Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors of Chipotle Mexican Grill, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Chipotle Mexican Grill, Inc. (the Company) as of December 31, 2021 and 2020, the related consolidated statements of income, comprehensive income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2021, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, 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) (PCAOB), the Company's internal control over financial reporting as of December 31, 2021, 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 11, 2022 expressed an unqualified opinion thereon.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the account or disclosure to which it relates.

Valuation and accounting for stock-based compensation
Description of the MatterThe Company incurred $178.7 million in stock-based compensation expense during the year ended December 31, 2021. Approximately 229,000 of the Company’s vested and non-vested stock awards were subject to service and performance conditions during the year ended December 31, 2021. As described in Notes 1 and 8 of the consolidated financial statements, the Company estimates the grant date fair value of the stock awards and expenses the fair value of stock awards subject to service conditions over the respective vesting period. Stock-based compensation expense of stock awards subject to performance conditions is based on the estimated probability of achieving levels of performance associated with particular levels of payout. Additionally, at each reporting period, the Company evaluates the probable outcome of the performance conditions including consideration of significant assumptions and as applicable, recognizes the cumulative effect of the change in estimate in the period of the change. Auditing the grant date fair value and the appropriateness of the accounting treatment of the Company’s stock awards was complex and judgmental. In particular, the fair value estimate for stock awards subject to performance conditions is sensitive to significant assumptions including management’s internal estimates of the Company’s future performance.
How We Addressed the Matter in Our AuditWe obtained an understanding, evaluated the design, and tested the operating effectiveness of management’s controls over stock-based compensation. We tested controls over management’s review of the valuation model methodology and assumptions used with regards to the service and performance conditions. We also tested management's controls to validate that data used in the valuation model was complete and accurate. Our substantive audit procedures included, among others, testing the significant assumptions underlying the performance conditions (e.g., certain targets related to growth in comparable restaurant sales and average restaurant margin) and testing the completeness and accuracy of the underlying data. We evaluated management’s significant assumptions by comparing the assumptions to current market and economic trends, historical results of the Company’s business, and to other relevant factors. We additionally performed a sensitivity analysis of the significant assumptions to evaluate the change in the fair value of the stock awards subject to performance conditions resulting from changes in the assumptions. We also evaluated the adequacy of the Company’s stock-based compensation disclosures included in Notes 1 and 8 of the consolidated financial statements in relation to these matters.

/s/ Ernst & Young LLP

We have served as the Company’s auditor since 1997.

Irvine, California

February 11, 2022

CHIPOTLE MEXICAN GRILL, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)

December 31,
20212020
Assets
Current assets:
Cash and cash equivalents$815,374$607,987
Accounts receivable, net99,599104,500
Inventory32,82626,445
Prepaid expenses and other current assets78,75654,906
Income tax receivable94,064282,783
Investments260,945343,616
Total current assets1,381,5641,420,237
Leasehold improvements, property and equipment, net1,769,2781,584,311
Long-term investments274,311102,328
Restricted cash30,85627,849
Operating lease assets3,118,2942,767,185
Other assets56,71659,047
Goodwill21,93921,939
Total assets$6,652,958$5,982,896
Liabilities and shareholders' equity
Current liabilities:
Accounts payable$163,161$121,990
Accrued payroll and benefits162,405203,054
Accrued liabilities173,052164,649
Unearned revenue156,351127,750
Current operating lease liabilities218,713204,756
Total current liabilities873,682822,199
Commitments and contingencies (Note 12)
Long-term operating lease liabilities3,301,6012,952,296
Deferred income tax liabilities141,765149,422
Other liabilities38,53638,844
Total liabilities4,355,5843,962,761
Shareholders' equity:
Preferred stock, $0.01 par value, 600,000 shares authorized, no shares issued as of December 31, 2021 and 2020, respectively--
Common stock, $0.01 par value, 230,000 shares authorized, 37,132 and 36,704 shares issued as of December 31, 2021 and 2020, respectively371367
Additional paid-in capital1,729,3121,549,909
Treasury stock, at cost, 9,052 and 8,703 common shares as of December 31, 2021 and 2020, respectively(3,356,102)(2,802,075)
Accumulated other comprehensive loss(5,354)(4,229)
Retained earnings3,929,1473,276,163
Total shareholders' equity2,297,3742,020,135
Total liabilities and shareholders' equity$6,652,958$5,982,896

See accompanying notes to consolidated financial statements.

CHIPOTLE MEXICAN GRILL, INC.

CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share data)

Year ended December 31,
202120202019
Food and beverage revenue$7,457,169$5,920,545$5,561,036
Delivery service revenue89,89264,08925,333
Total revenue7,547,0615,984,6345,586,369
Restaurant operating costs (exclusive of depreciation and amortization shown separately below):
Food, beverage and packaging2,308,6311,932,7661,847,916
Labor1,917,7611,593,0131,472,060
Occupancy416,606387,762363,072
Other operating costs1,197,0541,030,012760,831
General and administrative expenses606,854466,291451,552
Depreciation and amortization254,657238,534212,778
Pre-opening costs21,26415,51511,108
Impairment, closure costs, and asset disposals19,29130,57723,094
Total operating expenses6,742,1185,694,4705,142,411
Income from operations804,943290,164443,958
Interest and other income, net7,8203,61714,327
Income before income taxes812,763293,781458,285
Benefit/(Provision) for income taxes(159,779)61,985(108,127)
Net income$652,984$355,766$350,158
Earnings per share:
Basic$23.21$12.74$12.62
Diluted$22.90$12.52$12.38
Weighted-average common shares outstanding:
Basic28,13227,91727,740
Diluted28,51128,41628,295

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

Year ended December 31,
202120202019
Net income$652,984$355,766$350,158
Other comprehensive income (loss), net of income taxes:
Foreign currency translation adjustments(1,125)1,134726
Unrealized gain on available-for-sale securities, net of income taxes--147
Other comprehensive income (loss), net of income taxes(1,125)1,134873
Comprehensive income$651,859$356,900$351,031

See accompanying notes to consolidated financial statements.

CHIPOTLE MEXICAN GRILL, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(in thousands)

Common StockTreasury Stock
SharesAmountAdditional‎Paid-In‎CapitalSharesAmountRetained‎EarningsAvailable-for-Sale SecuritiesAccumulated Other Comprehensive LossTotal
Balance, December 31, 201835,973$360$1,374,1548,276$(2,500,556)$2,573,617$(147)$(6,089)$1,441,339
Adoption of ASU No. 2016-02, Leases (Topic 842)-----(2,327)--(2,327)
Stock-based compensation--92,062-----92,062
Stock plan transactions and other3503(519)-----(516)
Acquisition of treasury stock---292(198,563)---(198,563)
Net income-----350,158--350,158
Other comprehensive income (loss), net of income taxes------147726873
Balance, December 31, 201936,323$363$1,465,6978,568$(2,699,119)$2,921,448$-$(5,363)$1,683,026
Adoption of ASU No. 2016-13, Financial Instrument-Credit Losses (Topic 326)-----(1,051)--(1,051)
Stock-based compensation--84,463-----84,463
Stock plan transactions and other3814(251)-----(247)
Acquisition of treasury stock---135(102,956)---(102,956)
Net income-----355,766--355,766
Other comprehensive income (loss), net of income taxes-------1,1341,134
Balance, December 31, 202036,704$367$1,549,9098,703$(2,802,075)$3,276,163$-$(4,229)$2,020,135
Stock-based compensation--178,703-----178,703
Stock plan transactions and other4284700-----704
Acquisition of treasury stock---349(554,027)---(554,027)
Net income-----652,984--652,984
Other comprehensive income (loss), net of income taxes-------(1,125)(1,125)
Balance, December 31, 202137,132$371$1,729,3129,052$(3,356,102)$3,929,147$-$(5,354)$2,297,374

