Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm	39
Consolidated Balance Sheet as of December 31, 2016 and 2015	40
Consolidated Statement of Income and Comprehensive Income for the years ended December 31, 2016, 2015 and 2014	41
Consolidated Statement of Shareholders’ Equity for the years ended December 31, 2016, 2015 and 2014	42
Consolidated Statement of Cash Flows for the years ended December 31, 2016, 2015 and 2014	43
Notes to Consolidated Financial Statements	44

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders of

Chipotle Mexican Grill, Inc.

We have audited the accompanying consolidated balance sheets of Chipotle Mexican Grill, Inc. (the “Company”) as of December 31, 2016 and 2015, and the related consolidated statements of income and comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2016. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Chipotle Mexican Grill, Inc. at December 31, 2016 and 2015, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2016, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Chipotle Mexican Grill, Inc.’s internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 6, 2017 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Denver, Colorado

February 6, 2017

CHIPOTLE MEXICAN GRILL, INC.

CONSOLIDATED BALANCE SHEET

(in thousands, except per share data)

	December 31,
	2016			2015
Assets
Current assets:
Cash and cash equivalents	$	87,880		$	248,005
Accounts receivable, net of allowance for doubtful accounts of $259 and $1,176 as of December 31, 2016 and 2015, respectively		40,451			38,283
Inventory		15,019			15,043
Prepaid expenses and other current assets		44,080			39,965
Income tax receivable		5,108			58,152
Investments		329,836			415,199
Total current assets		522,374			814,647
Leasehold improvements, property and equipment, net		1,303,558			1,217,220
Long term investments		125,055			622,939
Other assets		53,177			48,321
Goodwill		21,939			21,939
Total assets	$	2,026,103		$	2,725,066
Liabilities and shareholders' equity
Current liabilities:
Accounts payable	$	78,363		$	85,709
Accrued payroll and benefits		76,301			64,958
Accrued liabilities		127,129			129,275
Total current liabilities		281,793			279,942
Deferred rent		288,927			251,962
Deferred income tax liability		18,944			32,305
Other liabilities		33,946			32,883
Total liabilities		623,610			597,092
Shareholders' equity:
Preferred stock, $0.01 par value, 600,000 shares authorized, no shares issued as of December 31, 2016 and 2015, respectively		-			-
Common stock $0.01 par value, 230,000 shares authorized, and 35,833 and 35,790 shares issued as of December 31, 2016 and 2015, respectively		358			358
Additional paid-in capital		1,238,875			1,172,628
Treasury stock, at cost, 7,019 and 5,206 common shares at December 31, 2016 and 2015, respectively		(2,049,389)			(1,234,612)
Accumulated other comprehensive income (loss)		(8,162)			(8,273)
Retained earnings		2,220,811			2,197,873
Total shareholders' equity		1,402,493			2,127,974
Total liabilities and shareholders' equity	$	2,026,103		$	2,725,066

See accompanying notes to consolidated financial statements.

CHIPOTLE MEXICAN GRILL, INC.

CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME

(in thousands, except per share data)

	Year ended December 31,
	2016			2015			2014
Revenue	$	3,904,384		$	4,501,223		$	4,108,269
Restaurant operating costs (exclusive of depreciation and amortization shown separately below):
Food, beverage and packaging		1,365,580			1,503,835			1,420,994
Labor		1,105,001			1,045,726			904,407
Occupancy		293,636			262,412			230,868
Other operating costs		641,953			514,963			434,244
General and administrative expenses		276,240			250,214			273,897
Depreciation and amortization		146,368			130,368			110,474
Pre-opening costs		17,162			16,922			15,609
Loss on disposal and impairment of assets		23,877			13,194			6,976
Total operating expenses		3,869,817			3,737,634			3,397,469
Income from operations		34,567			763,589			710,800
Interest and other income, net		4,172			6,278			3,503
Income before income taxes		38,739			769,867			714,303
Provision for income taxes		(15,801)			(294,265)			(268,929)
Net income	$	22,938		$	475,602		$	445,374
Other comprehensive income (loss), net of income taxes:
Foreign currency translation adjustments		(1,291)			(6,322)			(2,049)
Unrealized gain (loss) on investments, net of income taxes of $(849), $946, and $0		1,402			(1,522)			-
Other comprehensive income (loss), net of income taxes		111			(7,844)			(2,049)
Comprehensive income	$	23,049		$	467,758		$	443,325
Earnings per share:
Basic	$	0.78		$	15.30		$	14.35
Diluted	$	0.77		$	15.10		$	14.13
Weighted average common shares outstanding:
Basic		29,265			31,092			31,038
Diluted		29,770			31,494			31,512

See accompanying notes to consolidated financial statements.

CHIPOTLE MEXICAN GRILL, INC.

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

(in thousands)

	Common Stock								Treasury Stock								Accumulated Other Comprehensive Income (Loss)
	Shares		Amount			Additional Paid-In Capital			Shares		Amount			Retained Earnings			Available-for-Sale Securities				Foreign Currency Translation		Total
Balance, December 31, 2013	35,245		$	352		$	919,840		4,212		$	(660,421)		$	1,276,897		$	-			1,620		$	1,538,288
Stock-based compensation							97,618																	97,618
Stock plan transactions and other	149			2			(193)																	(191)
Excess tax benefit on stock-based compensation							21,667																	21,667
Acquisition of treasury stock									155			(88,338)												(88,338)
Net income															445,374									445,374
Other comprehensive income (loss), net of income tax																					(2,049)			(2,049)
Balance, December 31, 2014	35,394		$	354		$	1,038,932		4,367		$	(748,759)		$	1,722,271		$	-			(429)		$	2,012,369
Stock-based compensation							59,465																	59,465
Stock plan transactions and other	396			4			(211)																	(207)
Excess tax benefit on stock-based compensation							74,442																	74,442
Acquisition of treasury stock									839			(485,853)												(485,853)
Net income															475,602									475,602
Other comprehensive income (loss), net of income tax																		(1,522)			(6,322)			(7,844)
Balance, December 31, 2015	35,790		$	358		$	1,172,628		5,206		$	(1,234,612)		$	2,197,873		$	(1,522)			(6,751)		$	2,127,974
Stock-based compensation							65,112																	65,112
Stock plan transactions and other	43			-			(185)																	(185)
Excess tax benefit on stock-based compensation							1,320																	1,320
Acquisition of treasury stock									1,813			(814,777)												(814,777)
Net income															22,938									22,938
Other comprehensive income (loss), net of income tax																		1,402			(1,291)			111
Balance, December 31, 2016	35,833		$	358		$	1,238,875		7,019		$	(2,049,389)		$	2,220,811		$	(120)		$	(8,042)		$	1,402,493

See accompanying notes to consolidated financial statements.

