SHAKE SHACK INC.
10-Ks and 10-Qs
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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(Mark One)
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended
June 29, 2016
OR
|
o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from _______ to ______
Commission file number:
001-36823
SHAKE SHACK INC.
(Exact name of registrant as specified in its charter)
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Delaware
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47-1941186
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(State or other jurisdiction of
incorporation or organization)
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(IRS Employer
Identification No.)
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24 Union Square East, 5th Floor
New York, New York
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10003
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(Address of principal executive offices)
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(Zip Code)
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(646) 747-7200
(Registrant's telephone number, including area code)
Not applicable
(Former name or former address, if changed since last report)
Indicate by check mark if the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
þ
Yes
o
No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule-405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
þ
Yes
o
No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
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Large accelerated filer
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o
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Accelerated filer
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o
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Non-accelerated filer
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þ
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(Do not check if a smaller reporting company)
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Smaller reporting company
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o
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
o
Yes
þ
No
As of
August 3, 2016
, there were
23,953,852
shares of Class A common stock outstanding and
12,375,898
shares of Class B common stock outstanding.
SHAKE SHACK INC.
TABLE OF CONTENTS
Cautionary Note Regarding Forward-Looking Information
This Quarterly Report on Form 10-Q ("Form 10-Q") contains forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, which are subject to risks and uncertainties. All statements other than statements of historical fact are forward-looking statements. Many of the forward-looking statements are located in Part I, Item 2 of this Form 10-Q under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations." Forward-looking statements discuss our current expectations and projections relating to our financial position, results of operations, plans, objectives, future performance and business. You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as "aim," "anticipate," "believe," "estimate," "expect," "forecast," "outlook," "potential," "project," "projection," "plan," "intend," "seek," "may," "could," "would," "will," "should," "can," "can have," "likely," the negatives thereof and other similar expressions. All forward-looking statements are subject to known and unknown risks, uncertainties and other important factors that may cause actual results to be materially different.
While we believe that our assumptions are reasonable, it is very difficult to predict the impact of known factors, and it is impossible to anticipate all factors that could affect our actual results. All forward-looking statements are expressly qualified in their entirety by these cautionary statements. You should evaluate all forward-looking statements made in this Form 10-Q in the context of the risks and uncertainties disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended
December 30, 2015
filed with the U.S. Securities and Exchange Commission (the "SEC") under the heading "Risk Factors."
The forward-looking statements included in this Form 10-Q are made only as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law.
Shake Shack Inc.
Form 10-Q
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1
Form 10-Q
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1
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Page
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2
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Shake Shack Inc.
Form 10-Q
Form 10-Q
SHAKE SHACK INC.
(UNAUDITED)
(in thousands, except share and per share amounts)
|
June 29
2016 |
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December 30
2015 |
|
||||||
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ASSETS
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|||||||||
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Current assets:
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|||||||||
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Cash and cash equivalents
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$
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68,371
|
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$
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70,849
|
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|||
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Accounts receivable
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3,040
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4,217
|
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|||||
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Inventories
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635
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543
|
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|||||
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Prepaid expenses and other current assets
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3,872
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3,325
|
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|||||
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Total current assets
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75,918
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78,934
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|||||
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Property and equipment, net
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111,296
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93,041
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|||||
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Deferred income taxes, net
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274,625
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201,957
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|||||
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Other assets
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5,528
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5,615
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|||||
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TOTAL ASSETS
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$
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467,367
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$
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379,547
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|||
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LIABILITIES AND STOCKHOLDERS' EQUITY
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|||||||||
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Current liabilities:
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|||||||||
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Accounts payable
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$
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5,219
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$
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6,786
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|||
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Accrued expenses
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6,615
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6,801
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|||||
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Accrued wages and related liabilities
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4,401
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5,804
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|||||
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Other current liabilities
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5,840
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4,614
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|||||
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Total current liabilities
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22,075
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24,005
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|||||
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Note payable
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—
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313
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|||||
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Deferred rent
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26,219
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22,927
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|||||
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Liabilities under tax receivable agreement, net of current portion
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236,289
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170,933
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|||||
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Other long-term liabilities
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4,155
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4,350
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|||||
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Total liabilities
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288,738
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222,528
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|||||
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Commitments and contingencies
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|||||||
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Stockholders' equity:
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|||||||||
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Preferred stock, no par value—10,000,000 shares authorized; none issued and outstanding as of June 29, 2016 and December 30, 2015.
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—
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—
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|||||
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Class A common stock, $0.001 par value—200,000,000 shares authorized; 23,344,339 and 19,789,259 shares issued and outstanding as of June 29, 2016 and December 30, 2015, respectively.
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23
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20
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|||||
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Class B common stock, $0.001 par value—35,000,000 shares authorized; 12,983,596 and 16,460,741 shares issued and outstanding as of June 29, 2016 and December 30, 2015, respectively.
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13
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16
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|||||
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Additional paid-in capital
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119,415
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96,311
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|||||
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Retained earnings
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9,033
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4,273
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|||||
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Accumulated other comprehensive loss
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(10
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)
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(5
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)
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|||||
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Total stockholders' equity attributable to Shake Shack Inc.
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128,474
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100,615
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|||||
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Non-controlling interests
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50,155
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56,404
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|||||
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Total equity
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178,629
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157,019
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|||||
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
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$
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467,367
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$
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379,547
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|||
See accompanying Notes to Condensed Consolidated Financial Statements.
Shake Shack Inc.
Form 10-Q
|
3
Form 10-Q
|
3
SHAKE SHACK INC.
CONDENSED CONSOLIDATED STATEMENTS OF
INCOME (LOSS)
(UNAUDITED)
(in thousands, except per share amounts)
|
Thirteen Weeks Ended
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Twenty-Six Weeks Ended
|
||||||||||||||||
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June 29
2016 |
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July 1
2015 |
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June 29
2016 |
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July 1
2015 |
|
||||||||||
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Shack sales
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$
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64,406
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$
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46,583
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$
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116,559
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$
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82,630
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|||||
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Licensing revenue
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2,066
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1,867
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4,078
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3,628
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|||||||||
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TOTAL REVENUE
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66,472
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48,450
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120,637
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86,258
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|
|||||||||
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Shack-level operating expenses:
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|||||||||||||||||
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Food and paper costs
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18,104
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13,717
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33,136
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24,721
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|||||||||
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Labor and related expenses
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15,262
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11,168
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28,424
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20,269
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|||||||||
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Other operating expenses
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5,979
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3,723
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10,898
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7,203
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|||||||||
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Occupancy and related expenses
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5,209
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3,859
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9,532
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7,042
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|||||||||
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General and administrative expenses
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7,496
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6,052
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14,380
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24,437
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|||||||||
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Depreciation expense
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3,404
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2,447
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6,510
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4,638
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|||||||||
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Pre-opening costs
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2,085
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1,240
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4,110
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2,653
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|||||||||
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TOTAL EXPENSES
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57,539
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42,206
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106,990
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90,963
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|||||||||
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OPERATING INCOME (LOSS)
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8,933
|
|
6,244
|
|
13,647
|
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(4,705
|
)
|
|||||||||
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Interest expense, net
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68
|
|
84
|
|
132
|
|
162
|
|
|||||||||
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INCOME (LOSS) BEFORE INCOME TAXES
|
8,865
|
|
6,160
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|
13,515
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|
(4,867
|
)
|
|||||||||
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Income tax expense
|
2,316
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|
1,015
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|
3,615
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|
1,248
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|
|||||||||
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NET INCOME (LOSS)
|
6,549
|
|
5,145
|
|
9,900
|
|
(6,115
|
)
|
|||||||||
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Less: net income attributable to non-controlling interests
|
3,251
|
|
4,027
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|
5,140
|
|
5,435
|
|
|||||||||
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NET INCOME (LOSS) ATTRIBUTABLE TO SHAKE SHACK INC.
|
$
|
3,298
|
|
$
|
1,118
|
|
$
|
4,760
|
|
$
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(11,550
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)
|
|||||
|
Earnings (loss) per share of Class A common stock:
|
|||||||||||||||||
|
Basic
|
$
|
0.15
|
|
$
|
0.09
|
|
$
|
0.22
|
|
$
|
(0.96
|
)
|
|||||
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Diluted
|
$
|
0.14
|
|
$
|
0.08
|
|
$
|
0.22
|
|
$
|
(0.96
|
)
|
|||||
|
Weighted-average shares of Class A common stock outstanding:
|
|||||||||||||||||
|
Basic
|
22,553
|
|
12,058
|
|
21,453
|
|
12,006
|
|
|||||||||
|
Diluted
|
23,050
|
|
13,339
|
|
21,931
|
|
12,006
|
|
|||||||||
See accompanying Notes to Condensed Consolidated Financial Statements.
4
|
Shake Shack Inc.
Form 10-Q
Form 10-Q
SHAKE SHACK INC.
(UNAUDITED)
(in thousands)
|
Thirteen Weeks Ended
|
Twenty-Six Weeks Ended
|
||||||||||||||||
|
June 29
2016 |
|
July 1
2015 |
|
June 29
2016 |
|
July 1
2015 |
|
||||||||||
|
Net income (loss)
|
$
|
6,549
|
|
$
|
5,145
|
|
$
|
9,900
|
|
$
|
(6,115
|
)
|
|||||
|
Other comprehensive loss, net of tax:
|
|||||||||||||||||
|
Available-for-sale securities
(1)
:
|
|||||||||||||||||
|
Change in net unrealized holding losses
|
(6
|
)
|
—
|
|
(8
|
)
|
—
|
|
|||||||||
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Reclassification adjustments for net (gains) losses included in net income (loss)
|
—
|
|
—
|
|
—
|
|
—
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|
|||||||||
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OTHER COMPREHENSIVE LOSS
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(6
|
)
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—
|
|
(8
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)
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—
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|
|||||||||
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COMPREHENSIVE INCOME (LOSS)
|
6,543
|
|
5,145
|
|
9,892
|
|
(6,115
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)
|
|||||||||
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Less: comprehensive income attributable to non-controlling interests
|
3,249
|
|
4,027
|
|
5,137
|
|
5,435
|
|
|||||||||
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COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO SHAKE SHACK INC.
|
$
|
3,294
|
|
$
|
1,118
|
|
$
|
4,755
|
|
$
|
(11,550
|
)
|
|||||
See accompanying Notes to Condensed Consolidated Financial Statements.
Shake Shack Inc.
Form 10-Q
|
5
Form 10-Q
|
5
SHAKE SHACK INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
(in thousands, except share amounts)
|
Class A
Common Stock
|
Class B
Common Stock
|
Additional
Paid-In
Capital
|
|
Retained Earnings
|
|
Accumulated Other Comprehensive Loss
(1)
|
|
Non-
Controlling
Interest
|
|
Total
Equity
|
|
|||||||||||||||||||||||
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
|||||||||||||||||||||||||||
|
BALANCE, DECEMBER 30, 2015
|
19,789,259
|
|
$
|
20
|
|
16,460,741
|
|
$
|
16
|
|
$
|
96,311
|
|
$
|
4,273
|
|
$
|
(5
|
)
|
$
|
56,404
|
|
$
|
157,019
|
|
|||||||||
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Net income
|
|
|
|
|
|
4,760
|
|
|
5,140
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|
9,900
|
|
||||||||||||||||||||||
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Other comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
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(5
|
)
|
(3
|
)
|
(8
|
)
|
||||||||||||||||
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Equity-based compensation
|
|
|
|
|
|
|
|
2,302
|
|
|
|
|
|
|
|
2,302
|
|
|||||||||||||||||
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Stock option exercises
|
77,935
|
|
—
|
|
|
|
|
|
373
|
|
|
|
|
|
1,197
|
|
1,570
|
|
||||||||||||||||
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Income tax effect of stock compensation plans
|
|
|
|
|
|
|
|
|
31
|
|
|
|
|
|
4
|
|
35
|
|
||||||||||||||||
|
Redemption of LLC Interests
|
3,477,145
|
|
3
|
|
(3,477,145
|
)
|
(3
|
)
|
10,378
|
|
|
|
|
|
(10,378
|
)
|
—
|
|
||||||||||||||||
|
Establishment of liabilities under tax receivable agreement and related changes to deferred tax assets associated with increases in tax basis
|
|
|
|
|
|
|
|
|
10,020
|
|
|
|
|
|
|
|
10,020
|
|
||||||||||||||||
|
Distributions paid and payable to non-controlling interest holders
|
(2,209
|
)
|
(2,209
|
)
|
||||||||||||||||||||||||||||||
|
BALANCE, JUNE 29, 2016
|
23,344,339
|
|
$
|
23
|
|
12,983,596
|
|
$
|
13
|
|
$
|
119,415
|
|
$
|
9,033
|
|
$
|
(10
|
)
|
$
|
50,155
|
|
$
|
178,629
|
|
|||||||||
|
(1)
|
Accumulated Other Comprehensive Loss consists solely of net unrealized gains and losses associated with our available-for-sale securities.
|
See accompanying Notes to Condensed Consolidated Financial Statements.
6
|
Shake Shack Inc.
Form 10-Q
Form 10-Q
SHAKE SHACK INC.
(UNAUDITED)
(in thousands)
|
Twenty-Six Weeks Ended
|
||||||||||||
|
June 29
2016 |
|
July 1
2015 |
|
|||||||||
|
OPERATING ACTIVITIES
|
||||||||||||
|
Net income (loss) (including amounts attributable to non-controlling interests)
|
$
|
9,900
|
|
$
|
(6,115
|
)
|
||||||
|
Adjustments to reconcile net income (loss) to net cash provided by operating activities
|
||||||||||||
|
Depreciation expense
|
6,510
|
|
4,638
|
|
||||||||
|
Equity-based compensation
|
2,240
|
|
14,337
|
|
||||||||
|
Deferred income taxes
|
(21
|
)
|
—
|
|
||||||||
|
Non-cash interest expense
|
141
|
|
135
|
|
||||||||
|
Excess tax benefits on equity-based compensation
|
(35
|
)
|
—
|
|
||||||||
|
Changes in operating assets and liabilities:
|
||||||||||||
|
Accounts receivable
|
1,740
|
|
(640
|
)
|
||||||||
|
Inventories
|
(92
|
)
|
47
|
|
||||||||
|
Prepaid expenses and other current assets
|
169
|
|
(805
|
)
|
||||||||
|
Other assets
|
(492
|
)
|
1,657
|
|
||||||||
|
Accounts payable
|
347
|
|
192
|
|
||||||||
|
Accrued expenses
|
2,497
|
|
(617
|
)
|
||||||||
|
Accrued wages and related liabilities
|
(1,403
|
)
|
1,306
|
|
||||||||
|
Other current liabilities
|
409
|
|
455
|
|
||||||||
|
Deferred rent
|
2,768
|
|
3,348
|
|
||||||||
|
Other long-term liabilities
|
(242
|
)
|
(306
|
)
|
||||||||
|
NET CASH PROVIDED BY OPERATING ACTIVITIES
|
24,436
|
|
17,632
|
|
||||||||
|
INVESTING ACTIVITIES
|
||||||||||||
|
Purchases of property and equipment
|
(26,548
|
)
|
(16,929
|
)
|
||||||||
|
Purchases of marketable securities
|
(378
|
)
|
—
|
|
||||||||
|
Sales of marketable securities
|
322
|
|
—
|
|
||||||||
|
NET CASH USED IN INVESTING ACTIVITIES
|
(26,604
|
)
|
(16,929
|
)
|
||||||||
|
FINANCING ACTIVITIES
|
||||||||||||
|
Payments on promissory note
|
(313
|
)
|
—
|
|
||||||||
|
Proceeds from revolving credit facility
|
—
|
|
4,000
|
|
||||||||
|
Payments on revolving credit facility
|
—
|
|
(36,000
|
)
|
||||||||
|
Deferred financing costs
|
—
|
|
(92
|
)
|
||||||||
|
Proceeds from issuance of Class A common stock sold in initial public offering, net of underwriting discounts, commissions and offering costs
|
—
|
|
109,362
|
|
||||||||
|
Proceeds from issuance of Class B common stock
|
—
|
|
30
|
|
||||||||
|
Distributions paid to non-controlling interest holders
|
(1,602
|
)
|
—
|
|
||||||||
|
Distributions paid to members prior to the initial public offering
|
—
|
|
(11,125
|
)
|
||||||||
|
Proceeds from stock option exercises
|
1,570
|
|
—
|
|
||||||||
|
Employee withholding taxes related to net settled equity awards
|
—
|
|
(4,636
|
)
|
||||||||
|
Excess tax benefits from equity-based compensation
|
35
|
|
—
|
|
||||||||
|
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
|
(310
|
)
|
61,539
|
|
||||||||
|
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
(2,478
|
)
|
62,242
|
|
||||||||
|
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
|
70,849
|
|
2,677
|
|
||||||||
|
CASH AND CASH EQUIVALENTS AT END OF PERIOD
|
$
|
68,371
|
|
$
|
64,919
|
|
||||||
See accompanying Notes to Condensed Consolidated Financial Statements.