See accompanying notes to consolidated financial statements*.*

CHIPOTLE MEXICAN GRILL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

Year ended December 31,
202120202019
Operating activities
Net income$652,984$355,766$350,158
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization254,657238,534212,778
Deferred income tax provision(12,357)108,35029,962
Impairment, closure costs, and asset disposals17,08628,87415,402
Provision for credit losses49316433
Stock-based compensation expense176,39282,62691,396
Other(4,599)3,643(10,592)
Changes in operating assets and liabilities:
Accounts receivable(1,687)3,010(2,630)
Inventory(6,392)(394)(4,530)
Prepaid expenses and other current assets(26,826)(11,442)(23,066)
Operating lease assets223,837184,538163,952
Other assets3,993(26,577)2,818
Accounts payable21,440(3,859)(973)
Accrued payroll and benefits(44,555)76,68311,759
Accrued liabilities10,9975,59636,543
Unearned revenue34,38736,95830,400
Income tax payable/receivable193,379(255,251)(32,083)
Operating lease liabilities(207,164)(165,154)(151,557)
Other long-term liabilities(3,984)1,7821,862
Net cash provided by operating activities1,282,081663,847721,632
Investing activities
Purchases of leasehold improvements, property and equipment(442,475)(373,352)(333,912)
Purchases of investments(429,350)(468,418)(448,754)
Maturities of investments345,748419,078476,723
Proceeds from sale of equipment4,035-13,969
Acquisitions of equity method investments-(10,025)-
Net cash used in investing activities(522,042)(432,717)(291,974)
Financing activities
Acquisition of treasury stock(466,462)(54,401)(190,617)
Tax withholding on stock-based compensation awards(79,870)(48,555)(10,420)
Other financing activities(2,274)(1,895)(698)
Net cash used in financing activities(548,606)(104,851)(201,735)
Effect of exchange rate changes on cash, cash equivalents and restricted cash(1,039)1,076406
Net change in cash, cash equivalents, and restricted cash210,394127,355228,329
Cash, cash equivalents, and restricted cash at beginning of period635,836508,481280,152
Cash, cash equivalents, and restricted cash at end of period$846,230$635,836$508,481
Supplemental disclosures of cash flow information
Income taxes paid (refunded)$(17,831)$85,010$109,571
Purchases of leasehold improvements, property, and equipment accrued in accounts payable and accrued liabilities$63,802$46,975$36,886
Acquisition of treasury stock accrued in accounts payable and accrued liabilities$7,695$-$-

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

In this annual report on Form 10-K, Chipotle Mexican Grill, Inc., a Delaware corporation, together with its subsidiaries, is collectively referred to as “Chipotle,” “we,” “us,” or “our.”

We develop and operate restaurants that serve a relevant menu of burritos, burrito bowls, quesadillas, tacos, and salads, made using fresh, high-quality ingredients. As of December 31, 2021, we operated 2,962 Chipotle restaurants including 2,918 within the United States as well as 44 international Chipotle restaurants. We are also an investor in a consolidated entity that owns and operates four Pizzeria Locale restaurants, a fast-casual pizza concept. We manage our U.S. operations based on eight regions and have aggregated our operations to one reportable segment.

Principles of Consolidation and Basis of Presentation

Our consolidated financial statements include our accounts and our wholly and majority owned subsidiaries after elimination of all intercompany accounts and transactions. Certain prior-year amounts have been reclassified to conform to the current year presentation.

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 the disclosure of contingent assets and liabilities as of the date of the financial statements, as well as the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates under different assumptions or conditions.

Cash and Cash Equivalents

We consider highly liquid investment instruments purchased with an initial maturity of three months or less to be cash equivalents. We maintain cash and cash equivalent balances that exceed federally-insured limits with a number of financial institutions.

Restricted Cash

We maintain certain cash balances restricted as to withdrawal or use. Restricted cash assets are primarily insurance-related restricted trust assets.

Accounts Receivable

Accounts receivable primarily consists of receivables from third party gift card distributors, delivery receivables, insurance liabilities covered by third-party insurance carriers and vendor rebates.

Allowance for Credit Losses

We closely monitor accounts receivable and held to maturity investment balances and estimate the allowance for credit losses. Our estimate is based on historical collection experience, external market data and other factors, including those related to current market conditions and events.

Inventory

Inventory, consisting principally of food, beverages, and supplies, is valued at the lower of first-in, first-out cost or net realizable value.

Investments

Investments classified as trading securities are carried at fair value with any unrealized gain or loss being recorded in the consolidated statements of income. Investments classified as available-for-sale are carried at fair value with unrealized gains and losses, net of tax, included as a component of other comprehensive income (loss), net of income taxes on the consolidated statements of comprehensive income. Held-to-maturity securities are carried at amortized cost. Non-marketable equity investments are measured at cost, less impairments, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer.

Impairment charges on investments are recognized in interest and other income, net on the consolidated statements of income when management believes the decline in the fair value of the investment is other-than-temporary.

Fair Value Measurements

Fair value is the price we 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, we determine 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 for the asset or liability. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

Foreign Currency Translation

Our international operations 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 monthly using average monthly exchange rates. Resulting translation adjustments are recorded as a separate component of other comprehensive income (loss), net of income taxes on the consolidated statement of comprehensive income.

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. During the years ended December 31, 2021, 2020 and 2019, we capitalized $10,870, $9,268, and $6,735 of internal costs, respectively. Expenditures for refurbishments and improvements that significantly add to the productivity capacity or extend the useful life are capitalized, while expenditures for 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 option periods that are reasonably certain, 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 impairment, closure costs, and asset disposals in the consolidated statements of income. Assets to be disposed of are reported at the lower of their carrying amount or fair value less estimated costs to sell.

At least annually, or when impairment indicators are present, we evaluate, and adjust 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 buildings3-20 years
Furniture and fixtures4-7 years
Equipment3-10 years

Leases

The majority of our operating leases consist of restaurant locations and office space. We determine if a contract contains a lease at inception. Our leases generally have remaining terms of 1-20 years and most include options to extend the leases for additional 5-year periods. Generally, the lease term is the minimum of the noncancelable period of the lease or the lease term inclusive of reasonably certain renewal periods up to a term of 20 years.

We recognize an operating lease asset and operating lease liability for each lease with a contractual term greater than 12 months at the time of lease inception. We do not record leases with an initial term of 12 months or less on our consolidated balance sheet but continue to record rent expense on a straight-line basis over the lease term.