CHIPOTLE MEXICAN GRILL, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

(in thousands)

	Year ended December 31,
	2016			2015			2014
Operating activities
Net income	$	22,938		$	475,602		$	445,374
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		146,368			130,368			110,474
Deferred income tax (benefit) provision		(14,207)			11,666			(20,671)
Loss on disposal and impairment of assets		23,877			13,194			6,976
Bad debt allowance		(262)			(23)			9
Stock-based compensation expense		64,166			57,911			96,440
Excess tax benefit on stock-based compensation		(1,320)			(74,442)			(21,667)
Other		(604)			582			104
Changes in operating assets and liabilities:
Accounts receivable		(1,923)			(3,504)			(10,966)
Inventory		(91)			262			(2,307)
Prepaid expenses and other current assets		(4,259)			(5,259)			(658)
Other assets		(4,855)			(5,619)			1,071
Accounts payable		(6,734)			19,525			2,168
Accrued liabilities		33,491			(7,440)			35,019
Income tax payable/receivable		54,340			32,756			8,831
Deferred rent		37,030			32,911			27,025
Other long-term liabilities		1,287			4,826			4,845
Net cash provided by operating activities		349,242			683,316			682,067
Investing activities
Purchases of leasehold improvements, property and equipment		(258,842)			(257,418)			(252,590)
Purchases of investments		-			(559,372)			(521,004)
Maturities of investments		45,000			352,650			254,750
Proceeds from sale of investments		540,648			-			-
Net cash provided by (used in) investing activities		326,806			(464,140)			(518,844)
Financing activities
Acquisition of treasury stock		(837,655)			(460,675)			(88,338)
Excess tax benefit on stock-based compensation		1,320			74,442			21,667
Stock plan transactions and other financing activities		52			(207)			(66)
Net cash used in financing activities		(836,283)			(386,440)			(66,737)
Effect of exchange rate changes on cash and cash equivalents		110			(4,196)			(224)
Net change in cash and cash equivalents		(160,125)			(171,460)			96,262
Cash and cash equivalents at beginning of year		248,005			419,465			323,203
Cash and cash equivalents at end of year	$	87,880		$	248,005		$	419,465
Supplemental disclosures of cash flow information
Income taxes paid	$	23,862		$	248,547		$	280,687
Increase (decrease) in purchases of leasehold improvements, property, and equipment accrued in accounts payable and accrued liabilities	$	(1,781)		$	(2,870)		$	9,424
Increase (decrease) in acquisition of treasury stock accrued in accrued liabilities	$	(22,878)		$	25,178		$	-

See accompanying notes to consolidated financial statements.

CHIPOTLE MEXICAN GRILL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(dollar and share amounts in thousands, unless otherwise specified)

1. Description of Business and Summary of Significant Accounting Policies

Chipotle Mexican Grill, Inc., a Delaware corporation, together with its subsidiaries (collectively the “Company”) develops and operates restaurants that serve a focused menu of burritos, tacos, burrito bowls and salads, made using fresh, high-quality ingredients. As of December 31, 2016, the Company operated 2,198 Chipotle restaurants throughout the United States as well as 29 international Chipotle restaurants and 23 non-Chipotle restaurants. The Company transitioned the management of its operations from nine to eleven regions during 2016 and aggregates its operations to one reportable segment.

Principles of Consolidation and Basis of Presentation

The consolidated financial statements include the accounts of the Company, including wholly and majority owned subsidiaries. All intercompany balances and transactions have been eliminated.

Management Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates under different assumptions or conditions.

Revenue Recognition

The Company recognizes revenue, net of discounts and incentives, when payment is tendered at the point of sale. The Company recognizes a liability for offers of free food by estimating the cost to satisfy the offer based on company–specific historical redemption patterns for similar promotions. These costs are recognized in other operating costs in the consolidated statement of income and comprehensive income and in accrued liabilities in the consolidated balance sheet. The Company reports revenue net of sales-related taxes collected from customers and remitted to governmental taxing authorities.

During the year ended December 31, 2016, the Company introduced a limited-time frequency program that awarded free food or merchandise to customers based on frequency of monthly visits. The Company deferred revenue reflecting the portion of original sales allocated to the rewards that were earned by program participants and not redeemed at the end of the year, and recorded a corresponding liability in accrued liabilities on its consolidated balance sheet. The portion of revenue allocated to the rewards was based on the estimated value of the award earned and takes into consideration company-specific historical redemption patterns for similar promotions. Rewards expire according to the loyalty awards terms and conditions. The Company recognizes revenue when awards are redeemed or expire.

The Company sells gift cards which do not have an expiration date and it does not deduct non-usage fees from outstanding gift card balances. The Company recognizes revenue from gift cards when: (i) the gift card is redeemed by the customer; or (ii) the Company determines the likelihood of the gift card being redeemed by the customer is remote (gift card breakage) and there is not a legal obligation to remit the unredeemed gift cards to the relevant jurisdiction. The determination of the gift card breakage rate is based upon Company-specific historical redemption patterns. Gift card breakage is recognized in revenue as the gift cards are used on a pro rata basis over a six-month period beginning at the date of the gift card sale and is included in revenue in the consolidated statement of income and comprehensive income. The Company has determined that 4% of gift card sales will not be redeemed and will be retained by the Company. Breakage recognized during the years ended December 31, 2016, 2015 and 2014 was $3,624, $4,226 and $3,146, respectively.

Cash and Cash Equivalents

The Company considers all highly liquid investment instruments purchased with an initial maturity of three months or less to be cash equivalents. The Company maintains cash and cash equivalent balances with financial institutions that exceed federally-insured limits. The Company has not experienced any losses related to these balances and believes the risk to be minimal.

Accounts Receivable

Accounts receivable primarily consists of receivables from third party gift card distributors, tenant improvement receivables, vendor rebates, receivables arising from the normal course of business, and payroll-related tax receivables. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable based on a specific review of account balances. Account balances are charged against the allowance after all means of collection have been exhausted and the potential for recoverability is considered remote.

Inventory

Inventory, consisting principally of food, beverages, and supplies, is valued at the lower of first-in, first-out cost or net realizable value. Certain key ingredients (beef, pork, chicken, beans, rice, sour cream, cheese, and tortillas) are purchased from a small number of suppliers.

Investments

Investments classified as “trading” securities are carried at fair value with any unrealized gain or loss being recorded in the consolidated statement of income and comprehensive income. Investments classified as “available-for-sale” are carried at fair market value with unrealized gains and losses, net of tax, included as a component of other comprehensive income (loss). Held-to-maturity securities are carried at amortized cost. The Company recognizes impairment charges on its investments in the consolidated statement of income and comprehensive income when management believes the decline in the fair value of the investment is other-than-temporary.

