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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 26, 2018
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to ______
Commission file number: 001-36823
 
shak-img_shakeshacklogo.jpg
SHAKE SHACK INC.
(Exact name of registrant as specified in its charter)
 
Delaware
47-1941186
(State or other jurisdiction of
incorporation or organization)
(IRS Employer
Identification No.)
225 Varick Street, Suite 301
New York, New York
10014
(Address of principal executive offices)
(Zip Code)
(646) 747-7200
(Registrant's telephone number, including area code)
Not applicable
(Former name or former address, if changed since last report)
 

Indicate by check mark if the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule-405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). þ Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer  
þ
 
Accelerated filer  
o
Non-accelerated filer  
o
(Do not check if a smaller reporting company)
Smaller reporting company
o
 
 
 
Emerging growth company
o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). o Yes þ No
As of October 24, 2018, there were 29,371,355 shares of Class A common stock outstanding and 7,688,921 shares of Class B common stock outstanding.
 



SHAKE SHACK INC.
TABLE OF CONTENTS





Cautionary Note Regarding Forward-Looking Information
This Quarterly Report on Form 10-Q ("Form 10-Q") contains forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995 ("PSLRA"), which are subject to known and unknown risks, uncertainties and other important factors that may cause actual results to be materially different. All statements other than statements of historical fact are forward-looking statements. Many of the forward-looking statements are located in Part I, Item 2 of this Form 10-Q under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations." Forward-looking statements discuss our current expectations and projections relating to our financial position, results of operations, plans, objectives, future performance and business. You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as "aim," "anticipate," "believe," "estimate," "expect," "forecast," "outlook," "potential," "project," "projection," "plan," "intend," "seek," "may," "could," "would," "will," "should," "can," "can have," "likely," the negatives thereof and other similar expressions.
While we believe that our assumptions are reasonable, it is very difficult to predict the impact of known factors, and it is impossible to anticipate all factors that could affect our actual results. All forward-looking statements are expressly qualified in their entirety by these cautionary statements. 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 27, 2017 filed with the U.S. Securities and Exchange Commission (the "SEC") under the heading "Risk Factors."
The forward-looking statements included in this Form 10-Q are made only as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law.

Shake Shack Inc. shak-img_burgersmalla03.jpg Form 10-Q | 1


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

2 | Shake Shack Inc. shak-img_burgersmalla03.jpg Form 10-Q


SHAKE SHACK INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in thousands, except share and per share amounts)
 
 
 
 
September 26
2018

 
December 27
2017

ASSETS
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
$
29,295

 
$
21,507

 
Marketable securities
61,800

 
63,036

 
Accounts receivable
9,325

 
5,641

 
Inventories
1,378

 
1,258

 
Prepaid expenses and other current assets
2,119

 
1,757

 
Total current assets
103,917

 
93,199

Property and equipment, net
241,702

 
187,095

Deferred income taxes, net
243,021

 
185,914

Other assets
3,682

 
4,398

TOTAL ASSETS
$
592,322

 
$
470,606

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Current liabilities:
 
 
 
 
Accounts payable
$
9,654

 
$
8,210

 
Accrued expenses
22,759

 
11,649

 
Accrued wages and related liabilities
7,996

 
6,228

 
Other current liabilities
8,391

 
7,937

 
Total current liabilities
48,800

 
34,024

Deemed landlord financing
19,867

 
14,518

Deferred rent
43,476

 
36,596

Liabilities under tax receivable agreement, net of current portion
201,077

 
158,436

Other long-term liabilities
7,522

 
2,553

Total liabilities
320,742

 
246,127

Commitments and contingencies

 

Stockholders' equity:
 
 
 
 
Preferred stock, no par value—10,000,000 shares authorized; none issued and outstanding as of September 26, 2018 and December 27, 2017.

 

 
Class A common stock, $0.001 par value—200,000,000 shares authorized; 29,371,355 and 26,527,477 shares issued and outstanding as of September 26, 2018 and December 27, 2017, respectively.
29

 
27

 
Class B common stock, $0.001 par value—35,000,000 shares authorized; 7,688,921 and 10,250,007 shares issued and outstanding as of September 26, 2018 and December 27, 2017, respectively.
8

 
10

 
Additional paid-in capital
192,760

 
153,105

 
Retained earnings
31,362

 
16,399

 
Accumulated other comprehensive loss

 
(49
)
 
Total stockholders' equity attributable to Shake Shack Inc.
224,159

 
169,492

Non-controlling interests
47,421

 
54,987

Total equity
271,580

 
224,479

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$
592,322

 
$
470,606

See accompanying Notes to Condensed Consolidated Financial Statements.