Operating lease assets and liabilities are recognized at the lease commencement date, which is the date we control the use of the property. Operating lease liabilities represent the present value of lease payments not yet paid. We made the policy election to combine lease and non-lease components. We consider fixed CAM part of our fixed future lease payments; therefore, fixed CAM is also included in our lease liability. To determine the present value of lease payments not yet paid, we estimate incremental borrowing rates corresponding to the lease term including reasonably certain renewal periods. As we have no outstanding debt nor committed credit facilities, secured or otherwise, we estimate this rate based on prevailing financial market conditions, comparable company and credit analysis, and management judgment.

Total lease costs recorded primarily as occupancy costs include fixed operating lease costs, variable lease costs and short-term lease costs. Most of our real estate leases require we pay certain expenses, such as CAM costs, real estate taxes and insurance, of which the fixed portion is included in operating lease costs. We recognize operating lease costs on a straight-line basis over the lease term. In addition to the above costs, variable lease costs also include amounts based on a percentage of gross sales in excess of specified levels and are recognized when probable and are not included in determining the present value of our operating lease liability.

Operating lease assets represent our right to use an underlying asset and are based upon the operating lease liabilities adjusted for prepayments, initial direct costs, lease incentives, and impairment of operating lease assets. For operating leases, operating lease assets are reduced over the lease term by the recognized straight-line lease expense less the amount of accretion of the lease liability. Additionally, tenant incentives used to fund leasehold improvements are generally recognized when earned and reduce our right-of-use asset related to the lease. These are amortized through the operating lease asset as reductions of expense over the lease term.

Our lease agreements do not contain any material residual value guarantees or material restrictive covenants. We have not entered into any leases with related parties.

Goodwill

Goodwill is not subject to amortization, but instead is tested for impairment at least annually, or when impairment indicators are present, and we are required to record any necessary impairment adjustments. Impairment is measured as the excess of the carrying value over the fair value of the goodwill. No impairment charges were recognized on goodwill for the years ended December 31, 2021, 2020, and 2019.

Other Assets

Other assets consist primarily of a rabbi trust as described further in Note 9. “Employee Benefit Plans,” software as a service implementation costs where the service period is greater than one year, an equity method investment described further in Note 4. “Fair Value of Financial Instruments” and transferable liquor licenses.

Insurance Liability

We are self-insured for a significant portion of our employee health benefits programs, and carry significant retentions for risks and associated liabilities with respect to workers’ compensation, general liability, property and auto damage, employment practices liability, cyber liability and directors’ and officers’ liability. Predetermined loss limits have been arranged with third party insurance companies to limit exposure to these claims. We record a liability that represents our estimated cost of claims incurred and unpaid as of the balance sheet date. Our estimated liability is not discounted and is based on a number of assumptions and factors, including historical trends, actuarial assumptions and economic conditions, and is closely monitored and adjusted when warranted by changing circumstances.

Reserves/Contingencies for Litigation and Other Matters

We are involved in various claims and legal actions that arise in the ordinary course of business. We record an accrual for legal contingencies when we determine that it is probable that we have incurred a liability and we can reasonably estimate the amount of the loss.

Income Taxes

We compute income taxes using the asset and liability method, under which deferred income tax assets and liabilities are recognized based on the differences between the financial reporting bases and the respective tax bases of assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which we expect the temporary differences to reverse. Any effects of changes in income tax rates or tax laws are included in the provision for income taxes in the period that includes the enactment date.

We routinely assess the realizability of our deferred tax assets by jurisdiction and may record a valuation allowance if, based on all available positive and negative evidence, we determine that some portion of the deferred tax assets may not be realized prior to expiration. If we determine that we may be able to realize our deferred tax assets in the future in excess of their net recorded amount, we would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes during the period in which the determination was made that the deferred tax asset can be realized.

We evaluate our tax filing positions and recognize a tax benefit from an uncertain tax position only if it is more likely than not that based on its technical merits the tax position will be sustained upon examination by the relevant taxing authorities, including resolutions of any related appeals or litigation processes. The tax benefits recognized in the financial statements from such a position are measured based on the largest tax benefit that has a greater than 50% likelihood of being realized upon settlement with a taxing authority. For uncertain tax positions that do not meet this threshold, we record a related tax reserve in the period in which it arises. We adjust our unrecognized tax benefit liability and provision for income taxes in the period in which the uncertain tax position is effectively settled, the statute of limitations expires for the relevant taxing authority to examine the tax position or when new information becomes available that requires a change in recognition and/or measurement of the liability.

We 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 our consolidated statements of income. Accrued interest and penalties are included within the related tax reserve on our consolidated balance sheets.

Revenue Recognition

We generally recognize revenue, net of discounts and incentives, when payment is tendered at the point of sale. We report revenue net of sales-related taxes collected from customers and remitted to governmental taxing authorities. Food and beverage revenue primarily relates to the sale of food and beverages. Delivery service revenue is comprised of delivery and related service fees charged to customers on sales made through Chipotle’s app and website.

Delivery

We offer our customers delivery in almost all of our geographic regions. Delivery services are fulfilled by third-party service providers. In some cases, we make delivery sales through our website Chipotle.com or the Chipotle App (“White Label Sales”). In other cases, we make delivery sales through a non-Chipotle owned channel, such as the delivery partner’s website or mobile app (“Marketplace Sales”). With respect to White Label Sales, we control the delivery services and generally recognize revenue, including delivery fees, when the delivery partner transfers food to the customer. For these sales, we receive payment directly from the customer at the time of sale. With respect to Marketplace Sales, we generally recognize revenue, excluding delivery fees collected by the delivery partner, when control of the food is transferred to the delivery partner. We receive payment from the delivery partner subsequent to the transfer of food and the payment terms are short-term in nature.

Gift Cards

We sell gift cards, which do not have expiration dates and we do not deduct non-usage fees from outstanding gift card balances. Gift card balances are initially recorded as unearned revenue. We recognize revenue from gift cards when the gift card is redeemed by the customer. Historically, the majority of gift cards are redeemed within one year. In addition, a portion of gift cards are not expected to be redeemed and will be recognized as breakage over time in proportion to gift card redemptions (“gift card breakage rate”). The gift card breakage rate is based on company and program specific information, including historical redemption patterns, and expected remittance to government agencies under unclaimed property laws, if applicable. We evaluate our gift card breakage rate estimate annually, or more frequently as circumstances warrant, and apply that rate to gift card redemptions. Gift card liability balances are typically highest at the end of each calendar year following increased gift card sales during the holiday season; accordingly, revenue recognized from gift card liability balances is highest in the first quarter of each calendar year.

Chipotle Rewards

We have a loyalty program called Chipotle Rewards. Eligible customers who enroll in the program generally earn points for every dollar spent. In June 2021, we enhanced Chipotle Rewards and introduced a new redemption feature we call the “Rewards Exchange” that provides loyalty members multiple redemption options. Previously, Chipotle Rewards points were automatically redeemed for a free entrée when the customer obtained the required number of points. The change in the Chipotle Rewards program did not have a material impact on our consolidated financial statements.

We may also periodically offer promotions, which typically provide the customer with the opportunity to earn bonus points or other rewards. Earned rewards generally expire one to two months after they are issued, and points generally expire if an account is inactive for a period of six months.

We defer revenue associated with the estimated selling price of points or rewards earned by customers as each point or reward is earned, net of points or rewards we do not expect to be redeemed. The estimated selling price of each point or reward earned is based on the estimated value of product for which the reward is expected to be redeemed. Our estimate of points and rewards we expect to be redeemed is based on historical and other company specific data. The costs associated with rewards redeemed are primarily included in food, beverage, and packaging expense on our consolidated statements of income.

