earnings or losses of Shake Shack and are therefore not participating securities. As such, separate presentation of basic and diluted earnings per share of Class B common stock under the two-class method has not been presented.
The following table presents potentially dilutive securities excluded from the computations of diluted earnings per share of Class A common stock for the
thirteen and thirty-nine weeks ended
September 26, 2018
and
September 27, 2017
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
Thirty-Nine Weeks Ended
|
|
|
|
September 26
2018
|
|
|
September 27
2017
|
|
|
September 26
2018
|
|
|
September 27
2017
|
|
|
Stock options
(1)
|
—
|
|
|
18,676
|
|
(2)
|
—
|
|
|
18,676
|
|
(2)
|
Performance stock units
(1)
|
59,341
|
|
(3)
|
86,396
|
|
(3)
|
59,341
|
|
(3)
|
86,396
|
|
(3)
|
Shares of Class B common stock
|
7,688,921
|
|
(4)
|
10,567,792
|
|
(4)
|
7,688,921
|
|
(4)
|
10,567,792
|
|
(4)
|
(1) Represents the number of instruments outstanding at the end of the period. Application of the treasury stock method would reduce this amount if they had a dilutive effect and were included in the computation of diluted earnings per shares.
(2) Excluded from the computation of diluted earnings per share of Class A common stock because the exercise price of the stock options exceeded the average market price of our Class A common stock during the period ("out-of-the-money").
(3) Excluded from the computation of diluted earnings per share of Class A common stock because the performance conditions associated with these awards were not met assuming the end of the reporting period was the end of the performance period.
(4) Shares of our Class B common stock are considered potentially dilutive shares of Class A common stock. Amounts have been excluded from the computations of diluted earnings per share of Class A common stock because the effect would have been anti-dilutive under the if-converted and two-class methods.
22
|
Shake Shack Inc.
Form 10-Q
NOTE
13
: SUPPLEMENTAL CASH FLOW INFORMATION
The following table sets forth supplemental cash flow information for the
thirty-nine weeks ended
September 26, 2018
and
September 27, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
Thirty-Nine Weeks Ended
|
|
|
|
September 26
2018
|
|
|
September 27
2017
|
|
Cash paid for:
|
|
|
|
|
Income taxes, net of refunds
|
$
|
2,015
|
|
|
$
|
1,936
|
|
|
Interest, net of amounts capitalized
|
1,601
|
|
|
684
|
|
Non-cash investing activities:
|
|
|
|
|
Accrued purchases of property and equipment
|
17,697
|
|
|
10,138
|
|
|
Capitalized landlord assets for leases where we are deemed the accounting owner
|
4,478
|
|
|
9,095
|
|
|
Accrued purchases of marketable securities
|
—
|
|
|
307
|
|
|
Capitalized equity-based compensation
|
64
|
|
|
86
|
|
Non-cash financing activities:
|
|
|
|
|
Class A common stock issued in connection with the redemption of LLC Interests
|
2
|
|
|
—
|
|
|
Cancellation of Class B common stock in connection with the redemption of LLC Interests
|
(2
|
)
|
|
—
|
|
|
Establishment of liabilities under tax receivable agreement
|
42,641
|
|
|
12,918
|
|
NOTE
14
: COMMITMENTS AND CONTINGENCIES
Lease Commitments
We are obligated under various operating leases for Shacks and our home office space, expiring in various years through 2035. Under certain of these leases, we are liable for contingent rent based on a percentage of sales in excess of specified thresholds and are typically responsible for our proportionate share of real estate taxes, common area maintenance charges and utilities.
As security under the terms of several of our leases, we are obligated under letters of credit totaling
$160
as of
September 26, 2018
. The letters of credit expire in April 2019 and February 2026. In addition, in December 2013, we entered into an irrevocable standby letter of credit in conjunction with our home office lease in the amount of
$80
. The letter of credit expires in September 2019. In September 2017, we entered into an irrevocable standby letter of credit in conjunction with our new home office lease in the amount of
$603
. The letter of credit expires in August 2019 and renews automatically for
one
-year periods through January 2034.
Purchase Commitments
Purchase obligations include legally binding contracts, including commitments for the purchase, construction or remodeling of real estate and facilities, firm minimum commitments for inventory purchases, equipment purchases, marketing-related contracts, software acquisition/license commitments and service contracts. These obligations are generally short-term in nature and are recorded as liabilities when the related goods are received or services rendered. We also enter into
long-term, exclusive contracts with certain vendors to supply us with food, beverages and paper goods, obligating us to purchase specified quantities.
