SHAK-20170628_10Q
Table of Contents

 
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 June 28, 2017
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to ______
Commission file number: 001-36823
 
shak-img_shakeshacklogo.jpg
SHAKE SHACK INC.
(Exact name of registrant as specified in its charter)
 
Delaware
47-1941186
(State or other jurisdiction of
incorporation or organization)
(IRS Employer
Identification No.)
24 Union Square East, 5th Floor
New York, New York
10003
(Address of principal executive offices)
(Zip Code)
(646) 747-7200
(Registrant's telephone number, including area code)
Not applicable
(Former name or former address, if changed since last report)
 

Indicate by check mark if the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule-405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). þ Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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  
o
 
Accelerated filer  
þ
Non-accelerated filer  
o
(Do not check if a smaller reporting company)
Smaller reporting company
o
 
 
 
Emerging growth company
þ
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. þ
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 July 26, 2017, there were 25,981,176 shares of Class A common stock outstanding and 10,729,992 shares of Class B common stock outstanding.
 



SHAKE SHACK INC.
TABLE OF CONTENTS

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



Table of Contents

Cautionary Note Regarding Forward-Looking Information
This Quarterly Report on Form 10-Q ("Form 10-Q") contains forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995 ("PSLRA"), which are subject to known and unknown risks, uncertainties and other important factors that may cause actual results to be materially different. All statements other than statements of historical fact are forward-looking statements. Many of the forward-looking statements are located in Part I, Item 2 of this Form 10-Q under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations." Forward-looking statements discuss our current expectations and projections relating to our financial position, results of operations, plans, objectives, future performance and business. You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as "aim," "anticipate," "believe," "estimate," "expect," "forecast," "outlook," "potential," "project," "projection," "plan," "intend," "seek," "may," "could," "would," "will," "should," "can," "can have," "likely," the negatives thereof and other similar expressions.
While we believe that our assumptions are reasonable, it is very difficult to predict the impact of known factors, and it is impossible to anticipate all factors that could affect our actual results. All forward-looking statements are expressly qualified in their entirety by these cautionary statements, except that the safe harbor provisions of the PSLRA do not apply to any forward-looking statements relating to the operations of any of our partnerships or limited liability companies. You should evaluate all forward-looking statements made in this Form 10-Q in the context of the risks and uncertainties disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 28, 2016, as amended, and subsequent Quarterly Reports on Form 10-Q filed with the U.S. Securities and Exchange Commission (the "SEC") under the heading "Risk Factors."
The forward-looking statements included in this Form 10-Q are made only as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law.

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PART I – FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited).
 
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SHAKE SHACK INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in thousands, except share and per share amounts)
 
 
 
 
June 28
2017

 
December 28
2016

ASSETS
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
$
22,436

 
$
11,607

 
Marketable securities
63,106

 
62,040

 
Accounts receivable
5,078

 
6,006

 
Inventories
968

 
806

 
Prepaid expenses and other current assets
1,591

 
3,485

 
Total current assets
93,179

 
83,944

Property and equipment, net
160,383

 
136,264

Deferred income taxes, net
320,015

 
313,207

Other assets
4,679

 
4,779

TOTAL ASSETS
$
578,256

 
$
538,194

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Current liabilities:
 
 
 
 
Accounts payable
$
9,482

 
$
6,921

 
Accrued expenses
8,615

 
8,538

 
Accrued wages and related liabilities
4,758

 
6,084

 
Other current liabilities
10,252

 
10,173

 
Total current liabilities
33,107

 
31,716

Deemed landlord financing
11,166

 
2,007

Deferred rent
33,524

 
31,107

Liabilities under tax receivable agreement, net of current portion
277,316

 
267,902

Other long-term liabilities
2,145

 
4,109

Total liabilities
357,258

 
336,841

Commitments and contingencies

 

Stockholders' equity:
 
 
 
 
Preferred stock, no par value—10,000,000 shares authorized; none issued and outstanding as of June 28, 2017 and December 28, 2016.

 

 
Class A common stock, $0.001 par value—200,000,000 shares authorized; 25,939,866 and 25,151,384 shares issued and outstanding as of June 28, 2017 and December 28, 2016, respectively.
26

 
25

 
Class B common stock, $0.001 par value—35,000,000 shares authorized; 10,770,992 and 11,253,592 shares issued and outstanding as of June 28, 2017 and December 28, 2016, respectively.
11

 
11

 
Additional paid-in capital
145,102

 
135,448

 
Retained earnings
23,865

 
16,719

 
Accumulated other comprehensive loss
(17
)
 
(15
)
 
Total stockholders' equity attributable to Shake Shack Inc.
168,987

 
152,188

Non-controlling interests
52,011

 
49,165

Total equity
220,998

 
201,353

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$
578,256

 
$
538,194

See accompanying Notes to Condensed Consolidated Financial Statements.

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SHAKE SHACK INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(in thousands, except per share amounts)
 
 
 
 
Thirteen Weeks Ended
 
 
Twenty-Six Weeks Ended
 
 
 
 
June 28
2017

 
June 29
2016

 
June 28
2017

 
June 29
2016

Shack sales
$
88,003

 
$
64,406

 
$
162,158

 
$
116,559

Licensing revenue
3,313

 
2,066

 
5,907

 
4,078

TOTAL REVENUE
91,316

 
66,472

 
168,065

 
120,637

Shack-level operating expenses:
 
 
 
 
 
 
 
 
Food and paper costs
24,712

 
18,104

 
45,886

 
33,136

 
Labor and related expenses
22,426

 
15,262

 
42,886

 
28,424

 
Other operating expenses
8,486

 
5,979

 
16,151

 
10,898

 
Occupancy and related expenses
7,043

 
5,209

 
13,219

 
9,532

General and administrative expenses
9,678

 
7,496

 
18,148

 
14,380

Depreciation expense
5,258

 
3,404

 
10,006

 
6,510

Pre-opening costs
1,876

 
2,085

 
4,291

 
4,110

Loss on disposal of property and equipment
100

 

 
113

 

TOTAL EXPENSES
79,579

 
57,539

 
150,700

 
106,990

OPERATING INCOME
11,737

 
8,933

 
17,365

 
13,647

Other income, net
198

 
23

 
393

 
46

Interest expense
(366
)
 
(91
)
 
(669
)
 
(178
)
INCOME BEFORE INCOME TAXES
11,569

 
8,865

 
17,089

 
13,515

Income tax expense
3,385

 
2,316

 
5,043

 
3,615

NET INCOME
8,184

 
6,549

 
12,046

 
9,900

Less: net income attributable to non-controlling interests
3,305

 
3,251

 
4,900

 
5,140

NET INCOME ATTRIBUTABLE TO SHAKE SHACK INC.
$
4,879

 
$
3,298

 
$
7,146

 
$
4,760

Earnings per share of Class A common stock:
 
 
 
 
 
 
 
 
Basic
$
0.19

 
$
0.15

 
$
0.28

 
$
0.22

 
Diluted
$
0.19

 
$
0.14

 
$
0.27

 
$
0.22

Weighted-average shares of Class A common stock outstanding:
 
 
 
 
 
 
 
 
Basic
25,798

 
22,553

 
25,587

 
21,453

 
Diluted
26,312

 
23,050

 
26,133

 
21,931

See accompanying Notes to Condensed Consolidated Financial Statements.