Shake Shack Inc.
Form 10-Q
|
7
Form 10-Q
|
7
SHAKE SHACK INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
|
Page
|
||
8
|
Shake Shack Inc.
Form 10-Q
Form 10-Q
Shake Shack Inc. ("we," "us," "our," "Shake Shack" and the "Company") was formed on September 23, 2014 as a Delaware corporation for the purpose of facilitating an initial public offering and other related transactions in order to carry on the business of SSE Holdings, LLC and its subsidiaries ("SSE Holdings").
On February 4, 2015, we completed an initial public offering ("IPO") of
5,750,000
shares of our Class A common stock at a public offering price of
$21.00
per share. We used the net proceeds from the IPO to purchase newly-issued membership interests from SSE Holdings ("LLC Interests"). Following the organizational transactions completed in connection with the IPO, we became the sole managing member of SSE Holdings. As sole managing member, we operate and control all of the business and affairs of SSE Holdings and, as a result, consolidate the financial results of SSE Holdings. We report a non-controlling interest representing the economic interest in SSE Holdings held by the other members of SSE Holdings. As of
June 29, 2016
we owned
64.3%
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, hot dogs, crinkle-cut fries, shakes, frozen custard, beer, wine and more. As of
June 29, 2016
, there were
95
Shacks in operation, system-wide, of which
51
were domestic company-operated Shacks,
six
were domestic licensed Shacks and
38
were international licensed Shacks.
NOTE
2
: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include the accounts of Shake Shack Inc. and its subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. These interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") and on a basis consistent in all material respects with the accounting policies described in our Annual Report on Form 10-K for the fiscal year ended
December 30, 2015
("2015 Form 10-K"). In our opinion, all adjustments, which are normal and recurring in nature, necessary for a fair presentation of our financial position and results of operation have been included. Certain reclassifications have been made to prior period amounts to conform to the current year presentation. Operating results for interim periods are not necessarily indicative of the results that may be expected for a full fiscal year.
The accompanying Condensed Consolidated Balance Sheet as of
December 30, 2015
has been derived from the audited financial statements at that date but does not include all of the disclosures required by GAAP. These interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes thereto included in our 2015 Form 10-K.
In February 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update No. 2015-02,
Amendments to the Consolidation Analysis
("ASU 2015-02"). ASU 2015-02 amended the existing guidance to, among other things, modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities (VIEs) or voting interest entities, and eliminate the presumption that a general partner should consolidate a limited partnership. We adopted ASU 2015-02 on December 31, 2015. Prior to the adoption of ASU 2015-02, we consolidated SSE Holdings as a voting interest entity. Pursuant to the provisions of ASU 2015-02, SSE Holdings is now considered a VIE. Shake Shack Inc. is the primary beneficiary as we have the majority economic interest in SSE Holdings and, as the sole managing member, have decision making authority that significantly affects the economic performance of the entity, while the limited partners have no substantive kick-out or participating rights. As a result, we will continue to consolidate SSE Holdings. The assets and liabilities of SSE Holdings represent substantially all of our consolidated assets and liabilities with the exception of certain deferred taxes and liabilities under the Tax Receivable Agreement. As of
June 29, 2016
and
December 30, 2015
, the net assets of SSE Holdings were
$140,463
and
$124,214
, respectively. The assets of SSE Holdings are subject to certain restrictions in SSE Holdings' revolving credit agreements. See
Note 7
for more information.
Shake Shack Inc.
Form 10-Q
|
9
Form 10-Q
|
9
Fiscal Year
We operate on a 52/53 week fiscal year ending on the last Wednesday in December. Fiscal
2016
contains
52
weeks and ends on
December 28, 2016
. Fiscal
2015
contained
52
weeks and ended on
December 30, 2015
. Unless otherwise stated, references to years in this report relate to fiscal years.
Use of Estimates
The preparation of these condensed consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of sales and expenses during the reporting period. Actual results could differ from those estimates.
Recently Adopted Accounting Pronouncements
In April 2015, the FASB issued Accounting Standards Update No. 2015-05,
Customers' Accounting for Fees Paid in a Cloud Computing Arrangement
("ASU 2015-05"). ASU 2015-05 provides guidance in evaluating whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the software license element of the arrangement should be accounted for as an acquisition of a software license. If the arrangement does not contain a software license, it should be accounted for as a service contract. We adopted ASU 2015-05 on December 31, 2015 and elected to adopt the standard on a prospective basis. The adoption of ASU 2015-05 did not have a material impact on our consolidated financial statements.
In August 2015, the FASB issued Accounting Standards Update No. 2015-15,
Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements
("ASU 2015-15"), which clarifies the guidance set forth in Accounting Standards Update No. 2015-03,
Simplifying the Presentation of Debt Issuance Costs
("ASU 2015-03"), issued in April 2015. ASU 2015-03 requires that debt issuance costs related to a recognized liability be presented on the balance sheet as a direct reduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected. ASU 2015-15 provides additional guidance regarding debt issuance costs associated with line-of-credit arrangements, stating that the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred issuance costs ratably over the term of the line-of-credit arrangement. We adopted ASU 2015-03 and ASU 2015-15 on December 31, 2015 and the adoption did not have a material effect our consolidated financial statements.
Recently Issued Accounting Pronouncements
In March 2016, the FASB issued Accounting Standards Update No. 2016-09,
Improvements to Employee Share-Based Payment Accounting
("ASU 2016-09"). ASU 2016-09 simplifies certain aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, an option to recognize gross stock compensation expense with actual forfeitures recognized as they occur, as well as certain classifications on the statement of cash flows. ASU 2016-09 is effective for reporting periods beginning after December 15, 2016. Early adoption is permitted. We are currently evaluating the impact ASU 2016-09 will have on our consolidated financial statements.
In March 2016, the FASB issued Accounting Standards Update No. 2016-04,
Recognition of Breakage for Certain Prepaid Stored-Value Products
("ASU 2016-04"). ASU 2016-04 entitles a company to derecognize amounts related to expected breakage in proportion to the pattern of rights expected to be exercised by the product holder to the extent that it is probable a significant reversal of the recognized breakage amount will not subsequently occur. ASU 2016-04 is effective for reporting periods beginning after December 15, 2017 and is to be applied retrospectively. Early adoption is permitted. We are currently evaluating the impact ASU 2016-04 will have on our consolidated financial statements.
In February 2016, the FASB issued Accounting Standards Update No. 2016-02,
Leases
("ASU 2016-02"). ASU 2016-02 establishes a new lease accounting model, that, for many companies, eliminates the concept of operating leases and requires entities to record assets and liabilities related to leases on the balance sheet for certain types of leases. ASU 2016-02 is effective for reporting periods beginning after December 15, 2018. Early adoption will be permitted for all entities. We are currently evaluating the impact ASU 2016-02 will have on our consolidated financial statements.
In January 2016, the FASB issued Accounting Standards Update No. 2016-01,
Recognition and Measurement of Financial Assets and Financial Liabilities
("ASU 2016-01"). ASU 2016-01 requires: (i) equity investments (except those accounted for under the equity
10
|
Shake Shack Inc.
Form 10-Q
Form 10-Q
method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; (ii) simplification of the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; (iii) elimination of the requirement for public entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; (iv) public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (v) an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; (vi) separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements; and (vii) clarification that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. ASU 2016-01 is effective for reporting periods beginning after December 15, 2017 and amendments should be applied by means of a cumulative-effect adjustment to the balance sheet at the beginning of the fiscal year of adoption. Early adoption is permitted, subject to certain conditions. We are currently evaluating the impact ASU 2016-01 will have on our consolidated financial statements.
In July 2015, the FASB issued Accounting Standards Update No. 2015-11,
Simplifying the Measurement of Inventory
("ASU 2015-11"). Under ASU 2015-11 entities should measure inventory that is not measured using last-in, first-out (LIFO) or the retail inventory method, including inventory that is measured using first-in, first-out (FIFO) or average cost, at the lower of cost or net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. ASU 2015-11 is effective for reporting periods beginning after December 15, 2016 and is to be applied prospectively. The adoption of ASU 2015-11 is not expected to have a material effect on our consolidated financial statements.
In May 2014, the FASB issued Accounting Standards Update No. 2014-09,
Revenue from Contracts with Customers
("ASU 2014-09"). ASU 2014-09 supersedes the existing revenue recognition guidance and clarifies the principles for recognizing revenue. The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. In March 2016, the FASB issued an amendment to ASU 2014-09 clarifying the implementation guidance on principal versus agent considerations. In April 2016, the FASB issued an amendment to ASU 2014-09 clarifying the considerations for identifying performance obligations and the implementation guidance for revenue recognized from licensing arrangements. In August 2015, the FASB issued an update to ASU 2014-09 deferring the effective date for public entities, on a retrospective basis, to annual reporting periods beginning after December 15, 2017. Early adoption is permitted, subject to certain conditions. We are currently evaluating the impact ASU 2014-09 will have on our consolidated financial statements, as well as the expected timing and method of adoption.
Shake Shack Inc.
Form 10-Q
|
11
Form 10-Q
|
11
NOTE
3
: FAIR VALUE MEASUREMENTS
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following tables present information about our financial assets and liabilities measured at fair value on a recurring basis as of
June 29, 2016
and December 30, 2015
, and indicate the classification within the fair value hierarchy.
Cash, Cash Equivalents and Marketable Securities
The following tables summarize our cash, cash equivalents and marketable securities by significant investment categories as of
June 29, 2016
and December 30, 2015:
|
June 29, 2016
|
||||||||||||||||||||||||
|
Cost Basis
|
|
Gross Unrealized Gains
|
|
Gross Unrealized Losses
|
|
Fair Value
|
|
Cash and Cash Equivalents
|
|
Marketable Securities
|
|
|||||||||||||
|
Cash
|
$
|
68,351
|
|
$
|
—
|
|
$
|
—
|
|
$
|
68,351
|
|
$
|
68,351
|
|
$
|
—
|
|
||||||
|
Level 1:
|
||||||||||||||||||||||||
|
Money market funds
|
20
|
|
—
|
|
—
|
|
20
|
|
20
|
|
—
|
|
||||||||||||
|
Level 2:
|
||||||||||||||||||||||||
|
Corporate debt securities
(1)
|
2,452
|
|
4
|
|
(23
|
)
|
2,433
|
|
—
|
|
2,433
|
|
||||||||||||
|
Total
|
$
|
70,823
|
|
$
|
4
|
|
$
|
(23
|
)
|
$
|
70,804
|
|
$
|
68,371
|
|
$
|
2,433
|
|
||||||
|
December 30, 2015
|
||||||||||||||||||||||||
|
Cost Basis
|
|
Gross Unrealized Gains
|
|
Gross Unrealized Losses
|
|
Fair Value
|
|
Cash and Cash Equivalents
|
|
Marketable Securities
|
|
|||||||||||||
|
Cash
|
$
|
70,816
|
|
$
|
—
|
|
$
|
—
|
|
$
|
70,816
|
|
$
|
70,816
|
|
$
|
—
|
|
||||||
|
Level 1:
|
||||||||||||||||||||||||
|
Money market funds
|
33
|
|
—
|
|
—
|
|
33
|
|
33
|
|
—
|
|
||||||||||||
|
Level 2:
|
||||||||||||||||||||||||
|
Corporate debt securities
(1)
|
2,397
|
|
1
|
|
(12
|
)
|
2,386
|
|
—
|
|
2,386
|
|
||||||||||||
|
Total
|
$
|
73,246
|
|
$
|
1
|
|
$
|
(12
|
)
|
$
|
73,235
|
|
$
|
70,849
|
|
$
|
2,386
|
|
||||||
|
(1)
|
The fair value of marketable securities with contractual maturity dates within one year are included in prepaid expenses and other current assets and those with contractual maturity dates greater than one year are included in other assets on the Condensed Consolidated Balance Sheets. Corporate debt securities were measured at fair value using a market approach utilizing observable prices for identical securities or securities with similar characteristics and inputs that are observable or can be corroborated by observable market data.
|
The gross aggregate fair value of investment in an unrealized loss position as of
June 29, 2016
was
$1,542
. All investments that were in an unrealized loss position as of
June 29, 2016
have been in a continuous loss position for less than 12 months. For the
thirteen and twenty-six weeks ended
June 29, 2016
, interest income related to our available-for-sale securities of
$23
and
$46
, respectively, was included in interest expense, net on the Condensed Consolidated Statements of Income (Loss). As we held
no
available-for-sale securities during the twenty-six weeks ended July 1, 2015,
no
interest income related to available-for-sale securities was recognized for the
thirteen and twenty-six weeks ended
July 1, 2015
. Net unrealized losses on available-for-sale securities totaling
$6
and
$8
for the
thirteen and twenty-six weeks ended
June 29, 2016
were included in other comprehensive loss on the Condensed Consolidated Statements of Comprehensive Income (Loss). There were
no
unrealized gains or losses on available-for-sale securities for the
thirteen and twenty-six weeks ended
July 1, 2015
.
12
|
Shake Shack Inc.
Form 10-Q
Form 10-Q
A summary of available-for-sale securities sold and gross realized gains and losses recognized during the
thirteen
and
twenty-six weeks ended
June 29, 2016
and
July 1, 2015
is as follows:
|
Thirteen Weeks Ended
|
Twenty-Six Weeks Ended
|
|||||||||||||||
|
June 29
2016 |
|
July 1
2015 |
|
June 29
2016 |
|
July 1
2015 |
|
|||||||||
|
Available-for-sale securities:
|
||||||||||||||||
|
Gross proceeds from sales and redemptions
|
$
|
322
|
|
$
|
—
|
|
$
|
322
|
|
$
|
—
|
|
||||
|
Cost basis of sales and redemptions
|
322
|
|
—
|
|
322
|
|
—
|
|
||||||||
|
Gross realized gains included in net income (loss)
|
1
|
|
—
|
|
1
|
|
—
|
|
||||||||
|
Gross realized losses included in net income (loss)
|
(1
|
)
|
—
|
|
(1
|
)
|
—
|
|
||||||||
|
Amounts reclassified out of accumulated other comprehensive loss
|
—
|
|
—
|
|
—
|
|
—
|
|
||||||||
Realized gains and losses are determined on a specific identification method and are included in interest expense, net on the Condensed Consolidated Statements of Income (Loss).