Legal Contingencies
In February 2018, a claim was filed against Shake Shack in California state court alleging certain violations of the California Labor Code. At a mediation between the parties, we agreed to settle the matter with the plaintiff and all other California employees who elect to participate in the settlement for
$1,200
. As of
September 26, 2018
, an accrual in the amount of
$1,200
was recorded for this matter and related expenses.
Shake Shack Inc.
Form 10-Q
|
23
We are subject to various legal proceedings, claims and liabilities, such as employment-related claims and slip and fall cases, which arise in the ordinary course of business and are generally covered by insurance. As of
September 26, 2018
, the amount of the ultimate liability with respect to these matters was not material.
Liabilities under Tax Receivable Agreement
As described in
Note 11
, we are a party to the Tax Receivable Agreement under which we are contractually committed to pay certain of the members of SSE Holdings
85%
of the amount of any tax benefits that we actually realize, or in some cases are deemed to realize, as a result of certain transactions. We are not obligated to make any payments under the Tax Receivable Agreement until the tax benefits associated with the transactions that gave rise to the payments are realized. Amounts payable under the Tax Receivable Agreement are contingent upon, among other things, (i) generation of future taxable income over the term of the Tax Receivable Agreement and (ii) future changes in tax laws. If we do not generate sufficient taxable income in the aggregate over the term of the Tax Receivable Agreement to utilize the tax benefits, then we would not be required to make the related TRA Payments. During the
thirty-nine weeks ended
September 26, 2018
and
September 27, 2017
, we recognized liabilities totaling
$42,641
and
$12,918
, respectively, relating to our obligations under the Tax Receivable Agreement, after concluding that it was probable that we would have sufficient future taxable income over the term of the Tax Receivable Agreement to utilize the related tax benefits. As of
September 26, 2018
and
December 27, 2017
, our total obligations under the Tax Receivable Agreement, including accrued interest, were
$202,024
and
$159,373
, respectively. There were no transactions subject to the Tax Receivable Agreement for
which we did not recognize the related liability, as we concluded that we would have sufficient future taxable income to utilize all of the related tax benefits.
NOTE
15
: RELATED PARTY TRANSACTIONS
Union Square Hospitality Group
The Chairman of our Board of Directors serves as the Chief Executive Officer of Union Square Hospitality Group, LLC. As a result, Union Square Hospitality Group, LLC and its subsidiaries, set forth below, are considered related parties.
USHG, LLC
Effective January 2015, we entered into an Amended and Restated Management Services Agreement with USHG, LLC ("USHG"), in which USHG provides reduced management services to SSE Holdings comprised of executive leadership from members of its senior management, advisory and development services and limited leadership development and human resources services. The initial term of the Amended and Restated Management Services Agreement is through December 31, 2019, with renewal periods.
No
amounts were paid to
USHG for general corporate expenses for the
thirteen weeks ended
September 26, 2018
and
September 27, 2017
. Amounts paid to
USHG for general corporate expenses were
$2
and
$6
for the
thirty-nine weeks ended
September 26, 2018
and
September 27, 2017
, respectively.
These amounts are included in general and administrative expenses on the Condensed Consolidated Statements of
Income
.
No
amounts were payable to USHG as of
September 26, 2018
and
December 27, 2017
.
No
amounts were due from USHG as of
September 26, 2018
and
December 27, 2017
.
Hudson Yards Sports and Entertainment
In fiscal 2011, we entered into a Master License Agreement (as amended, "MLA") with Hudson Yards Sports and Entertainment LLC ("HYSE") to operate Shake Shack branded limited menu concession stands in sports and entertainment venues within the United States. The agreement expires in January 2027 and includes
five
consecutive
five
-year renewal options at HYSE's option. As consideration for these rights, HYSE pays us a license fee based on a percentage of net food sales, as defined in the MLA. HYSE also pays us a percentage of profits on sales of branded beverages, as defined in the MLA. Amount paid to us by the HYSE for the
thirteen and thirty-nine weeks ended
September 26, 2018
were
$200
and
$311
, respectively. Amounts paid to us by HYSE for the
thirteen and thirty-nine weeks ended
September 27, 2017
were
$193
and
$328
, respectively.
These amounts are included in licensing revenue on the Condensed Consolidated Statements of
Income
.
Total amounts due from HYSE as of
September 26, 2018
and
December 27, 2017
were
$82
and
$18
, respectively, which are included in prepaid expenses and other current assets on the Condensed Consolidated Balance Sheets
.
24
|
Shake Shack Inc.