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SHAKE SHACK INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
(in thousands)
 
 
 
 
Thirteen Weeks Ended
 
 
Twenty-Six Weeks Ended
 
 
 
 
June 28
2017

 
June 29
2016

 
June 28
2017

 
June 29
2016

Net income
$
8,184

 
$
6,549

 
$
12,046

 
$
9,900

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
Available-for-sale securities(1):
 
 
 
 
 
 
 
 
 
Change in net unrealized holding losses
(8
)
 
(6
)
 
(17
)
 
(8
)
 
 
Less: reclassification adjustments for net realized losses included in net income
11

 

 
14

 

 
 
Net change
3

 
(6
)
 
(3
)
 
(8
)
OTHER COMPREHENSIVE INCOME (LOSS)
3

 
(6
)
 
(3
)
 
(8
)
COMPREHENSIVE INCOME
8,187

 
6,543

 
12,043

 
9,892

Less: comprehensive income attributable to non-controlling interest
3,306

 
3,249

 
4,899

 
5,137

COMPREHENSIVE INCOME ATTRIBUTABLE TO SHAKE SHACK INC.
$
4,881

 
$
3,294

 
$
7,144

 
$
4,755

(1) Net of tax benefit of $0 for the thirteen and twenty-six weeks ended June 28, 2017 and June 29, 2016.
See accompanying Notes to Condensed Consolidated Financial Statements.



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

 
Retained Earnings

 
Accumulated Other Comprehensive Loss

 
Non-
Controlling
Interest

 
Total
Equity

 
 
Shares

 
Amount

 
Shares

 
Amount

 
 
 
 
 
BALANCE, DECEMBER 28, 2016
25,151,384

 
$
25

 
11,253,592

 
$
11

 
$
135,448

 
$
16,719

 
$
(15
)
 
$
49,165

 
$
201,353

 
Net income

 

 

 

 

 
7,146

 

 
4,900

 
12,046

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


 


 


 


 


 


 
(2
)
 
(1
)
 
(3
)
 
Equity-based compensation

 


 


 


 
2,612

 


 


 


 
2,612

 
Activity under stock compensation plans
305,882

 
1

 


 


 
3,502

 


 


 
2,368

 
5,871

 
Redemption of LLC Interests
482,600

 

 
(482,600
)
 

 
2,042

 


 


 
(2,042
)
 

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


 


 


 


 
1,498

 


 


 


 
1,498

 
Distributions paid to non-controlling interest holders
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(2,379
)
 
(2,379
)
BALANCE, JUNE 28, 2017
25,939,866

 
$
26

 
10,770,992

 
$
11

 
$
145,102

 
$
23,865

 
$
(17
)
 
$
52,011

 
$
220,998

See accompanying Notes to Condensed Consolidated Financial Statements.



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SHAKE SHACK INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
 
 
 
 
 
 
 
Twenty-Six Weeks Ended
 
 
 
 
 
 
 
June 28
2017

 
June 29
2016

OPERATING ACTIVITIES
 
 
 
Net income (including amounts attributable to non-controlling interests)
$
12,046

 
$
9,900

Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
 
Depreciation expense
10,006

 
6,510

 
Equity-based compensation
2,534

 
2,240

 
Deferred income taxes
2,561

 
(21
)
 
Non-cash interest expense
154

 
141

 
Excess tax benefits on equity-based compensation

 
(35
)
 
Loss on sale of marketable securities
15

 

 
Loss on disposal of property and equipment
113

 

 
Changes in operating assets and liabilities:
 
 
 
 
 
Accounts receivable
3,964

 
1,740

 
 
Inventories
(162
)
 
(92
)
 
 
Prepaid expenses and other current assets
2,310

 
169

 
 
Other assets
(633
)
 
(492
)
 
 
Accounts payable
1,024

 
347

 
 
Accrued expenses
1,324

 
2,497

 
 
Accrued wages and related liabilities
(1,326
)
 
(1,403
)
 
 
Other current liabilities
(1,390
)
 
409

 
 
Deferred rent
603

 
2,768

 
 
Other long-term liabilities
587

 
(242
)
NET CASH PROVIDED BY OPERATING ACTIVITIES
33,730

 
24,436

INVESTING ACTIVITIES
 
 
 
Purchases of property and equipment
(24,986
)
 
(26,548
)
Purchases of marketable securities
(5,993
)
 
(378
)
Sales of marketable securities
5,628

 
322

NET CASH USED IN INVESTING ACTIVITIES
(25,351
)
 
(26,604
)
FINANCING ACTIVITIES
 
 
 
Payments on promissory note

 
(313
)
Proceeds from deemed landlord financing
530

 

Payments on deemed landlord financing
(101
)
 

Distributions paid to non-controlling interest holders
(2,379
)
 
(1,602
)
Payments under tax receivable agreement
(1,471
)
 

Proceeds from stock option exercises
6,187

 
1,570

Employee withholding taxes related to net settled equity awards
(316
)
 

Excess tax benefits from equity-based compensation

 
35

NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
2,450

 
(310
)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
10,829

 
(2,478
)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
11,607

 
70,849

CASH AND CASH EQUIVALENTS AT END OF PERIOD
$
22,436

 
$
68,371

See accompanying Notes to Condensed Consolidated Financial Statements.