We evaluate Chipotle Rewards point breakage annually, or more frequently as circumstances warrant. We completed our most recent breakage assessment as of October 31, 2021, which resulted in incremental revenue recognized of $10,831 during the three months ended December 31, 2021. Revenue recognized was primarily the result of a change in our ultimate redemption rate estimate as program data indicated a lower redemption trend than originally estimated.

We recognize loyalty revenue within food and beverage revenue on the consolidated statements of income when a customer redeems an earned reward. Deferred revenue associated with Chipotle Rewards is included in unearned revenue on our consolidated balance sheets.

Advertising, Marketing and Promotional Costs

Advertising, marketing and promotional costs are expensed as incurred and totaled $222,091, $222,820 and $168,881 for the years ended December 31, 2021, 2020 and 2019, respectively. Advertising, marketing and promotional costs include costs related to free food which a customer does not need to make a purchase to earn. These costs are included in other operating costs on the consolidated statements of income.

Stock-Based Compensation

We issue shares as part of employee compensation pursuant to the Amended and Restated Chipotle Mexican Grill, Inc. 2011 Stock Incentive Plan (the “2011 Incentive Plan”). Stock-only stock appreciation rights, or “SOSARs”, and stock awards 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 12 months which coincides with the service period required to earn the full award. We estimate forfeitures based on historical data when determining the amount of stock-based compensation costs to be recognized in each period. We have also granted stock awards with performance vesting conditions and/or market vesting conditions. Stock awards with performance or market vesting conditions generally vest based on our achievement versus stated targets or criteria over a three-year performance and service period. Compensation expense on stock awards subject to performance conditions, which is based on the quantity of awards we have 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 our new restaurant development activities, and expense for these awards is recognized as capitalized development and included in leasehold improvements, property and equipment, net, on the consolidated balance sheets.

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, and are included in operating expenses on the consolidated statements of income.

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. We manage our 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.

The fair value measurement for asset impairment is based on Level 3 inputs. See “Fair Value Measurements” above for a description of level inputs. We first compare the carrying value of the asset (or asset group, referred interchangeably throughout as asset) to the asset’s estimated future undiscounted cash flows. If the estimated undiscounted future cash flows are less than the carrying value of the asset, we determine if we have an impairment loss by comparing the carrying value of the asset to the asset's estimated fair value. The estimated fair value of the asset is generally determined using the income approach to measure the fair value, which is based on the present value of estimated future cash flows. Key inputs to the income approach for restaurant assets include the discount rate, projected restaurant revenues and expenses, and sublease income if we are closing the restaurant. In certain cases, management uses other market information, when available, to estimate the fair value of an asset. The impairment charges represent the excess of each asset’s carrying amount over its estimated fair value and are allocated among the long-lived asset or assets of the group.

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 are antidilutive.

Recently Issued Accounting Standards

Recently Issued Accounting Standards

In November 2021, the Financial Accounting Standards Board (the “FASB”) issued ASU No. 2021-10, “Disclosures by Business Entities about Government Assistance.” The ASU codifies new requirements to disclose information about the nature of certain government assistance received, the accounting policy used to account for the transactions, the location in the financial statements where such transactions were recorded and significant terms and conditions associated with such transactions. The guidance is effective for annual periods beginning after December 15, 2021. We do not expect the adoption of ASU No. 2021-10 to have a material impact to our consolidated financial statements.

In March 2020, the FASB issued ASU No. 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” The pronouncement provides temporary optional expedients and exceptions to the current guidance on contract modifications and hedge accounting to ease the financial reporting burden related to the expected market transition from the London Interbank Offered Rate ("LIBOR") and other interbank offered rates to alternative reference rates. The guidance was effective upon issuance and generally can be applied to applicable contract modifications through December 31, 2022. We are evaluating the impact of the transition from LIBOR to alternative reference rates but do not expect a significant impact to our consolidated financial statements.

We 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.

Recently Adopted Accounting Standards

On January 1, 2021, we adopted ASU 2019-12, “Simplifying the Accounting for Income Taxes (Topic 740),” which modified certain technical guidelines for accounting for income taxes. The adoption of ASU 2019-12 did not result in a material change to our consolidated financial statements.

2. Supplemental Balance Sheet Information

Leasehold improvements, property and equipment, net were as follows:

December 31,
20212020
Land$12,943$12,943
Leasehold improvements and buildings2,094,2271,921,371
Furniture and fixtures222,774198,387
Equipment868,435755,003
Construction in Progress107,22276,317
Leasehold improvements, property and equipment, gross3,305,6012,964,021
Accumulated depreciation(1,536,323)(1,379,710)
Leasehold improvements, property and equipment, net$1,769,278$1,584,311

Accrued payroll and benefits were as follows:

December 31,
20212020
Workers' compensation liability$27,456$27,630
Accrued payroll and bonuses107,79979,702
Accrued employer payroll taxes, deferred pursuant to the CARES Act-70,812
Other accrued payroll and benefits27,15024,910
Accrued payroll and benefits$162,405$203,054

Accrued liabilities were as follows:

December 31,
20212020
Sales and use tax payable$32,004$26,419
Legal reserve liability48,09851,214
Other accrued liabilities92,95087,016
Accrued liabilities$173,052$164,649

3. Revenue Recognition

Gift Cards

The gift card liability included in unearned revenue on the consolidated balance sheets was as follows:

December 31,
20212020
Gift card liability$130,779$105,413

Revenue recognized from the redemption of gift cards that was included in unearned revenue at the beginning of the year was as follows:

Year ended December 31,
202120202019
Revenue recognized from gift card liability balance at the beginning of the year$48,605$39,612$37,386

Chipotle Rewards

Changes in our Chipotle Rewards liability included in unearned revenue on the consolidated balance sheets were as follows:

Year ended December 31,
202120202019
Chipotle Rewards liability, beginning balance$22,337$10,584$-
Revenue deferred106,75987,25944,666
Revenue recognized(103,524)(75,506)(34,082)
Chipotle Rewards liability, ending balance$25,572$22,337$10,584

4**.** Fair Value of Financial Instruments

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The carrying value of our cash and cash equivalents, restricted cash, accounts receivable and accounts payable approximate fair value because of their short-term nature.

Our investments are comprised of U.S. Treasury securities, a corporate debt security, non-marketable equity securities, and an equity method investment. We also maintain a deferred compensation plan with related assets held in a rabbi trust. We designate the appropriate classification of our investments at the time of purchase based upon the intended holding period.

Held-to-Maturity Investments

U.S. Treasury Securities

As of December 31, 2021, we held $501,288 of U.S. Treasury securities with maturities of up to 24 months, of which $260,945 mature within one year. As of December 31, 2020, we held $445,944 of U.S. Treasury securities with maturities of up to 16 months, of which $343,616 matured within one year. Our investments in U.S. Treasury securities are held at amortized cost. The fair value of our held-to-maturity U.S. Treasury security investments is measured using Level 1 inputs (quoted prices for identical assets in active markets). For the years ended December 31, 2021 and 2020, the fair value of our securities were $500,172 and $445,828, respectively. We recognize a reserve for expected credit losses when lifetime credit losses are expected by management. As of December 31, 2021, management has concluded there is no risk of non-payment with respect to our U.S. Treasury security investments.

