GRUBHUB INC., 10-K filed on 2/28/2018
Annual Report
Document and Entity Information (USD $)
12 Months Ended
Dec. 31, 2017
Feb. 16, 2018
Jun. 30, 2017
Document And Entity Information [Abstract]
 
 
 
Document Type
10-K 
 
 
Amendment Flag
false 
 
 
Document Period End Date
Dec. 31, 2017 
 
 
Document Fiscal Year Focus
2017 
 
 
Document Fiscal Period Focus
FY 
 
 
Trading Symbol
GRUB 
 
 
Entity Registrant Name
GRUBHUB INC. 
 
 
Entity Central Index Key
0001594109 
 
 
Current Fiscal Year End Date
--12-31 
 
 
Entity Filer Category
Large Accelerated Filer 
 
 
Entity Common Stock, Shares Outstanding
 
87,194,255 
 
Entity Current Reporting Status
Yes 
 
 
Entity Voluntary Filers
No 
 
 
Entity Well-known Seasoned Issuer
Yes 
 
 
Entity Public Float
 
 
$ 3,292,229,504 
Consolidated Statements of Operations (USD $)
In Thousands, except Per Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2017
Dec. 31, 2016
Dec. 31, 2015
Income Statement [Abstract]
 
 
 
Revenues
$ 683,067 
$ 493,331 
$ 361,825 
Costs and expenses:
 
 
 
Operations and support
269,453 
171,756 
107,424 
Sales and marketing
150,730 
110,323 
91,150 
Technology (exclusive of amortization)
56,263 
42,454 
32,782 
General and administrative
65,023 
50,482 
41,013 
Depreciation and amortization
51,848 
35,193 
28,034 
Total costs and expenses
593,317 
410,208 
300,403 
Income from operations
89,750 
83,123 
61,422 
Interest (income) expense - net
102 
(729)
(507)
Income before provision for income taxes
89,648 
83,852 
61,929 
Income tax (benefit) expense
(9,335)
34,295 
23,852 
Net income attributable to common stockholders
$ 98,983 
$ 49,557 
$ 38,077 
Net income per share attributable to common stockholders:
 
 
 
Basic
$ 1.15 
$ 0.58 
$ 0.45 
Diluted
$ 1.12 
$ 0.58 
$ 0.44 
Weighted-average shares used to compute net income per share attributable to common stockholders:
 
 
 
Basic
86,297 
85,069 
84,076 
Diluted
88,182 
86,135 
85,706 
Consolidated Statements of Comprehensive Income (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2017
Dec. 31, 2016
Dec. 31, 2015
Statement Of Income And Comprehensive Income [Abstract]
 
 
 
Net income
$ 98,983 
$ 49,557 
$ 38,077 
OTHER COMPREHENSIVE INCOME (LOSS)
 
 
 
Foreign currency translation adjustments
850 
(1,474)
(342)
COMPREHENSIVE INCOME
$ 99,833 
$ 48,083 
$ 37,735 
Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Dec. 31, 2017
Dec. 31, 2016
CURRENT ASSETS:
 
 
Cash and cash equivalents
$ 234,090 
$ 239,528 
Short-term investments
23,605 
84,091 
Accounts receivable, less allowances for doubtful accounts
95,970 
60,550 
Prepaid expenses and other current assets
6,818 
12,168 
Total current assets
360,483 
396,337 
PROPERTY AND EQUIPMENT:
 
 
Property and equipment, net of depreciation and amortization
71,384 
46,555 
OTHER ASSETS:
 
 
Other assets
6,487 
4,530 
Goodwill
589,862 
436,455 
Acquired intangible assets, net of amortization
515,553 
313,630 
Total other assets
1,111,902 
754,615 
TOTAL ASSETS
1,543,769 
1,197,507 
CURRENT LIABILITIES:
 
 
Restaurant food liability
119,922 
83,349 
Accounts payable
7,607 
7,590 
Accrued payroll
13,186 
7,338 
Taxes payable
3,109 
865 
Short-term debt
3,906 
 
Other accruals
26,818 
11,348 
Total current liabilities
174,548 
110,490 
LONG-TERM LIABILITIES:
 
 
Deferred taxes, non-current
74,292 
108,022 
Other accruals
7,468 
6,876 
Long-term debt
169,645 
 
Total long-term liabilities
251,405 
114,898 
Commitments and contingencies
   
   
STOCKHOLDERS’ EQUITY:
 
 
Preferred Stock, $0.0001 par value. Authorized: 25,000,000 shares as of December 31, 2017 and December 31, 2016; issued and outstanding: no shares as of December 31, 2017 and December 31, 2016.
   