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

 
 
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NOTE 1: NATURE OF OPERATIONS
 
Shake Shack Inc. ("we," "us," "our," "Shake Shack" and the "Company") was formed on September 23, 2014 as a Delaware corporation for the purpose 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 28, 2017 we owned 70.7% of SSE Holdings. Unless the context otherwise requires, "we," "us," "our," "Shake Shack," the "Company" and other similar references, refer to Shake Shack Inc. and, unless otherwise stated, all of its subsidiaries, including SSE Holdings.
We operate and license Shake Shack restaurants ("Shacks"), which serve hamburgers, chicken sandwiches, hot dogs, crinkle-cut fries, shakes, frozen custard, beer, wine and more. As of June 28, 2017, there were 134 Shacks in operation, system-wide, of which 75 were domestic company-operated Shacks, nine were domestic licensed Shacks and 50 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 28, 2016, as amended ("2016 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 28, 2016 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 2016 Form 10-K.
SSE Holdings is 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 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 28, 2017 and December 28, 2016, the net assets of SSE Holdings were $177,437 and $158,845, respectively. The assets of SSE Holdings are subject to certain restrictions in SSE Holdings' revolving credit agreements. See Note 7 for more information.

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Fiscal Year
We operate on a 52/53 week fiscal year ending on the last Wednesday in December. Fiscal 2017 contains 52 weeks and ends on December 27, 2017. Fiscal 2016 contained 52 weeks and ended on December 28, 2016. 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     
We adopted the Accounting Standards Updates (“ASUs”) summarized below in fiscal 2017. The effects of adoption did not have a material impact on our consolidated financial statements.
Accounting Standards Update (“ASU”)
Description
Date
Adopted
Improvements to Employee Share-Based Payment Accounting
(ASU 2016-09)
This standard simplifies certain aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, certain classifications on the statement of cash flows, and an option to recognize gross stock compensation expense with actual forfeitures recognized as they occur. Upon adoption, we made such policy election. The adoption methodology applied varied based on each applicable provision of the standard, and none of the provisions had a material impact on our consolidated financial statements.
December 29, 2016
Simplifying the Measurement of Inventory (ASU 2015-11)
This standard applies to inventory measured using methods other than last-in, first-out (LIFO) or the retail method, and requires entities to measure such inventory at the lower of cost or net realizable value. It was applied prospectively.
December 29, 2016
Recently Issued Accounting Pronouncements       
Accounting Standards Update (“ASU”)
Description
Expected Impact
Effective Date
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. It should be applied retrospectively to each period presented, subject to certain conditions.
We are currently evaluating the impact this standard will have on our consolidated financial statements.
December 28, 2017

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Accounting Standards Update (“ASU”)
Description
Expected Impact
Effective Date
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 standard 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 resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value.
We are currently evaluating the impact this standard will have on our consolidated financial statements.
December 28, 2017
Revenue from Contracts with Customers and related standards
(ASU’s 2014-09, 2015-14, 2016-08, 2016-10, 2016-12, 2015-20)
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. This standard may be adopted using either a retrospective or modified retrospective method. Early adoption is permitted.

We are currently in the process of evaluating the impact this standard is expected to have on our consolidated financial statements. It is still too early in our process to determine the magnitude of the potential impact. However, based on our preliminary assessment, we believe that further evaluation of the fixed fees associated with our licensing agreements (such as the initial territory fees) may reveal differences in the timing of revenue recognition from current policy, but that it is likely that recognition of sales-based royalties will not significantly change. In addition to further evaluating each of our licensing agreements, we are in the process of assessing whether any sales promotions or discounts we currently offer related to our Shack sales could be considered separate performance obligations. As we continue our evaluation, we will further clarify the expected impact of the adoption of the standard.


We plan to adopt the standard on December 28, 2017, and we have not yet selected a transition method.
December 28, 2017
Leases
(ASU 2016-02)

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, with the option to elect various practical expedients. Early adoption is permitted.
We are currently evaluating the impact this standard will have on our consolidated financial statements.
December 27, 2018


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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 28, 2017 and December 28, 2016, 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 28, 2017 and December 28, 2016:
 
 
June 28, 2017
 
 
Cost Basis

 
 Gross Unrealized Gains

 
 Gross Unrealized Losses

 
 Fair Value

 
 Cash and Cash Equivalents

 
Marketable Securities

Cash
$
17,417

 
$

 
$

 
$
17,417

 
$
17,417

 
$

Level 1:
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
5,019

 

 

 
5,019

 
5,019

 

 
Mutual funds
60,566

 

 

 
60,566

 

 
60,566

Level 2:
 
 
 
 
 
 
 
 
 
 
 
 
Corporate debt securities(1)
2,570

 
2

 
(32
)
 
2,540

 

 
2,540

Total
$
85,572

 
$
2

 
$
(32
)
 
$
85,542

 
$
22,436

 
$
63,106

 
 
December 28, 2016
 
 
Cost Basis

 
 Gross Unrealized Gains

 
 Gross Unrealized Losses

 
 Fair Value

 
 Cash and Cash Equivalents

 
Marketable Securities

Cash
$
6,322

 
$

 
$

 
$
6,322

 
$
6,322

 
$

Level 1:
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
5,285

 

 

 
5,285

 
5,285

 

 
Mutual funds
60,232

 

 

 
60,232

 

 
60,232

Level 2:
 
 
 
 
 
 
 
 
 
 
 
 
Corporate debt securities(1)
2,473

 
3

 
(30
)
 
2,446

 

 
2,446

Total
$
74,312

 
$
3

 
$
(30
)
 
$
74,285

 
$
11,607

 
$
62,678

(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.

Net unrealized losses on available-for-sale securities totaling $30 and $27 were included in accumulated other comprehensive loss on the Condensed Consolidated Balance Sheet as of June 28, 2017 and December 28, 2016, respectively.