Corporate Debt Security

On September 30, 2021, we acquired a promissory note issued by a supplier in exchange for $18,000. The promissory note has a principal balance of $18,000 and bears interest at a rate equal to the 3-month U.S. dollar London Interbank Offered Rate (“LIBOR”) plus a fixed interest spread. Accrued interest is paid quarterly in arrears and principal is payable in accordance with an amortization schedule beginning on December 31, 2022. The promissory note matures on September 30, 2028. Our investment in the corporate debt security is held at amortized cost and approximates fair value as of December 31, 2021. As of December 31, 2021, we maintained a reserve of $423 for expected credit losses associated with the investment.

Rabbi Trust

We have 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 9. “Employee Benefit Plans.”

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

Assets recognized or disclosed at fair value on the consolidated financial statements on a nonrecurring basis include items such as leasehold improvements, property and equipment, certain long-term investments, operating lease assets, other assets, and goodwill. These assets are measured at fair value whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

The following table summarizes our assets measured at fair value by hierarchy level on a nonrecurring basis:

Carrying Value
December 31,
Level20212020
Leasehold improvements, property and equipment, net3$1,041$4,682
Operating lease assets32,79110,372
Total$3,832$15,054

Fair value of these assets was measured using Level 3 inputs (unobservable inputs for the asset or liability). Unobservable inputs include the discount rate, projected restaurant revenues and expenses, and sublease income if we are closing the restaurant. For the years ended December 31, 2021, 2020 and 2019 we recorded asset impairments related to restaurants and offices of $4,727, $16,683 and $2,897, respectively. Carrying value after the impairment charges approximates fair value.

Non-Marketable Equity Securities

On March 23, 2021, we acquired 766 shares of the Series C Preferred Stock of Nuro, Inc. (“Nuro”) in exchange for cash consideration of $10,000. Our investment represents a minority interest and we have determined that we do not have significant influence over Nuro. Nuro is a privately held company, and as such, the preferred shares comprising our investment are illiquid and fair value is not readily determinable. We have elected to measure our investment in the non-marketable equity securities of Nuro at cost, less impairments, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer.

In November 2021, Nuro completed a Series D financing round. With respect to our Series C Preferred Stock of Nuro, we concluded that this transaction represented an observable price change in an orderly transaction for a similar investment of the same issuer. Accordingly, we recognized a gain of $5,968 relating to the increase in fair value of our investment in Nuro, within interest and other income on the consolidated statement of income for the year ended December 31, 2021.

Equity Method Investment

On April 16, 2020, we acquired approximately 10% of the common stock of a supplier in exchange for cash consideration of $7,500. On August 6, 2020, we acquired an additional 3.2% of the common stock of the same supplier in exchange for cash consideration of $2,500. As of December 31, 2021, we own approximately 12.7% of the supplier’s common stock and have invested total cash consideration of $10,000. As we are a significant customer of the supplier and maintain board representation, we are accounting for our investment under the equity method. The investment is included within other assets on the consolidated balance sheets with a carrying value of $9,251 and $9,529 as of December 31, 2021 and 2020, respectively. There were no impairment charges in 2021 or 2020 associated with this equity method investment. Refer to Note 14. “Related Party Transactions” for related party disclosures.

5. Corporate Restructuring Costs

In May 2018, we announced that we would open a headquarters office in Newport Beach, California, consolidate certain corporate administrative functions into our existing office in Columbus, Ohio, and close our existing headquarters offices in Denver, Colorado, as well as additional corporate offices in New York, New York. All affected employees were either offered an opportunity to continue in the new organization or were offered a severance package. We record severance as a one-time termination benefit and recognize the expense ratably over the employees’ required future service period.

All other costs, including other employee transition costs, recruitment and relocation costs, office asset impairment and other office closure costs, and third-party and other costs, are recognized in the period incurred.

Corporate restructuring costs consist of the following:

Year ended December 31,
202120202019
Employee severance and other employee transition costs(1)$-$303$1,768
Recruitment and relocation costs(1)4498746,231
Office asset impairment and other office closure costs(2)--1,719
Third-party and other costs(1)4,9645,2224,324
Stock-based compensation(1)--134
Total corporate restructuring costs$5,413$6,399$14,176

(1)Recorded in general and administrative expenses on the consolidated statements of income.

(2)Recorded in impairment, closure costs, and asset disposals on the consolidated statements of income.

Upon the adoption of Accounting Standards Codification Topic 842 on January 1, 2019, lease termination and other closure liabilities of $14,716 were reclassified into operating lease assets and are no longer within the scope of ASC 420, Exit or Disposal Cost Obligations.

6. Income Taxes

Income before income taxes, classified by source of income, was as follows:

Year ended December 31,
202120202019
Domestic$818,057$311,021$465,253
Foreign(5,294)(17,240)(6,968)
Income before income taxes$812,763$293,781$458,285

The components of the benefit/(provision) for income taxes were as follows:

Year ended December 31,
202120202019
Current tax:
U.S. Federal$(156,447)$204,063$(57,020)
U.S. State(15,351)(32,684)(20,499)
Foreign(338)(1,044)(646)
(172,136)170,335(78,165)
Deferred tax:
U.S. Federal33,004(120,066)(27,231)
U.S. State(20,404)11,507(2,740)
Foreign7,2297,1582,685
19,829(101,401)(27,286)
Valuation allowance(7,472)(6,949)(2,676)
Benefit/(provision) for income taxes$(159,779)$61,985$(108,127)

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

Year ended December 31,
202120202019
Statutory U.S. federal income tax rate21.0%21.0%21.0%
State income tax, net of related federal income tax benefit3.54.24.1
Federal credits(1.6)(3.5)(1.7)
Executive compensation disallowed2.92.92.0
Meals and entertainment-0.10.1
Enhanced deduction for food donation-(0.1)-
Valuation allowance0.31.60.5
Other-1.80.8
Return to provision and other discrete items0.12.10.1
Equity compensation related adjustments(4.7)(13.5)(3.3)
Federal net operating loss(1.8)(37.7)-
Effective income tax rate19.7%(21.1)%23.6%

The effective tax rate for the year ended December 31, 2021, was higher than the effective tax rate for the year ended December 31, 2020, primarily due to fewer net excess benefits generated from a federal net operating loss (“NOL”) and the proportionality of excess tax benefits related to option exercises and equity vesting relative to profit before tax in each respective year. This is partially offset by a net reduction in tax expense mostly related to the write-off of uncertain tax position reserves.

The components of the deferred income tax assets and liabilities for continuing operations were as follows:

December 31,
20212020
Deferred income tax liability:
Leasehold improvements, property and equipment, net$279,586$298,225
Goodwill and other assets1,7281,628
Prepaid assets and other106(350)
Operating lease assets851,324752,864
Total deferred income tax liability1,132,7441,052,367
Deferred income tax asset:
Gift card liability9,6993,849
Capitalized transaction costs324324
Stock-based compensation and other employee benefits45,26134,709
Foreign net operating loss carry-forwards27,44621,598
State credits3,5954,452
Operating lease liabilities909,528812,699
Allowances, reserves and other24,17925,981
State net operating loss carry-forwards1,56822,482
Valuation allowance(30,621)(23,149)
Total deferred income tax asset990,979902,945
Deferred income tax liabilities$141,765$149,422

Gross foreign NOLs were $108,324 and $98,710 for the year ended December 31, 2021 and 2020, respectively. Our foreign NOLs can be carried forward indefinitely.

