El Pollo Loco 2016 Annual Report Download - page 43

AtDecember25,2013,wemaintainedafullvaluationallowanceagainstourdeferredtaxassets.Afterevaluatingallofthepositiveandnegativeevidence,
includingourcontinuedincomefromoperations,reductionininterestexpenseresultingfromthe2014and2013refinancingofdebtandfromourcompletedIPO
andtheresultantrepaymentofthe2013SecondLienTermLoan,weconcludedthatitwasmorelikelythannotthatourdeferredtaxassetswouldberecovered.As
aresult,infiscal2014,wereleasedourvaluationallowancetotalingapproximately$65million.Wehadpreviouslymaintainedafullvaluationallowanceonour
deferredtaxassets,aswehadbeenexperiencingcontinuingtaxablelosses,andaccordinglydidnotrecognizeabenefitforNOLcarryforwardsorotherdeferredtax
assetsinfiscal2013and2012.In2015,avaluationallowanceof$2.9millionwasestablishedtoreserveagainstthepotentialthatcertaintaxcreditsmaynotbe
utilizedpriortothedatetheyexpire.
Wewillcontinuetoreevaluatethecontinuedneedforeitherafullorpartialvaluationallowance.Relevantfactorsinclude:
·currentfinancialperformance;
·ourabilitytomeetshort-termandlong-termfinancialandtaxableincomeprojections;
·theoverallmarketenvironment;and
·thevolatilityandtrendsintheindustryinwhichweoperate.
Allofthefactorsthatweconsiderinevaluatingtreatmentofadeferredtaxassetvaluationallowanceinvolvesignificantjudgment.Forexample,therearemany
differentinterpretationsof“cumulativelossesinrecentyears”thatcanbeused.Also,significantjudgmentisinvolvedinmakingprojectionsoffuturefinancialand
taxableincome,especiallybecauseourfinancialresultsaresignificantlydependentuponindustrytrends.Anychangeinourvaluationallowancewillsignificantly
impactourfinancialresultsintheperiodofthatchange.
Whenthereareuncertaintiesrelatedtopotentialincometaxbenefits,inordertoqualifyforrecognition,thepositionwetakehastohaveatleasta“morelikelythan
not”chanceofbeingsustained(basedontheposition’stechnicalmerits)uponchallengebytheresponsibleauthorities.Theterm“morelikelythannot”meansa
likelihoodofmorethan50%.Otherwise,wemaynotrecognizeanyofthepotentialtaxbenefitsassociatedwiththatposition.Werecognizeabenefitforatax
positionthatmeetsthe“morelikelythannot”criterionasthelargestamountoftaxbenefitthatisgreaterthan50%likelytoberealizeduponitseffective
resolution.Unrecognizedtaxbenefitsinvolveourjudgmentregardingthelikelihoodofabenefitbeingsustained.Thefinalresolutionsofuncertaintaxpositions
couldresultinadjustmentstorecordedamountsandaffectourresultsofoperations,financialposition,andcashflows.However,weanticipatethatanysuch
adjustmentswouldnotmateriallyimpactourfinancialstatements.
OnJuly30,2014,weenteredintotheTRA.TheTRAcallsforustopaytoourpre-IPOstockholders85%ofthesavingsincashthatwerealizeinourtaxesasa
resultofutilizingournetoperatinglossesandothertaxattributesattributabletoprecedingperiods.InconnectionwiththeTRA,weamendedthe2013FirstLien
CreditAgreementtopermitdividendpaymentstousbyoursubsidiariesinamountsupto$11millionperfiscalyear,nottoexceed$33millionintheaggregate,
whilethe2013FirstLienCreditAgreementwasoutstanding.Infiscal2014,weincurredchargestotalingapproximately$41millionrelatingtothepresentvalueof
ourtotalestimatedTRApayments.WearepermittedtomakeTRApaymentsunderthe2014Revolver.TheTRAchargeof$41millionisapermanentadd-backto
theCompany’staxableincomethatresultedinapproximately$14millionoftaxexpensefor2014.Infiscal2015,weincurredchargesof$.2millionrelatedtothe
amortizationofthepresentvalueoftheTRAobligation.
Inaddition,infiscal2014,weappliedforvarioustaxcreditsthatresultedin$6.7millionofadditionaldeferredtaxassetsandtaxbenefits.
Stock-Based Compensation
Wemeasureandrecognizecompensationexpensefortheestimatedfairvalueofstockoptionsforemployeesandnon-employeedirectorsandsimilarawardsbased
onthegrant-datefairvalueoftheaward.Foroptionsthatarebasedonaservicerequirement,thecostisrecognizedonastraight-linebasisovertherequisite
serviceperiod,usuallythevestingperiod.Theoptionsgrantedinfiscal2012hadathree-yearvestingperiod(with25%oftheoptionsvestingimmediately),while
theoptionsgrantedinfiscal2013and2014hadafour-yearvestingperiod.Nooptionsweregrantedinfiscal2015.Foroptionsthatarebasedonperformance
requirements,costsarerecognizedovertheperiodstowhichtheperformancecriteriarelate.
Inordertocalculateourstockoptions’fairvaluesandtheassociatedcompensationcostsforshare-basedawards,weutilizetheBlack–Scholesoptionpricing
model,andwehavedevelopedestimatesofvariousinputsincludingforfeiturerate,expectedterm,expectedvolatility,andrisk-freeinterestrate.These
assumptionsgenerallyrequiresignificantjudgment.Theforfeiturerateisbasedonhistoricalratesandreducesthecompensationexpenserecognized.Theexpected
termforoptionsgrantedisderivedusingthe“simplified”method,inaccordancewithSECguidance.Expectedvolatilityisestimatedusingfourpublicly-traded
peercompaniesinourmarketcategory.
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