The following table summarizes, by contractual maturity date, the estimated fair value of our investments in marketable debt securities that are accounted for as available-for-sale securities:
|
June 29
2016 |
|
||
|
Due within one year
|
$
|
820
|
|
|
Due after one year through 5 years
|
1,613
|
|
|
|
Due after 5 years through 10 years
|
—
|
|
|
|
Due after 10 years
|
—
|
|
|
|
Total
|
$
|
2,433
|
|
We periodically review our marketable debt 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. We also consider whether (i) it is more likely than not that we will be required to sell the debt securities before recovery of their amortized cost basis, and (ii) the amortized cost basis cannot be recovered as a result of credit losses. As of
June 29, 2016
and December 30, 2015, the declines in the market value of our marketable securities investment portfolio were considered to be temporary in nature.
Other Financial Instruments
The carrying value of our other financial instruments, including accounts receivable, accounts payable, and accrued expenses as of
June 29, 2016
and December 30, 2015 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
twenty-six weeks ended
June 29, 2016
and
July 1, 2015
.
Shake Shack Inc.
Form 10-Q
|
13
Form 10-Q
|
13
NOTE
4
: INVENTORIES
Inventories as of
June 29, 2016
and
December 30, 2015
consisted of the following:
|
June 29
2016 |
|
December 30
2015 |
|
||||
|
Food
|
$
|
419
|
|
$
|
328
|
|
|
|
Wine
|
34
|
|
30
|
|
|||
|
Beer
|
46
|
|
46
|
|
|||
|
Beverages
|
61
|
|
57
|
|
|||
|
Retail merchandise
|
75
|
|
82
|
|
|||
|
Inventories
|
$
|
635
|
|
$
|
543
|
|
|
NOTE
5
: PROPERTY AND EQUIPMENT
Property and equipment
as of
June 29, 2016
and
December 30, 2015
consisted of the following:
|
June 29
2016 |
|
December 30
2015 |
|
||||
|
Leasehold improvements
|
$
|
97,162
|
|
$
|
82,904
|
|
|
|
Equipment
|
19,756
|
|
16,903
|
|
|||
|
Furniture and fixtures
|
5,941
|
|
4,965
|
|
|||
|
Computer equipment and software
|
6,241
|
|
5,197
|
|
|||
|
Construction in progress
|
12,225
|
|
6,591
|
|
|||
|
Property and equipment, gross
|
141,325
|
|
116,560
|
|
|||
|
Less: accumulated depreciation
|
30,029
|
|
23,519
|
|
|||
|
Property and equipment, net
|
$
|
111,296
|
|
$
|
93,041
|
|
|
NOTE
6
: SUPPLEMENTAL BALANCE SHEET INFORMATION
The components of other current liabilities as of
June 29, 2016
and
December 30, 2015
are as follows:
|
June 29
2016 |
|
December 30
2015 |
|
||||
|
Sales tax payable
|
$
|
1,429
|
|
$
|
1,073
|
|
|
|
Current portion of liabilities under tax receivable agreement
|
2,166
|
|
2,157
|
|
|||
|
Gift card liability
|
795
|
|
833
|
|
|||
|
Other
|
1,450
|
|
551
|
|
|||
|
Other current liabilities
|
$
|
5,840
|
|
$
|
4,614
|
|
|
14
|
Shake Shack Inc.
Form 10-Q
Form 10-Q
NOTE
7
: DEBT
In January 2015, we executed a Third Amended and Restated Credit Agreement, which became effective on February 4, 2015 (together with the prior agreements and amendments, and as further amended, the "Revolving Credit Facility"), which provides for a revolving total commitment amount of
$50,000
, of which
$20,000
is available immediately. The Revolving Credit Facility will mature and all amounts outstanding will be due and payable
five
years from the effective date. The Revolving Credit Facility permits the issuance of letters of credit upon our request of up to
$10,000
. In May 2016, the Revolving Credit Facility was amended to, among other things, lower the borrowing rates. Borrowings under the Revolving Credit Facility to 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
June 29, 2016
and December 30, 2015, there were
no
amounts outstanding under the Revolving Credit Facility. As of
June 29, 2016
, we had
$19,920
of availability under the Revolving Credit Facility, after giving effect to
$80
in outstanding letters of credit.
The Revolving Credit Facility is secured by a first-priority security interest in substantially all of the assets of SSE Holdings and the guarantors. The obligations under the Revolving Credit Facility are guaranteed by each of SSE Holdings' wholly-owned domestic subsidiaries (with certain exceptions).
The Revolving Credit Facility contains a number of covenants that, among other things, limit our ability to, subject to specified exceptions, incur additional debt; incur additional liens and contingent liabilities; sell or dispose of assets; merge with or acquire other companies; liquidate or dissolve ourselves; pay dividends or make distributions; engage in businesses that are not in a related line of business; make loans, advances or guarantees; engage in transactions with affiliates; and make investments. In addition, the Revolving Credit Facility contains certain cross-default provisions. We are required to maintain a specified consolidated fixed-charge coverage ratio and a specified funded net debt to adjusted EBITDA ratio, both as defined under the Revolving Credit Facility. As of
June 29, 2016
, we were in compliance with all covenants.
During the thirteen weeks ended June 29, 2016, we failed to furnish audited financial statements of SSE Holdings, as required under the Revolving Credit Facility if certain financial tests are not met. As a result, we were considered to be in default. In May 2016, we obtained a waiver for the covenant violation. As no amounts were outstanding at the time of the default, there was no impact to our consolidated financial statements. Additionally, the Revolving Credit Facility was subsequently amended to remove this requirement.
In March 2013, we entered into a promissory note in the amount of
$313
in connection with the purchase of a liquor license. Interest on the outstanding principal balance of this note is due and payable on a monthly basis from the effective date at a rate of
5.0%
per year. The entire principal balance and interest is due and payable on the earlier of the maturity date, which is the expiration of the lease in
June 2023
, or the date of the sale of the license. As of
December 30, 2015
the outstanding balance of the promissory note was
$313
. During the thirteen weeks ended June 29, 2016, we repaid the entire outstanding balance of the promissory note.
No
amounts were outstanding as of
June 29, 2016
.
Total interest costs incurred were
$91
and
$178
for the
thirteen
and
twenty-six weeks ended
June 29, 2016
, respectively, and
$83
and
$269
for the
thirteen
and
twenty-six weeks ended
July 1, 2015
, respectively. Total amounts capitalized into property and equipment were
$108
for the
twenty-six weeks ended
July 1, 2015
.
No
amounts were capitalized for the
twenty-six weeks ended
June 29, 2016
.
NOTE
8
: NON-CONTROLLING INTERESTS
We are the sole managing member of SSE Holdings and, as a result, consolidate the financial results of SSE Holdings. We report a non-controlling interest representing the economic interest in SSE Holdings held by the other members of SSE Holdings.
The Third Amended and Restated Limited Liability Company Agreement (the "LLC Agreement") of SSE Holdings provides that holders of LLC Interests may, from time to time, require SSE Holdings to redeem all or a portion of their LLC Interests for newly-issued shares of Class A common stock on a one-for-one basis. In connection with any redemption or exchange, we will receive a corresponding number of LLC Interests, increasing our total ownership interest in SSE Holdings.
Changes in our ownership interest in SSE Holdings while we retain our controlling interest in SSE Holdings will be accounted for as equity transactions. As such, future
Shake Shack Inc.
Form 10-Q
|
15
Form 10-Q
|
15
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
June 29, 2016
and
December 30, 2015
.
|
June 29, 2016
|
December 30, 2015
|
||||||||||
|
LLC Interests
|
|
Ownership %
|
|
LLC Interests
|
|
Ownership %
|
|
||||
|
Number of LLC Interests held by Shake Shack Inc.
|
23,344,339
|
|
64.3
|
%
|
19,789,259
|
|
54.6
|
%
|
|||
|
Number of LLC Interests held by non-controlling interest holders
|
12,983,596
|
|
35.7
|
%
|
16,460,741
|
|
45.4
|
%
|
|||
|
Total LLC Interests outstanding
|
36,327,935
|
|
100.0
|
%
|
36,250,000
|
|
100.0
|
%
|
|||
The weighted average ownership percentages for the applicable reporting periods are used to attribute net income and other comprehensive income to Shake Shack Inc. and the non-controlling interest holders. The non-controlling interest holders' weighted average ownership percentage for the
thirteen
and
twenty-six weeks ended
June 29, 2016
was
37.9%
and
40.9%
, respectively. For the
twenty-six weeks ended
July 1, 2015
, net income was attributed to non-controlling interest holders only for the period subsequent to the IPO and the organizational transactions completed in connection with our IPO, based on a weighted-average ownership percentage of
66.7%
.
The following table summarizes the effects of changes in ownership in SSE Holdings on our equity during the
thirteen
and
twenty-six weeks ended
June 29, 2016
and
July 1, 2015
.
|
Thirteen Weeks Ended
|
Twenty-Six Weeks Ended
|
|||||||||||||||
|
June 29
2016 |
|
July 1
2015 |
|
June 29
2016 |
|
July 1
2015 |
|
|||||||||
|
Comprehensive income (loss) attributable to Shake Shack Inc.
|
$
|
3,294
|
|
$
|
1,118
|
|
$
|
4,755
|
|
$
|
(11,550
|
)
|
||||
|
Transfers (to) from non-controlling interests:
|
—
|
|
—
|
|
||||||||||||
|
Increase in additional paid-in capital as a result of the settlement of unit appreciation rights
|
—
|
|
—
|
|
—
|
|
987
|
|
||||||||
|
Decrease in additional paid-in as a result of the organizational transactions completed in connection with our IPO
|
—
|
|
—
|
|
—
|
|
(75,182
|
)
|
||||||||
|
Increase in additional paid-in capital as a result of the redemption of LLC Interests
|
5,736
|
|
—
|
|
10,378
|
|
—
|
|
||||||||
|
Increase in additional paid-in capital as a result of stock option exercises and the related income tax effect
|
161
|
|
—
|
|
404
|
|
—
|
|
||||||||
|
Total effect of changes in ownership interest on equity attributable to Shake Shack Inc.
|
$
|
9,191
|
|
$
|
1,118
|
|
$
|
15,537
|
|
$
|
(85,745
|
)
|
||||
In February 2015, we used the net proceeds from our IPO to purchase
5,750,000
newly-issued LLC Interests. Additionally, in connection with our IPO, we acquired
5,968,841
LLC Interests through the acquisition, by merger, of two entities there were owned by former indirect members of SSE Holdings. Pursuant to the LLC Agreement, we received
339,306
LLC Interests as a result of the issuance of
339,306
shares of Class A common stock in settlement of the outstanding UARs.
During
twenty-six weeks ended
June 29, 2016
, an aggregate of
3,477,145
LLC Interests were redeemed by non-controlling interest holders for newly-issued shares of Class A common stock, and we received
3,477,145
LLC Interests in connection with these redemptions, increasing our total ownership interest in SSE Holdings.
No
LLC Interests were redeemed during the
twenty-six weeks ended
July 1, 2015
.
During
twenty-six weeks ended
June 29, 2016
, we received an aggregate of
77,935
LLC Interests in connection with the exercise of employee stock options.
No
stock options were exercised during the
twenty-six weeks ended
July 1, 2015
.
16
|
Shake Shack Inc.
Form 10-Q
Form 10-Q
NOTE
9
: EQUITY-BASED COMPENSATION
A summary of equity-based compensation expense recognized during the
thirteen
and
twenty-six weeks ended
June 29, 2016
and
July 1, 2015
is as follows:
|
Thirteen Weeks Ended
|
Twenty-Six Weeks Ended
|
|||||||||||||||
|
June 29
2016 |
|
July 1
2015 |
|
June 29
2016 |
|
July 1
2015 |
|
|||||||||
|
Unit appreciation rights
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
11,762
|
|
||||
|
Restricted Class B units
|
—
|
|
—
|
|
—
|
|
605
|
|
||||||||
|
Stock options
|
1,053
|
|
1,178
|
|
2,083
|
|
1,970
|
|
||||||||
|
Performance stock units
|
157
|
|
—
|
|
157
|
|
—
|
|
||||||||
|
Equity-based compensation expense
|
$
|
1,210
|
|
$
|
1,178
|
|
$
|
2,240
|
|
$
|
14,337
|
|
||||
|
Total income tax benefit recognized related to equity-based compensation
|
$
|
33
|
|
$
|
95
|
|
$
|
64
|
|
$
|
362
|
|
||||
Amounts are included in general and administrative expense and labor and related expenses on the Condensed Consolidated Statements of Income (Loss).
Unit Appreciation Rights
Prior to the IPO, we maintained a Unit Appreciation Rights Plan (the "UAR Plan"), effective in fiscal year 2012, and as amended, whereby we had the authority to grant up to
31,303
unit appreciation rights ("UARs") to employees. The UARs granted were subject to continued employment and were only exercisable upon a qualifying transaction, which was either a change of control or an initial public offering. Our IPO constituted a qualifying transaction under the terms of the UAR Plan, and as a result
339,306
shares of Class A common stock were issued upon the settlement of the
22,554
outstanding UARs, net of employee withholding taxes. We recognized compensation expense of
$11,762
during the
twenty-six weeks ended
July 1, 2015
upon settlement of the outstanding UARs.
There were
no
UARs outstanding as of
June 29, 2016
or
December 30, 2015
.
No
compensation expense was recognized during the
twenty-six weeks ended
June 29, 2016
.
Restricted Class B Units
Prior to the IPO, we granted restricted Class B units to certain of our executive officers. These awards were to vest in equal installments over periods ranging from
three
to
five
years. If not already fully vested, these units would fully vest (i) upon the occurrence of a change in control event or (ii) upon the occurrence of an initial public offering. The IPO constituted a transaction under the terms of the restricted Class B unit award agreements that resulted in the accelerated vesting of all then-outstanding awards, and we recognized
$605
of equity-based compensation expense upon the vesting of these awards during the
twenty-six weeks ended
July 1, 2015
.
There were
no
restricted Class B units outstanding as of
June 29, 2016
or
December 30, 2015
.
No
compensation expense was recorded during the
twenty-six weeks ended
June 29, 2016
.
Stock Options
In January 2015, we adopted the 2015 Incentive Award Plan (the "2015 Plan") under which we may grant up to
5,865,522
stock options and other equity-based awards to employees, directors and officers. The stock options granted generally vest equally over periods ranging from
one
to
five
years. We do not use cash to settle any of our equity-based awards, and we issue new shares of Class A common stock upon the exercise of stock options.
The fair value of stock option awards was determined on the grant date using the Black-Scholes valuation model based on the following weighted-average assumptions:
Shake Shack Inc.