Leasehold Improvements, Property and Equipment

Leasehold improvements, property and equipment are recorded at cost. Internal costs directly associated with the acquisition, development and construction of a restaurant are capitalized and were $8,076, $9,554 and $7,756 for the years ended December 31, 2016, 2015 and 2014, respectively. Expenditures for major renewals and improvements are capitalized while expenditures for minor replacements, maintenance and repairs are expensed as incurred. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized over the shorter of the lease term, which generally includes reasonably assured option periods, or the estimated useful lives of the assets. Upon retirement or disposal of assets, the accounts are relieved of cost and accumulated depreciation and any related gain or loss is reflected in loss on disposal and impairment of assets in the consolidated statement of income and comprehensive income.

At least annually, the Company evaluates, and adjusts when necessary, the estimated useful lives of leasehold improvements, property and equipment. The changes in estimated useful lives did not have a material impact on depreciation in any period. The estimated useful lives are:

Leasehold improvements and buildings	3-20 years
Furniture and fixtures	4-7 years
Equipment	3-10 years

Goodwill

Goodwill represents the excess of cost over fair value of net assets of the business acquired. Goodwill is not subject to amortization, but instead is tested for impairment at least annually, and the Company is required to record any necessary impairment adjustments. Impairment is measured as the excess of the carrying value over the fair value of the goodwill. Based on the Company’s analysis, no impairment charges were recognized on goodwill for the years ended December 31, 2016, 2015 and 2014.

Other Assets

Other assets consist primarily of restricted cash assets of $28,490 and $22,572 as of December 31, 2016 and 2015, respectively, a rabbi trust as described further in Note 7. “Employee Benefit Plans,” transferable liquor licenses which are carried at the lower of fair value or cost, and rental deposits related to leased properties. Restricted cash assets are primarily insurance-related restricted trust assets.

Impairment of Long-Lived Assets

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. For the purpose of reviewing restaurant assets to be held and used for potential impairment, assets are grouped together at the market level, or in the case of a potential relocation or closure, at the restaurant level. The Company manages its restaurants as a group with significant common costs and promotional activities; as such, an individual restaurant’s cash flows are not generally independent of the cash flows of others in a market. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized as the amount by which the carrying amount of the asset exceeds the fair value of the asset. During the years ended December 31, 2016, 2015 and 2014, an aggregate impairment charge of $17,394, $6,675 and $0, respectively, was recognized in loss on disposal and impairment of assets in the consolidated statement of income and comprehensive income.

Impairment charges recognized during the year ended December 31, 2016 resulted primarily from the Company’s determination that its ShopHouse Southeast Asian Kitchen restaurants were impaired and the recognition of a non-cash impairment charge of $14,505 ($8,014 net of tax), representing substantially all of the value of long-lived assets of ShopHouse. The decision to impair the assets was based on an analysis of each restaurant’s past and present operating performance, including a significant change from comparable restaurant sales increases to decreases, and projected future cash flows expected to be generated by the restaurant assets. The Company has decided not to invest further in developing and growing the ShopHouse brand and is pursuing strategic alternatives. During the year ended December 31, 2015, the impairment charges resulted from an internally developed software program that the Company chose not to implement and the related hardware, the discontinued use of certain kitchen equipment from the Company’s restaurants, as well as restaurant relocations. The fair value of restaurants, including ShopHouse, was determined using level 3 inputs (unobservable inputs) based on a discounted cash flows method.

Income Taxes

The Company recognizes deferred tax assets and liabilities at enacted income tax rates for the temporary differences between the financial reporting bases and the tax bases of its assets and liabilities. Any effects of changes in income tax rates or tax laws are included in the provision for income taxes in the period of enactment. The deferred income tax impacts of investment tax credits are recognized as an immediate adjustment to income tax expense. When it is more likely than not that a portion or all of a deferred tax asset will not be realized in the future, the Company provides a corresponding valuation allowance against the deferred tax asset. When it is more likely than not that a position will be sustained upon examination by a tax authority that has full knowledge of all relevant information, the Company measures the amount of tax benefit from the position and records the largest amount of tax benefit that is greater than 50% likely of being realized after settlement with a tax authority. The Company’s policy is to recognize interest to be paid on an underpayment of income taxes in interest expense and any related statutory penalties in the provision for income taxes in the consolidated statement of income and comprehensive income.

Restaurant Pre-Opening Costs

Pre-opening costs, including rent, wages, benefits and travel for training and opening teams, food and other restaurant operating costs, are expensed as incurred prior to a restaurant opening for business.

Insurance Liability

The Company maintains various insurance policies including workers’ compensation, employee health, general liability, automobile, and property damage. Pursuant to these policies, the Company is responsible for losses up to certain limits and is required to estimate a liability that represents the ultimate exposure for aggregate losses below those limits. This liability is based on management’s estimates of the ultimate costs to be incurred to settle known claims and, where applicable, claims not reported as of the balance sheet date. The estimated liability is not discounted and is based on a number of assumptions and factors, including historical trends, actuarial assumptions, and economic conditions. If actual trends differ from the estimates, the financial results could be impacted. As of December 31, 2016 and 2015, $35,550 and $28,391, respectively, of the estimated liability was included in accrued payroll and benefits and $13,881 and $11,898, respectively, was included in accrued liabilities in the consolidated balance sheet.

Advertising and Marketing Costs

Advertising and marketing costs are expensed as incurred and totaled $102,969, $69,257 and $57,290 for the years ended December 31, 2016, 2015 and 2014, respectively. Advertising and marketing costs are included in other operating costs in the consolidated statement of income and comprehensive income.

Rent

Rent expense for the Company’s leases, which generally have escalating rentals over the term of the lease, is recorded on a straight-line basis over the lease term. The lease term is the lesser of 20 years inclusive of reasonably assured renewal periods, or the lease term. The lease term begins when the Company has the right to control the use of the property, which is typically before rent payments are due under the lease. The difference between the rent expense and rent paid is recorded as deferred rent in the consolidated balance sheet. Pre-opening rent is included in pre-opening costs in the consolidated statement of income and comprehensive income. Tenant incentives used to fund leasehold improvements are recorded in deferred rent and amortized as reductions of rent expense over the term of the lease.

Additionally, certain of the Company’s operating leases contain clauses that provide additional contingent rent based on a percentage of sales greater than certain specified target amounts. The Company recognizes contingent rent expense provided the achievement of that target is considered probable.

Fair Value of Financial Instruments

The carrying value of the Company’s cash and cash equivalents, accounts receivable and accounts payable approximate fair value because of their short-term nature.