   
Common stock, $0.0001 par value. Authorized: 500,000,000 shares at December 31, 2017 and December 31, 2016; issued and outstanding: 86,790,624 and 85,692,333 shares as of December 31, 2017 and December 31, 2016, respectively
Accumulated other comprehensive loss
(1,228)
(2,078)
Additional paid-in capital
849,043 
805,731 
Retained earnings
269,992 
168,457 
Total Stockholders’ Equity
1,117,816 
972,119 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$ 1,543,769 
$ 1,197,507 
Consolidated Balance Sheets (Parenthetical) (USD $)
Dec. 31, 2017
Dec. 31, 2016
Statement Of Financial Position [Abstract]
 
 
Preferred Stock, par value
$ 0.0001 
$ 0.0001 
Preferred Stock, shares authorized
25,000,000 
25,000,000 
Preferred Stock, shares issued
Preferred Stock, shares outstanding
Common stock, par value
$ 0.0001 
$ 0.0001 
Common stock, shares authorized
500,000,000 
500,000,000 
Common stock, shares issued
86,790,624 
85,692,333 
Common stock, shares outstanding
86,790,624 
85,692,333 
Statements of Cash Flows (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2017
Dec. 31, 2016
Dec. 31, 2015
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net income
$ 98,983 
$ 49,557 
$ 38,077 
Adjustments to reconcile net income to net cash from operating activities:
 
 
 
Depreciation
11,775 
8,921 
5,085 
Provision for doubtful accounts
1,424 
1,102 
850 
Deferred taxes
(31,179)
1,027 
(3,835)
Amortization of intangible assets
40,073 
26,272 
22,949 
Stock-based compensation
32,748 
23,559 
13,450 
Deferred rent
849 
1,286 
32 
Amortization of deferred loan costs
487 
365 
 
Investment premium amortization
(739)
(612)
688 
Other
436 
(159)
(159)
Change in assets and liabilities, net of the effects of business acquisitions:
 
 
 
Accounts receivable
(27,833)
(17,488)
(4,343)
Prepaid expenses and other assets
4,112 
(8,765)
242 
Restaurant food liability
8,576 
16,451 
(29,409)
Accounts payable
(4,244)
(3,204)
3,312 
Accrued payroll
5,537 
1,819 
(2,104)
Other accruals
11,735 
(2,453)
(80)
Net cash provided by operating activities
152,740 
97,678 
44,755 
CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
Purchases of investments
(154,758)
(226,694)
(220,667)
Proceeds from maturity of investments
215,983 
284,662 
189,872 
Capitalized website and development costs
(21,325)
(12,809)
(7,137)
Purchases of property and equipment
(18,971)
(24,087)
(4,150)
Acquisitions of businesses, net of cash acquired
(333,301)
(65,849)
(73,907)
Acquisition of other intangible assets
(25,147)
(250)
 
Other cash flows from investing activities
557 
(492)
(408)
Net cash used in investing activities
(336,962)
(45,519)
(116,397)
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Proceeds from borrowings under the credit facility
200,000 
 
 
Repayments of borrowings under the credit facility
(25,781)
 
 
Repurchases of common stock
 
(14,774)
 
Proceeds from exercise of stock options
16,375 
13,468 
11,919 
Excess tax benefits related to stock-based compensation
 
24,906 
27,830 
Taxes paid related to net settlement of stock-based compensation awards
(10,556)
(2,779)
(345)
Payments for debt issuance costs
(1,979)
(1,477)
 
Net cash provided by financing activities
178,059 
19,344 
39,404 
Net change in cash and cash equivalents
(6,163)
71,503 
(32,238)
Effect of exchange rates on cash
725 
(1,268)
(265)
Cash and cash equivalents at beginning of year
239,528 
169,293 
201,796 
Cash and cash equivalents at end of the period
234,090 
239,528 
169,293 
SUPPLEMENTAL DISCLOSURE OF NON-CASH ITEMS
 
 
 
Fair value of common stock and equity awards issued for acquisitions
274 
 
15,980 
Cash paid for income taxes
19,148 
8,722 
 
Capitalized property, equipment and website and development costs in accounts payable at period end
2,960 
2,583 
927 
Settlement of receivable through cashless acquisition of treasury shares in connection with net settlement of stock-based awards
 