Shake Shack Inc. shak-img_burgersmalla03.jpg Form 10-Q | 3


SHAKE SHACK INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(in thousands, except per share amounts)
 
 
 
 
Thirteen Weeks Ended
 
 
Thirty-Nine Weeks Ended
 
 
 
 
September 26
2018

 
September 27
2017

 
September 26
2018

 
September 27
2017

Shack sales
$
115,882

 
$
91,100

 
$
324,869

 
$
253,258

Licensing revenue
3,765

 
3,509

 
10,176

 
9,416

TOTAL REVENUE
119,647

 
94,609

 
335,045

 
262,674

Shack-level operating expenses:
 
 
 
 
 
 
 
 
Food and paper costs
32,703

 
25,760

 
91,336

 
71,646

 
Labor and related expenses
31,232

 
23,806

 
87,651

 
66,692

 
Other operating expenses
13,496

 
9,229

 
36,536

 
25,380

 
Occupancy and related expenses
8,545

 
7,522

 
23,621

 
20,741

General and administrative expenses
13,151

 
9,204

 
37,547

 
27,352

Depreciation expense
7,439

 
5,604

 
20,905

 
15,610

Pre-opening costs
3,581

 
2,670

 
8,031

 
6,961

Loss on disposal of property and equipment
157

 
204

 
543

 
317

TOTAL EXPENSES
110,304

 
83,999

 
306,170

 
234,699

OPERATING INCOME
9,343

 
10,610

 
28,875

 
27,975

Other income, net
436

 
229

 
1,070

 
622

Interest expense
(592
)
 
(475
)
 
(1,770
)
 
(1,144
)
INCOME BEFORE INCOME TAXES
9,187

 
10,364

 
28,175

 
27,453

Income tax expense
2,241

 
2,494

 
5,679

 
7,537

NET INCOME
6,946

 
7,870

 
22,496

 
19,916

Less: net income attributable to non-controlling interests
1,921

 
2,873

 
6,359

 
7,773

NET INCOME ATTRIBUTABLE TO SHAKE SHACK INC.
$
5,025

 
$
4,997

 
$
16,137

 
$
12,143

Earnings per share of Class A common stock:
 
 
 
 
 
 
 
 
Basic
$
0.17

 
$
0.19

 
$
0.58

 
$
0.47

 
Diluted
$
0.17

 
$
0.19

 
$
0.56

 
$
0.46

Weighted-average shares of Class A common stock outstanding:
 
 
 
 
 
 
 
 
Basic
28,954

 
26,024

 
27,930

 
25,733

 
Diluted
29,883

 
26,477

 
28,820

 
26,248

See accompanying Notes to Condensed Consolidated Financial Statements.




4 | Shake Shack Inc. shak-img_burgersmalla03.jpg Form 10-Q


SHAKE SHACK INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
(in thousands)
 
 
 
 
Thirteen Weeks Ended
 
 
Thirty-Nine Weeks Ended
 
 
 
 
September 26
2018

 
September 27
2017

 
September 26
2018

 
September 27
2017

Net income
$
6,946

 
$
7,870

 
$
22,496

 
$
19,916

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

 
53

 
(3
)
 
36

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

 
14

 
16

 
28

 
 
Net change

 
67

 
13

 
64

OTHER COMPREHENSIVE INCOME

 
67

 
13

 
64

COMPREHENSIVE INCOME
6,946

 
7,937

 
22,509

 
19,980

Less: comprehensive income attributable to non-controlling interest
1,921

 
2,893

 
6,362

 
7,792

COMPREHENSIVE INCOME ATTRIBUTABLE TO SHAKE SHACK INC.
$
5,025

 
$
5,044

 
$
16,147

 
$
12,188

(1) Net of tax benefit (expense) of $0 for the thirteen and thirty-nine weeks ended September 26, 2018 and September 27, 2017.
See accompanying Notes to Condensed Consolidated Financial Statements.