Fair Value Measurements

Fair value is the price the Company would receive to sell an asset or pay to transfer a liability (exit price) in an orderly transaction between market participants. For assets and liabilities recorded or disclosed at fair value on a recurring basis, the Company determines fair value based on the following:

Level 1: Quoted prices in active markets for identical assets or liabilities that the entity has the ability to access.

Level 2: Observable inputs other than prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated with observable market data.

Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

Foreign Currency Translation

The Company’s international operations generally use the local currency as the functional currency. Assets and liabilities are translated at exchange rates in effect as of the balance sheet date. Income and expense accounts are translated at the average monthly exchange rates during the year. Resulting translation adjustments are recorded as a separate component of other comprehensive income (loss) in the consolidated statement of income and comprehensive income.

Recently Issued Accounting Standards and Adoption of Accounting Pronouncements

In November 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-18, “Statement of Cash Flows (Topic 230)”, which provides guidance on the classification of restricted cash to be included with cash and cash equivalents when reconciling the beginning of period and end of period total amounts on the statement of cash flows. This pronouncement is effective for reporting periods beginning after December 15, 2017 using a retrospective adoption method and early adoption is permitted. For the years ended December 31, 2016, 2015 and 2014, $28,490, $22,572 and $19,889, respectively, of restricted cash would have been included in cash and cash equivalents and changes in the balance excluded from net cash provided by operating activities in the consolidated statement of cash flows if this new guidance had been adopted as of the respective dates.

In March 2016, the FASB issued ASU No. 2016-09, “Compensation – Stock Compensation (Topic 718).” The pronouncement was issued to simplify the accounting for share-based payment transactions, including income tax consequences, the classification of awards as either equity or liabilities, and the classification on the statement of cash flows. This pronouncement is effective for reporting periods beginning after December 15, 2016. The guidance will be applied either prospectively, retrospectively or using a modified retrospective transition method, depending on the area covered in this update. Upon adoption, any future excess tax benefits or deficiencies will be recorded to the provision for income taxes in the consolidated statement of income, instead of additional paid-in capital in the consolidated balance sheet. For the years ended December 31, 2016, 2015 and 2014, $1,320, $74,442 and $21,667, respectively, of excess tax benefits were recorded to additional paid-in capital that would have been recorded as a reduction to the provision for income taxes if this new guidance had been adopted as of the respective dates. Additionally, excess tax benefits will be classified as operating activities in the consolidated statement of cash flow instead of in financing activities as required under the current guidance. The Company has not selected a transition method, and except as described above, does not expect the provisions of ASU 2016-09 to have an impact on the Company’s consolidated financial position or results of operations.

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” The pronouncement requires the recognition of a liability for lease obligations and a corresponding right-of-use asset on the balance sheet and disclosure of key information about leasing arrangements. This pronouncement is effective for reporting periods beginning after December 15, 2018 using a modified retrospective adoption method. The Company’s adoption of ASU No. 2016-02 will have a significant impact on its consolidated balance sheet as it will record material assets and obligations for current operating leases. The Company is evaluating the impact that adoption will have on its consolidated statement of income.

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” as amended by multiple standards updates. The pronouncement was issued to clarify the principles for recognizing revenue and to develop a common revenue standard and disclosure requirements for U.S. GAAP and IFRS. The pronouncement is effective for reporting periods beginning after December 15, 2017. The expected adoption method of ASU 2014-09 is being evaluated by the Company, and the adoption is not expected to have a significant impact on the Company’s consolidated financial position or results of operations.

The Company reviewed all other recently issued accounting pronouncements and concluded that they were either not applicable or not expected to have a significant impact to the consolidated financial statements. Additionally, the adoption of accounting pronouncements during 2016 did not have an impact on the Company’s consolidated financial position or results of operations.

2. Supplemental Financial Information

Leasehold improvements, property and equipment were as follows:

	December 31,
	2016			2015
Land	$	12,943		$	13,052
Leasehold improvements and buildings		1,572,606			1,419,418
Furniture and fixtures		157,541			142,825
Equipment		405,937			362,800
Leasehold improvements, property and equipment		2,149,027			1,938,095
Accumulated depreciation		(845,469)			(720,875)
Leasehold improvements, property and equipment, net	$	1,303,558		$	1,217,220

Accrued payroll and benefits were as follows:

	December 31,
	2016			2015
Worker's compensation liability	$	33,038		$	26,408
Accrued payroll		22,338			13,780
Other accrued payroll and benefits		20,925			24,770
Accrued payroll and benefits	$	76,301		$	64,958

Accrued liabilities were as follows:

	December 31,
	2016			2015
Gift card liability	$	59,438		$	51,055
Transaction tax payable		20,435			15,634
Treasury stock liability		2,300			25,178
Other accrued expenses		44,956			37,408
Accrued liabilities	$	127,129		$	129,275

3. Investments

As of December 31, 2016 and 2015, the Company’s investments consisted of U.S. treasury notes with maturities up to approximately two years and were classified as available-for-sale. Fair market value of U.S. treasury notes is measured on a recurring basis based on Level 1 inputs (level inputs are described in Note 1 under “Fair Value Measurements”).

The Company designates the appropriate classification of its investments at the time of purchase based upon the intended holding period. During the year ended December 31, 2015, the Company transferred the classification of its investments from held-to-maturity to available-for-sale due to anticipated liquidity needs related to increased repurchases of shares of the Company’s common stock. The carrying value of held-to-maturity securities transferred to available-for-sale during the year ended December 31, 2015 was $1,040,850 and the fair market value of those securities was determined to be $1,038,138, resulting in an unrealized holding loss of $2,712. As a result, the Company recorded $2,468 ($1,522, net of tax) of unrealized holding losses in other comprehensive income (loss), and an other-than-temporary impairment charge of $244 in interest and other income (expense), in the consolidated statement of income and comprehensive income.

The following is a summary of available-for-sale securities:

	December 31,
	2016			2015
Amortized cost	$	455,109		$	1,040,850
Unrealized gains (losses)		(218)			(2,712)
Fair market value	$	454,891		$	1,038,138

The following is a summary of unrealized gains (losses) of available-for-sale securities recorded in other comprehensive income (loss):

				Year ended December 31,
				2016			2015			2014
Unrealized gains (losses) on available-for-sale securities				$	2,251		$	(2,468)		$	-
Unrealized gains (losses) on available-for-sale securities, net of tax				$	1,402		$	(1,522)		$	-

The following is a summary of available-for-sale securities activity recorded in interest and other income (expense) in the consolidated statement of income and comprehensive income:

				Year ended December 31,
				2016			2015			2014
Realized gains (losses) from sale of available-for-sale securities				$	547		$	-		$	-
Other-than-temporary impairment				$	-		$	244		$	-

The Company has elected to fund certain deferred compensation obligations through a rabbi trust, the assets of which are designated as trading securities, as described further in Note 7. “Employee Benefit Plans.”