Gross state NOLs available across all jurisdictions in which we operate were $50,467 and $340,259 as of December 31, 2021 and 2020, respectively. Our state NOLs expire over varying intervals in the future.

We had gross valuation allowances against certain foreign deferred tax assets of $119,741 and $104,820 as of December 31, 2021 and 2020, respectively. The increase in the valuation allowance was primarily due to the recording of a valuation allowance on various foreign tax attributes.

Unrecognized Tax Benefits

A reconciliation of the unrecognized tax benefits was as follows:

Year ended December 31,
202120202019
Beginning of year$10,859$15,028$9,360
(Decrease)/Increase resulting from prior year tax position(151)(2,853)5,855
Increase resulting from current year tax position1,3871,870758
Settlements with taxing authorities--(736)
Lapsing of statutes of limitations(6,833)(3,186)(209)
End of year$5,262$10,859$15,028

Interest expense related to uncertain tax positions is recognized in interest and other income, net on the consolidated statements of income. Penalties related to uncertain tax positions are recognized in benefit/(provision) for income taxes on the consolidated statements of income. For the years ended December 31, 2021, 2020 and 2019, we recognized $180, $554 and $1,853, respectively, in interest expense related to uncertain tax positions. These are gross amounts before any tax benefits and are included in other liabilities on the consolidated balance sheets. As of December 31, 2021 and 2020, we have accrued interest of $356 and $2,185, respectively.

We are no longer subject to U.S. federal tax examinations by tax authorities for tax years before 2017. For the majority of states where we have a significant presence, we are no longer subject to tax examinations by tax authorities for tax years before 2017. Currently, we expect expirations of statutes of limitations, excluding indemnified amounts, on reserves of approximately $826 within the next twelve months.

It is reasonably possible the amount of the unrecognized benefit with respect to certain unrecognized positions could significantly increase or decrease within the next twelve months and would have an impact on net income.

Coronavirus Aid, Relief and Economic Security Act (“CARES Act”)

On March 27, 2020, President Trump signed into law the CARES Act. Intended to provide economic relief to those impacted by the COVID-19 pandemic, the CARES Act includes provisions, among others, addressing the carryback of NOLs for specific periods, refunds of alternative minimum tax credits, temporary modifications to the limitations placed on the tax deductibility of net interest expenses, and technical amendments for qualified improvement property (“QIP”). Additionally, the CARES Act, in efforts to enhance business’ liquidity, provides for refundable employee retention tax credits and the deferral of the employer-paid portion of social security taxes.

In connection with the CARES Act, we carried back the federal NOL generated in 2020 to tax years 2015-2017 when the corporate federal income tax rate was 35%. As a result, for the year ended December 31, 2021 and December 31, 2020, we recorded an income tax benefit of $14,431 and $110,765 respectively, due to the federal income tax rate differential in 2020 of 21% versus 2015-2017 of 35%.

The CARES Act provides for the deferral of the employer-paid portion of social security payroll taxes. We elected to defer the employer-paid portion of social security payroll taxes through December 31, 2020, of $70,812 and early remitted all deferred amounts to the IRS during the year ended December 31, 2021.

The CARES Act provided refundable employee retention credits, which could be used to offset payroll tax liabilities. For the year ended December 31, 2020, we recorded a benefit of $3,403, which primarily offsets payroll tax expense. On March 11, 2021, President Biden signed the American Rescue Plan Act (“ARPA”). The ARPA includes several provisions, such as measures that extend and expand the employee retention credit, previously enacted under the CARES Act, through December 31, 2021. During the year ended December 31, 2021, we recorded an employee retention credit of $11,445 which primarily offset payroll tax expense.

7. Shareholders’ Equity

We have had a stock repurchase program in place since 2008. As of December 31, 2021, we had $240,871 authorized for repurchasing shares of our common stock, which includes the $200,000 additional authorization approved by our Board of Directors and announced on February 8, 2022. Shares we repurchased are being held in treasury stock until they are reissued or retired at the discretion of our Board of Directors.

During the years ended December 31, 2021, 2020, and 2019, shares of common stock at a total cost of $79,870, $48,555, and $10,420, respectively, were netted and surrendered as payment for minimum statutory withholding obligations in connection with the vesting of outstanding stock awards. Shares surrendered by the participants in accordance with the applicable award agreements and plan are deemed repurchased by us but are not part of publicly announced share repurchase programs.

8. Stock-Based Compensation

Pursuant to the 2011 Incentive Plan, we grant stock options, SOSARs, restricted stock units (“RSUs”), or performance and/or market based restricted stock units (“PSUs”) to employees and non-employee directors. We issue shares of common stock upon the exercise of SOSARs and the vesting of RSUs and PSUs.

Under the 2011 Incentive Plan, 6,830 shares of common stock have been authorized and reserved for issuance to eligible participants, of which 2,141 shares were authorized for issuance but not issued or subject to outstanding awards as of December 31, 2021. For purposes of calculating the available shares remaining, each share issuable pursuant to outstanding full value awards, such as RSUs and PSUs, counts as two shares, and each share underlying a stock option or SOSAR count as one share.

The following table sets forth total stock-based compensation expense:

Year ended December 31,
202120202019
Stock-based compensation$178,703$84,463$92,062
Stock-based compensation, net of income taxes$159,972$69,904$73,866
Total capitalized stock-based compensation included in leasehold improvements, property and equipment, net on the consolidated balance sheets$2,311$1,837$666
Excess tax benefit on stock-based compensation recognized in benefit/(provision) for income taxes on the consolidated statements of income$47,958$49,690$16,203

SOSARs

A summary of SOSAR activity was as follows (in thousands, except years and per share data):

SharesWeighted-Average Exercise Price per ShareWeighted-Average Remaining Contractual Life (Years)Aggregate Intrinsic Value
Outstanding, January 1, 2021748$533.71$637,905
Granted821,510.79
Exercised(446)448.02
Forfeited or cancelled(20)913.86
Outstanding, December 31, 2021364838.624.7331,352
Exercisable, December 31, 2021100473.643.4127,918
Vested and expected to vest, December 31, 2021353823.914.6326,444

The total intrinsic value of SOSARs exercised during the years ended December 31, 2021, 2020, and 2019, was $498,399, $236,573, and $219,984, respectively. Unrecognized stock-based compensation expense for SOSARs as of December 31, 2021 was $23,115 and is expected to be recognized over a weighted average period of 1.5 years. SOSARs expire 7 years after the day they were granted.

The weighted average assumptions utilized in the Black-Scholes option-pricing model to estimate the fair value of SOSARs granted each year were as follows:

202120202019
Risk-free interest rate0.3%1.3%2.4%
Expected life (years)3.73.83.9
Expected dividend yield0.0%0.0%0.0%
Volatility35.2%32.4%34.7%
Weighted-average Black-Scholes fair value per share at date of grant$403.01$231.52$176.79

The risk-free interest rate is based on U.S. Treasury rates for instruments with similar terms, and the expected life assumption is based on our historical data. We have not paid dividends to date and do not plan to pay dividends in the near future. The volatility assumption is based on our historical data and implied volatility.