Shake Shack Inc. shak-img_burgersmalla03.jpg Form 10-Q | 5


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

 
Retained Earnings

 
Accumulated Other Comprehensive Income (Loss)

 
Non-
Controlling
Interest

 
Total
Equity

 
 
Shares

 
Amount

 
Shares

 
Amount

 
 
 
 
 
BALANCE, DECEMBER 27, 2017
26,527,477

 
$
27

 
10,250,007

 
$
10

 
$
153,105

 
$
16,399

 
$
(49
)
 
$
54,987

 
$
224,479

 
Cumulative effect of accounting changes


 


 


 


 


 
(1,174
)
 
39

 
(439
)
 
(1,574
)
 
Net income


 


 


 


 


 
16,137

 


 
6,359

 
22,496

 
Other comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net change related to available-for-sale securities


 


 


 


 


 


 
10

 
3

 
13

 
Equity-based compensation

 


 


 


 
4,534

 


 


 


 
4,534

 
Activity under stock compensation plans
282,792

 

 


 


 
2,318

 


 


 
1,836

 
4,154

 
Redemption of LLC Interests
2,561,086

 
2

 
(2,561,086
)
 
(2
)
 
14,633

 


 


 
(14,633
)
 

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

 


 


 


 
18,170

 


 


 


 
18,170

 
Distributions paid to non-controlling interest holders
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(692
)
 
(692
)
BALANCE, SEPTEMBER 26, 2018
29,371,355

 
$
29

 
7,688,921

 
$
8

 
$
192,760

 
$
31,362

 
$

 
$
47,421

 
$
271,580


See accompanying Notes to Condensed Consolidated Financial Statements.



6 | Shake Shack Inc. shak-img_burgersmalla03.jpg Form 10-Q


SHAKE SHACK INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
 
 
 
 
 
 
 
Thirty-Nine Weeks Ended
 
 
 
 
 
 
 
September 26
2018

 
September 27
2017

OPERATING ACTIVITIES
 
 
 
Net income (including amounts attributable to non-controlling interests)
$
22,496

 
$
19,916

Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
 
Depreciation expense
20,905

 
15,610

 
Equity-based compensation
4,470

 
3,823

 
Deferred income taxes
1,996

 
3,056

 
Non-cash interest expense
72

 
245

 
Loss on sale of marketable securities
16

 
27

 
Loss on disposal of property and equipment
543

 
317

 
Unrealized gain on available-for-sale securities
(1
)
 

 
Net loss on sublease
672

 

 
Changes in operating assets and liabilities:
 
 
 
 
 
Accounts receivable
3,015

 
5,628

 
 
Inventories
(120
)
 
(321
)
 
 
Prepaid expenses and other current assets
(540
)
 
1,844

 
 
Other assets
(895
)
 
(516
)
 
 
Accounts payable
437

 
536

 
 
Accrued expenses
3,860

 
4,455

 
 
Accrued wages and related liabilities
1,768

 
(957
)
 
 
Other current liabilities
89

 
(1,544
)
 
 
Deferred rent
786

 
702

 
 
Other long-term liabilities
3,216

 
1,150

NET CASH PROVIDED BY OPERATING ACTIVITIES
62,785

 
53,971

INVESTING ACTIVITIES
 
 
 
Purchases of property and equipment
(60,144
)
 
(41,179
)
Purchases of marketable securities
(910
)
 
(6,675
)
Sales of marketable securities
2,144

 
6,399

NET CASH USED IN INVESTING ACTIVITIES
(58,910
)
 
(41,455
)
FINANCING ACTIVITIES
 
 
 
Proceeds from deemed landlord financing
793

 
530

Payments on deemed landlord financing
(342
)
 
(154
)
Distributions paid to non-controlling interest holders
(692
)
 
(2,392
)
Payments under tax receivable agreement

 
(1,471
)
Proceeds from stock option exercises
5,103

 
6,567

Employee withholding taxes related to net settled equity awards
(949
)
 
(316
)
NET CASH PROVIDED BY FINANCING ACTIVITIES
3,913

 
2,764

NET INCREASE IN CASH AND CASH EQUIVALENTS
7,788

 
15,280

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
21,507

 
11,607

CASH AND CASH EQUIVALENTS AT END OF PERIOD
$
29,295

 
$
26,887

See accompanying Notes to Condensed Consolidated Financial Statements.