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The following tables summarize the gross unrealized losses and fair values for those investments that were in an unrealized loss position as of June 28, 2017 and December 28, 2016, aggregated by investment category and the length of time that individual securities have been in a continuous loss position:
 
 
June 28, 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

 

 

 

 

 

 
Corporate debt securities
1,445

 
(8
)
 
455

 
(24
)
 
1,900

 
(32
)
Total
$
1,445

 
$
(8
)
 
$
455

 
$
(24
)
 
$
1,900

 
$
(32
)
 
 
December 28, 2016
 
 
 
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

 

 

 

 

 

 
Corporate debt securities
1,244

 
(10
)
 
540

 
(20
)
 
1,784

 
(30
)
Total
$
1,244

 
$
(10
)
 
$
540

 
$
(20
)
 
$
1,784

 
$
(30
)
A summary of other income from available-for-sale securities recognized during the thirteen and twenty-six weeks ended June 28, 2017 and June 29, 2016 is as follows:
 
 
Thirteen Weeks Ended
 
 
Twenty-Six Weeks Ended
 
 
June 28
2017

 
June 29
2016

 
June 28
2017

 
June 29
2016

Available-for-sale securities:
 
 
 
 
 
 
 
 
Dividend income
$
191

 
$

 
$
369

 
$

 
Interest income
19

 
23

 
39

 
46

 
Loss on investments
(12
)
 

 
(15
)
 

Total other income, net
$
198

 
$
23

 
$
393

 
$
46

A summary of available-for-sale securities sold and gross realized gains and losses recognized during the thirteen and twenty-six weeks ended June 28, 2017 and June 29, 2016 is as follows:
 
 
Thirteen Weeks Ended
 
 
Twenty-Six Weeks Ended
 
 
June 28
2017

 
June 29
2016

 
June 28
2017

 
June 29
2016

Available-for-sale securities:
 
 
 
 
 
 
 
 
Gross proceeds from sales and redemptions
$
473

 
$
322

 
$
628

 
$
322

 
Cost basis of sales and redemptions
484

 
322

 
642

 
322

 
Gross realized gains included in net income

 
1

 

 
1

 
Gross realized losses included in net income
(12
)
 
(1
)
 
(15
)
 
(1
)
 
Amounts reclassified out of accumulated other comprehensive loss
11

 

 
14

 


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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.
The estimated fair value of our investments in corporate debt securities that are accounted for as available-for-sale securities are all due within one year and are included within marketable securities on the Condensed Consolidated Balance Sheets.
We periodically review our marketable securities for other-than-temporary impairment. We consider factors such as the duration, severity and the reason for the decline in value, the potential recovery period and our intent to sell. For our debt securities, we also consider whether (i) it is more likely than not that we will be required to sell the debt securities before recovery of their amortized cost basis, and (ii) the amortized cost basis cannot be recovered as a result of credit losses. As of June 28, 2017 and December 28, 2016, 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 28, 2017 and December 28, 2016 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 28, 2017 and June 29, 2016.
NOTE 4: INVENTORIES
 
Inventories as of June 28, 2017 and December 28, 2016 consisted of the following:
 
June 28
2017

 
December 28
2016

Food
$
578

 
$
543

Wine
56

 
47

Beer
71

 
58

Beverages
93

 
79

Retail merchandise
170

 
79

Inventories
$
968

 
$
806


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NOTE 5: PROPERTY AND EQUIPMENT
 
Property and equipment as of June 28, 2017 and December 28, 2016 consisted of the following:
 
June 28
2017

 
December 28
2016

Leasehold improvements
$
139,252

 
$
120,629

Landlord funded assets
4,644

 

Equipment
27,069

 
23,194

Furniture and fixtures
8,535

 
7,342

Computer equipment and software
10,057

 
8,710

Construction in progress (includes assets under construction from deemed landlord financing)
18,067

 
13,510

Property and equipment, gross
207,624

 
173,385

Less: accumulated depreciation
47,241

 
37,121

Property and equipment, net
$
160,383

 
$
136,264

NOTE 6: SUPPLEMENTAL BALANCE SHEET INFORMATION
 
The components of other current liabilities as of June 28, 2017 and December 28, 2016 are as follows:
 
June 28
2017

 
December 28
2016

Sales tax payable
$
1,601

 
$
1,324

Current portion of liabilities under tax receivable agreement
3,110

 
4,580

Gift card liability
1,105

 
1,153

Deferred compensation
2,455

 

Other
1,981

 
3,116

Other current liabilities
$
10,252

 
$
10,173

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. 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 28, 2017 and December 28, 2016, there were no amounts outstanding under the Revolving Credit Facility. As of June 28, 2017, 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).

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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 28, 2017, we were in compliance with all covenants.
As of June 28, 2017 and December 28, 2016 we had deemed landlord financing liabilities of $11,166 and $2,007, respectively, for certain leases where we are involved in the construction of leased assets and are considered the accounting owner of the construction project.
Total interest costs incurred were $409 and $733 for the thirteen and twenty-six weeks ended June 28, 2017, respectively, and $91 and $178 for the thirteen and twenty-six weeks ended June 29, 2016, respectively. Total amounts capitalized into property and equipment were $43 and $64 for the thirteen and twenty-six weeks ended June 28, 2017, respectively. No amounts were capitalized for the thirteen and 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, as further amended, (the "LLC Agreement") of SSE Holdings provides that holders of LLC Interests may, from time to time, require SSE Holdings to redeem all or a portion of their LLC Interests for newly-issued shares of Class A common stock on a one-for-one basis. In connection with any redemption or exchange, we will receive a corresponding number of LLC Interests, increasing our total ownership interest in SSE Holdings. Changes in our ownership interest in SSE Holdings while we retain our controlling interest in SSE Holdings will be accounted for as equity transactions. As such, future redemptions or direct exchanges of LLC Interests in SSE Holdings by the other members of SSE Holdings will result in a change in ownership and reduce the amount recorded as non-controlling interest and increase additional paid-in capital.
The following table summarizes the ownership interest in SSE Holdings as of June 28, 2017 and December 28, 2016.
 
June 28, 2017
 
 
December 28, 2016
 
 
LLC Interests

 
Ownership %

 
LLC Interests

 
Ownership %

Number of LLC Interests held by Shake Shack Inc.
25,939,866

 
70.7
%
 
25,151,384

 
69.1
%
Number of LLC Interests held by non-controlling interest holders
10,770,992

 
29.3
%
 
11,253,592

 
30.9
%
Total LLC Interests outstanding
36,710,858

 
100.0
%
 
36,404,976

 
100.0
%
The weighted average ownership percentages for the applicable reporting periods are used to attribute net income and other comprehensive income (loss) 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 28, 2017 was 29.6% and 30.0%, respectively. 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.

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The following table summarizes the effects of changes in ownership of SSE Holdings on our equity during the thirteen and twenty-six weeks ended June 28, 2017 and June 29, 2016.
 
