Shake Shack 2015 Annual Report Download - page 47

Table of Contents
under the Tax Receivable Agreement, which will be significant. We intend to cause SSE Holdings to make distributions in an amount sufficient to allow us to pay our tax obligations
and operating expenses, including distributions to fund any ordinary course payments due under the Tax Receivable Agreement. See Item 13, "Certain Relationships and Related Party
Transactions."
Equity-Based Compensation
Equity-based compensation expense is measured based on fair value. We recognize compensation expense on a straight-
line basis over the requisite service period. For awards with
graded vesting features and service conditions only, compensation expense is recognized on a straight-line basis over the total requisite service period for the entire award.
Restricted Class B Units
Prior to the IPO, certain of our employees received grants of restricted Class B Units in SSE Holdings. The restricted Class B Units were eligible to vest annually over five years from
the applicable grant date. If not fully vested, awards were eligible to become fully vested (i) upon the occurrence of a change in control or (ii) upon the occurrence of an initial public
offering, each as defined in the grant agreements with respect to such awards. Upon consummation of the IPO, all outstanding awards vested and each restricted Class B Unit was
exchanged for LLC Interests in SSE Holdings. The amount of unrecognized compensation expense related to non-
vested awards as of December 31, 2014 was $0.6 million and such
compensation expense was recognized in fiscal 2015 upon consummation of the IPO.
Unit Appreciation Rights
Prior to the IPO, SSE Holdings maintained a phantom equity plan, which we refer to as the Unit Appreciation Rights Plan (the " Plan
"), whereby we had the authority to grant up to
31,303 unit appreciation rights (" UARs
") to employees. The UARs would have terminated on the tenth anniversary of the grant date or upon termination of employment, if earlier, and
were only exercisable upon a qualifying transaction, which is defined in the Plan as either a change of control or an initial public offering. Upon the occurrence of a qualifying
transaction, participants were entitled to receive a payment determined by multiplying (i) the excess, if any, of the qualifying transaction price over the base price per UAR, as specified
in each participant's award agreement, by (ii) the stated number of Class B Units deemed covered by the UARs held by the participant. Our IPO constituted a qualifying transaction
under the terms of the Plan and resulted in the recognition of approximately $11.8 million of compensation expense in the first quarter of fiscal 2015. All UARs outstanding under the
Plan were settled in connection with IPO in the form of shares of our Class A common stock.
JUMPSTART OUR BUSINESS STARTUPS ACT OF 2012
The Jumpstart Our Business Startups Act of 2012 (the " JOBS Act
") permits us, as an "emerging growth company," to take advantage of an extended transition period to comply with
new or revised accounting standards applicable to public companies. We are choosing to "opt out" of this provision and, as a result, we will comply with new or revised accounting
standards as required when they are adopted. This decision to opt out of the extended transition period under the JOBS Act is irrevocable.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
COMMODITY AND FOOD PRICE RISKS
Our profitability is dependent on, among other things, our ability to anticipate and react to changes in the costs of key operating resources, including food and beverage, energy and
other commodities. We have been able to partially offset cost increases resulting from a number of factors, including market conditions, shortages or interruptions in supply due to
weather or other conditions beyond our control, governmental regulations and inflation, by increasing our menu prices, as well as making other operational adjustments that increase
productivity. However, substantial increases in costs and expenses could impact our operating results to the extent that such increases cannot be offset by menu price increases.
LABOR AND BENEFITS COSTS
At our domestic company-
operated Shacks, we have historically provided a starting wage that is above the minimum wage in place for that particular state. For instance, in Manhattan
Shacks, we start our new employees at $10.00 per hour even though the minimum wage in New York is $8.00 per hour. We believe that this enables us to attract a higher caliber
employee and this translates directly to better guest service. Our desire is to continue to do so and, as such, there can be no assurance that we will generate same Shack sales growth in
an amount sufficient to offset increases in minimum wage or other inflationary pressures.
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