4. Income Taxes

The components of the provision for income taxes are as follows:

	Year ended December 31,
	2016			2015			2014
Current tax:
U.S. Federal	$	20,765		$	244,470		$	248,219
U.S. State		8,687			37,957			41,225
Foreign		556			172			156
		30,008			282,599			289,600
Deferred tax:
U.S. Federal		(11,596)			11,000			(13,890)
U.S. State		(2,546)			699			(6,740)
Foreign		(2,470)			(2,288)			(3,075)
		(16,612)			9,411			(23,705)
Valuation allowance		2,405			2,255			3,034
Provision for income taxes	$	15,801		$	294,265		$	268,929

Actual taxes paid for each tax period were less than the current tax expense due to the excess tax benefit on stock-based compensation of $1,320, $74,442, and $21,667 during the years ended December 31, 2016, 2015, and 2014, respectively.

The effective tax rate differs from the statutory tax rates as follows:

		Year ended December 31,
		2016			2015			2014
Statutory U.S. federal income tax rate		35.0	%		35.0	%		35.0	%
State income tax, net of related federal income tax benefit		13.3			3.6			3.7
Federal credits		(10.1)			(0.4)			(0.5)
Enhanced deduction for food donation		(2.4)			(0.2)			(0.1)
Valuation allowance		6.0			0.3			0.4
Other		6.2			-			0.1
Return to provision and other discrete items		(7.2)			(0.1)			(1.0)
Effective income tax rate		40.8	%		38.2	%		37.6	%

The 2016 effective tax rate was higher due to a higher state tax rate, not qualifying for the federal research and development tax credit in 2016, and non-deductible items on overall lower pre-tax operating income. Additionally, 2014 included a benefit from filing the 2013 tax returns, which included a non-recurring change in the estimate of usable employer credits resulting in a lower effective tax rate than 2015.

Deferred income tax liabilities are taxes the Company expects to pay in future periods. Similarly, deferred income tax assets are recorded for expected reductions in taxes payable in future periods. Deferred income taxes arise because of the differences in the book and tax bases of certain assets and liabilities. Deferred income tax liabilities and assets consist of the following:

				December 31,
				2016			2015
Deferred income tax liability:
Leasehold improvements, property and equipment				$	204,640		$	192,125
Goodwill and other assets					1,856			1,696
Prepaid assets and other					6,012			8,297
Total deferred income tax liability					212,508			202,118
Deferred income tax asset:
Deferred rent					63,159			57,716
Gift card liability					5,563			3,171
Capitalized transaction costs					500			502
Stock-based compensation and other employee benefits					101,628			83,058
Foreign net operating loss carry-forwards					9,580			11,407
State credits					4,595			4,783
Allowances, reserves and other					19,359			18,577
Valuation allowance					(10,820)			(9,401)
Total deferred income tax asset					193,564			169,813
Net deferred income tax liability				$	18,944		$	32,305

The unrecognized tax benefits are as follows:

	2016			2015			2014
Beginning of year	$	3,776		$	1,342		$	-
Increase resulting from prior year tax position		-			402			-
Increase resulting from current year tax position		435			2,032			1,342
End of year	$	4,211		$	3,776		$	1,342

During the year ending December 31, 2016, $430 of interest was accrued for uncertain tax positions. The Company is open to federal and state tax audits until the applicable statutes of limitations expire. Tax audits by their very nature are often complex and can require several years to complete. The Company is no longer subject to U.S. federal tax examinations by tax authorities for tax years before 2013. For the majority of states where the Company has a significant presence, it is no longer subject to tax examinations by tax authorities for tax years before 2013. As of December 31, 2016, the Company had cumulative gross foreign net operating losses of $36,464, which have no expiration date.

5. Shareholders’ Equity

Through December 31, 2016, the Company announced authorizations by its Board of Directors of the expenditure of an aggregate of up to $2,100,000 to repurchase shares of the Company’s common stock. On January 10, 2017, the Company announced that its Board of Directors authorized the expenditure of up to an additional $100,000 to repurchase shares of its common stock. Under the remaining repurchase authorization, shares may be purchased from time to time in open market transactions, subject to market conditions.

The shares of common stock repurchased under authorized programs were 1,811 during the year ended December 31, 2016, 839 during the year ended December 31, 2015 and 154 during the year ended December 31, 2014, for a total cost of $813,881, $485,841 and $87,996 during 2016, 2015 and 2014, respectively. As of December 31, 2016, $102,568 was available to be repurchased under the authorized programs. The shares repurchased are being held in treasury until such time as they are reissued or retired, at the discretion of the Board of Directors.

During 2016, 2015, and 2014, shares of common stock were netted and surrendered as payment for minimum statutory tax withholding obligations in connection with the exercise and vesting of outstanding stock awards. Shares surrendered by the participants in accordance with the applicable award agreements and plan are deemed repurchased by the Company but are not part of publicly announced share repurchase programs.

6. Stock Based Compensation

The Company issues shares pursuant to the Amended and Restated Chipotle Mexican Grill, Inc. 2011 Stock Incentive Plan (the “2011 Incentive Plan”), approved at the annual shareholders’ meeting on May 13, 2015. Shares issued pursuant to awards granted prior to the 2011 Incentive Plan were issued subject to previous stock plans that were also approved by shareholders. For purposes of counting the shares remaining available under the 2011 Incentive Plan, each share issuable pursuant to outstanding full value awards, such as restricted stock units and performance shares, count as two shares used, whereas each share underlying a stock appreciation right or stock option count as one share used. Under the 2011 Incentive Plan, 5,560 shares of common stock have been authorized and reserved for issuance to eligible participants, of which 2,165 represent shares that were authorized for issuance but not issued or subject to outstanding awards at December 31, 2016. The 2011 Incentive Plan is administered by the Compensation Committee of the Board of Directors, which has the authority to select the individuals to whom awards will be granted or to delegate its authority under the plan to make grants (subject to certain legal and regulatory restrictions), to determine the type of awards and when the awards are to be granted, the number of shares to be covered by each award, the vesting schedule and all other terms and conditions of the awards. The exercise price for stock awards granted under the 2011 Incentive Plan cannot be less than fair market value at the date of grant.