 
Thirteen Weeks Ended
 
 
Twenty-Six Weeks Ended
 
 
June 28
2017

 
June 29
2016

 
June 28
2017

 
June 29
2016

Net income attributable to Shake Shack Inc.
$
4,879

 
$
3,298

 
$
7,146

 
$
4,760

Other comprehensive income (loss):
 
 
 
 
 
 
 
 
Unrealized holding gains (losses) on available-for-sale securities
2

 
(4
)
 
(2
)
 
(5
)
Transfers (to) from non-controlling interests:
 
 
 
 
 
 
 
 
Increase in additional paid-in capital as a result of the redemption of LLC Interests
720

 
5,736

 
2,042

 
10,378

 
Increase in additional paid-in capital as a result of activity under stock compensation plans
632

 
161

 
3,502

 
404

Total effect of changes in ownership interest on equity attributable to Shake Shack Inc.
$
6,233

 
$
9,191

 
$
12,688

 
$
15,537

During the twenty-six weeks ended June 28, 2017 and June 29, 2016, an aggregate of 482,600 and 3,477,145 LLC Interests, respectively, were redeemed by non-controlling interest holders for newly-issued shares of Class A common stock, and we received 482,600 and 3,477,145 LLC Interests in connection with these redemptions for the twenty-six weeks ended June 28, 2017 and June 29, 2016, respectively, increasing our total ownership interest in SSE Holdings.
During the twenty-six weeks ended June 28, 2017 and June 29, 2016, we received an aggregate of 305,882 and 77,935 LLC Interests, respectively, in connection with the activity under our stock compensation plan.
NOTE 9: EQUITY-BASED COMPENSATION
 
A summary of equity-based compensation expense recognized during the thirteen and twenty-six weeks ended June 28, 2017 and June 29, 2016 is as follows:
 
 
Thirteen Weeks Ended
 
 
Twenty-Six Weeks Ended
 
 
 
June 28
2017

 
June 29
2016

 
June 28
2017

 
June 29
2016

Stock options
$
863

 
$
1,053

 
$
1,827

 
$
2,083

Performance stock units
399

 
157

 
684

 
157

Restricted stock units
23

 

 
23

 

Equity-based compensation expense
$
1,285

 
$
1,210

 
$
2,534

 
$
2,240

Total income tax benefit recognized related to equity-based compensation
$
44

 
$
33

 
$
95

 
$
64

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

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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 28
2017
 
 
June 29
2016
 
 
June 28
2017
 
 
June 29
2016
 
Expected U.S. federal income taxes at statutory rate
$
4,050

35.0
 %
 
$
3,014

34.0
 %
 
$
5,982

35.0
 %
 
$
4,595

34.0
 %
State and local income taxes, net of federal benefit
659

5.7
 %
 
472

5.3
 %
 
1,008

5.9
 %
 
744

5.5
 %
Foreign withholding taxes
227

2.0
 %
 
117

1.3
 %
 
413

2.4
 %
 
357

2.6
 %
Tax credits
(248
)
(2.1
)%
 
(87
)
(1.0
)%
 
(378
)
(2.2
)%
 
(126
)
(0.9
)%
Non-controlling interest
(1,303
)
(11.3
)%
 
(1,200
)
(13.5
)%
 
(1,982
)
(11.6
)%
 
(1,955
)
(14.5
)%
Income tax expense
$
3,385

29.3
 %
 
$
2,316

26.1
 %
 
$
5,043

29.5
 %
 
$
3,615

26.7
 %

Our effective income tax rates for the thirteen weeks ended June 28, 2017 and June 29, 2016 were 29.3% and 26.1%, 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 70.4% and 62.1% for the thirteen weeks ended June 28, 2017 and June 29, 2016, respectively. The impact to the effective income tax rate related to the increase in ownership was partially offset by higher tax credits.
Our effective income tax rates for the twenty-six weeks ended June 28, 2017 and June 29, 2016 were 29.5% and 26.7%, 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 70.0% and 59.1% for the twenty-six weeks ended June 28, 2017 and June 29, 2016, respectively. The impact to the effective income tax rate related to the increase in ownership was partially offset by higher tax credits.
Deferred Tax Assets and Liabilities
During the twenty-six weeks ended June 28, 2017, we acquired an aggregate of 788,482 LLC Interests in connection with the redemption of LLC Interests and activity relating to our stock compensation plan. We recognized a deferred tax asset in the amount of $7,876 associated with the basis difference in our investment in SSE Holdings upon acquisition of these LLC Interests. As of June 28, 2017, the total deferred tax asset related to the basis difference in our investment in SSE Holdings was $215,457. However, a portion of the total basis difference will only reverse upon the eventual sale of our interest in SSE Holdings, which we expect would result in a capital loss. As of June 28, 2017, the total valuation allowance established against the deferred tax asset to which this portion relates was $16,334.
During the twenty-six weeks ended June 28, 2017, we also recognized $3,801 of deferred tax assets related to additional tax basis increases generated from expected future payments under the Tax Receivable Agreement and related deductions for imputed interest on such payments. See "—Tax Receivable Agreement" for more information.

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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 28, 2017, 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 28, 2017. Shake Shack Inc. was formed in September 2014 and did not engage in any operations prior to the IPO and related organizational transactions. Shake Shack Inc. first filed tax returns for tax year 2014, which is the first tax year subject to examination by taxing authorities for U.S. federal and state income tax purposes. Additionally, although SSE Holdings is treated as a partnership for U.S. federal and state income taxes purposes, it is still required to file an annual U.S. Return of Partnership Income, which is subject to examination by the Internal Revenue Service ("IRS"). The statute of limitations has expired for tax years through 2012 for SSE Holdings.
Tax Receivable Agreement
Pursuant to our election under Section 754 of the Internal Revenue Code (the "Code"), we expect to obtain an increase in our share of the tax basis in the net assets of SSE Holdings when LLC Interests are redeemed or exchanged by the other members of SSE Holdings. We plan to make an election under Section 754 of the Code for each taxable year in which a redemption or exchange of LLC Interest occurs. We intend to treat any redemptions and exchanges of LLC Interests as direct purchases of LLC Interests for U.S. federal income tax purposes. These increases in tax basis may reduce the amounts that we would otherwise pay in the future to various tax authorities. They may also decrease gains (or increase losses) on future dispositions of certain capital assets to the extent tax basis is allocated to those capital assets.
On February 4, 2015, we entered into a tax receivable agreement with certain of the then-existing members of SSE Holdings (the "Tax Receivable Agreement") that provides for the payment by us of 85% of the amount of any tax benefits that we actually realize, or in some cases are deemed to realize, as a result of (i) increases in our share of the tax basis in the net assets of SSE Holdings resulting from any redemptions or exchanges of LLC Interests, (ii) tax basis increases attributable to payments made under the Tax Receivable Agreement, and (iii) deductions attributable to imputed interest pursuant to the Tax Receivable Agreement (the "TRA Payments"). We expect to benefit from the remaining 15% of any tax benefits that we may actually realize. The TRA Payments are not conditioned upon any continued ownership interest in SSE Holdings or us. The rights of each member of SSE Holdings, that is a party to the Tax Receivable Agreement, are assignable to transferees of their respective LLC Interests.
During the twenty-six weeks ended June 28, 2017, we acquired an aggregate of 482,600 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 $9,413 for the TRA Payments due to the redeeming members, representing 85% of the aggregate tax benefits we expect to realize from the tax basis increases related to the redemption of LLC Interests, after concluding it was probable that such TRA Payments would be paid based on our estimates of future taxable income. During the twenty-six weeks ended June 28, 2017, payments of $1,471, inclusive of interest, were made to the members of SSE Holdings pursuant to the Tax Receivable Agreement. No amounts were paid to the members during the twenty-six weeks ended June 29, 2016. As of June 28, 2017, the total amount of TRA Payments due under the Tax Receivable Agreement, was $280,426, of which $3,110 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.