 
(345)
Net working capital adjustment receivable
$ 737 
 
 
Consolidated Statements of Changes in Stockholders' Equity (USD $)
In Thousands, except Share data
Total
Common stock
Additional Paid-in Capital
Accumulated Other Comprehensive Income (Loss)
Retained Earnings
Balance, beginning at Dec. 31, 2014
$ 770,522 
$ 8 
$ 689,953 
$ (262)
$ 80,823 
Balance, beginning (in shares) at Dec. 31, 2014
 
81,905,325 
 
 
 
Net income
38,077 
 
 
 
38,077 
Currency translation
(342)
 
 
(342)
 
Stock-based compensation
13,955 
 
13,955 
 
 
Tax benefit related to stock-based compensation
27,830 
 
27,830 
 
 
Stock option exercises, net of withholdings and other
11,919 
 
11,919 
 
 
Stock option exercises, net of withholdings and other (in shares)
 
2,578,398 
 
 
 
Issuance of restricted stock awards (in shares)
 
101,616 
 
 
 
Issuance of common stock, acquisitions
15,980 
 
15,980 
 
 
Issuance of common stock, acquisitions (in shares)
 
407,812 
 
 
 
Shares repurchased and retired to satisfy tax withholding upon vesting
(345)
 
(345)
 
 
Shares repurchased and retired to satisfy tax withholding upon vesting (in shares)
 
(13,282)
 
 
 
Balance, ending at Dec. 31, 2015
877,596 
759,292 
(604)
118,900 
Balance, ending (in shares) at Dec. 31, 2015
 
84,979,869 
 
 
 
Net income
49,557 
 
 
 
49,557 
Currency translation
(1,474)
 
 
(1,474)
 
Stock-based compensation
25,619 
 
25,619 
 
 
Tax benefit related to stock-based compensation
24,906 
 
24,906 
 
 
Stock option exercises and vesting of restricted stock units, net of withholdings and other
13,468 
13,467 
 
 
Stock option exercises and vesting of restricted stock units, net of withholdings and other (in shares)
 
1,523,952 
 
 
 
Repurchases of common stock
(14,774)
 
(14,774)
 
 
Repurchases of common stock (shares)
 
(724,473)
 
 
 
Shares repurchased and retired to satisfy tax withholding upon vesting
(2,779)
 
(2,779)
 
 
Shares repurchased and retired to satisfy tax withholding upon vesting (in shares)
 
(87,015)
 
 
 
Balance, ending at Dec. 31, 2016
972,119 
805,731 
(2,078)
168,457 
Balance, ending (in shares) at Dec. 31, 2016
 
85,692,333 
 
 
 
Net income
98,983 
 
 
 
98,983 
Cumulative effect adjustment upon adoption of ASU 2016-09
2,552 
 
 
 
2,552 
Currency translation
850 
 
 
850 
 
Stock-based compensation
37,219 
 
37,219 
 
 
Stock option exercises, net of withholdings and other (in shares)
728,710 
 
 
 
 
Stock option exercises and vesting of restricted stock units, net of withholdings and other
16,375 
 
16,375 
 
 
Stock option exercises and vesting of restricted stock units, net of withholdings and other (in shares)
 
1,331,083 
 
 
 
Issuance of common stock, acquisitions
274 
 
274 
 
 
Shares repurchased and retired to satisfy tax withholding upon vesting
(10,556)
 
(10,556)
 
 
Shares repurchased and retired to satisfy tax withholding upon vesting (in shares)
 
(232,792)
 
 
 
Balance, ending at Dec. 31, 2017
$ 1,117,816 
$ 9 
$ 849,043 
$ (1,228)
$ 269,992 
Balance, ending (in shares) at Dec. 31, 2017
 
86,790,624 
 
 
 
Organization
Organization

1. Organization

Grubhub Inc., a Delaware corporation, and its wholly-owned subsidiaries (collectively referred to as the “Company”) provide an online and mobile takeout marketplace for restaurant pick-up and delivery orders. Diners enter their delivery address or use geo-location within the mobile applications and the Company displays the menus and other relevant information for restaurants in its network. Orders may be placed directly online, via mobile applications or over the phone at no cost to the diner. The Company charges the restaurant a per order commission that is largely fee based. In many markets, the Company also provides delivery services to restaurants on its platform that do not have their own delivery operations.

Summary of Significant Accounting Policies
Summary of Significant Accounting Policies

2. Summary of Significant Accounting Policies

Basis of Presentation and Principles of Consolidation

The Company’s consolidated financial statements were prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The accompanying consolidated financial statements include all wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. The consolidated statements of operations include the results of entities acquired from the dates of the acquisitions for accounting purposes.