Shake Shack Inc. shak-img_burgersmalla03.jpg Form 10-Q | 7


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


8 | Shake Shack Inc. shak-img_burgersmalla03.jpg Form 10-Q


NOTE 1: NATURE OF OPERATIONS
 
Shake Shack Inc. ("we," "us," "our," "Shake Shack" and the "Company") was formed on September 23, 2014 as a Delaware corporation for the purpose of facilitating an initial public offering and other related transactions in order to carry on the business of SSE Holdings, LLC and its subsidiaries ("SSE Holdings"). We are the sole managing member of SSE Holdings and, as sole managing member, we operate and control all of the business and affairs of SSE Holdings. As a result, we consolidate the financial results of SSE Holdings and report a non-controlling interest representing the economic interest in SSE Holdings held by the other members of SSE Holdings. As of September 26, 2018 we owned 79.3% of SSE Holdings. Unless the context otherwise requires, "we," "us," "our," "Shake Shack," the "Company" and other similar references, refer to Shake Shack Inc. and, unless otherwise stated, all of its subsidiaries, including SSE Holdings.
We operate and license Shake Shack restaurants ("Shacks"), which serve hamburgers, chicken sandwiches, hot dogs, crinkle-cut fries, shakes, frozen custard, beer, wine and more. As of September 26, 2018, there were 188 Shacks in operation, system-wide, of which 107 were domestic company-operated Shacks, 11 were domestic licensed Shacks and 70 were international licensed Shacks.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include the accounts of Shake Shack Inc. and its subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. These interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") and on a basis consistent in all material respects with the accounting policies described in our Annual Report on Form 10-K for the fiscal year ended December 27, 2017 ("2017 Form 10-K"). In our opinion, all adjustments, which are normal and recurring in nature, necessary for a fair presentation of our financial position and results of operation have been included. Certain reclassifications have been made to prior period amounts to conform to the current year presentation. Operating results for interim periods are not necessarily indicative of the results that may be expected for a full fiscal year.
The accompanying Condensed Consolidated Balance Sheet as of December 27, 2017 has been derived from the audited financial statements at that date but does not include all of the disclosures required by GAAP. These interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes thereto included in our 2017 Form 10-K.
SSE Holdings is considered a variable interest entity. Shake Shack Inc. is the primary beneficiary as we have the majority economic interest in SSE Holdings and, as the sole managing member, have decision making authority that significantly affects the economic performance of the entity, while the limited partners have no substantive kick-out or participating rights. As a result, we consolidate SSE Holdings. The assets and liabilities of SSE Holdings represent substantially all of our consolidated assets and liabilities with the exception of certain deferred taxes and liabilities under the Tax Receivable Agreement. As of September 26, 2018 and December 27, 2017, the net assets of SSE Holdings were $228,773 and $197,301, respectively. The assets of SSE Holdings are subject to certain restrictions in SSE Holdings' revolving credit agreements. See Note 8 for more information.
Fiscal Year
We operate on a 52/53 week fiscal year ending on the last Wednesday in December. Fiscal 2018 contains 52 weeks and ends on December 26, 2018. Fiscal 2017 contained 52 weeks and ended on December 27, 2017. Unless otherwise stated, references to years in this report relate to fiscal years.
Use of Estimates
The preparation of these condensed consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date

Shake Shack Inc. shak-img_burgersmalla03.jpg Form 10-Q | 9


of the financial statements, and the reported amounts of sales and expenses during the reporting period. Actual results could differ from those estimates.
Recently Adopted Accounting Pronouncements     
We adopted the Accounting Standards Updates (“ASUs”) summarized below in fiscal 2018.
Accounting Standards Update (“ASU”)
Description
Date
Adopted
Revenue from Contracts with Customers and related standards
(ASU’s 2014-09, 2015-14, 2016-08, 2016-10, 2016-12, 2016-20)

This standard supersedes the existing revenue recognition guidance and provides a new framework for recognizing revenue. The core principle of the standard is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. The new standard also requires significantly more comprehensive disclosures than the existing standard. Guidance subsequent to ASU 2014-09 has been issued to clarify various provisions in the standard, including principal versus agent considerations, identifying performance obligations, licensing transactions, as well as various technical corrections and improvements.