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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 28, 2017 and June 29, 2016.
 
 
 
Thirteen Weeks Ended
 
 
Twenty-Six Weeks Ended
 
 
 
 
June 28
2017

 
June 29
2016

 
June 28
2017

 
June 29
2016

Numerator:
 
 
 
 
 
 
 
 
Net income
$
8,184

 
$
6,549

 
$
12,046

 
$
9,900

 
Less: net income attributable to non-controlling interests
3,305

 
3,251

 
4,900

 
5,140

 
Net income attributable to Shake Shack Inc.
$
4,879

 
$
3,298

 
$
7,146

 
$
4,760

Denominator:
 
 
 
 
 
 
 
 
Weighted-average shares of Class A common stock outstanding—basic
25,798

 
22,553

 
25,587

 
21,453

 
Effect of dilutive securities:
 
 
 
 
 
 
 
 
 
Stock options
494

 
497

 
523

 
478

 
 
Performance stock units
20

 

 
23

 

 
Weighted-average shares of Class A common stock outstanding—diluted
26,312

 
23,050

 
26,133

 
21,931

 
 
 
 
 
 
 
 
 
 
Earnings per share of Class A common stock—basic
$
0.19

 
$
0.15

 
$
0.28

 
$
0.22

Earnings per share of Class A common stock—diluted
$
0.19

 
$
0.14

 
$
0.27

 
$
0.22

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.

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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 28, 2017 and June 29, 2016.
 
 
 
Thirteen Weeks Ended
 
Twenty-Six Weeks Ended
 
 
 
June 28
2017

 
 
June 29
2016

 
 
June 28
2017

 
 
June 29
2016

 
Stock options
6,258

(1)
 

 
 
6,258

(1)
 

 
Performance stock units
84,755

(2)
 
63,200

(2)
 
84,755

(2)
 
63,200

(2)
Shares of Class B common stock
10,770,992

(3)
 
12,983,596

(3)
 
10,770,992

(3)
 
12,983,596

(3)

(1)
Excluded from the computation of diluted earnings per share of Class A common stock because the exercise price of the stock options exceeded the average market price of our Class A common stock during the period ("out-of-the-money").
(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 28, 2017 and June 29, 2016:
 
 
Twenty-Six Weeks Ended
 
 
 
June 28
2017

 
June 29
2016

Cash paid for:
 
 
 
 
Income taxes, net of refunds
$
1,595

 
$
1,325

 
Interest, net of amounts capitalized
357

 
28

Non-cash investing activities:
 
 
 
 
Accrued purchases of property and equipment
7,690

 
3,059

 
Capitalized landlord assets for leases where we are deemed the accounting owner
7,634

 

 
Accrued purchases of marketable securities
80

 

 
Capitalized equity-based compensation
78

 
62

Non-cash financing activities:
 
 
 
 
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
9,413

 
65,356

 
Accrued distributions payable to non-controlling interest holders


 
607


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NOTE 13: COMMITMENTS AND CONTINGENCIES
 
Lease Commitments
We are obligated under various operating leases for Shacks and our home office space, expiring in various years through 2035. Under certain of these leases, we are liable for contingent rent based on a percentage of sales in excess of specified thresholds and are typically responsible for our proportionate share of real estate taxes, common area maintenance charges and utilities.
As security under the terms of several of our leases, we are obligated under letters of credit totaling $160 as of June 28, 2017. The letters of credit expire in April 2018 and February 2026. In addition, in December 2013, we entered into an irrevocable standby letter of credit in conjunction with our home office lease in the amount of $80. The letter of credit expires in September 2017 and renews automatically for one-year periods through September 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 participated in a voluntary mediation with counsel representing two former Shake Shack managers, who alleged that we improperly classified our restaurant managers as exempt from overtime protections. At the conclusion of the mediation, the parties mutually agreed to fully and finally resolve the matter by settling, rather than litigating. In connection with the settlement, the parties entered into a memorandum of understanding, pursuant to which we agreed to create a settlement fund in the amount of $750 and, in exchange for their participation in the settlement fund, all participating employees (current and former) were required to release Shake Shack from all federal and/or state wage and hour claims that may have existed through the settlement date. In March 2016, the parties entered into a settlement agreement in the amount of $750 million. In May 2017, we paid to the claims administrator $774 in full satisfaction of the amounts owed by us under the settlement agreement and 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 28, 2017, 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 28, 2017 and June 29, 2016, we recognized liabilities totaling $9,413 and $65,356, respectively, relating to our obligations under the Tax Receivable Agreement, after concluding that it was probable that we would have sufficient future taxable income over the term of the Tax Receivable Agreement to utilize the related tax benefits. As of June 28, 2017 and December 28, 2016, our total obligations under the Tax Receivable Agreement, including accrued interest, were $280,426 and $272,482, 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.