Form 10-Q
|
17
Form 10-Q
|
17
|
Twenty-Six Weeks Ended
|
|
|
|
June 29
2016 |
|
|
|
Expected term (years)
(1)
|
5.5
|
|
|
Expected volatility
(2)
|
50.8
|
%
|
|
Risk-free interest rate
(3)
|
1.5
|
%
|
|
Dividend yield
(4)
|
—
|
%
|
|
(1)
|
Expected term represents the estimated period of time until an award is exercised and was determined using the simplified method.
|
|
(2)
|
Expected volatility is based on a combination of our historical volatility and the historical volatility of a selected peer group over a period equivalent to the expected term.
|
|
(3)
|
The risk-free rate rate is an interpolation of yields on U.S. Treasury securities with maturities equivalent to the expected term.
|
|
(4)
|
We have assumed a dividend yield of zero as we have no plans to declare dividends in the foreseeable future.
|
A summary of stock option activity for
twenty-six weeks ended
June 29, 2016
is as follows:
|
Stock
Options
|
|
Weighted
Average
Exercise
Price
|
|
||||
|
Outstanding at beginning of period
|
2,574,981
|
|
$
|
21.00
|
|
||
|
Granted
|
15,823
|
|
34.62
|
|
|||
|
Exercised
|
(82,946
|
)
|
(21.00
|
)
|
|||
|
Forfeited
|
(25,925
|
)
|
(21.00
|
)
|
|||
|
Outstanding at end of period
|
2,481,933
|
|
$
|
21.09
|
|
||
The weighted-average grant date fair value of stock options granted during the
twenty-six weeks ended
June 29, 2016
was
$34.62
.
As of
June 29, 2016
, there were
2,481,933
stock options outstanding, of which
478,750
were exercisable. As of
June 29, 2016
, total unrecognized compensation expense related to unvested stock options, including an estimate for pre-vesting forfeitures, was
$14,787
, which is expected to be recognized over a weighted-average period of
3.5
years.
Performance Stock Units
Under the 2015 Plan, we may grant performance stock units and other types of performance-based equity awards that vest based on the outcome of certain performance criteria that are established and approved by the Compensation Committee of the Board of Directors. The actual number of equity awards earned is based on the level of performance achieved over a predetermined performance period, relative to established financial goals, none of which are considered market conditions.
For performance stock units granted during the
twenty-six weeks ended
June 29, 2016
, the amount of awards that can be earned range from
0%
to
125%
of the number of performance stock units granted, based on the achievement of approved financial goals over a performance period that is approximately
one year
. In addition to the performance conditions, performance stock units are also subject to a requisite service period and the awards will vest ratably over
three years
. The fair value of performance stock units is determined based on the closing market price of our common stock on the date of grant. Compensation expense related to the performance stock units is recognized using a graded-vesting attribution method over the vesting period based on the most probable outcome of the performance conditions.
18
|
Shake Shack Inc.
Form 10-Q
Form 10-Q
A summary of performance stock unit activity for
twenty-six weeks ended
June 29, 2016
is as follows:
|
Performance
Stock
Units
|
|
Weighted
Average
Grant Value
Price
|
|
||||
|
Outstanding at beginning of period
|
—
|
|
$
|
—
|
|
||
|
Granted
|
63,600
|
|
38.41
|
|
|||
|
Exercised
|
—
|
|
—
|
|
|||
|
Forfeited
|
(400
|
)
|
(38.43
|
)
|
|||
|
Outstanding at end of period
|
63,200
|
|
$
|
38.41
|
|
||
As of
June 29, 2016
, there were
63,200
performance stock units outstanding, of which
none
were exercisable. As of
June 29, 2016
, total unrecognized compensation expense related to unvested performance stock units, including an estimate for pre-vesting forfeitures, was
$2,566
, which is expected to be recognized over a weighted-average period of
2.8
years.
NOTE
10
: INCOME TAXES
We are the sole managing member of SSE Holdings, and as a result, consolidate the financial results of SSE Holdings. SSE Holdings is treated as a partnership for U.S. federal and most applicable state and local income tax purposes. As a partnership, SSE Holdings is not subject to U.S. federal and certain state and local income taxes. Any taxable income or loss generated by SSE Holdings is passed through to and included in the taxable income or loss of its members, including us, on a pro rata basis. We are subject to U.S. federal income taxes, in addition to state and local income taxes with respect to our allocable share of any taxable income or loss of SSE Holdings, as well as any stand-alone income or loss generated by Shake Shack Inc. We are also subject to withholding taxes in foreign jurisdictions.
Income Tax Expense
A reconciliation of income tax expense computed at the U.S. federal statutory income tax rate to the recognized income tax expense is as follows:
|
Thirteen Weeks Ended
|
Twenty-Six Weeks Ended
|
||||||||||||||
|
June 29
2016 |
|
July 1
2015 |
|
June 29
2016 |
|
July 1
2015 |
|
||||||||
|
Expected U.S. federal income taxes at statutory rate (34%)
|
$
|
3,014
|
|
$
|
2,094
|
|
$
|
4,595
|
|
$
|
(1,655
|
)
|
|||
|
State and local income taxes, net of federal benefit
|
472
|
|
175
|
|
744
|
|
26
|
|
|||||||
|
Foreign withholding taxes
|
117
|
|
106
|
|
357
|
|
222
|
|
|||||||
|
Non-deductible expenses
|
—
|
|
108
|
|
—
|
|
343
|
|
|||||||
|
Tax credits
|
(87
|
)
|
—
|
|
(126
|
)
|
—
|
|
|||||||
|
Non-controlling interest
|
(1,200
|
)
|
(1,468
|
)
|
(1,955
|
)
|
2,312
|
|
|||||||
|
Income tax expense
|
$
|
2,316
|
|
$
|
1,015
|
|
$
|
3,615
|
|
$
|
1,248
|
|
|||
Our effective income tax rates for the
thirteen weeks ended
June 29, 2016
and
July 1, 2015
were
26.1%
and
16.5%
, respectively. The increase in our effective income tax rate for the period is primarily due to an increase in our ownership interest in SSE Holdings. As our ownership interest in SSE Holdings increases, our share of the taxable income of SSE Holdings also increases. Our weighted-average ownership interest in SSE Holdings was
62.1%
and
33.3%
for the thirteen weeks ended June 29, 2016 and July 1, 2015, respectively.
Our effective income tax rates for the
twenty-six weeks ended
June 29, 2016
and
July 1, 2015
were
26.7%
and
(25.6)%
, respectively. As the majority of the pre-tax loss for the
twenty-six weeks ended
July 1, 2015
was generated in the period prior to the organizational
Shake Shack Inc.
Form 10-Q
|
19
Form 10-Q
|
19
transactions completed in connection with the IPO, and prior to our becoming a member of SSE Holdings, we are not entitled to any tax benefits related to those losses. We recognized tax expense on our allocable share of the pre-tax income generated in the period subsequent to becoming a member of SSE Holdings, which resulted in a negative effective tax rate when compared to our consolidated pre-tax loss.
Deferred Tax Assets and Liabilities
During the
twenty-six weeks ended
June 29, 2016
, we acquired an aggregate of
3,555,080
LLC Interests in connection with the redemption of LLC Interests and the exercise of employee stock options. We recognized an additional deferred tax asset in the amount of
$44,588
associated with the change in the basis difference in our investment in SSE Holdings upon acquisition of these LLC Interests, increasing our total deferred tax asset to
$199,237
as of
June 29, 2016
. However, a portion of the 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
June 29, 2016
, we established a valuation allowance in the amount of
$18,615
against the deferred tax asset to which this portion relates.
During the
twenty-six weeks ended
June 29, 2016
, we also recognized
$26,247
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. As of
June 29, 2016
, the total deferred tax asset related to these payments was
$95,760
. See "—Tax Receivable Agreement" for more information.
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
June 29, 2016
, we concluded, based on the weight of all available positive and negative evidence, that all of our deferred tax assets (except for those deferred tax assets described above relating to basis differences that are expected to result in a capital loss upon the eventual sale of our interest in SSE Holdings) are more likely than not to be realized. As such, no additional valuation allowance was recognized.
Uncertain Tax Positions
No
uncertain tax positions existed as of
June 29, 2016
. Shake Shack Inc. was formed in September 2014 and did not engage in any operations prior to the IPO and related organizational transactions. Shake Shack Inc. first filed tax returns for tax year 2014, which is the first tax year subject to examination by taxing authorities for U.S. federal and state income tax purposes. Additionally, although SSE Holdings is treated as a partnership for U.S. federal and state income taxes purposes, it is still required to file an annual U.S. Return of Partnership Income, which is subject to examination by the Internal Revenue Service ("IRS"). The statute of limitations has expired for tax years through 2011 for SSE Holdings.
Tax Receivable Agreement
Pursuant to our election under Section 754 of the Internal Revenue Code (the "Code"), we expect to obtain an increase in our share of the tax basis in the net assets of SSE Holdings when LLC Interests are redeemed or exchanged by the other members of SSE Holdings. We plan to make an election under Section 754 of Code for each taxable year in which a redemption or exchange of LLC Interest occurs. We intend to treat any redemptions and exchanges of LLC Interests as direct purchases of LLC Interests for U.S. federal income tax purposes. These increases in tax basis may reduce the amounts that we would otherwise pay in the future to various tax authorities. They may also decrease gains (or increase losses) on future dispositions of certain capital assets to the extent tax basis is allocated to those capital assets.
On February 4, 2015, we entered into a tax receivable agreement with certain of the then-existing members of SSE Holdings (the "Tax Receivable Agreement") that provides for the payment by us of
85%
of the amount of any tax benefits that we actually realize, or in some cases are deemed to realize, as a result of (i) increases in our share of the tax basis in the net assets of SSE Holdings resulting from any redemptions or exchanges of LLC Interests, (ii) tax basis increases attributable to payments made under the Tax Receivable Agreement, and (iii) deductions attributable to imputed interest pursuant to the Tax Receivable Agreement (the "TRA Payments"). We expect to benefit from the remaining
15%
of any tax benefits that we may actually realize. The TRA Payments are not conditioned upon any continued ownership interest in SSE Holdings or us. The rights of each SSE Holdings member party under the Tax Receivable Agreement are assignable to transferees of its LLC Interests.
During the
twenty-six weeks ended
June 29, 2016
, we acquired an aggregate of
3,477,145
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
$65,356
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
20
|
Shake Shack Inc.
Form 10-Q
Form 10-Q
the redemption of LLC Interests, after concluding it was probable that such TRA Payments would be paid based on our estimates of future taxable income. As of
June 29, 2016
, the total amount of TRA Payments due under the Tax Receivable Agreement, including accrued interest, was
$238,455
, of which
$2,166
was included in other current liabilities on the Condensed Consolidated Balance Sheet. See
Note 13
for more information relating to our liabilities under the Tax Receivable Agreement.
NOTE
11
: EARNINGS PER SHARE
Basic earnings per share of Class A common stock is computed by dividing net income available to Shake Shack Inc. by the weighted-average number of shares of Class A common stock outstanding during the period. Diluted earnings per share of Class A common stock is computed by dividing net income available to Shake Shack Inc. by the weighted-average number of shares of Class A common stock outstanding adjusted to give effect to potentially dilutive securities.
The following table sets forth reconciliations of the numerators and denominators used to compute basic and diluted earnings per share of Class A common stock for the
thirteen
and
twenty-six weeks ended
June 29, 2016
and
July 1, 2015
.
|
Thirteen Weeks Ended
|
Twenty-Six Weeks Ended
|
||||||||||||||||
|
June 29
2016 |
|
July 1
2015 |
|
June 29
2016 |
|
July 1
2015 |
|
||||||||||
|
Numerator:
|
|||||||||||||||||
|
Net income (loss)
|
$
|
6,549
|
|
$
|
5,145
|
|
$
|
9,900
|
|
$
|
(6,115
|
)
|
|||||
|
Less: net income attributable to non-controlling interests
|
3,251
|
|
4,027
|
|
5,140
|
|
5,435
|
|
|||||||||
|
Net income (loss) attributable to Shake Shack Inc.
|
$
|
3,298
|
|
$
|
1,118
|
|
$
|
4,760
|
|
$
|
(11,550
|
)
|
|||||
|
Denominator:
|
|||||||||||||||||
|
Weighted-average shares of Class A common stock outstanding—basic
|
22,553
|
|
12,058
|
|
21,453
|
|
12,006
|
|
|||||||||
|
Effect of dilutive securities:
|
|||||||||||||||||
|
Stock options
|
497
|
|
1,281
|
|
478
|
|
—
|
|
|||||||||
|
Weighted-average shares of Class A common stock outstanding—diluted
|
23,050
|
|
13,339
|
|
21,931
|
|
12,006
|
|
|||||||||
|
Earnings (loss) per share of Class A common stock—basic
|
$
|
0.15
|
|
$
|
0.09
|
|
$
|
0.22
|
|
$
|
(0.96
|
)
|
|||||
|
Earnings (loss) per share of Class A common stock—diluted
|
$
|
0.14
|
|
$
|
0.08
|
|
$
|
0.22
|
|
$
|
(0.96
|
)
|
|||||
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.
Shake Shack Inc.
Form 10-Q
|
21
Form 10-Q
|
21
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
twenty-six weeks ended
June 29, 2016
and
July 1, 2015
.
|
Thirteen Weeks Ended
|
Twenty-Six Weeks Ended
|
||||||||||||||||
|
June 29
2016 |
|
July 1
2015 |
|
June 29
2016 |
|
July 1
2015 |
|
||||||||||
|
Stock options
|
—
|
|
—
|
|
—
|
|
2,600,281
|
|
(1)
|
||||||||
|
Performance stock units
|
63,200
|
|
(2)
|
—
|
|
63,200
|
|
(2)
|
—
|
|
|||||||
|
Shares of Class B common stock
|
12,983,596
|
|
(3)
|
24,191,853
|
|
(3)
|
12,983,596
|
|
(3)
|
24,191,853
|
|
(1)
|
|||||
|
(1)
|
Excluded from the computation of diluted earnings per share of Class A common stock because the effect would have been anti-dilutive since we recognized a net loss for the period.
|
|
(2)
|
Excluded from the computation of diluted earnings per share of Class A common stock because the performance conditions associated with these awards were not met assuming the end of the reporting period was the end of the performance period.
|
|
(3)
|
Shares of our Class B common stock are considered potentially dilutive shares of Class A common stock. Amounts have been excluded from the computations of diluted earnings per share of Class A common stock because the effect would have been anti-dilutive under the if-converted and two-class methods.
|
NOTE
12
: SUPPLEMENTAL CASH FLOW INFORMATION
The following table sets forth supplemental cash flow information for the
twenty-six weeks ended
June 29, 2016
and
July 1, 2015
:
|
Twenty-Six Weeks Ended
|
||||||||
|
June 29
2016 |
|
July 1
2015 |
|
|||||
|
Cash paid for:
|
||||||||
|
Income taxes, net of refunds
|
$
|
1,325
|
|
$
|
121
|
|
||
|
Interest, net of amounts capitalized
|
28
|
|
171
|
|
||||
|
Non-cash investing activities:
|
||||||||
|
Accrued purchases of property and equipment
|
3,059
|
|
2,537
|
|
||||
|
Capitalized equity-based compensation
|
62
|
|
—
|
|
||||
|
Class A common stock issued in connection with the acquisition of two former indirect members of SSE Holdings
|
—
|
|
6
|
|
||||
|
Non-cash financing activities:
|
||||||||
|
Cancellation of Class B common stock in connection with certain organizational transactions completed in connection with our IPO
|
—
|
|
(6
|
)
|
||||
|
Class A common stock issued in connection with the redemption of LLC Interests
|
3
|
|
—
|
|
||||
|
Cancellation of Class B common stock in connection with the redemption of LLC Interests
|
(3
|
)
|
—
|
|
||||
|
Establishment of liabilities under tax receivable agreement
|
65,356
|
|
5,600
|
|
||||
|
Accrued distributions payable to non-controlling interest holders
|
607
|
|
—
|
|
||||
22
|
Shake Shack Inc.