Stock only stock appreciation rights (“SOSARs”) generally vest equally over two and three years and expire after seven years. Stock-based compensation expense is generally recognized on a straight-line basis for each separate vesting portion. Compensation expense related to employees eligible to retire and retain full rights to the awards is recognized over six months which coincides with the notice period. The Company has also granted SOSARs and stock awards with performance vesting conditions and/or market vesting conditions. Compensation expense on SOSARs subject to performance conditions is recognized over the longer of the estimated performance goal attainment period or time vesting period. Compensation expense on stock awards subject to performance conditions, which is based on the quantity of awards the Company has determined are probable of vesting, is recognized over the longer of the estimated performance goal attainment period or time vesting period. Compensation expense is recognized ratably for awards subject to market conditions regardless of whether the market condition is satisfied, provided that the requisite service has been provided. Some stock-based compensation awards are made to employees involved in the Company’s new restaurant development activities, and expense for these awards is recognized as capitalized development and included in leasehold improvements, property and equipment in the consolidated balance sheet.

The following table sets forth stock-based compensation expense, including SOSARs and stock awards:

	Year ended December 31,
	2016			2015			2014
Stock-based compensation expense	$	65,112		$	59,465		$	97,618
Stock-based compensation expense, net of tax		35,974			36,666			60,084
Stock-based compensation expense recognized as capitalized development		946			1,554			1,178

The tables below summarize the option and SOSAR activity under the stock incentive plans (in thousands, except years and per share data):

	2016					2015					2014
	Shares		Weighted-Average Exercise Price Per Share			Shares		Weighted-Average Exercise Price Per Share			Shares		Weighted-Average Exercise Price Per Share
Outstanding, beginning of year	1,694		$	490.70		2,087		$	395.46		1,690		$	312.44
Granted	460		$	457.77		379		$	659.12		764		$	545.66
Exercised	(124)		$	315.87		(716)		$	297.25		(315)		$	310.32
Forfeited or cancelled	(113)		$	559.25		(56)		$	554.73		(52)		$	419.74
Outstanding, end of year	1,917		$	490.06		1,694		$	490.70		2,087		$	395.46

	Shares		Weighted-Average Exercise Price Per Share			Weighted-Average Remaining Years of Contractual Life		Aggregate Intrinsic Value
Outstanding as of December 31, 2016	1,917		$	490.06		4.4		$	22,040
Vested and expected to vest as of December 31, 2016	1,851		$	489.18		4.3		$	22,040
Exercisable as of December 31, 2016	846		$	422.32		3.3		$	22,040

During the year ended December 31, 2014 the Company granted 220 SOSARs that include performance conditions. No SOSARs that include performance conditions were granted during 2015 or 2016. As of December 31, 2016, 388 SOSARs that include performance conditions were outstanding, of which 278 awards had met the performance conditions. In addition to time vesting described above, the shares vest upon achieving a targeted cumulative cash flow from operations. The total intrinsic value of options and SOSARs exercised during the years ended December 31, 2016, 2015 and 2014 was $15,946, $260,466 and $88,245. Unearned compensation as of December 31, 2016 was $34,862 for SOSAR awards, and is expected to be recognized over a weighted average period of 1.5 years.

The following table reflects the average assumptions utilized in the Black-Scholes option-pricing model to value SOSAR awards granted for each year:

		2016				2015				2014
Risk-free interest rate			1.0	%			1.1	%			0.8	%
Expected life (years)			3.5				3.4				3.4
Expected dividend yield			0.0	%			0.0	%			0.0	%
Volatility			32.2	%			30.8	%			33.3	%
Weighted-average Black-Scholes fair value per share at date of grant		$	117.48			$	156.32			$	136.18

The risk-free interest rate is based upon U.S. Treasury rates for instruments with similar terms and the expected life assumptions were based on the Company’s historical data. The Company has not paid dividends to date and does not plan to pay dividends in the near future. The volatility assumption was based on the Company’s historical data and implied volatility.

A summary of non-vested stock award activity under the stock incentive plans is as follows (in thousands, except per share data):

	2016					2015					2014
	Shares		Grant Date Fair Value Per Share			Shares		Grant Date Fair Value Per Share			Shares		Grant Date Fair Value Per Share
Outstanding, beginning of year	116		$	511.88		70		$	525.60		71		$	520.27
Granted	90		$	509.05		47		$	785.32		2		$	495.92
Vested	(7)		$	605.83		(1)		$	413.07		(2)		$	284.11
Forfeited or cancelled	(74)		$	529.54		-		$	534.55		(1)		$	410.55
Outstanding, end of year	125		$	606.24		116		$	511.88		70		$	525.60

At December 31, 2016, 116 of the outstanding non-vested stock awards were subject to performance and/or market conditions, in addition to service vesting conditions. During the first quarter of 2016, the Company awarded 73 shares, net of cancellations, that are subject to both service and market vesting conditions. The quantity of shares that will vest may range from 0% to 400% of a targeted number of shares, and will be determined based on the price of the Company’s common stock reaching certain targets for a consecutive number of days during the three year period starting on the grant date. If the minimum defined stock price target is not met, then no shares will vest.

During the year ended December 31, 2015, the Company awarded 40 performance shares that were subject to service, performance, and market vesting conditions (“the 2015 stock awards”). The quantity of shares that will ultimately vest is determined based on the Company’s relative performance versus a restaurant industry peer group in the annual average of: revenue growth, net income growth, and total shareholder return. The quantity of shares awarded ranges from 0% to 200% based on the level of achievement of the performance and market conditions. If minimum targets are not met, then no shares will vest. Each performance and market measure will be weighted equally, and performance is calculated over a three year period beginning January 1, 2015 through December 31, 2017.

During the year ended December 31, 2013, the Company granted 66 stock awards that were subject to both service and performance vesting conditions (“the 2013 stock awards”). The performance conditions for the grant required achievement of specific targets for cumulative cash flow from operations during a three year period. Targets were not met and none of the stock awards vested.

During the year ended December 31, 2016, the Company adjusted its estimate of 2015 stock awards expected to vest as well as reduced its expense for the 2013 stock awards that did not vest. The impact of these changes resulted in a cumulative reduction to expense of $6,031 ($3,332 net of tax as well as $0.11 to basic and diluted earnings per share) in the year ended December 31, 2016.

The Company’s measurement of the grant date fair value of the 2015 and 2016 stock awards included using a Monte Carlo simulation model, which incorporates into the fair-value determination the possibility that the market condition may not be satisfied, using the following assumptions:

						2016				2015
Risk-free interest rate							0.9	%			1.0	%
Expected life (years)							3.0				2.9
Expected dividend yield							0.0	%			0.0	%
Volatility							31.4	%			33.7	%

The assumptions are based on the same factors as those described for SOSARs, except that the expected life is based on the contractual performance period for stock awards.

Unearned compensation as of December 31, 2016 was $39,758 for non-vested stock awards the Company has determined are probable of vesting, and is expected to be recognized over a weighted average period of 1.7 years. The fair value of shares earned as of the vesting date during the year ended December 31, 2016, 2015, and 2014 was $2,787, $634, and $783, respectively.