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NOTE 14: RELATED PARTY TRANSACTIONS
 
Union Square Hospitality Group
The Chairman of our Board of Directors serves as the Chief Executive Officer of Union Square Hospitality Group, LLC. As a result, Union Square Hospitality Group, LLC and its subsidiaries are considered related parties.
USHG, LLC
Effective January 2015, we entered into an Amended and Restated Management Services Agreement with USHG, LLC ("USHG"), in which USHG provides reduced management services to SSE Holdings comprised of executive leadership from members of its senior management, advisory and development services and limited leadership development and human resources services. The initial term of the Amended and Restated Management Services Agreement is through December 31, 2019, with renewal periods.
Total amounts paid to USHG for general corporate expenses were $1 and $6 for the thirteen and twenty-six weeks ended June 28, 2017. For the thirteen and twenty-six weeks ended June 29, 2016 total amounts paid to USHG for general corporate expenses were $1 and $6, respectively. These amounts are included in general and administrative expenses on the Condensed Consolidated Statements of Income.
No amounts were payable to USHG as of June 28, 2017. Total amounts payable to USHG as of December 28, 2016 were $1, which is included in other current liabilities on the Condensed Consolidated Balance Sheets. No amounts were due from USHG as of June 28, 2017 and December 28, 2016.
Daily Provisions
In May 2017 we began purchasing coffee cake from Daily Provisions, a restaurant owned by Union Square Hospitality Group, to offer as a breakfast item at our Madison Square Park Shack. No amounts were paid to Daily Provisions during the thirteen and twenty-six weeks ended June 28, 2017 and June 29, 2016. Total amounts payable to Daily Provisions as of June 28, 2017 were $1, which are included in accounts payable on the Condensed Consolidated Balance Sheets. No amounts were payable to Daily provisions as of December 28, 2016.
Hudson Yards Sports and Entertainment
In fiscal 2011, we entered into a Master License Agreement (as amended, "MLA") with Hudson Yards Sports and Entertainment LLC ("HYSE") to operate Shake Shack branded limited menu concession stands in sports and entertainment venues within the United States. The agreement expires in January 2027 and includes five consecutive five-year renewal options at HYSE's option. As consideration for these rights, HYSE pays us a license fee based on a percentage of net food sales, as defined in the MLA. HYSE also pays us a percentage of profits on sales of branded beverages, as defined in the MLA. Amounts paid to us by HYSE for the thirteen and twenty-six weeks ended June 28, 2017 were $115 and $135, respectively. For both the thirteen and twenty-six weeks ended June 29, 2016 amounts paid to us by HYSE in the were $103. These amounts are included in licensing revenue on the Condensed Consolidated Statements of Income. Total amounts due from HYSE as of June 28, 2017 and December 28, 2016 were $58 and $11, which are included in prepaid expenses and other current assets on the Condensed Consolidated Balance Sheets.
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 $133 and $332 for the thirteen and twenty-six weeks ended June 28, 2017, respectively. Amounts paid to Madison Square Park Conservancy as rent amounted to $195 and $390 for the thirteen and twenty-six weeks ended June 29, 2016, respectively. These amounts are included in occupancy and related expenses on the Condensed Consolidated Statements of Income.Total amounts due to MSP Conservancy as of June 28, 2017 and December 28, 2016 were $79 and $1, respectively. These amounts are included in accrued expenses on the Condensed Consolidated Balance Sheets.
Additionally, we received tenant improvement allowances from MSP Conservancy related to a reconstruction project which ended in 2015. No amounts were paid to us from MSP Conservancy during the thirteen weeks ended June 28, 2017. During the twenty-six weeks ended June 28, 2017 amounts paid to us from MSP Conservancy totaled $200. No amounts were paid to us during the thirteen and twenty-six weeks ended June 29, 2016. No amounts were due to us from MSP Conservancy as of June 28, 2017.

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Total amounts due from MSP Conservancy as of December 28, 2016 were $200, which are included in accounts receivable 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.
During the thirteen and twenty-six weeks ended June 28, 2017 the Great American Shake Sale raised $631 for Share Our Strength, which was payable to Share Our Strength as of June 28, 2017 and included in accounts payable on the Condensed Consolidated Balance Sheets. Amounts paid to Share Our Strength for both the thirteen and twenty-six weeks ended June 29, 2016 were $587. We incurred costs of approximately $119 for both the thirteen and twenty-six weeks ended June 28, 2017 and $98 for both the thirteen and twenty-six weeks ended June 29, 2016. These costs represent the cost of the free shakes redeemed and are included in general and administrative expenses on the Condensed Consolidated Statements of Income.
Mobo Systems, Inc.
The Chairman of our Board of Directors serves as a director of Mobo Systems, Inc. (also known as "Olo"), a platform we use in connection with our mobile ordering application. Amounts paid to Olo during the thirteen and twenty-six weeks ended June 28, 2017 were $20 and $38, respectively, which are included in other operating expenses on the Condensed Consolidated Statements of Income. No amounts were paid to Olo for the thirteen and twenty-six weeks ended June 29, 2016. No amounts were payable to Olo as of June 28, 2017 and December 28, 2016.
Square, Inc.
On July 20, 2017, our Chief Executive Officer joined the Board of Directors of Square, Inc ("Square"). Square provides point-of-sale solutions and other business management tools. Square also owns Caviar, a food ordering service. We currently use the Square payment application to process a limited number of sales at our Shacks and sales for certain off-site events. In March 2017, we partnered with Caviar for a limited-time delivery promotion.
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 payments were made to the members of SSE Holdings pursuant to the Tax Receivable Agreement during the thirteen weeks ended June 28, 2017. During the twenty-six weeks ended June 28, 2017, payments of $1,471, inclusive of interest, were made to the members. No amounts were paid to the members during the thirteen and twenty-six weeks ended June 29, 2016. As of June 28, 2017 and December 28, 2016, total amounts due under the Tax Receivable Agreement were $280,426 and $272,482, respectively.
Distributions to Members of SSE Holdings
Under the terms of the SSE Holdings LLC Agreement, SSE Holdings is obligated to make tax distributions to its members. During the thirteen and twenty-six weeks ended June 28, 2017 distributions paid to non-controlling interest holders were $2,024 and $2,379, respectively. For the thirteen and twenty-six weeks ended June 29, 2016 tax distributions of $1,602 were paid to non-controlling interest holders. No tax distributions were payable to non-controlling interest holders as of June 28, 2017. As of December 28, 2016 tax distributions of $607 were payable to non-controlling interest holders.