Form 10-Q
Form 10-Q
NOTE
13
: COMMITMENTS AND CONTINGENCIES
Lease Commitments
We are obligated under various operating leases for Shacks and our home office space, expiring in various years through 2032. Under certain of these leases, we are liable for contingent rent based on a percentage of sales in excess of specified thresholds and are responsible for our proportionate share of real estate taxes and utilities.
As security under the terms of several of our leases, we are obligated under letters of credit totaling
$160
as of
June 29, 2016
. The letters of credit expire on April 23, 2017 and February 28, 2026. In addition, in December 2013, we entered into an irrevocable standby letter of credit in conjunction with our home office lease in the amount of
$80
. The letter of credit expires in September 2016 and renews automatically for
one
-year periods through September 30, 2019.
Purchase Commitments
Purchase obligations include legally binding contracts, including commitments for the purchase, construction or remodeling of real estate and facilities, firm minimum commitments for inventory purchases, equipment purchases, marketing-related contracts, software acquisition/license commitments and service contracts. These obligations are generally short-term in nature and are recorded as liabilities when the related goods are received or services rendered. We also enter into
long-term, exclusive contracts with certain vendors to supply us with food, beverages and paper goods, obligating us to purchase specified quantities.
Legal Contingencies
In November 2015, we met with a law firm representing
two
former Shake Shack managers who alleged that we improperly classified our restaurant managers as exempt. Although we have always believed that our managers are properly classified as exempt under both federal and state laws, and have always intended to defend any allegations to the contrary vigorously, we agreed to mediate the matter. At the conclusion of the meeting, the parties entered into a Memorandum of Understanding, and we agreed to create a fund of
$750
to settle the matter. In exchange, all managers who choose to participate (former and current), including the
two
former managers, will release Shake Shack from all federal and/or state wage and hour claims that may exist through the settlement date. As part of the settlement process, the partners entered into a Settlement Agreement on March 11, 2016, and the law firm filed a Complaint on March 17, 2016 with the Supreme Court of the State of New York (the “Court”), a request for judicial intervention on March 19, 2016 and a motion seeking the Court’s preliminary approval of the Settlement Agreement on May 20, 2016. The parties are awaiting a judge to be assigned. As of
June 29, 2016
, an accrual in the amount of
$770
was recorded for this matter and the related expenses.
We are subject to various legal and regulatory proceedings, claims and liabilities, such as employment-related claims and slip and fall cases, which arise in the ordinary course of business and are generally covered by insurance. As of
June 29, 2016
, the amount of ultimate liability with respect to these matters was not material.
Liabilities under Tax Receivable Agreement
As described in
Note 10
, we are a party to the Tax Receivable Agreement under which we are contractually committed to pay certain of the members of SSE Holdings
85%
of the amount of any tax benefits that we actually realize, or in some cases are deemed to realize, as a result of certain transactions. We are not obligated to make any payments under the Tax Receivable Agreement until the tax benefits associated with the transactions that gave rise to the payments are realized. Amounts payable under the Tax Receivable Agreement are contingent upon, among other things, (i) generation of future taxable income over the term of the Tax Receivable Agreement and (ii) future changes in tax laws. If we do not generate sufficient taxable income in the aggregate over the term of the Tax Receivable Agreement to utilize the tax benefits, then we would not be required to make the related TRA Payments. During the
twenty-six weeks ended
June 29, 2016
and
July 1, 2015
, we recognized liabilities totaling
$65,356
and
$5,600
, respectively, relating to our obligations under the Tax Receivable Agreement, after concluding that it was probable that we would have sufficient future taxable income to utilize the related tax benefits. As of
June 29, 2016
and
December 30, 2015
, our total obligations under the Tax Receivable Agreement, including accrued interest, were
$238,455
and
$173,090
, respectively. There were no transactions subject to the Tax Receivable Agreement for which we did not recognize the related liability, as we concluded that we would have sufficient future taxable income to utilize all of the related tax benefits.
Shake Shack Inc.
Form 10-Q
|
23
Form 10-Q
|
23
NOTE
14
: RELATED PARTY TRANSACTIONS
Union Square Hospitality Group
Union Square Hospitality Group, LLC is a stockholder and a party to the Stockholders Agreement dated February 4, 2015, as amended, that we entered into in connection with our IPO. The Chairman of our Board of Directors serves as the Chief Executive Officer of Union Square Hospitality Group, LLC. As a result, Union Square Hospitality Group, LLC and its subsidiaries (collectively, "USHG") are considered related parties.
Previously, our employees were included in USHG's self-insurance health plan and we paid our portion of the plan costs on a monthly basis to USHG. In February 2015, we established our own self-funded health insurance plan for our employees and ceased payments to USHG. Amounts paid to the USHG for these health insurance costs were
$146
for the
twenty-six weeks ended
July 1, 2015
.
No
amounts were paid to USHG for health insurance costs for the
thirteen and twenty-six weeks ended
June 29, 2016
. These amounts are included in labor and related expenses and general and administrative expenses on the Condensed Consolidated Statements of
Income (Loss)
. Additionally, our employees are eligible participants under USHG's 401(k) plan. We pay our share of the employer's matching contributions directly to the third-party plan trustee.
We also pay USHG for certain miscellaneous general operating expenses incurred by them on our behalf. Total amounts paid to USHG for general corporate expenses were
$1
and
$6
for the
thirteen and twenty-six weeks ended
June 29, 2016
. For the
thirteen and twenty-six weeks ended
July 1, 2015
total amounts paid to USHG for general corporate expenses were
$61
and
$126
, respectively. These amounts are included in general and administrative expenses on the Condensed Consolidated Statements of Income (Loss).
No
amounts were payable to USHG as of
June 29, 2016
. Total amounts payable to USHG as of
December 30, 2015
were
$2
. These amounts are included in other current liabilities on the Condensed Consolidated Balance Sheets.
No
amounts were due from USHG as of
June 29, 2016
and
December 30, 2015
.
Hudson Yards Sports and Entertainment
In fiscal 2011, we entered into a Master License Agreement ("MLA") with Hudson Yards Sports and Entertainment LLC ("HYSE"), a subsidiary of USHG and a related party, to operate Shake Shack branded limited menu concession stands in sports and entertainment venues within the United States. The agreement expires on December 31, 2027 and includes
five
consecutive
five
-year renewal options at HYSE's option. As consideration for these rights, HYSE pays us a license fee based on a percentage of net food sales, as defined in the MLA. HYSE also pays us a percentage of profits on sales of branded beverages, as defined in the MLA. For both the
thirteen and twenty-six weeks ended
June 29, 2016
,
$103
was paid to us by HYSE. For both the
thirteen and twenty-six weeks ended
July 1, 2015
,
$95
was paid to us by HYSE. Total amounts due from HYSE as of
June 29, 2016
were
$45
, which is included in prepaid expenses and other current assets on the Condensed Consolidated Balance Sheets
.
No
amounts were due from HYSE as of
December 30, 2015
due to the seasonal nature of the concession stands.
Madison Square Park Conservancy
The Chairman of our Board of Directors serves as a director of the Madison Square Park Conservancy ("MSP Conservancy"), with which we have a license agreement and pay license fees to operate our Madison Square Park Shack. Amounts paid to Madison Square Park Conservancy as rent amounted to
$195
and
$390
, respectively, for the
thirteen and twenty-six weeks ended
June 29, 2016
. We paid
$111
to Madison Square Park Conservancy as rent for both the
thirteen and twenty-six weeks ended
July 1, 2015
. These amounts are included in occupancy and related expenses on the Condensed Consolidated Statements of
Income (Loss)
. Total amounts due to the MSP Conservancy as of
June 29, 2016
and
December 30, 2015
were
$120
and
$17
, respectively, which is included in accrued expenses on the Condensed Consolidated Balance Sheets.
Share Our Strength
The Chairman of our Board of Directors serves as a director of Share Our Strength, for which Shake Shack holds the "Great American Shake Sale" every year during the month of May to raise money and awareness for childhood hunger. During the Great American Shake Sale, we encourage guests to donate money to Share Our Strength's No Kid Hungry campaign in exchange for a coupon for a free cake-themed shake. All of the guest donations we collect go directly to Share Our Strength. We raised a total of
$587
for
24
|
Shake Shack Inc.
Form 10-Q
Form 10-Q
both the
thirteen and twenty-six weeks ended
June 29, 2016
. For both the
thirteen and twenty-six weeks ended
July 1, 2015
we raised a total of
$504
. The proceeds were remitted to Share Our Strength in the respective years. We incurred costs of approximately
$98
for both the
thirteen and twenty-six weeks ended
June 29, 2016
. For both the
thirteen and twenty-six weeks ended
July 1, 2015
we incurred costs of
$89
. These costs represent the cost of the free shakes redeemed and are included in general and administrative expense and other operating expenses on the Consolidated Statements of Income (Loss).
Tax Receivable Agreement
As described in
Note 10
, we entered into a tax receivable agreement with certain members of SSE Holdings that provides for the payment by us
of
85%
of the amount of tax benefits, if any, that Shake Shack actually realizes or in some cases is deemed to realize as a result of certain transactions.
No
amounts were paid to any members of SSE Holdings pursuant to the Tax Receivable Agreement during the
thirteen and twenty-six weeks ended
June 29, 2016
and
July 1, 2015
. As of
June 29, 2016
and
December 30, 2015
, total amounts due to members of SSE Holdings under the under the Tax Receivable Agreement were
$238,455
and
$173,090
, respectively.
Distributions to Members of SSE Holdings
Under the terms of the SSE Holdings LLC Agreement, SSE Holdings is obligated to make tax distributions to its members. For the
thirteen and twenty-six weeks ended
June 29, 2016
tax distributions of
$1,602
were paid to non-controlling interest holders. A special distribution was paid to certain of the members of SSE Holdings in the amount of
$11,125
on February 4, 2015.
No
tax distributions were paid to non-controlling interest holders for the
thirteen and twenty-six weeks ended
July 1, 2015
. As of
June 29, 2016
,
$607
was payable to non-controlling interest holders and
no
distributions were payable to non-controlling interest holders as of
December 30, 2015
.
Shake Shack Inc.
Form 10-Q
|
25
Form 10-Q
|
25
This section and other parts of this Quarterly Report on Form 10-Q ("Form 10-Q") contain forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, which are subject to risks and uncertainties. All statements other than statements of historical fact are forward-looking statements. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact, such as our expected financial outlook for fiscal 2016, expected Shack openings, expected same-Shack sales growth and trends in our business. Forward-looking statements can also be identified by words such as "aim," "anticipate," "believe," "estimate," "expect," "forecast," "future," "intend," "outlook," "plan," "potential," "predict," "project," "seek," "may," "can," "will," "would," "could," "should," the negatives thereof and other similar expressions. Forward-looking statements are not guarantees of future performance and actual results may differ materially from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended
December 30, 2015
("2015 Form 10-K") and Part II, Item 1A of this Form 10-Q. The following discussion should be read in conjunction with our 2015 Form 10-K, our subsequent Quarterly Reports on Form 10-Q and the condensed consolidated financial statements and notes thereto included in Part I, Item 1 of this Form 10-Q. All information presented herein is based on our fiscal calendar. Unless otherwise stated, references to particular years, quarters, months or periods refer to our fiscal years and the associated quarters, months and periods of those fiscal years. We undertake no obligation to revise or update any forward-looking statements for any reason, except as required by law.
OVERVIEW
Shake Shack is a modern day "roadside" burger stand serving a classic American menu of premium burgers, hot dogs, crinkle cut fries, shakes, frozen custard, beer and wine. As of
June 29, 2016
, there were
95
Shacks in operation, system-wide, of which
51
were domestic company-operated Shacks,
six
were domestic licensed Shacks and
38
were international licensed Shacks.
Development Highlights
During the quarter, we opened
four
domestic company-operated Shacks, including a Shack in Virginia in the Fashion Centre at Pentagon City, two Shacks in New York—a Shack in the iconic Herald Square and a second Queens Shack located in Forest Hills—as well as out first Shack in Minnesota, located in the Mall of America. Additionally, we opened
one
domestic licensed Shack in the Las Vegas market at the T-Mobile Arena and
two
international licensed Shacks—a second Shack in the Japan market in Ebisu and our first Shack in Bahrain at the Bahrain City Centre shopping center.
Financial Highlights for the
Second
Quarter
2016
|
▪
|
Total revenue
increase
d
37.2%
to
$66.5 million
.
|
|
▪
|
Shack sales
increase
d
38.3%
to
$64.4 million
.
|
|
▪
|
Same-Shack sales increased
4.5%
.
|
|
▪
|
Net
income
was
$3.3 million
, or
$0.14
per diluted share.
|
|
▪
|
Shack-level operating profit*, a non-GAAP measure,
increase
d
40.6%
to
$19.9 million
, or
30.8%
of Shack sales.
|
|
▪
|
Adjusted EBITDA*, a non-GAAP measure,
increase
d
39.3%
to
$15.6 million
.
|
|
▪
|
Adjusted pro forma net
income
*, a non-GAAP measure,
increase
d
51.9%
to
$5.2 million
, or $
0.14
per fully exchanged and diluted share.
|
* Shack-level operating profit, adjusted EBITDA and adjusted pro forma net income are non-GAAP measures. See "—Non-GAAP Financial Measures" for reconciliations of Shack-level operating profit to operating income (loss), adjusted EBITDA to net
income
(loss), and adjusted pro forma net
income
to net
income
(loss), the most directly comparable financial measures presented in accordance with GAAP.
26
|
Shake Shack Inc.
Form 10-Q
Form 10-Q
We continued to execute on our growth strategies in 2016 and the
second
quarter of
2016
was positively impacted by the following: (i) an approximate 1.5% menu price increase implemented in January 2016, (ii) menu innovation and positive mix shifts from the Chick'n Shack and the Bacon CheddarShack, and (iii) lower commodity prices, primarily in beef and dairy.
Shack-level operating profit margins increased to
30.8%
driven by these positive factors and improved leverage on fixed costs from the higher Shack sales.
Net
income
was
$3.3 million
, or
$0.14
per diluted share, for the
second
quarter of
2016
, compared to
$1.1 million
, or
$0.08
per diluted share, for the same period last year. On an adjusted pro forma basis, which excludes certain non-recurring items and assumes that all outstanding LLC Interests were exchanged for shares of Class A common stock as of the beginning of the period, we would have recognized net
income
of
$5.2 million
, or $
0.14
per fully exchanged and diluted share, for the
second
quarter of
2016
compared to
$3.4 million
, or
$0.09
per fully exchanged and diluted share for the the
second
quarter of
2015
, an
increase
of
51.9%
.