Non-Vested Stock Awards (RSUs)

A summary of RSU award activity was as follows (in thousands, except per share data):

SharesWeighted-Average Grant Date Fair Value per Share
Outstanding, January 1, 202192$631.66
Granted251,492.15
Vested(50)497.97
Forfeited or cancelled(9)1,021.45
Outstanding, December 31, 2021581,064.67
Vested and expected to vest, December 31, 2021531,042.33

The weighted average grant date fair value per RSU granted during the years ended December 31, 2020 and 2019, was $905.96 and $627.94, respectively. Unrecognized stock-based compensation expense for non-vested RSU stock awards we have determined are probable of vesting was $21,600 as of December 31, 2021, and is expected to be recognized over a weighted average period of 1.5 years. The fair value of shares earned as of the vesting date during the years ended December 31, 2021, 2020, and 2019, was $73,540, $47,649, and $27,197, respectively.

Non-Vested Performance Stock Awards (PSUs)

A summary of PSU award activity was as follows (in thousands, except per share data):

SharesWeighted-Average Grant Date Fair Value per Share
Outstanding, January 1, 2021 (1)150$846.22
Granted181,479.55
Vested(62)891.17
Expired(1)946.17
Outstanding, December 31, 2021105928.28
Vested and expected to vest, December 31, 2021229880.99

(1)The beginning outstanding balance includes the shares issued through the modification of the 2018 Performance Share Awards which was completed on December 30, 2020. This amount was not included in the table above in the 2020 Form 10-K and instead was discussed in a separate paragraph.

The weighted average fair value per PSU granted during the years ended December 31, 2020 and 2019, was $853.03 and $583.13, respectively. The Unrecognized stock-based compensation expense for non-vested PSU stock awards we have determined are probable of vesting was $69,203 as of December 31, 2021, 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 years ended December 31, 2021, 2020, and 2019, was $97,496, $60,081, and $0, respectively.

During the year ended December 31, 2021, we awarded performance share awards that are subject to service, market, and performance vesting conditions. The quantity of shares that will vest will range from 0% to 300% of the target number of shares based on performance factors related to our growth in comparable restaurant sales and average restaurant margin over a three year period beginning on January 1, 2021. If the defined minimum targets are not met, then no shares will vest. Further, in no event may more than 100% of the target number of PSUs vest if our 3-year total shareholder return is below the 25th percentile of the constituent companies comprising the S&P 500 on the day of the grant.

During the year ended December 31, 2020, we awarded performance share awards that are subject to service, market, and performance vesting conditions. The quantity of shares that will vest will range from 0% to 300% of the target number of shares based on performance factors related to our growth in comparable restaurant sales and average restaurant margin over a three year period beginning on January 1, 2020. If the defined minimum targets are not met, then no shares will vest. Further, in no event may more than 100% of the target number of PSUs vest if our 3-year total shareholder return is below the 25th percentile of the constituent companies comprising the S&P 500 on the day of the grant.

During the year ended December 31, 2019, we awarded two types of performance share awards that are subject to service and performance vesting conditions. The quantity of shares that will vest range from 0% to 300% of the targeted number of shares for both awards. The first award, consisting of 33 shares, will vest based on our growth in comparable restaurant sales and average restaurant margin over a three year period beginning on January 1, 2019. The second award, consisting of 13 shares, will vest based on performance conditions based on achievement of certain targets related to digital sales, general and administrative expenses as a percentage of total revenue, and successful completion of a defined number of strategic initiatives in 2019 and 2020. These awards will vest 40% on the third anniversary of the grant date and 60% on the fourth anniversary of the grant date provided required service is completed through these dates.

The information contained in this paragraph describing the modification of the 2018 Performance Share Awards is included in the PSU table above. On December 30, 2020, due to the impact that the COVID-19 pandemic had on the growth in comparable restaurant sales and restaurant margin relative to the trajectory of both of these performance factors prior to the pandemic, and also due to the significant shareholder value created over the performance period of the original award, the Compensation Committee of the Board of Directors modified the 2018 PSU award. This modification pertained to all seven recipients of this award, and resulted in incremental compensation expense of $71,441, of which $63,050 was recognized during the year ended December 31, 2021, and $8,391 remains unamortized as of December 31, 2021. To receive all incremental shares generated through the modification, the employees must remain employed through December 31, 2022, and the incremental shares will vest in four installments over this period. The first two installments of the modification vested during 2021, which included the vesting of 33 PSUs. The remaining expense will be recognized over this requisite service period of 12 months. The incremental compensation cost is calculated by multiplying the number of incremental shares generated though the modification by the stock price on the modification date. The stock price on the modification date of December 30, 2020 was $1,374.17.

9. Emplo****yee Benefit Plans

**Defined Contribution Plan—**We maintain the Chipotle Mexican Grill 401(k) Plan (“401(k) Plan”) for eligible U.S.-based employees. The 401(k) Plan allows participants to make cash contributions from payroll deductions. Employees become eligible to receive matching contributions after one year, and at least 1,000 hours, of service with Chipotle. We match 100% of the first 3% of pay contributed by each eligible employee and 50% on the next 2% of pay contributed each pay period (with an annual true-up) through cash contributions. For the years ended December 31, 2021, 2020, and 2019, matching contributions totaled approximately $10,527, $8,490 and $6,968, respectively and are included in general and administrative expenses on the consolidated statements of income. Certain subsidiaries outside the U.S. also offer other similar benefits and are immaterial to the consolidated statements of income.

**Deferred Compensation Plan—**We also maintain the Chipotle Mexican Grill, Inc. Supplemental Deferred Investment Plan (the “Deferred Plan”) for eligible employees. 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 obligations under the Deferred Plan as of December 31, 2021 and 2020, were $19,330 and $15,296, respectively, and are included in other liabilities on the consolidated balance sheets and was fully funded as of December 31, 2021. We match 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.

The following table summarizes estimated current and long-term material cash requirements for our deferred compensation plan as of December 31, 2021:

Payments Due by Fiscal Year
Total20222023-20242025-2026Thereafter
Deferred compensation(1)$19,330$3,797$4,640$4,265$6,628

(1) Includes scheduled payments from our deferred compensation plan where payment dates are determinable for employed participants in accordance with the account’s election, and the assumption that active participants will retire at the age of 65 and begin distributions from their accounts at that time. This does not include future contributions, investment earnings, or future participants. Timing and amounts of payments may vary significantly.

We have elected to fund our deferred compensation obligation 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, carried at fair value, and are included in other assets on the consolidated balance sheets. Fair value of rabbi trust investments in mutual funds is measured using Level 1 inputs. The fair value of the investments in the rabbi trust was $19,330 and $15,296 as of December 31, 2021 and 2020, respectively. We record trading gains and losses in general and administrative expenses on the consolidated statements of income, along with the offsetting amount related to the increase or decrease in deferred compensation to reflect our exposure to liabilities for payment under the deferred plan.