See Note 3 for more information.
December 28, 2017
Recognition and Measurement of Financial Assets and Financial Liabilities
(ASU 2016-01)
For public business entities, this standard requires: (i) certain equity investments to be measured at fair value with changes in fair value recognized in net income; (ii) a qualitative assessment to identify impairment of equity investments without readily determinable fair values; (iii) elimination of the requirement to disclose the method(s) and significant assumptions used to estimate the fair value for financial instruments measured at amortized cost on the balance sheet; (iv) use of the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (v) separate presentation in other comprehensive income of the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; (vi) separate presentation of financial assets and liabilities by measurement category and form of financial asset in the financial statements; and (vii) an entity to evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets.

The adoption of this standard did not have a material impact to our consolidated financial statements.

December 28, 2017
Statement of Cash Flows: Classification of Certain Cash Receipts and Payments

(ASU 2016-15)
This standard provides guidance on eight specific cash flow issues with the objective of reducing diversity in practice.

The adoption of this standard did not have a material impact to our consolidated financial statements.
December 28, 2017

10 | Shake Shack Inc. shak-img_burgersmalla03.jpg Form 10-Q


Recently Issued Accounting Pronouncements       
Accounting Standards Update (“ASU”)
Description
Expected Impact
Effective Date
Leases

(ASU's 2016-02, 2018-01, 2018-10, 2018-11)
This standard establishes a new lease accounting model, which introduces the recognition of lease assets and liabilities for those leases classified as operating leases under previous GAAP. It should be applied using a modified retrospective approach applied either at the beginning of the earliest period presented, or at the adoption date, with the option to elect various practical expedients. Early adoption is permitted.
We plan to adopt the standard on December 27, 2018, electing the optional transition method to apply the standard as of the transition date. As a result, we will not apply the standard to the comparative periods presented.

We plan to elect the transition package of three practical expedients permitted under the new standard, which among other things, allows us to carryforward our historical lease classifications. We also made certain preliminary accounting policy elections for new leases post-transition, including the election to combine components. We are further evaluating other optional practical expedients and policy elections, as well as the impact of the standard to our processes, disclosures and internal control over financial reporting.

It is likely that the adoption will have a significant impact to our consolidated balance sheet given the extent of our real estate lease portfolio. We are completing our estimate of the impact, which is dependent on a number of key assumptions and factors, such as the discount rate as of the transition date, and the number of leases we will take possession of by the end of the year. Additionally, we expect that substantially all of our landlord funded assets and deemed landlord financing liabilities will be fully derecognized upon transition.

While we are continuing to assess all impacts of the standard, we currently do not expect our existing operating leases to have a material impact on our statement of income. For those leases where we are involved in construction and deemed to be the accounting owner, we will determine their lease classification. If they result in operating leases, we expect an increase to occupancy and related expenses, and a decrease to interest and depreciation expense post-transition.

We believe our real estate portfolio represents a significant portion of our overall lease portfolio, however, we are still in the process of evaluating other leases, such as equipment and embedded leases.
December 27, 2018

Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract

(ASU 2018-15)
This standard provides additional guidance on accounting for costs of implementation activities performed in a cloud computing arrangement that is a service contract. The standard aligns the requirements for capitalizing implementation costs of such arrangements with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The standard also clarifies the presentation and classification of the capitalized costs, amortization expense, and the associated treatment in the statement of cash flows by aligning these items with the same treatment for costs of the hosting service itself. Early adoption is permitted, including adoption in any interim period, utilizing either a prospective or retrospective adoption methodology.

We intend on early adopting this standard during the fourth quarter 2018, on a prospective basis. We are in the early stages of an implementation of an enterprise-wide system initiative, therefore, we expect to be able to capitalize some implementation costs related to this initiative that previously would have been expensed as incurred.