Form 10-Q
Madison Square Park Conservancy
The Chairman of our Board of Directors serves as a director of the Madison Square Park Conservancy ("MSP Conservancy"), with which we have a license agreement and pay license fees to operate our Madison Square Park Shack. Amounts paid to MSP Conservancy as rent amounted to
$203
and
$673
for the
thirteen and thirty-nine weeks ended
September 26, 2018
, respectively. Amounts paid to MSP Conservancy as rent amounted to
$199
and
$531
for the
thirteen and thirty-nine weeks ended
September 27, 2017
, respectively. These amounts are included in occupancy and related expenses on the Condensed Consolidated Statements of
Income
.
No
amounts were due to MSP Conservancy as of
September 26, 2018
and
December 27, 2017
.
No
amounts were paid to us from MSP Conservancy during the
thirteen and thirty-nine weeks ended
September 26, 2018
.
No
amounts were paid to us from MSP Conservancy during the
thirteen weeks ended
September 27, 2017
. Amounts paid to us during the
thirty-nine weeks ended
September 27, 2017
totaled
$200
.
No
amounts were due to us from MSP Conservancy as of
September 26, 2018
and
December 27, 2017
.
Share Our Strength
The Chairman of our Board of Directors serves as a director of Share Our Strength, for which Shake Shack holds the "Great American Shake Sale" every year during the month of May to raise money and awareness for childhood hunger. During the Great American Shake Sale, we encourage guests to donate money to Share Our Strength's No Kid Hungry campaign in exchange for a coupon for a free cake-themed shake. All of the guest donations we collect go directly to Share Our Strength.
During the
thirty-nine weeks ended
September 26, 2018
and
September 27, 2017
the Great American Shake Sale raised
$343
and
$631
, respectively.
No
amounts were raised for both
thirteen weeks ended
September 26, 2018
and
September 27, 2017
. All proceeds were remitted to Share Our Strength in the respective years. We incurred costs of approximately
$53
for the
thirty-nine weeks ended
September 26, 2018
.
No
costs were incurred for the
thirteen weeks ended
September 26, 2018
. We incurred costs of approximately
$29
and
$148
for the
thirteen and thirty-nine weeks ended
September 27, 2017
, respectively. These costs represents the cost of the free shakes redeemed and are included in general and administrative expenses on the Condensed Consolidated Statements of Income.
Mobo Systems, Inc.
The Chairman of our Board of Directors serves as a director of Mobo Systems, Inc. (also known as "Olo"), a platform we use in connection with our mobile ordering application. Amounts paid to Olo during the
thirteen and thirty-nine weeks ended
September 26, 2018
were
$28
and
$80
, respectively. Amounts paid to Olo during the
thirteen and thirty-nine weeks ended
September 27, 2017
were
$19
and
$57
, respectively. These amounts are included in other operating expenses on the
Condensed Consolidated Statements of
Income
.
No
amounts were payable to Olo as of
September 26, 2018
and
December 27, 2017
.
Square, Inc.
In July 2017, our Chief Executive Officer joined the Board of Directors of Square, Inc. ("Square"). We currently use certain point-of-sale applications, payment processing services, hardware and other enterprise platform services in connection with the processing of a limited amount of sales at certain of our Shacks, sales for certain off-site events and in connection with our kiosk technology. Additionally, we partnered with Caviar, Square’s food ordering service for delivery services, in a number of cities for limited-time delivery promotions.
Tax Receivable Agreement
As described in
Note 11
, we entered into a tax receivable agreement with certain members of SSE Holdings that provides for the payment by us
of
85%
of the amount of tax benefits, if any, that Shake Shack actually realizes or in some cases is deemed to realize as a result of certain transactions.
No
payments were made to the members of SSE Holdings pursuant to the Tax Receivable Agreement during the
thirteen and thirty-nine weeks ended
September 26, 2018
.
No
payments were paid to the members during the
thirteen weeks ended
September 27, 2017
. During the
thirty-nine weeks ended
September 27, 2017
, payments totaling
$1,471
, inclusive of interest, were made to the members of SSE Holdings pursuant to the Tax Receivable Agreement. As of
September 26, 2018
and
December 27, 2017
, total amounts due under the Tax Receivable Agreement were
$202,024
and
$159,373
, respectively.
Shake Shack Inc.
Form 10-Q
|
25
Distributions to Members of SSE Holdings
Under the terms of the SSE Holdings LLC Agreement, SSE Holdings is obligated to make tax distributions to its members
. During the
thirteen and thirty-nine weeks ended
September 26, 2018
distributions paid to non-controlling interest holders were
$22
and
$692
,
respectively.
During the
thirteen and thirty-nine weeks ended
September 27, 2017
distributions paid to non-controlling interest holders were
$13
and
$2,392
, respectively.
No
tax distributions were payable to non-controlling interest holders as of
September 26, 2018
and
December 27, 2017
.
26
|
Shake Shack Inc.
Form 10-Q