FISCAL 2016 OUTLOOK
For the fiscal year ending December 28, 2016, we revised our financial outlook to the following:
|
Current Outlook
|
|
Previous Outlook
|
|
||
|
Total revenue
|
$253 to $256 million
|
|
$245 to $249 million
|
|
|
|
Same-Shack sales growth (%)
|
4% to 5% increase
|
|
4% to 5% increase
|
|
|
|
Domestic company-operated Shack openings
|
18
|
|
16
|
|
|
|
Licensed Shack openings
|
7, net of one relocation
|
|
7
|
|
|
|
Labor and related expenses (as a percentage of total revenue) (basis points)
|
50 basis points of
deleverage
|
|
75 to 100 basis points of deleverage
|
|
|
|
Adjusted pro forma effective tax rate (%)
|
40% to 41%
|
|
40% to 41%
|
|
|
Shake Shack Inc.
Form 10-Q
|
27
Form 10-Q
|
27
RESULTS OF OPERATIONS
The following table summarizes our results of operations for the
thirteen and twenty-six weeks ended
June 29, 2016
and
July 1, 2015
:
|
Thirteen Weeks Ended
|
Twenty-Six Weeks Ended
|
||||||||||||||||||||||||
|
June 29, 2016
|
July 1, 2015
|
June 29, 2016
|
July 1, 2015
|
||||||||||||||||||||||
|
Shack sales
|
$
|
64,406
|
|
96.9
|
%
|
$
|
46,583
|
|
96.1
|
%
|
$
|
116,559
|
|
96.6
|
%
|
$
|
82,630
|
|
95.8
|
%
|
|||||
|
Licensing revenue
|
2,066
|
|
3.1
|
%
|
1,867
|
|
3.9
|
%
|
4,078
|
|
3.4
|
%
|
3,628
|
|
4.2
|
%
|
|||||||||
|
TOTAL REVENUE
|
66,472
|
|
100.0
|
%
|
48,450
|
|
100.0
|
%
|
120,637
|
|
100.0
|
%
|
86,258
|
|
100.0
|
%
|
|||||||||
|
Shack-level operating expenses
(1)
:
|
|||||||||||||||||||||||||
|
Food and paper costs
|
18,104
|
|
28.1
|
%
|
13,717
|
|
29.4
|
%
|
33,136
|
|
28.4
|
%
|
24,721
|
|
29.9
|
%
|
|||||||||
|
Labor and related expenses
|
15,262
|
|
23.7
|
%
|
11,168
|
|
24.0
|
%
|
28,424
|
|
24.4
|
%
|
20,269
|
|
24.5
|
%
|
|||||||||
|
Other operating expenses
|
5,979
|
|
9.3
|
%
|
3,723
|
|
8.0
|
%
|
10,898
|
|
9.3
|
%
|
7,203
|
|
8.7
|
%
|
|||||||||
|
Occupancy and related expenses
|
5,209
|
|
8.1
|
%
|
3,859
|
|
8.3
|
%
|
9,532
|
|
8.2
|
%
|
7,042
|
|
8.5
|
%
|
|||||||||
|
General and administrative expenses
|
7,496
|
|
11.3
|
%
|
6,052
|
|
12.5
|
%
|
14,380
|
|
11.9
|
%
|
24,437
|
|
28.3
|
%
|
|||||||||
|
Depreciation expense
|
3,404
|
|
5.1
|
%
|
2,447
|
|
5.1
|
%
|
6,510
|
|
5.4
|
%
|
4,638
|
|
5.4
|
%
|
|||||||||
|
Pre-opening costs
|
2,085
|
|
3.1
|
%
|
1,240
|
|
2.6
|
%
|
4,110
|
|
3.4
|
%
|
2,653
|
|
3.1
|
%
|
|||||||||
|
TOTAL EXPENSES
|
57,539
|
|
86.6
|
%
|
42,206
|
|
87.1
|
%
|
106,990
|
|
88.7
|
%
|
90,963
|
|
105.5
|
%
|
|||||||||
|
OPERATING INCOME (LOSS)
|
8,933
|
|
13.4
|
%
|
6,244
|
|
12.9
|
%
|
13,647
|
|
11.3
|
%
|
(4,705
|
)
|
(5.5
|
)%
|
|||||||||
|
Interest expense, net
|
68
|
|
0.1
|
%
|
84
|
|
0.2
|
%
|
132
|
|
0.1
|
%
|
162
|
|
0.2
|
%
|
|||||||||
|
INCOME (LOSS) BEFORE INCOME TAXES
|
8,865
|
|
13.3
|
%
|
6,160
|
|
12.7
|
%
|
13,515
|
|
11.2
|
%
|
(4,867
|
)
|
(5.6
|
)%
|
|||||||||
|
Income tax expense
|
2,316
|
|
3.5
|
%
|
1,015
|
|
2.1
|
%
|
3,615
|
|
3.0
|
%
|
1,248
|
|
1.4
|
%
|
|||||||||
|
NET INCOME (LOSS)
|
6,549
|
|
9.9
|
%
|
5,145
|
|
10.6
|
%
|
9,900
|
|
8.2
|
%
|
(6,115
|
)
|
(7.1
|
)%
|
|||||||||
|
Less: net income attributable to non-controlling interests
|
3,251
|
|
4.9
|
%
|
4,027
|
|
8.3
|
%
|
5,140
|
|
4.3
|
%
|
5,435
|
|
6.3
|
%
|
|||||||||
|
NET INCOME (LOSS) ATTRIBUTABLE TO SHAKE SHACK INC.
|
$
|
3,298
|
|
5.0
|
%
|
$
|
1,118
|
|
2.3
|
%
|
$
|
4,760
|
|
3.9
|
%
|
$
|
(11,550
|
)
|
(13.4
|
)%
|
|||||
|
(1)
|
As a percentage of Shack sales.
|
Shack Sales
Shack sales represent the aggregate sales of food and beverages in domestic company-operated Shacks. Shack sales in any period are directly influenced by the number of operating weeks in such period, the number of open Shacks and same-Shack sales. Same-Shack sales means, for any reporting period, sales for the comparable Shack base, which we define as the number of domestic company-operated Shacks open for 24 months or longer.
Shack sales were
$64.4 million
for the
thirteen weeks ended
June 29, 2016
compared to
$46.6 million
for the
thirteen weeks ended
July 1, 2015
,
an
increase
of
$17.8 million
or
38.3%
. The growth in Shack sales was primarily driven by the opening of
14
new domestic company-operated Shacks between
July 1, 2015
and
June 29, 2016
, as well as same-Shack sales growth of
$1.3 million
, or
4.5%
. The increase in same-Shack sales is primarily due to increased guest traffic of
1.2%
as well as a combined increase of
3.3%
in price and sales mix. For purposes of calculating same-Shack sales growth, Shack sales for
23
Shacks were included in the comparable Shack base.
Shack sales were
$116.6 million
for the
twenty-six weeks ended
June 29, 2016
compared to
$82.6 million
for the
twenty-six weeks ended
July 1, 2015
,
an
increase
of
$34.0 million
or
41.1%
. The increase is primarily due to the opening of
14
new domestic company-operated Shacks between
July 1, 2015
and
June 29, 2016
, as well as same-Shack sales growth of
$3.6 million
, or
6.9%
. The increase in same-Shack sales is primarily due to increased guest traffic of
3.9%
as well as a combined increase of
3.0%
in price
28
|
Shake Shack Inc.
Form 10-Q
Form 10-Q
and sales mix. For purposes of calculating same-Shack sales growth, Shack sales for
23
Shacks were included in the comparable Shack base.
Licensing Revenue
Licensing revenue is comprised of license fees, opening fees for certain licensed Shacks and territory fees. License fees are calculated as a percentage of sales and territory fees are payments for the exclusive right to develop Shacks in a specific geographic area.
Licensing revenue was
$2.1 million
for the
thirteen weeks ended
June 29, 2016
compared to
$1.9 million
for the
thirteen weeks ended
July 1, 2015
,
an
increase
of
$0.2 million
or
10.7%
. Licensing revenue was
$4.1 million
for the
twenty-six weeks ended
June 29, 2016
compared to
$3.6 million
twenty-six weeks ended
July 1, 2015
,
an
increase
of
$0.5 million
or
12.4%
. The
increase
s for the
thirteen and twenty-six week periods
were primarily driven by the opening of
nine
international licensed Shacks between
July 1, 2015
and
June 29, 2016
.
Food and Paper Costs
Food and paper costs include the direct costs associated with food, beverage and packaging of our menu items. The components of food and paper costs are variable by nature, changing with sales volume, and are impacted by menu mix and fluctuations in commodity costs.
Food and paper costs were
$18.1 million
for the
thirteen weeks ended
June 29, 2016
compared to
$13.7 million
for the
thirteen weeks ended
July 1, 2015
, an increase of
$4.4 million
or
32.0%
. Food and paper costs were
$33.1 million
for the
twenty-six weeks ended
June 29, 2016
compared to
$24.7 million
twenty-six weeks ended
July 1, 2015
,
an
increase
of
$8.4 million
or
34.0%
. The
increase
s
for the
thirteen and twenty-six week periods
were primarily due to the opening of
14
new domestic company-operated Shacks between
July 1, 2015
and
June 29, 2016
.
As a percentage of Shack sales, food and paper costs
decrease
d to
28.1%
and
28.4%
for the
thirteen and twenty-six weeks ended
June 29, 2016
, respectively, from
29.4%
and
29.9%
for the
thirteen and twenty-six weeks ended
July 1, 2015
, respectively. These decreases were the result of menu price increases implemented in January 2016, lower commodity costs, primarily in beef and dairy, and to a lesser extent, efficiencies gained through supply chain enhancements, such as the restructuring of certain of our purchasing arrangements and better geographic diversification of our suppliers. These were partially offset by higher distribution costs associated with entering new markets.
Labor and Related Expenses
Labor and related expenses include domestic company-operated Shack-level hourly and management wages, bonuses, payroll taxes, equity-based compensation, workers' compensation expense and medical benefits. As we expect with other variable expense items, we expect labor costs to grow as our Shack sales grow. Factors that influence labor costs include minimum wage and payroll tax legislation, health care costs and the performance of our domestic company-operated Shacks.
Labor and related expenses were
$15.3 million
for the
thirteen weeks ended
June 29, 2016
compared to
$11.2 million
for the
thirteen weeks ended
July 1, 2015
, an increase of
$4.1 million
or
36.7%
. Labor and related expenses were
$28.4 million
for the
twenty-six weeks ended
June 29, 2016
compared to
$20.3 million
for the
twenty-six weeks ended
July 1, 2015
,
an
increase
of
$8.1 million
or
40.2%
. These
increase
s for the
thirteen and twenty-six week periods
were primarily due to the opening of
14
new domestic company-operated Shacks between
July 1, 2015
and
June 29, 2016
.
As a percentage of Shack sales, labor and related expenses
decrease
d to
23.7%
and
24.4%
for the
thirteen and twenty-six weeks ended
June 29, 2016
, respectively, compared to
24.0%
and
24.5%
for the
thirteen and twenty-six weeks ended
July 1, 2015
, respectively. The
decrease
s for the
thirteen and twenty-six week periods
were primarily due to the benefit from higher Shack sales as well as lower expenses in certain areas, such as medical claims. Offsetting these, were increases in hourly labor expenses as a result of the company-wide increase to the starting wage of all hourly team members that we implemented in January 2016.
Other Operating Expenses
Other operating expenses consist of Shack-level marketing expenses, utilities, repair and maintenance costs, and other operating expenses incidental to operating our domestic company-operated Shacks, such as non-perishable supplies, credit card fees and property insurance..
Other operating expenses consist of Shack-level marketing expenses, utilities, repair and maintenance costs, and other operating expenses incidental to operating our domestic company-operated Shacks, such as non-perishable supplies, credit card fees and property insurance..
Shake Shack Inc.
Form 10-Q
|
29
Form 10-Q
|
29
Other operating expenses were
$6.0 million
for the
thirteen weeks ended
June 29, 2016
compared to
$3.7 million
for the
thirteen weeks ended
July 1, 2015
,
an
increase
of
$2.3 million
or
60.6%
. Other operating expenses were
$10.9 million
for the
twenty-six weeks ended
June 29, 2016
compared to
$7.2 million
for the
twenty-six weeks ended
July 1, 2015
,
an
increase
of
$3.7 million
or
51.3%
. The
increase
s for the
thirteen and twenty-six week periods
were primarily due to the opening of
14
new domestic company-operated Shacks between
July 1, 2015
and
June 29, 2016
.
As a percentage of Shack sales, other operating expenses
increase
d to
9.3%
for both the
thirteen and twenty-six weeks ended
June 29, 2016
, respectively, compared to
8.0%
and
8.7%
for the
thirteen and twenty-six weeks ended
July 1, 2015
, respectively. The
increase
was primarily due to higher repair and maintenance costs as our base of mature Shacks has grown.
Occupancy and Related Expenses
Occupancy and related expenses consist of Shack-level occupancy expenses (including rent, common area expenses and certain local taxes), excluding pre-opening costs, which are recorded separately.
Occupancy and related expenses were
$5.2 million
for the
thirteen weeks ended
June 29, 2016
compared to
$3.9 million
for the
thirteen weeks ended
July 1, 2015
,
an
increase
of
$1.3 million
or
35.0%
. Occupancy and related expenses were
$9.5 million
for the
twenty-six weeks ended
June 29, 2016
compared to
$7.0 million
or the
twenty-six weeks ended
July 1, 2015
,
an
increase
of
$2.5 million
or
35.4%
. The
increase
s for the
thirteen and twenty-six week periods
were primarily due to the opening of
14
new domestic company-operated Shacks between
July 1, 2015
and
June 29, 2016
.
As a percentage of Shack sales, occupancy and related expenses
decrease
d to
8.1%
and
8.2%
for the
thirteen and twenty-six weeks ended
June 29, 2016
, respectively, compared to
8.3%
and
8.5%
for the
thirteen and twenty-six weeks ended
July 1, 2015
, respectively. The
decrease
s were primarily due to increased amounts of amortization of tenant improvement allowances as well as the benefit from higher Shack sales.
General and Administrative Expenses
General and administrative expenses consist of costs associated with corporate and administrative functions that support Shack development and operations, as well as equity-based compensation expense.
General and administrative expenses were
$7.5 million
for the
thirteen weeks ended
June 29, 2016
compared to
$6.1 million
for the
thirteen weeks ended
July 1, 2015
,
an
increase
of
$1.4 million
or
23.9%
. The
increase
was primarily driven by higher consulting fees related to maintaining our complex organizational structure as well as incremental costs associated with our first annual shareholders' meeting. As a percentage of total revenue, general and administrative expenses
decrease
d to
11.3%
for the
thirteen weeks ended
June 29, 2016
from
12.5%
for the
thirteen weeks ended
July 1, 2015
. This
decrease
was primarily due to the increased levels of Shack sales.
General and administrative expenses were
$14.4 million
for the
twenty-six weeks ended
June 29, 2016
compared to
$24.4 million
for the
twenty-six weeks ended
July 1, 2015
,
a
decrease
of
$10.0 million
or
41.2%
. As a percentage of total revenue, general and administrative expenses
decrease
d to
11.9%
for the
twenty-six weeks ended
June 29, 2016
compared to
28.3%
for the
twenty-six weeks ended
July 1, 2015
. This
decrease
was primarily due to IPO-related expenses incurred in the prior year for which none were incurred in the current year, including
$12.8 million
of non-recurring compensation expenses incurred in connection with the vesting of equity awards upon consummation of our IPO and
$0.6 million
of other IPO-related expenses. These were partially offset by the aforementioned increases in consulting fees and annual meeting costs.
Depreciation Expense
Depreciation expense consists of the depreciation of fixed assets, including leasehold improvements and equipment.