September 27, 2018



Shake Shack Inc. shak-img_burgersmalla03.jpg Form 10-Q | 11


NOTE 3: REVENUE
 
On December 28, 2017 we adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606), using the modified retrospective method applied to those contracts which were not completed as of December 28, 2017. We elected a practical expedient to aggregate the effect of all contract modifications that occurred before the adoption date, which did not have a material impact to our consolidated financial statements. Results for reporting periods beginning on or after December 28, 2017 are presented under Accounting Standards Codification Topic 606 ("ASC 606"). Prior period amounts were not revised and continue to be reported in accordance with ASC Topic 605 ("ASC 605"), the accounting standard then in effect.
Upon transition, on December 28, 2017, we recorded a decrease to opening equity of $1,574, net of tax, of which $1,135 was recognized in retained earnings and $439 in non-controlling interest, with a corresponding increase of $1,769 in other long-term liabilities, a decrease of $68 in other current liabilities, and an increase of $100 to accounts receivable.
Revenue Recognition
Revenue consists of Shack sales and licensing revenue. Generally, revenue is recognized as promised goods or services transfer to the guest or customer in an amount that reflects the consideration we expect to be entitled in exchange for those goods or services.
Revenue from Shack sales is presented net of discounts and recognized when food, beverage and retail products are sold. Sales tax collected from customers is excluded from Shack sales and the obligation is included in sales tax payable until the taxes are remitted to the appropriate taxing authorities. Revenue from our gift cards is deferred and recognized upon redemption.
Licensing revenues include initial territory fees, Shack opening fees, and ongoing sales-based royalty fees from licensed Shacks. Generally, the licenses granted to develop, open, and operate each Shack in a specified territory are the predominant goods or services transferred to the licensee in our contracts, and represent distinct performance obligations. Ancillary promised services, such as training and assistance during the initial opening of a Shack, are typically combined with the licenses and considered as one performance obligation per Shack. We determine the transaction price for each contract, which is comprised of the initial territory fee, and an estimate of the total Shack opening fees we expect to be entitled to. The calculation of total Shack opening fees included in the transaction price requires judgment, as it is based on an estimate of the number of Shacks we expect the licensee to open. The transaction price is then allocated equally to each Shack expected to open. The performance obligations are satisfied over time, starting when a Shack opens, through the end of the term of the license granted to the Shack. Because we are transferring licenses to access our intellectual property during a contractual term, revenue is recognized on a straight-line basis over the license term. Generally, payment for the initial territory fee is received upon execution of the licensing agreement, and payment for the restaurant opening fees are received either in advance of or upon opening the related restaurant. These payments are initially deferred and recognized as revenue as the performance obligations are satisfied, which occurs over a long-term period.
Revenue from sales-based royalties is recognized as the related sales occur.
Prior to the adoption of ASC 606, Shack opening fees were recorded as deferred revenue when received and proportionate amounts were recognized as revenue when a licensed Shack opened and all material services and conditions related to the fee were substantially performed. Territory fees were recorded as deferred revenue when received and recognized as revenue on a straight-line basis over the term of the license agreement, which generally began upon execution of the contract.

Shake Shack Inc. shak-img_burgersmalla03.jpg Form 10-Q | 12


Revenue recognized for the thirteen and thirty-nine weeks ended September 26, 2018 under ASC 606 and revenue that would have been recognized for the thirteen and thirty-nine weeks ended September 26, 2018 had ASC 605 been applied is as follows:
 
Thirteen Weeks Ended September 26, 2018
 
 
Thirty-Nine Weeks Ended September 26, 2018
 
 
As reported under ASC 606

 
If reported under ASC 605

 
Increase (decrease)

 
As reported under ASC 606

 
If reported under ASC 605

 
Increase (decrease)

Shack sales
$
115,882

 
$
115,882

 
$

 
$
324,869

 
$
324,869

 
$

Licensing revenue
3,765

 
3,909

 
(144
)
 
10,176

 
10,581

 
(405
)
Total revenue
$
119,647

 
$
119,791

 
$
(144
)
 
$
335,045

 
$
335,450

 
$
(405
)

Revenue recognized during the thirteen and thirty-nine weeks ended September 26, 2018 (under ASC 606) and thirteen and thirty-nine weeks ended September 27, 2017 (under ASC 605) disaggregated by type is as follows:
 
Thirteen Weeks Ended
 
 
Thirty-Nine Weeks Ended
 
 
September 26
2018

 
September 27
2017

 
September 26
2018

 
September 27
2017

Shack sales
$
115,882

 
$
91,100

 
$
324,869

 
$
253,258

Licensing revenue:
 
 
 
 
 
 
 
Sales-based royalties
3,660

 
3,318

 
9,951

 
8,918

Initial territory and opening fees
105

 
191

 
225

 
498

Total revenue
$
119,647

 
$
94,609

 
$
335,045

 
$
262,674


The aggregate amount of the transaction price allocated to performance obligations that are unsatisfied (or partially unsatisfied) as of September 26, 2018 is $11,332. We expect to recognize this amount as revenue over a long-term period, as the license term for each Shack ranges from 5 to 20 years. This amount excludes any variable consideration related to sales-based royalties.
Contract Balances
Opening and closing balances of contract liabilities and receivables from contracts with customers is as follows:
 