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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
This section and other parts of this Quarterly Report on Form 10-Q ("Form 10-Q") contain forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995 ("PSLRA"), which are subject to known and unknown risks, uncertainties and other important factors that may cause actual results to be materially different. All statements other than statements of historical fact are forward-looking statements. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact, such as our expected financial outlook for fiscal 2017, expected Shack openings, expected same-Shack sales growth and trends in our business. Forward-looking statements can also be identified by words such as "aim," "anticipate," "believe," "estimate," "expect," "forecast," "future," "intend," "outlook," "plan," "potential," "predict," "project," "seek," "may," "can," "will," "would," "could," "should," the negatives thereof and other similar expressions. All forward-looking statements are expressly qualified in their entirety by these cautionary statements, except that the safe harbor provisions of the PSLRA do not apply to any forward-looking statements relating to the operations of any of our partnerships or limited liability companies. Forward-looking statements are not guarantees of future performance and actual results may differ materially from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 28, 2016, as amended, ("2016 Form 10-K"), subsequent Quarterly Reports on Form 10-Q and Part II, Item 1A of this Form 10-Q. The following discussion should be read in conjunction with our 2016 Form 10-K 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, chicken sandwiches, hot dogs, crinkle cut fries, shakes, frozen custard, beer and wine. As of June 28, 2017, there were 134 Shacks in operation, system-wide, of which 75 were domestic company-operated Shacks, nine were domestic licensed Shacks and 50 were international licensed Shacks.
Development Highlights
During the quarter, we opened four domestic company-operated Shacks, including our first Shack in Lexington, Kentucky, as well as Shacks in Melville, New York, Chicago at the West Loop and Orlando at the Florida Mall. Additionally, we opened two domestic licensed Shacks, which included a Shack at the Minute Maid Park in Houston and LAX Airport Terminal 3, as well as two additional international licensed Shacks in South Korea.
Financial Highlights for the Second Quarter 2017:
Total revenue increased 37.4% to $91.3 million.
Shack sales increased 36.6% to $88.0 million.
Same-Shack sales decreased 1.8%.
Operating income increased 31.4% to $11.7 million, or 12.9% of total revenue.
Shack-level operating profit*, a non-GAAP measure, increased 27.6% to $25.3 million, or 28.8% of Shack sales.
Net income increased 25.0% to $8.2 million and net income attributable to Shake Shack Inc. was $4.9 million, or $0.19 per diluted share.
Adjusted EBITDA*, a non-GAAP measure, increased 36.4% to $19.4 million.
Adjusted pro forma net income*, a non-GAAP measure, increased 38.7% to $7.3 million, or $0.20 per fully exchanged and diluted share.
Seven net system-wide Shack openings, including four domestic company-operated Shacks and three net licensed Shacks.

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* Shack-level operating profit, adjusted EBITDA and adjusted pro forma net income are non-GAAP measures. See "—Non-GAAP Financial Measures" for reconciliations of Shack-level operating profit to operating income, adjusted EBITDA to net income, and adjusted pro forma net income to net income attributable to Shake Shack Inc., the most directly comparable financial measures presented in accordance with GAAP.
We continued to execute on our growth strategies in 2017 and the second quarter of 2017 was positively impacted by the opening of 24 new domestic company-operated Shacks between June 29, 2016 and June 28, 2017 and the approximate 1.5% menu price increase implemented at the end of December 2016, offset by a decline in same-Shack sales of 1.8% and increased labor and related expenses resulting from increases in hourly wages that were implemented at the end of fiscal 2016, investments in our management team to support future growth and the opening of more target-volume Shacks.
Net income attributable to Shake Shack Inc. was $4.9 million, or $0.19 per diluted share, for the second quarter of 2017, compared to $3.3 million, or $0.14 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 $7.3 million, or $0.20 per fully exchanged and diluted share, for the second quarter of 2017 compared to $5.2 million, or $0.14 per fully exchanged and diluted share for the the second quarter of 2016, an increase of 38.7%.
FISCAL 2017 OUTLOOK
 
For the fiscal year ending December 27, 2017, we have revised our financial outlook to the following:
 
Current Outlook
 
Previous Outlook

Total revenue
$351 to $355 million
 
$351 to $355 million

Same-Shack sales growth (%)(1)
-2% to -3%
 
0
%
Domestic company-operated Shack openings(2)
23 to 24
 
23 to 24

Licensed Shack openings
15, net
 
12, net

Shack-level operating profit margin
26.5% to 27.5%
 
26.5% to 27.5%

General and administrative expenses
$38 to $40 million
 
$38 to $40 million

Depreciation expense
$22 million
 
$22 million

Interest expense
$1.6 to $2.0 million
 
$1.6 to $2.0 million

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

(1) Includes approximately 1.5% to 2.0% of menu price increases taken at the end of December 2016.
(2)
The average annual sales volume for the domestic company-operated Shacks to be opened in fiscal 2017 is expected to be at least $3.4 million in the current outlook ($3.3 million in the previous outlook).


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RESULTS OF OPERATIONS
 
The following table summarizes our results of operations for the thirteen and twenty-six weeks ended June 28, 2017 and June 29, 2016:
 
 
 
Thirteen Weeks Ended
 
 
Twenty-Six Weeks Ended
 
(dollar amounts in thousands)
June 28
2017
June 29
2016
June 28
2017
June 29
2016
 
Shack sales
$
88,003

96.4
 %
 
$
64,406

96.9
 %
 
$
162,158

96.5
 %
 
$
116,559

96.6
 %
Licensing revenue
3,313

3.6
 %
 
2,066

3.1
 %
 
5,907

3.5
 %
 
4,078

3.4
 %
TOTAL REVENUE
91,316

100.0
 %
 
66,472

100.0
 %
 
168,065

100.0
 %
 
120,637

100.0
 %
Shack-level operating expenses(1):
 
 
 
 
 
 
 
 
 
 
 
 
Food and paper costs
24,712

28.1
 %
 
18,104

28.1
 %
 
45,886

28.3
 %
 
33,136

28.4
 %
 
Labor and related expenses
22,426

25.5
 %
 
15,262

23.7
 %
 
42,886

26.4
 %
 
28,424

24.4
 %
 
Other operating expenses
8,486

9.6
 %
 
5,979

9.3
 %
 
16,151

10.0
 %
 
10,898

9.3
 %
 
Occupancy and related expenses
7,043

8.0
 %
 
5,209

8.1
 %
 
13,219

8.2
 %
 
9,532

8.2
 %
General and administrative expenses
9,678

10.6
 %
 
7,496

11.3
 %
 
18,148

10.8
 %
 
14,380

11.9
 %
Depreciation expense
5,258
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