Depreciation expense was
$3.4 million
for the
thirteen weeks ended
June 29, 2016
compared to
$2.4 million
for the
thirteen weeks ended
July 1, 2015
,
an
increase
of
$1.0 million
or
39.1%
. Depreciation expense was
$6.5 million
for the
twenty-six weeks ended
June 29, 2016
compared to
$4.6 million
for the
twenty-six weeks ended
July 1, 2015
,
an
increase
of
$1.9 million
or
40.4%
. The
increase
s for the
thirteen and twenty-six week periods
were due primarily to incremental depreciation of property and equipment related to the opening of
14
new domestic company-operated Shacks between
July 1, 2015
and
June 29, 2016
.
30
|
Shake Shack Inc.
Form 10-Q
Form 10-Q
As a percentage of total revenue, depreciation expense
remained constant
at
5.1%
and
5.4%
for the
thirteen and twenty-six weeks ended
June 29, 2016
, respectively, compared to
5.1%
and
5.4%
for the
thirteen and twenty-six weeks ended
July 1, 2015
, respectively.
Pre-Opening Costs
Pre-opening costs consist primarily of legal fees, rent, managers' salaries, training costs, employee payroll and related expenses, costs to relocate and compensate Shack management teams prior to an opening and wages, as well as travel and lodging costs for our opening training team. All such costs incurred prior to the opening of a domestic company-operated Shack are expensed in the period in which the expense was incurred. Pre-opening costs can fluctuate significantly from period to period, based on the number and timing of domestic company-operated Shack openings and the specific pre-opening costs incurred for each domestic company-operated Shack. Additionally, domestic company-operated Shack openings in new geographic market areas will initially experience higher pre-opening costs than our established geographic market areas, such as the New York City metropolitan area, where we have greater economies of scale and incur lower travel and lodging costs for our training team.
Pre-opening costs were
$2.1 million
for the
thirteen weeks ended
June 29, 2016
, compared to
$1.2 million
for the
thirteen weeks ended
July 1, 2015
,
an
increase
of $
0.9 million
or
68.1%
. Pre-opening costs were
$4.1 million
for the
twenty-six weeks ended
June 29, 2016
compared to
$2.7 million
for the
twenty-six weeks ended
July 1, 2015
,
an
increase
of
$1.4 million
or
54.9%
. The variances for the
thirteen and twenty-six week periods
were due to the timing and total number of new domestic company-operated Shacks expected to open as well as an increase in the number of Shacks opened in new geographic markets.
Interest Expense, Net
Interest expense primarily consists of amortization of deferred financing costs and interest on our Revolving Credit Facility, as well as imputed interest on deferred compensation, offset by interest income related to our available-for-sale securities.
For all periods presented, net interest expense was not material.
Income Tax Expense
Income tax
expense
was
$2.3 million
for the
thirteen weeks ended
June 29, 2016
compared to
$1.0 million
for the
thirteen weeks ended
July 1, 2015
. Our effective income tax rate
increase
d to
26.1%
for the
thirteen weeks ended
June 29, 2016
from
16.5%
for the
thirteen weeks ended
July 1, 2015
.
Income tax
expense
was
$3.6 million
for the
twenty-six weeks ended
June 29, 2016
compared to
$1.2 million
for the
twenty-six weeks ended
July 1, 2015
. Our effective income tax rate
increase
d to
26.7%
for the
twenty-six weeks ended
June 29, 2016
from
(25.6)%
for the
twenty-six weeks ended
July 1, 2015
.
As a result of the IPO and certain organizational transactions completed in connection with our IPO, we became the sole managing member of SSE Holdings, which 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 generated by SSE Holdings. As the majority of the pre-tax loss for the
twenty-six weeks ended
July 1, 2015
was generated in the period prior to the organizational transactions completed in connection with the IPO, and prior to our becoming a member of SSE Holdings, we are not entitled to any tax benefits related to those losses. We recognized tax expense on our allocable share of the pre-tax income generated in the period subsequent to becoming a member of SSE Holdings, which resulted in a negative effective tax rate when compared to our consolidated pre-tax loss.
Additionally, as our ownership interest in SSE Holdings increases, our share of the taxable income of SSE Holdings will also increase. When compared to consolidated pre-tax income, this will result in increases to our effective income tax rate. Our weighted-average ownership interest in SSE Holdings was
62.1%
and
33.3%
for the thirteen weeks ended June 29, 2016 and July 1, 2015, respectively. This increase in ownership interest was the primary driver for the increase in our effective income tax rate for the thirteen week period.
Shake Shack Inc.
Form 10-Q
|
31
Form 10-Q
|
31
Net Income Attributable to Non-Controlling Interests
We are the sole managing member of SSE Holdings and have the sole voting power in, and control the management of, SSE Holdings. Accordingly, we consolidate the financial results of SSE Holdings and reporting a non-controlling interest on our Consolidated Statements of Income, representing the portion of net income attributable to the other members of SSE Holdings. 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.
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.
Net income attributable to non-controlling interests was
$3.3 million
for the thirteen weeks ended June 29, 2016 compared to
$4.0 million
for the thirteen weeks ended July 1, 2015, a
decrease
of
$0.7 million
or
19.3%
. This
decrease
was primarily driven by an increase in our weighted-average ownership interest in SSE Holdings from
33.3%
for the
thirteen weeks ended
July 1, 2015
to
62.1%
for the
thirteen weeks ended
June 29, 2016
, as result of redemptions of LLC Interests.
Net income attributable to non-controlling interests was
$5.1 million
for the twenty-six ended June 29, 2016 compared to
$5.4 million
for the twenty-six weeks ended July 1, 2015, a
decrease
of
$0.3 million
or
5.4%
. This
decrease
was primarily driven by an increase in our weighted-average ownership interest in SSE Holdings for the twenty-six week period. In the prior year, our weighted-average ownership interest in SSE Holdings was
33.3%
for the period subsequent to the IPO and the organizational transactions completed in connection with our IPO through July 1, 2015, compared
to
59.1%
for the twenty-six weeks ended
June 29, 2016
, as result of redemptions of LLC Interests. Additionally, a
s the non-recurring compensation expenses and other IPO-related expenses were incurred in the period prior to the IPO, no portion of these expenses were attributed to the non-controlling interest holders. As a result, the net income attributable to non-controlling interests is significantly higher than the consolidated net income for the prior year period.
32
|
Shake Shack Inc.
Form 10-Q
Form 10-Q
NON-GAAP FINANCIAL MEASURES
To supplement our consolidated financial statements, which are prepared and presented in accordance with U.S. generally accepted accounting principles (“GAAP”), we use the following non-GAAP financial measures: Shack-level operating profit, EBITDA, adjusted EBITDA, adjusted pro forma net income and adjusted pro forma earnings per fully exchanged and diluted share (collectively, the "non-GAAP financial measures"). We believe that these non-GAAP financial measures, when used in conjunction with GAAP financial measures, provide useful information about our operating results, enhance the overall understanding of past financial performance and future prospects, and allow for greater transparency with respect to the key metrics we use in our financial and operational decision making. The presentation of this financial information is not intended to be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP. The non-GAAP measures that we use are not necessarily comparable to similarly titled measures used by other companies due to different methods of calculation.
Shack-Level Operating Profit
Shack-level operating profit and Shack-level operating profit margin are supplemental measures of operating performance and are not required by, nor presented in accordance with, GAAP. We believe that Shack-level operating profit and Shack-level operating profit margin, when used in conjunction with GAAP financial measures, are important measures we use to evaluate the performance and profitability of each Shack, individually and in the aggregate. A reconciliation of Shack-level operating profit to operating income (loss), the most directly comparable GAAP measure, is set forth below.
|
Thirteen Weeks Ended
|
Twenty-Six Weeks Ended
|
|||||||||||||||
|
(dollar amounts in thousands)
|
June 29
2016 |
|
July 1
2015 |
|
June 29
2016 |
|
July 1
2015 |
|
||||||||
|
Shack-level operating profit
|
$
|
19,852
|
|
$
|
14,116
|
|
$
|
34,569
|
|
$
|
23,395
|
|
||||
|
Add:
|
||||||||||||||||
|
Licensing revenue
|
2,066
|
|
1,867
|
|
4,078
|
|
3,628
|
|
||||||||
|
Less:
|
||||||||||||||||
|
General and administrative expenses
|
7,496
|
|
6,052
|
|
14,380
|
|
24,437
|
|
||||||||
|
Depreciation expense
|
3,404
|
|
2,447
|
|
6,510
|
|
4,638
|
|
||||||||
|
Pre-opening costs
|
2,085
|
|
1,240
|
|
4,110
|
|
2,653
|
|
||||||||
|
Operating income (loss)
|
$
|
8,933
|
|
$
|
6,244
|
|
$
|
13,647
|
|
$
|
(4,705
|
)
|
||||
|
Total revenue
|
$
|
66,472
|
|
$
|
48,450
|
|
$
|
120,637
|
|
$
|
86,258
|
|
||||
|
Less: licensing revenue
|
2,066
|
|
1,867
|
|
4,078
|
|
3,628
|
|
||||||||
|
Shack sales
|
$
|
64,406
|
|
$
|
46,583
|
|
$
|
116,559
|
|
$
|
82,630
|
|
||||
|
Shack-level operating profit margin
|
30.8
|
%
|
30.3
|
%
|
29.7
|
%
|
28.3
|
%
|
||||||||
Shake Shack Inc.
Form 10-Q
|
33
Form 10-Q
|
33
EBITDA and Adjusted EBITDA
EBITDA and Adjusted EBITDA are non-GAAP supplemental measures of operating performance that do not represent and should not be considered alternatives to net income (loss) or cash flow from operations, as determined by GAAP. We use EBITDA and Adjusted EBITDA to measure the operating performance of our business, excluding specifically identified items that we don't believe directly reflect our core operations. A reconciliation of EBITDA and Adjusted EBITDA to net income (loss), the most directly comparable GAAP measure, is set forth below.
|
Thirteen Weeks Ended
|
Twenty-Six Weeks Ended
|
|||||||||||||||
|
(in thousands)
|
June 29
2016 |
|
July 1
2015 |
|
June 29
2016 |
|
July 1
2015 |
|
||||||||
|
Net income (loss)
|
$
|
6,549
|
|
$
|
5,145
|
|
$
|
9,900
|
|
$
|
(6,115
|
)
|
||||
|
Depreciation expense
|
3,404
|
|
2,447
|
|
6,510
|
|
4,638
|
|
||||||||
|
Interest expense, net
|
68
|
|
84
|
|
132
|
|
162
|
|
||||||||
|
Income tax expense
|
2,316
|
|
1,015
|
|
3,615
|
|
1,248
|
|
||||||||
|
EBITDA
|
12,337
|
|
8,691
|
|
20,157
|
|
(67
|
)
|
||||||||
|
Equity-based compensation
(1)
|
1,210
|
|
1,178
|
|
2,240
|
|
1,970
|
|
||||||||
|
Pre-opening costs
(2)
|
1,405
|
|
927
|
|
2,768
|
|
1,882
|
|
||||||||
|
Deferred rent
(3)
|
657
|
|
413
|
|
1,247
|
|
969
|
|
||||||||
|
Non-recurring compensation expenses related to the IPO
(4)
|
—
|
|
—
|
|
—
|
|
12,818
|
|
||||||||
|
IPO-related expenses
(5)
|
—
|
|
—
|
|
—
|
|
635
|
|
||||||||
|
ADJUSTED EBITDA
|
$
|
15,609
|
|
$
|
11,209
|
|
$
|
26,412
|
|
$
|
18,207
|
|
||||
|
(1)
|
Represents non-cash equity-based compensation expense and relate solely to stock options and performance stock units granted subsequent to the Company's IPO.
|
|
(2)
|
Non-capital expenditures associated with opening new Shacks exclusive of deferred rent incurred prior to opening.
|
|
(3)
|
Reflects the extent to which our rent expense is greater than or less than our cash rent payments.
|
|
(4)
|
Non-recurring compensation expense incurred in connection with our IPO. Includes expense recognized upon settlement of outstanding unit appreciation rights, the related employer withholding taxes and the accelerated vesting of outstanding restricted Class B units.
|
|
(5)
|
Costs incurred in connection with our IPO, including legal, accounting and other related expenses.
|
34
|
Shake Shack Inc.
Form 10-Q
Form 10-Q
Adjusted Pro Forma Net Income and Adjusted Pro Forma Earnings per Fully Exchanged and Diluted Share
Adjusted pro forma net income represents net income (loss) attributable to Shake Shack Inc. assuming the full exchange of all outstanding SSE Holdings, LLC membership interests ("LLC Interests") for shares of Class A common stock, adjusted for certain non-recurring items that we don't believe directly reflect our core operations. Adjusted pro forma earnings per fully exchanged and diluted share is calculated by dividing adjusted pro forma net income by the weighted-average shares of Class A common stock outstanding, assuming the full exchange of all outstanding LLC Interests, after giving effect to the dilutive effect of outstanding stock options.
Adjusted pro forma net income and adjusted pro forma earnings per fully exchanged and diluted share are supplemental measures of operating performance that do not represent and should not be considered alternatives to net income (loss) and earnings (loss) per share, as determined by GAAP. We believe adjusted pro forma net income and adjusted pro forma earnings per fully exchanged and diluted share supplement GAAP measures and enable us to more effectively evaluate our performance period-over-period and relative to our competitors. A reconciliation of adjusted pro forma net income to net income (loss) attributable to Shake Shack Inc., the most directly comparable GAAP measure, and the computation of adjusted pro forma earnings per fully exchanged and diluted share are set forth below.
|
Thirteen Weeks Ended
|
Twenty-Six Weeks Ended
|
||||||||||||||||
|
(in thousands, except per share amounts)
|
June 29
2016 |
|
July 1
2015 |
|
June 29
2016 |
|
July 1
2015 |
|
|||||||||
|
Numerator:
|
|||||||||||||||||
|
Net income (loss) attributable to Shake Shack Inc.
|
$
|
3,298
|
|
$
|
1,118
|
|
$
|
4,760
|
|
$
|
(11,550
|
)
|
|||||
|
Adjustments:
|
|||||||||||||||||
|
Reallocation of net income attributable to non-controlling interests from the assumed exchange of LLC Interests
(1)
|
3,251
|
|
4,027
|
|
5,140
|
|
5,435
|
|
|||||||||
|
Non-recurring compensation expenses incurred in connection with the IPO
(2)
|
—
|
|
—
|
|
—
|
|
12,818
|
|
|||||||||
|
IPO-related expenses
(3)
|
—
|
|
—
|
|
—
|
|
635
|
|
|||||||||
|
Income tax expense
(4)
|
(1,310
|
)
|
(1,696
|
)
|
(1,853
|
)
|
(2,579
|
)
|
|||||||||
|
Adjusted pro forma net income
|
$
|
5,239
|
|
$
|
3,449
|
|
$
|
8,047
|
|
$
|
4,759
|
|
|||||
|
Denominator:
|
|||||||||||||||||
|
Weighted-average shares of Class A common stock outstanding—diluted
|
23,050
|
|
13,339
|
|
21,931
|
|
12,006
|
|
|||||||||
|
Adjustments:
|
|||||||||||||||||
|
Assumed exchange of LLC Interests for shares of Class A common stock
(1)
|
13,748
|
|
24,192
|
|
14,824
|
|
24,192
|
|
|||||||||
|
Dilutive effect of stock options
|
—
|
|
—
|
|
—
|
|
1,093
|
|
|||||||||
|
Adjusted pro forma fully exchanged weighted-average shares of Class A common stock outstanding—diluted
|
36,798
|
|
37,531
|
|
36,755
|
|
37,291
|
|
|||||||||
|
Adjusted pro forma earnings per fully exchanged share—diluted
|
$
|
0.14
|
|
$
|
0.09
|
|
$
|
0.22
|
|
$
|
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 interests and recognition of the net income attributable to non-controlling interests.
|
|
(2)
|
Non-recurring compensation expense incurred in connection with our IPO. Includes expense recognized upon settlement of outstanding unit appreciation rights, the related employer withholding taxes and the accelerated vesting of outstanding restricted Class B units.
|
|
(3)
|
Costs incurred in connection with our IPO, including legal, accounting and other related expenses.
|
|
(4)
|
Represents the tax effect of the aforementioned adjustments and pro forma adjustments to reflect corporate income taxes at assumed effective tax rates of
40.9%
and
40.5%
for the
thirteen and twenty-six weeks ended
June 29, 2016
, respectively, and
44.0%
and
44.6%
for the and
thirteen and twenty-six weeks ended
July 1, 2015
, respectively. Amounts include provisions for U.S. federal and state income taxes, certain LLC entity-level taxes and foreign withholding taxes, assuming the highest statutory rates apportioned to each applicable state, local and foreign jurisdiction.
|
Shake Shack Inc.