September 26
2018

 
December 28
2017

Shack sales receivables
$
2,460

 
$
2,184

Licensing receivables
3,187

 
1,522

Gift card liability
1,358

 
1,472

Deferred revenue, current
291

 
265

Deferred revenue, long-term
7,027

 
3,742


Revenue recognized during the thirteen and thirty-nine weeks ended September 26, 2018 that was included in their respective liability balances at the beginning of the period is as follows:
 
Thirteen Weeks Ended
September 26 2018

 
Thirty-Nine Weeks Ended
September 26 2018

Gift card liability
$
59

 
$
467

Deferred revenue, current
67

 
185



Shake Shack Inc. shak-img_burgersmalla03.jpg Form 10-Q | 13


NOTE 4: FAIR VALUE MEASUREMENTS
 
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following tables present information about our financial assets and liabilities measured at fair value on a recurring basis as of September 26, 2018 and December 27, 2017, and indicate the classification within the fair value hierarchy.
Cash, Cash Equivalents and Marketable Securities
The following tables summarize our cash, cash equivalents and marketable securities by significant investment categories as of September 26, 2018 and December 27, 2017:
 
 
September 26, 2018
 
 
Cost Basis

 
 Gross Unrealized Gains

 
 Gross Unrealized Losses

 
 Fair Value

 
 Cash and Cash Equivalents

 
Marketable Securities

Cash
$
24,290

 
$

 
$

 
$
24,290

 
$
24,290

 
$

Level 1:
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
5,005

 

 

 
5,005

 
5,005

 

 
Mutual funds
61,860

 

 
(60
)
 
61,800

 

 
61,800

Level 2:
 
 
 
 
 
 
 
 
 
 
 
 
Corporate debt securities(1)

 

 

 

 

 

Total
$
91,155

 
$

 
$
(60
)
 
$
91,095

 
$
29,295

 
$
61,800

 
 
December 27, 2017
 
 
Cost Basis

 
 Gross Unrealized Gains

 
 Gross Unrealized Losses

 
 Fair Value

 
 Cash and Cash Equivalents

 
Marketable Securities

Cash
$
16,138

 
$

 
$

 
$
16,138

 
$
16,138

 
$

Level 1:
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
5,369

 

 

 
5,369

 
5,369

 

 
Mutual funds
60,985

 

 
(61
)
 
60,924

 

 
60,924

Level 2:
 
 
 
 
 
 
 
 
 
 
 
 
Corporate debt securities(1)
2,125

 
2

 
(15
)
 
2,112

 

 
2,112

Total
$
84,617

 
$
2

 
$
(76
)
 
$
84,543

 
$
21,507

 
$
63,036

(1)
Corporate debt securities were measured at fair value using a market approach utilizing observable prices for identical securities or securities with similar characteristics and inputs that are observable or can be corroborated by observable market data.

On December 28, 2017, we adopted ASU 2016-01, which requires certain equity investments to be measured at fair value with changes in fair value recognized in net income. Net unrealized gains on available-for-sale equity securities totaling $62 and $1 were included on the Condensed Consolidated Statements of Income during the thirteen and thirty-nine weeks ended September 26, 2018, respectively. Net unrealized losses on available-for-sale securities totaling $74 were included in accumulated other comprehensive income on the Condensed Consolidated Balance Sheet as of December 27, 2017.

14 | Shake Shack Inc. shak-img_burgersmalla03.jpg Form 10-Q


The following tables summarize the gross unrealized losses and fair values for those investments that were in an unrealized loss position as of September 26, 2018 and December 27, 2017, aggregated by investment category and the length of time that individual securities have been in a continuous loss position:
 
 
September 26, 2018
 
 
 
Less than 12 Months
 
 
12 Months or Greater
 
 
Total
 
 
Fair Value

 
Unrealized Loss

 
Fair Value

 
Unrealized Loss

 
Fair Value

 
Unrealized Loss

 
Money market funds
$

 
$

 
$

 
$

 
$

 
$

 
Mutual funds
61,800

 
(60
)
 

 

 
61,800

 
(60
)
 
Corporate debt securities

 

 

 

 

 

Total
$
61,800

 
$
(60
)
 
