Edgar Filing: Shake Shack Inc.

SHAK-20180926_10Q

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



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

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			1

Part I			2
	Item 1.	Financial Statements (Unaudited)	2
	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	27
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	40
	Item 4.	Controls and Procedures	40

Part II			41
	Item 1.	Legal Proceedings	41
	Item 1A.	Risk Factors	41
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	41
	Item 3.	Defaults Upon Senior Securities	41
	Item 4.	Mine Safety Disclosures	41
	Item 5.	Other Information	41
	Item 6.	Exhibits	42

SIGNATURES			43

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.

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PART I – FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited).



	Page
Condensed Consolidated Balance Sheets	3
Condensed Consolidated Statements of Income	4
Condensed Consolidated Statements of Comprehensive Income	5
Condensed Consolidated Statement of Stockholders' Equity	6
Condensed Consolidated Statements of Cash Flows	7
Notes to Condensed Consolidated Financial Statements	8

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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.

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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.

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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.

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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 Income (Loss)			Non- Controlling Interest			Total Equity
		Shares	Amount		Shares		Amount			Additional Paid-In Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Non- Controlling Interest			Total Equity
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.

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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.

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SHAKE SHACK INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share amounts)



		Page
Note 1	Nature of Operations	9
Note 2	Summary of Significant Accounting Policies	9
Note 3	Revenue	12
Note 4	Fair Value Measurements	14
Note 5	Inventories	16
Note 6	Property and Equipment	17
Note 7	Supplemental Balance Sheet Information	17
Note 8	Debt	17
Note 9	Non-Controlling Interests	18
Note 10	Equity-Based Compensation	19
Note 11	Income Taxes	20
Note 12	Earnings Per Share	21
Note 13	Supplemental Cash Flow Information	23
Note 14	Commitments and Contingencies	23
Note 15	Related Party Transactions	24

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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"). 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

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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

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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

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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.

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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

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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.

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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 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

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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.

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

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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	$