**Employee Stock Purchase Plan—**We also offer an employee stock purchase plan (“ESPP”). Employees become eligible to participate after one year of service with Chipotle and may contribute up to 15% of their base earnings, subject to an annual maximum dollar amount, toward the monthly purchase of our common stock. The purchase price is 95% of the fair market value of the stock on the last trading date of the monthly exercise period. Under the ESPP, 250 shares of common stock have been authorized and reserved for issuances to eligible employees, of which 245 represent shares that were authorized for issuance but not issued as of December 31, 2021. For the years ended December 31, 2021, 2020, and 2019, the number of shares issued each year under the ESPP were less than one.

10. Leases

The weighted average remaining lease term and discount rate were as follows:

December 31,December 31,
20212020
Weighted average remaining lease term (years)13.813.4
Weighted average discount rate4.56%4.92%

The components of lease cost were as follows:

Year ended December 31,
Classification202120202019
Operating lease costOccupancy, Other operating costs, General and administrative expenses and Pre-opening costs$364,314$333,878$308,586
Short-term lease costOther operating costs256363,238
Variable lease costOccupancy, Other operating costs, General and administrative expenses and Pre-opening costs92,14537,86036,828
Sublease incomeGeneral and administrative expenses(4,930)(3,588)(3,385)
Total lease cost$451,785$368,186$345,267

Supplemental disclosures of cash flow information related to leases were as follows:

Year ended December 31,
202120202019
Cash paid for operating lease liabilities$359,391$316,249$295,113
Operating lease assets obtained in exchange for operating lease liabilities(1)$577,273$484,888$2,702,778
Derecognition of operating lease assets due to terminations or impairment$5,765$20,242$17,740

(1)Amounts for the year ended December 31, 2019, include the transition adjustment for the adoption of Topic 842 discussed in Note 1. “Description of Business and Summary of Significant Accounting Policies” on Annual Report on Form 10-K for the year ended December 31, 2019.

Maturities of lease liabilities were as follows as of December 31, 2021:

Operating Leases
2022$347,399
2023377,064
2024367,618
2025359,687
2026351,393
Thereafter2,973,135
Total lease payments4,776,296
Less: imputed interest1,255,982
Operating lease liabilities (Current and Long-Term)$3,520,314

As of December 31, 2021, the total lease payments include $2,321,456 related to options to extend lease terms that are reasonably certain of being exercised, and exclude approximately $289,840 of legally binding lease payments for leases signed but not yet commenced and $20,132 of future sublease income.

In April 2020, the FASB issued guidance allowing entities to make a policy election whether to account for lease concessions related to the COVID-19 pandemic as lease modifications. The election applies to any lessor-provided lease concession related to the impact of the COVID-19 pandemic, provided the concession does not result in a substantial increase in the rights of the lessor or in the obligations of the lessee. In 2020 and 2021, we received non-substantial concessions from certain landlords in the form of rent deferrals and abatements related to the COVID-19 pandemic. We have elected to not account for these rent concessions as lease modifications. The recognition of rent concessions did not have a material impact on our consolidated financial statements as of December 31, 2021.

We have six sale and leaseback transactions, which do not qualify for sale leaseback accounting due to fixed price renewal options prohibiting sale accounting. These transactions are accounted for under the financing method. Under the financing method, the assets remain on the consolidated balance sheets 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 $1,515 and $1,845 as of December 31, 2021, and 2020, respectively, with the current portion of the liability included in accrued liabilities, and the remaining portion included in other liabilities on the consolidated balance sheets.

11. Earnings Per Share

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

Year ended December 31,
202120202019
Net income$652,984$355,766$350,158
Shares:
Weighted-average number of common shares outstanding (for basic calculation)28,13227,91727,740
Dilutive stock awards379499555
Weighted-average number of common shares outstanding (for diluted calculation)28,51128,41628,295
Basic earnings per share$23.21$12.74$12.62
Diluted earnings per share$22.90$12.52$12.38

The following stock awards were excluded from the calculation of diluted earnings per share:

Year ended December 31,
202120202019
Stock awards subject to performance conditions668781
Stock awards that were antidilutive3457139
Total stock awards excluded from diluted earnings per share100144220

12. Commitments and Contingencies

Purchase Obligations

We enter 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

New York Legal Proceedings

As reported in our previous SEC filings, on September 10, 2019, the New York City Department of Consumer and Worker Protection (“DCWP”) filed a complaint in the City of New York Office of Administrative Trials and Hearings alleging violations at five Chipotle restaurants of New York City’s Fair Work Week law (“FWW”) and Earned Safe and Sick Time Act (“ESTA”) between November 2017 and September 2019. On April 28, 2021, DCWP amended the complaint to cover purported violations of FWW and ESTA at substantially all Chipotle restaurants in New York City, through the date the amended complaint was filed. Chipotle and the DCWP have engaged in mediation proceedings, which are ongoing. In the event the parties are not able to resolve the matter, Chipotle intends to vigorously defend against the allegations. During the three months ended December 31, 2021, we accrued a liability that represents the total estimated amount we expect to pay to settle this matter. We do not expect any additional losses above the amount accrued to be material to our consolidated financial statements.

Other

We are involved in various claims and legal actions, such as wage and hour, wrongful termination and other employment-related claims, slip and fall and other personal injury claims, advertising and consumer claims, and lease and other commercial disputes, that arise in the ordinary course of business, some of which may be covered by insurance. The outcomes of these actions are not predictable, but we do not believe that the ultimate resolution of these actions will have a material adverse effect on our financial position, results of operations, liquidity, or capital resources. However, if there is a significant increase in the number of these claims, or if we incur greater liabilities than we currently anticipate under one or more claims, it could materially and adversely affect our business, financial condition, results of operations and cash flows.

Accrual for Estimated Liability

In relation to various legal matters as of December 31, 2021, we had an accrued legal liability balance of $48,098 included within accrued liabilities on the consolidated balance sheet. Included in this amount is the accrued loss for the DCWP legal matter discussed above.

13. Debt

On May 8, 2020, we entered into a $600,000 revolving credit facility with JPMorgan Chase Bank (“JPMorgan”) as administrative agent. On April 13, 2021, we terminated this facility, which we did not borrow on over the period of which it was active, and entered into a new 5-year $500,000 revolving credit facility, with JPMorgan as administrative agent. Borrowings on the new credit facility bear interest at a rate equal to LIBOR plus 1.375%, which is subject to increase due to changes in our total leverage ratio as defined in the credit agreement. We are also obligated to pay a commitment fee of 0.175% per year for unused amounts under the credit facility, which also may increase due to changes in our total leverage ratio. Further, we are subject to certain covenants defined in the credit agreement, which include maintaining a total leverage ratio of less than 3.0x, maintaining a consolidated fixed charge coverage ratio of greater than 1.5x, and limiting us from incurring additional indebtedness in certain circumstances. We had no outstanding borrowings under the credit facility and are in compliance with all covenants as of December 31, 2021.

14. Related Party Transactions

In April 2020, we acquired common stock of a supplier. As of December 31, 2021, we owned approximately 12.7% of the common stock outstanding of a supplier. As we are a significant customer of the supplier and maintain board representation, we are accounting for our investment under the equity method. Accordingly, we have identified the supplier as a related party. We purchase product from the supplier for sale to customers in our restaurants. During the years ended December 31, 2021 and 2020, purchases from the supplier were $29,400 and $11,931.

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