$

 
$

 
$
61,800

 
$
(60
)
 
 
December 27, 2017
 
 
 
Less than 12 Months
 
 
12 Months or Greater
 
 
Total
 
 
Fair Value

 
Unrealized Loss

 
Fair Value

 
Unrealized Loss

 
Fair Value

 
Unrealized Loss

 
Money market funds
$

 
$

 
$

 
$

 
$

 
$

 
Mutual funds
60,924

 
(61
)
 

 

 
60,924

 
(61
)
 
Corporate debt securities
1,675

 
(12
)
 
162

 
(3
)
 
1,837

 
(15
)
Total
$
62,599

 
$
(73
)
 
$
162

 
$
(3
)
 
$
62,761

 
$
(76
)

A summary of other income from available-for-sale securities recognized during the thirteen and thirty-nine weeks ended September 26, 2018 and September 27, 2017 is as follows:
 
 
Thirteen Weeks Ended
 
 
Thirty-Nine Weeks Ended
 
 
September 26
2018

 
September 27
2017

 
September 26
2018

 
September 27
2017

Available-for-sale securities:
 
 
 
 
 
 
 
 
Dividend income
$
373

 
$
222

 
$
977

 
$
591

 
Interest income

 
19

 
7

 
58

 
Realized gain (loss) on sale of investments
1

 
(12
)
 
(15
)
 
(27
)
 
Unrealized gain (loss) on available-for-sale equity securities
62

 

 
1

 

Total other income, net
$
436

 
$
229

 
$
970

 
$
622


A summary of available-for-sale securities sold and gross realized gains and losses recognized during the thirteen and thirty-nine weeks ended September 26, 2018 and September 27, 2017 is as follows:
 
 
Thirteen Weeks Ended
 
 
Thirty-Nine Weeks Ended
 
 
September 26
2018

 
September 27
2017

 
September 26
2018

 
September 27
2017

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

 
$
584

 
$
2,144

 
$
1,212

 
Cost basis of sales and redemptions

 
597

 
2,160

 
1,239

 
Gross realized gains included in net income

 
1

 
2

 
1

 
Gross realized losses included in net income

 
(13
)
 
(18
)
 
(28
)
 
Amounts reclassified out of accumulated other comprehensive loss

 
14

 
16

 
28



Shake Shack Inc. shak-img_burgersmalla03.jpg Form 10-Q | 15


Realized gains and losses are determined on a specific identification method and are included in other income, net on the Condensed Consolidated Statements of Income.
We periodically review our marketable securities for other-than-temporary impairment. We consider factors such as the duration, severity and the reason for the decline in value, the potential recovery period and our intent to sell. As of September 26, 2018 and December 27, 2017, the declines in the market value of our marketable securities investment portfolio were considered to be temporary in nature.
Other Financial Instruments
The carrying value of our other financial instruments, including accounts receivable, accounts payable, and accrued expenses as of September 26, 2018 and December 27, 2017 approximated their fair value due to the short-term nature of these financial instruments.
Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
Assets and liabilities that are measured at fair value on a non-recurring basis include our long-lived assets and indefinite-lived intangible assets. There were no impairments recognized during the thirteen and thirty-nine weeks ended September 26, 2018 and September 27, 2017.
NOTE 5: INVENTORIES
 
Inventories as of September 26, 2018 and December 27, 2017 consisted of the following:
 
September 26
2018

 
December 27
2017

Food
$
977

 
$
874

Wine
72

 
69

Beer
95

 
85

Beverages
168

 
111

Retail merchandise
66

 
119

Inventories
$
1,378

 
$
1,258



16 | Shake Shack Inc. shak-img_burgersmalla03.jpg Form 10-Q


NOTE 6: PROPERTY AND EQUIPMENT
 
Property and equipment as of September 26, 2018 and December 27, 2017 consisted of the following:
 
September 26
2018

 
December 27
2017

Leasehold improvements
$
197,565

 
$
166,963

Landlord funded assets
12,782

 
7,472

Equipment
36,325

 
31,608

Furniture and fixtures
12,381

 
10,128

Computer equipment and software
16,073

 
12,721

Construction in progress (includes landlord funded assets under construction)
44,302

 
16,458

Property and equipment, gross
319,428

 
245,350

Less: accumulated depreciation
77,726

 
58,255

Property and equipment, net
$
241,702