7. Employee Benefit Plans

The Company maintains the Chipotle Mexican Grill 401(k) Plan (the “401(k) Plan”). The Company matches 100% of the first 3% of pay contributed by each eligible employee and 50% on the next 2% of pay contributed. Employees become eligible to receive matching contributions after one year of service with the Company. For the years ended December 31, 2016, 2015, and 2014, Company matching contributions totaled approximately $5,939, $4,995 and $3,881, respectively. In addition to the traditional pre-tax deferral options, during 2016 the 401(k) Plan began offering a Roth after-tax deferral option.

The Company also maintains the Chipotle Mexican Grill, Inc. Supplemental Deferred Investment Plan (the “Deferred Plan”) which covers eligible employees of the Company. The Deferred Plan is a non-qualified plan that allows participants to make tax-deferred contributions that cannot be made under the 401(k) Plan because of Internal Revenue Service limitations. Participants’ earnings on contributions made to the Deferred Plan fluctuate with the actual earnings and losses of a variety of available investment choices selected by the participant. Total liabilities under the Deferred Plan as of December 31, 2016 and 2015 were $17,843 and $18,331, respectively, and are included in other long-term liabilities in the consolidated balance sheet. The Company matches 100% of the first 3% of pay contributed by each eligible employee and 50% on the next 2% of pay contributed once the 401(k) contribution limits are reached. For the years ended December 31, 2016, 2015, and 2014, the Company made deferred compensation matches of $225, $617, and $536 respectively, to the Deferred Plan.

The Company has elected to fund its deferred compensation obligations through a rabbi trust. The rabbi trust is subject to creditor claims in the event of insolvency, but the assets held in the rabbi trust are not available for general corporate purposes. Amounts in the rabbi trust are invested in mutual funds, consistent with the investment choices selected by participants in their Deferred Plan accounts, which are designated as trading securities and carried at fair value, and are included in other assets in the consolidated balance sheet. Fair value of mutual funds is measured using Level 1 inputs (quoted prices for identical assets in active markets), and the fair values of the investments in the rabbi trust were $17,843 and $18,331 as of December 31, 2016 and 2015, respectively. The Company records trading gains and losses in general and administrative expenses in the consolidated statement of

income and comprehensive income, along with the offsetting amount related to the increase or decrease in deferred compensation to reflect its exposure of the Deferred Plan liability.

The following table sets forth unrealized gains and losses on investments held in the rabbi trust:

				Year ended December 31,
				2016			2015			2014
Unrealized gains (losses) on investments held in rabbi trust				$	586		$	(571)		$	184

The Company offers an employee stock purchase plan (“ESPP”). Employees become eligible to participate after one year of service with the Company and may contribute up to 15% of their base earnings, subject to an annual maximum dollar amount, toward the monthly purchase of the Company’s common stock. Under the ESPP, 250 shares of common stock have been authorized and reserved for issuances to eligible employees, of which 247 represent shares that were authorized for issuance but not issued at December 31, 2016. For each of the years ended December 31, 2016, 2015, and 2014, the number of shares issued under the ESPP were less than 1.

8. Leases

The Company generally operates its restaurants in leased premises. Lease terms for traditional shopping center or building leases generally include combined initial and option terms of 20-25 years. Ground leases generally include combined initial and option terms of 30-40 years. The option terms in each of these leases are typically in five-year increments. Typically, the lease includes rent escalation terms every five years including fixed rent escalations, escalations based on inflation indexes, and fair market value adjustments. Certain leases contain contingent rental provisions that include a fixed base rent plus an additional percentage of the restaurant’s sales in excess of stipulated amounts. The leases generally provide for the payment of common area maintenance, property taxes, insurance and various other use and occupancy costs by the Company. In addition, the Company is the lessee under non-cancelable leases covering certain offices.

Contractually required future minimum cash lease payments under existing operating leases as of December 31, 2016 are as follows:

2017	$	264,911
2018		268,862
2019		269,133
2020		263,732
2021		257,400
Thereafter		2,358,941
Total minimum lease payments	$	3,682,979

Minimum lease payments have not been reduced by minimum sublease rentals of $5,342 due in the future under non-cancelable subleases.

Rental expense consists of the following:

	Year ended December 31,
	2016			2015			2014
Minimum rentals	$	255,955		$	227,602		$	200,575
Contingent rentals	$	1,811		$	4,542		$	4,616
Sublease rental income	$	(2,074)		$	(1,879)		$	(1,838)

The Company has six sales and leaseback transactions. These transactions do not qualify for sale leaseback accounting because of the Company’s deemed continuing involvement with the buyer-lessor due to fixed price renewal options, which results in the transaction being recorded under the financing method. Under the financing method, the assets remain on the consolidated balance sheet and the proceeds from the transactions are recorded as a financing liability. A portion of lease payments are applied as payments of deemed principal and imputed interest. The deemed landlord financing liability was $2,854 and $3,060 as of December 31, 2016, and 2015, respectively, with the current portion of the liability included in accrued liabilities, and the remaining portion included in other liabilities in the consolidated balance sheet.

9. Earnings Per Share

Basic earnings per share is calculated by dividing income available to common shareholders by the weighted-average number of shares of common stock outstanding during each period. Diluted earnings per share (“diluted EPS”) is calculated using income available to common shareholders divided by diluted weighted-average shares of common stock outstanding during each period. Potentially dilutive securities include shares of common stock underlying SOSARs and non-vested stock awards (collectively “stock awards”). Diluted EPS considers the impact of potentially dilutive securities except in periods in which there is a loss because the inclusion of the potential common shares would have an anti-dilutive effect. Stock awards are excluded from the calculation of diluted EPS in the event they are subject to performance conditions or antidilutive. The following stock awards were excluded from the calculation of diluted EPS:

	Year ended December 31,
	2016			2015			2014
Stock awards subject to performance conditions		263			266			385
Stock awards that were antidilutive		1,316			289			232
Total stock awards excluded from diluted earnings per share		1,579			555			617

The following table sets forth the computations of basic and diluted earnings per share:

	Year ended December 31,
	2016			2015			2014
Net income	$	22,938		$	475,602		$	445,374
Shares:
Weighted average number of common shares outstanding		29,265			31,092			31,038
Dilutive stock awards		505			402			474
Diluted weighted average number of common shares outstanding		29,770			31,494			31,512
Basic earnings per share	$	0.78		$	15.30		$	14.35
Diluted earnings per share	$	0.77		$	15.10		$	14.13

10. Commitments and Contingencies

Purchase Obligations

The Company enters into various purchase obligations in the ordinary course of business, generally of a short term nature. Those that are binding primarily relate to commitments for food purchases and supplies, amounts owed under contractor and subcontractor agreements, orders submitted for equipment for restaurants under construction, and marketing initiatives and corporate sponsorships.

