El Pollo Loco 2015 Annual Report Download - page 93

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Table of Contents
EL POLLO LOCO HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
and 2014 had a four year vesting period. For options that are based on a performance requirement, the cost is recognized over the period which
the performance criteria relate to. The Company has authorized 4,402,240 shares of common stock for issuance in connection with stock options.
As of December 31, 2014, 834,763 shares were available for grant. In order to meet the fair value measurement objective, the Company utilizes
the Black–Scholes option-pricing model to value compensation expense for share-based awards and has developed estimates of various inputs
including forfeiture rate, expected term life, expected volatility, and risk-free interest rate. The forfeiture rate is based on historical rates and
reduces the compensation expense recognized. The expected term of options granted is derived from the simplified method. The risk-
free interest
rate is based on the implied yield on a U.S. Treasury constant maturity with a remaining term equal to the expected term of the Company’s
employee stock options. Expected volatility is based on the comparative industry entity data. The Company does not anticipate paying any cash
dividends in the foreseeable future and therefore uses an expected dividend yield of zero for option valuation. The volatility factor was
determined based on four publicly-traded companies which are in the same market category as the Company. The peer companies were selected
based on similarity of market capitalization, size and certain operating characteristics. The calculated volatility was established by taking the
historical daily closing values prior to grant date, over a period equal to the expected term, for each of the peer companies.
The weighted-average estimated fair value of employee stock options granted during the year ended December 31, 2014 was $6.23 per share
using the Black–Scholes model with the following weighted-
average assumptions used to value the option grants: expected volatility of 32.4% to
41.0%, expected life of 5.75 years, risk-free interest rate of 1.70% to 1.72%, and expected dividends of 0%.
The weighted-average estimated fair value of employee stock options granted during the year ended December 25, 2013 was $1.40 per share
using the Black–Scholes model with the following weighted-average assumptions used to value the option grants: expected volatility of 40.6%,
expected life of 6.25 years, risk-free interest rates of 1.15% to 1.99%, and expected dividends of 0%.
The weighted-average estimated fair value of employee stock options granted during the year ended December 26, 2012 was $0.60 per share
using the Black–Scholes model with the following weighted-average assumptions used to value the option grants: expected volatility of 39.0%,
expected life of 5.75 years, risk-free interest rate of 1.02%, and expected dividends of 0%.
During the years ended December 31, 2014, December 25, 2013 and December 26, 2012, the Company recognized share-based compensation
expense of $1.1 million, $822,000 and $860,000, respectively. These expenses were included in general and administrative expenses consistent
with the salary expense for the related optionees in the accompanying consolidated statements of operations.
As of December 31, 2014, there was total unrecognized compensation expense of $0.8 million related to unvested stock options which the
Company expects to recognize over a weighted average period of 1.0 years.
The Company has a Stockholders Agreement that provides that, under certain circumstances, certain management holders of shares, including
shares acquired from exercise of option awards, can put such shares to the Company at fair market value. Because the events that could trigger
the right to put are not within the control of the management holders, such option awards are classified as liabilities only when the condition that
could trigger the put right is probable of occurring. As of December 31, 2014, the Company concluded that the contingent events are not
probable and therefore the option awards are classified as equity. The Company’s Stockholders Agreement also provides the Company with call
rights if a management holder leaves the Company for various reasons. The Company has sufficient authorized capital, has the ability to deliver
shares, and does not
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