Form 10-Q
|
35
Form 10-Q
|
35
LIQUIDITY AND CAPITAL RESOURCES
Sources and Uses of Cash
Our primary sources of liquidity are cash from operations, cash on hand, and availability under our Revolving Credit Facility. As of
June 29, 2016
, we maintained a cash balance of
$68.4 million
and had
$19.9 million
of availability under our Revolving Credit Facility.
Our primary requirements for liquidity are to fund our working capital needs, operating lease obligations, capital expenditures and general corporate needs. Our requirements for working capital are not significant because our guests pay for their food and beverage purchases in cash or on debit or credit cards at the time of the sale and we are able to sell many of our inventory items before payment is due to the supplier of such items. Our ongoing capital expenditures are principally related to opening new Shacks, existing Shack capital investments (both for remodels and maintenance), as well as investments in our corporate infrastructure.
In addition, we are obligated to make payments under the Tax Receivable Agreement. As of June 29, 2016, such obligations totaled
$238.5 million
. Amounts payable under the Tax Receivable Agreement are contingent upon, among other things, (i) generation of future taxable income over the term of the Tax Receivable Agreement and (ii) future changes in tax laws. If we do not generate sufficient taxable income in the aggregate over the term of the Tax Receivable Agreement to utilize the tax benefits, then we would not be required to make the related TRA Payments. Although the amount of any payments that must be made under the Tax Receivable Agreement may be significant, the timing of these payments will vary and will generally be limited to one payment per member per year. The amount of such payments are also limited to the extent we utilize the related deferred tax assets. The payments that we are required to make will generally reduce the amount of overall cash flow that might have otherwise been available to us or to SSE Holdings, but we expect the cash tax savings we will realize from the utilization of the related deferred tax assets to fund the required payments.
We believe that cash provided by operating activities, cash on hand and availability under the Revolving Credit Facility will be sufficient to fund our operating lease obligations, capital expenditures and working capital needs for at least the next 12 months and the foreseeable future.
Summary of Cash Flows
The following table presents a summary of our cash flows from operating, investing and financing activities.
|
Twenty-Six Weeks Ended
|
|||||||
|
(in thousands)
|
June 29
2016 |
|
July 1
2015 |
|
|||
|
Net cash provided by operating activities
|
$
|
24,436
|
|
$
|
17,632
|
|
|
|
Net cash used in investing activities
|
(26,604
|
)
|
(16,929
|
)
|
|||
|
Net cash provided by (used in) financing activities
|
(310
|
)
|
61,539
|
|
|||
|
Increase (decrease) in cash
|
(2,478
|
)
|
62,242
|
|
|||
|
Cash at beginning of period
|
70,849
|
|
2,677
|
|
|||
|
Cash at end of period
|
$
|
68,371
|
|
$
|
64,919
|
|
|
Operating Activities
For the
twenty-six weeks ended
June 29, 2016
net cash
provided by
operating activities was
$24.4 million
compared to
$17.6 million
for the
twenty-six weeks ended
July 1, 2015
,
an
increase
of
$6.8 million
. This
increase
was primarily driven by the opening of
14
new domestic company-operated Shacks.
Investing Activities
For the
twenty-six weeks ended
June 29, 2016
net cash used in investing activities was
$26.6 million
compared to
$16.9 million
for the
twenty-six weeks ended
July 1, 2015
,
an
increase
of
$9.7 million
. This
increase
was due to the timing of capital expenditures to construct new domestic company-operated Shacks and, to a lesser extent, higher capital expenditures related to remodels and replacement equipment as our base of mature Shacks has grown.
36
|
Shake Shack Inc.
Form 10-Q
Form 10-Q
Financing Activities
For the
twenty-six weeks ended
June 29, 2016
, net cash used in financing activities was
$0.3 million
compared to net cash provided by financing activities of
$61.5 million
for the
twenty-six weeks ended
July 1, 2015
,
a
decrease
of $
61.8 million
. This decrease is primarily due to
$109.4 million
of net proceeds received from the IPO in the prior year, as well as decreases in payments on the Revolving Credit Facility of
$36.0 million
and member distributions of $9.5 million. These decreases were offset by
$1.6 million
in proceeds from employee stock option exercises.
Revolving Credit Facility
We maintain a Revolving Credit Facility that provides for a revolving total commitment amount of
$50.0 million
, of which
$20.0 million
is available immediately. The Revolving Credit Facility will mature and all amounts outstanding will be due and payable in February 2020. The Revolving Credit Facility permits the issuance of letters of credit upon our request of up to
$10.0 million
. 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
June 29, 2016
, there were
no
amounts outstanding under the Revolving Credit Facility. We had
$19.9 million
of availability, as of
June 29, 2016
, after giving effect to
$0.1 million
in outstanding letters of credit.
The Revolving Credit Facility is secured by a first-priority security interest in substantially all of the assets of SSE Holdings and the guarantors. The obligations under the Revolving Credit Facility are guaranteed by each of SSE Holdings' wholly-owned domestic subsidiaries (with certain exceptions).
The Revolving Credit Facility contains a number of covenants that, among other things, restrict 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
June 29, 2016
, we were in compliance with all covenants.
During the thirteen weeks ended June 29, 2016, we failed to furnish audited financial statements of SSE Holdings, as required under the Revolving Credit Facility if certain financial tests are not met. As a result, we were considered to be in default. In May 2016, we obtained a waiver for the covenant violation. As no amounts were outstanding at the time of the default, there was no impact to our consolidated financial statements. Additionally, the Revolving Credit Facility was subsequently amended to remove this requirement.
CONTRACTUAL OBLIGATIONS
There have been no material changes to the contractual obligations as disclosed in our Annual Report on Form 10-K for the fiscal year ended
December 30, 2015
, other than those made in the ordinary course of business.
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 ended
December 30, 2015
.
Shake Shack Inc.
Form 10-Q
|
37
Form 10-Q
|
37
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our consolidated financial condition and results of operations is based upon the accompanying condensed consolidated financial statements and notes thereto, which have been prepared in accordance with GAAP. The preparation of the condensed consolidated financial statements requires us to make estimates, judgments and assumptions, which we believe to be reasonable, based on the information available. These estimates and assumptions affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. Variances in the estimates or assumptions used to actual experience could yield materially different accounting results. On an ongoing basis, we evaluate the continued appropriateness of our accounting policies and resulting estimates to make adjustments we consider appropriate under the facts and circumstances. There have been no significant changes to our critical accounting policies as disclosed in our Annual Report on Form 10-K for the fiscal year ended
December 30, 2015
.
Recently Issued Accounting Pronouncements
In March 2016, the FASB issued Accounting Standards Update No. 2016-09,
Improvements to Employee Share-Based Payment Accounting
("ASU 2016-09"). ASU 2016-09 simplifies certain aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, an option to recognize gross stock compensation expense with actual forfeitures recognized as they occur, as well as certain classifications on the statement of cash flows. ASU 2016-09 is effective for reporting periods beginning after December 15, 2016. Early adoption is permitted. We are currently evaluating the impact ASU 2016-09 will have on our consolidated financial statements.
In March 2016, the FASB issued Accounting Standards Update No. 2016-04,
Recognition of Breakage for Certain Prepaid Stored-Value Products
("ASU 2016-04"). ASU 2016-04 entitles a company to derecognize amounts related to expected breakage in proportion to the pattern of rights expected to be exercised by the product holder to the extent that it is probable a significant reversal of the recognized breakage amount will not subsequently occur. ASU 2016-04 is effective for reporting periods beginning after December 15, 2017 and is to be applied retrospectively. Early adoption is permitted. We are currently evaluating the impact ASU 2016-04 will have on our consolidated financial statements.
In February 2016, the FASB issued Accounting Standards Update No. 2016-02,
Leases
("ASU 2016-02"). ASU 2016-02 establishes a new lease accounting model, that, for many companies, eliminates the concept of operating leases and requires entities to record assets and liabilities related to leases on the balance sheet for certain types of leases. ASU 2016-02 is effective for reporting periods beginning after December 15, 2018. Early adoption will be permitted for all entities. We are currently evaluating the impact that this new standard will have on our consolidated financial statements.
In January 2016, the FASB issued Accounting Standards Update No. 2016-01,
Recognition and Measurement of Financial Assets and Financial Liabilities
("ASU 2016-01"). ASU 2016-01 requires: (i) equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; (ii) simplification of the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; (iii) elimination of the requirement for public entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; (iv) public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (v) an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; (vi) separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements; and (vii) clarification that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. ASU 2016-01 is effective for reporting periods beginning after December 15, 2017 and amendments should be applied by means of a cumulative-effect adjustment to the balance sheet at the beginning of the fiscal year of adoption. Early adoption is permitted, subject to certain conditions. We are currently evaluating the impact ASU 2016-01 will have on our consolidated financial statements.
In July 2015, the FASB issued Accounting Standards Update No. 2015-11
, Simplifying the Measurement of Inventory
("ASU 2015-11"). Under ASU 2015-11 entities should measure inventory that is not measured using last-in, first-out (LIFO) or the retail inventory method, including inventory that is measured using first-in, first-out (FIFO) or average cost, at the lower of cost or net realizable
38
|
Shake Shack Inc.
Form 10-Q
Form 10-Q
value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. ASU 2015-11 is effective for reporting periods beginning after December 15, 2016 and is to be applied prospectively. The adoption of ASU 2015-11 is not expected to have a material effect on our consolidated financial statements.
In May 2014, the FASB issued Accounting Standards Update No. 2014-09,
Revenue from Contracts with Customers
("ASU 2014-09"). ASU 2014-09 supersedes the existing revenue recognition guidance and clarifies the principles for recognizing revenue. The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. In March 2016, the FASB issued an amendment to ASU 2014-09 clarifying the implementation guidance on principal versus agent considerations. In April 2016, the FASB issued an amendment to ASU 2014-09 clarifying the considerations for identifying performance obligations and the implementation guidance for revenue recognized from licensing arrangements. In August 2015, the FASB issued an update to ASU 2014-09 deferring the effective date for public entities, on a retrospective basis, to annual reporting periods beginning after December 15, 2017. Early adoption is permitted, subject to certain conditions. We are currently evaluating the impact ASU 2014-09 will have on our consolidated financial statements, as well as the expected timing and method of adoption.
There have been no material changes to our exposure to market risks as described in Part II, Item 7A of our Annual Report on Form 10-K for the fiscal year ended
December 30, 2015
.
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 an evaluation of the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of such date. Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There were no changes to our internal control over financial reporting that occurred during the quarter ended
June 29, 2016
that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Shake Shack Inc.
Form 10-Q
|
39
Form 10-Q
|
39
The information required by this Item is incorporated by reference to Part I, Item 1,
Note 13
: Commitments and Contingencies—Legal Contingencies.
There have been no material changes with respect to the risk factors disclosed in our Annual Report on Form 10-K for the fiscal year ended
December 30, 2015
.
None.
None.
Not applicable.
None.
40
|
Shake Shack Inc.
Form 10-Q
Form 10-Q
|
Exhibit
Number
|
Incorporated by Reference
|
Filed
Herewith
|
||||||||
|
Exhibit Description
|
Form
|
Exhibit
|
Filing Date
|
|||||||
|
3.1
|
Amended and Restated Certificate of Incorporation of Shake Shack Inc., effective February 4, 2015
|
8-K
|
3.1
|
2/10/2015
|
||||||
|
3.2
|
Amended and Restated Bylaws of Shack Shake Inc., dated February 4, 2015
|
8-K
|
3.2
|
2/10/2015
|
||||||
|
4.1
|
Form of Class A Common Stock Certificate
|
S-1/A
|
4.1
|
1/28/2015
|
||||||
|
31.1
|
Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
*
|
||||||||
|
31.2
|
Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
*
|
||||||||
|
32
|
Certifications of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
#
|
||||||||
|
101.INS
|
XBRL Instance Document
|
*
|
||||||||
|
101.SCH
|
XBRL Taxonomy Extension Schema Document
|
*
|
||||||||
|
101.CAL
|
XBRL Taxonomy Extension Calculation Linkbase Document
|
*
|
||||||||
|
101.DEF
|
XBRL Taxonomy Extension Definition Linkbase Document
|
*
|
||||||||
|
101.LAB
|
XBRL Taxonomy Extension Label Linkbase Document
|
*
|
||||||||
|
101.PRE
|
XBRL Taxonomy Extension Presentation Linkbase Document
|
*
|
||||||||
|
#
|
Furnished herewith.
|
Shake Shack Inc.
Form 10-Q
|
41
Form 10-Q
|
41
SIGNATURES
Pursuant 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, thereunto duly authorized.
|
Shake Shack Inc.
|
||
|
(Registrant)
|
||
|
Date: August 11, 2016
|
By:
|
/s/ Randy Garutti
|
|
|
Randy Garutti
|
|
|
|
Chief Executive Officer
(Principal Executive Officer and Duly Authorized Officer)
|
|
|
Date: August 11, 2016
|
By:
|
/s/ Jeff Uttz
|
|
|
Jeff Uttz
|
|
|
|
Chief Financial Officer
(Principal Financial Officer and Duly Authorized Officer)
|
|
42
|
Shake Shack Inc.
Form 10-Q
Form 10-Q
TABLE OF CONTENTS
Part I Financial InformationItem 1. Financial Statements (unaudited)Note 1: Nature Of OperationsNote 2: Summary Of Significant Accounting PoliciesNote 3: Fair Value MeasurementsNote 4: InventoriesNote 5: Property and EquipmentNote 6: Supplemental Balance Sheet InformationNote 7: DebtNote 8: Non-controlling InterestsNote 9: Equity-based CompensationNote 10: Income TaxesNote 11: Earnings Per ShareNote 12: Supplemental Cash Flow InformationNote 13: Commitments and ContingenciesNote 14: Related Party TransactionsItem 2. Management's Discussion and Analysis Of Financial Condition and Results Of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPart II Other InformationItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsItem 3. Defaults Upon Senior SecuritiesItem 4. Mine Safety DisclosuresItem 5. Other InformationItem 6. Exhibits