Litigation

Receipt of Grand Jury Subpoenas

On January 28, 2016, the Company was served with a Federal Grand Jury Subpoena from the U.S. District Court for the Central District of California in connection with an official criminal investigation being conducted by the U.S. Attorney’s Office for the Central District of California, in conjunction with the U.S. Food and Drug Administration’s Office of Criminal Investigations. The subpoena requires the production of documents and information related to company-wide food safety matters dating back to January 1, 2013. The Company intends to continue to fully cooperate in the investigation. It is not possible at this time to determine

whether the Company will incur, or to reasonably estimate the amount of, any fines or penalties in connection with the investigation pursuant to which the subpoena was issued.

Shareholder Class Action

On January 8, 2016, Susie Ong filed a complaint in the U.S. District Court for the Southern District of New York on behalf of a purported class of purchasers of shares of the Company’s common stock between February 4, 2015 and January 5, 2016. The complaint purports to state claims against the Company, each of its co-Chief Executive Officers and its Chief Financial Officer under Sections 10(b) and 20(a) of the Exchange Act and related rules, based on the Company’s alleged failure during the claimed class period to disclose material information about the Company’s quality controls and safeguards in relation to consumer and employee health. The complaint asserts that those failures and related public statements were false and misleading and that, as a result, the market price of the Company’s stock was artificially inflated during the claimed class period. The complaint seeks damages on behalf of the purported class in an unspecified amount, interest, and an award of reasonable attorneys’ fees, expert fees and other costs. The Company intends to defend this case vigorously, but it is not possible at this time to reasonably estimate the outcome of or any potential liability from the case.

Shareholder Derivative Actions

On March 21, 2016, Jessica Oldfather filed a shareholder derivative action in the Court of Chancery of the State of Delaware alleging that the Company’s Board of Directors and officers breached their fiduciary duties in connection with allegedly excessive compensation awarded from 2011 to 2015 under the Company’s stock incentive plan. On December 8, 2016, the Court of Chancery dismissed the complaint, with prejudice.

On April 6, 2016, Uri Skorski filed a shareholder derivative action in Colorado state court in Denver, Colorado, making largely the same allegations as the Oldfather complaint and also alleging that the Company’s Board of Directors and officers breached their fiduciary duties in connection with the Company’s alleged failure to disclose material information about the Company’s food safety policies and procedures. On April 14, 2016, Mark Arnold and Zachary Arata filed a shareholder derivative action in Colorado state court in Denver, Colorado, making largely the same allegations as the Skorski complaint. On May 26, 2016, the court issued an order consolidating the Skorski and Arnold/Arata actions into a single case. On August 8, 2016, Sean Gubricky filed a shareholder derivative action the U.S. District Court for the District of Colorado, alleging that the Company’s Board of Directors and certain officers failed to institute proper food safety controls and policies, issued materially false and misleading statements in violation of federal securities laws, and otherwise breached their fiduciary duties to the Company. On September 1, 2016, Ross Weintraub filed a shareholder derivative action in Colorado state court in Denver, Colorado, making largely the same allegations as the Gubricky complaint. On December 27, 2016, Cyrus Lashkari filed a shareholder derivative action the U.S. District Court for the District of Colorado, making largely the same allegations as the foregoing shareholder derivative complaints. Each of these actions purports to state a claim for damages on behalf of the Company, and is based on statements in the Company’s SEC filings and related public disclosures, as well as media reports and Company records. The Company intends to defend these cases vigorously, but it is not possible at this time to reasonably estimate the outcome of or any potential liability from these cases.

Notices of Inspection of Work Authorization Documents and Related Civil and Criminal Investigations

Following an inspection during 2010 by the U.S. Department of Homeland Security, or DHS, of the work authorization documents of the Company’s restaurant employees in Minnesota, the Immigration and Customs Enforcement arm of DHS, or ICE, issued to the Company a Notice of Suspect Documents identifying a large number of employees who, according to ICE and notwithstanding the Company’s review of work authorization documents for each employee at the time they were hired, appeared not to be authorized to work in the U.S. The Company approached each of the named employees to explain ICE’s determination and afforded each employee an opportunity to confirm the validity of their original work eligibility documents, or provide valid work eligibility documents. Employees who were unable to provide valid work eligibility documents were terminated in accordance with the law. In December 2010, the Company was also requested by DHS to provide the work authorization documents of restaurant employees in the District of Columbia and Virginia, and the Company provided the requested documents in January 2011. The Company subsequently received requests from the office of the U.S. Attorney for the District of Columbia for work authorization documents covering all of the Company’s employees since 2007, plus employee lists and other documents concerning work authorization. In May 2012, the U.S. Securities and Exchange Commission notified the Company that it was conducting a civil investigation of the Company’s compliance with employee work authorization verification requirements and its related disclosures and statements, and the office of the U.S. Attorney for the District of Columbia advised the Company that its investigation had broadened to include a parallel criminal and civil investigation of the Company’s compliance with federal securities laws. During the fourth quarter of 2016, the Company entered into an agreement with the office of the U.S. Attorney for the District of Columbia to resolve the DHS and ICE investigations.

Miscellaneous

The Company is involved in various other claims and legal actions that arise in the ordinary course of business. The Company does not believe that the ultimate resolution of these actions will have a material adverse effect on the Company’s financial position, results of operations, liquidity or capital resources. However, a significant increase in the number of these claims, or one or more successful claims under which the Company incurs greater liabilities than the Company currently anticipates, could materially and adversely affect the Company’s business, financial condition, results of operations and cash flows.

11. Quarterly Financial Data (Unaudited)

Summarized unaudited quarterly financial data:

					2016
					March 31			June 30			September 30			December 31
Revenue					$	834,459		$	998,383		$	1,036,982		$	1,034,560
Operating income (loss)					$	(46,604)		$	40,895		$	9,726		$	30,550
Net income (loss)					$	(26,432)		$	25,596		$	7,799		$	15,975
Basic earnings (loss) per share					$	(0.88)		$	0.88		$	0.27		$	0.55
Diluted earnings (loss) per share					$	(0.88)		$	0.87		$	0.27		$	0.55
					2015
					March 31			June 30			September 30			December 31
Revenue					$	1,089,043		$	1,197,783		$	1,216,890		$	997,507
Operating income					$	197,801		$	227,416		$	234,759		$	103,613
Net income					$	122,641		$	140,204		$	144,883		$	67,874
Basic earnings per share					$	3.95		$	4.51		$	4.65		$	2.19
Diluted earnings per share					$	3.88		$	4.45		$	4.59		$	2.17