Changes in Accounting Principle

See “Recently Issued Accounting Pronouncements” below for a description of accounting principle changes adopted during the year ended December 31, 2017 related to goodwill, business combinations and stock-based compensation.

Use of Estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and the related disclosures at the date of the financial statements, as well as the reported amounts of revenue and expenses during the periods presented. Estimates include revenue recognition, the allowance for doubtful accounts, website and internal-use software development costs, goodwill, depreciable lives of property and equipment, recoverability of intangible assets with finite lives and other long-lived assets and stock-based compensation. To the extent there are material differences between these estimates, judgments or assumptions and actual results, the Company’s consolidated financial statements will be affected. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management’s judgment in its application.

Cash and Cash Equivalents

Cash includes demand deposits with banks or financial institutions. Cash equivalents include short-term, highly liquid investments that are both readily convertible to known amounts of cash, and that are so near their maturity that they present minimal risk of changes in value because of changes in interest rates. The Company’s cash equivalents include only investments with original maturities of three months or less. The Company regularly maintains cash in excess of federally insured limits at financial institutions.

Marketable Securities

Marketable securities consist primarily of commercial paper and investment grade U.S. and non-U.S.-issued corporate and U.S. government agency debt securities. The Company invests in a diversified portfolio of marketable securities and limits the concentration of its investment in any particular security. Marketable securities with original maturities of three months or less are included in cash and cash equivalents and marketable securities with original maturities greater than three months, but less than one year, are included in short term investments on the consolidated balance sheets. The Company determines the classification of its marketable securities as available-for-sale or held-to-maturity at the time of purchase and reassesses these determinations at each balance sheet date. Debt securities are classified as held-to-maturity when the Company has the intent to hold the securities to maturity. Held-to-maturity securities are stated at amortized cost and are periodically assessed for other-than-temporary impairment. The amortized cost of debt securities is adjusted for the amortization of premiums and accretion of discounts to maturity, which is recognized as interest income within interest (income) expense in the consolidated statements of operations. Interest income is recognized when earned.

Accumulated Other Comprehensive Loss

Accumulated other comprehensive loss consists of foreign currency translation adjustments. The financial statements of the Company’s U.K. subsidiary are translated from their functional currency into U.S. dollars. Assets and liabilities are translated at period end rates of exchange, and revenue and expenses are translated using average rates of exchange. The resulting gain or loss is included in accumulated other comprehensive loss on the consolidated balance sheets.

Property and Equipment, Net

Property and equipment is recorded at cost and depreciated using the straight-line method over the estimated useful lives of the related assets. The useful lives are as follows:

 

 

 

Estimated Useful Life

Computer equipment

 

2-3 years

Furniture and fixtures

 

5 years

Developed software

 

1-3 years

Purchased software and digital assets

 

3-5 years

Leasehold improvements

 

Shorter of expected useful life or lease term

Maintenance and repair costs are charged to expense as incurred. Major improvements, which extend the useful life of the related asset, are capitalized. Upon disposal of a fixed asset, the Company records a gain or loss based on the difference between the proceeds received and the net book value of the disposed asset.

Accounts Receivable, Net

Accounts receivable primarily represent the net cash due from the Company’s payment processor for cleared transactions and amounts owed from corporate customers. The carrying amount of the Company’s receivables is reduced by an allowance for doubtful accounts that reflects management’s best estimate of amounts that will not be collected. These uncollected amounts are generally not recovered from the restaurants. The allowance is recorded through a charge to bad debt expense which is recognized within general and administrative expense in the consolidated statements of operations. The allowance is based on historical loss experience and any specific risks, current or forecasted, identified in collection matters.

Management provides for probable uncollectible amounts through a charge against bad debt expense and a credit to an allowance based on its assessment of the current status of individual accounts. Balances still outstanding after management has used reasonable collection efforts are written off against the allowance. The Company does not charge interest on trade receivables.

The Company incurs expenses for uncollected credit card receivables (or “chargebacks”), including fraudulent orders, when a diner’s card is authorized but fails to process, and for other unpaid credit card receivables. The majority of the Company’s chargeback expense is recorded directly to general and administrative expense in the consolidated statements of operations as the charges are incurred; however, a portion of the allowance for doubtful accounts includes a reserve for estimated chargebacks on the net cash due from the Company’s payment processors as of the end of the period.

Changes in the Company’s allowance for doubtful accounts for the periods presented were as follows:

 

 

Year Ended December 31,

 

 

 

2017

 

 

2016

 

Balance at beginning of period

 

$

1,229

 

 

$

959

 

Additions to expense

 

 

1,424

 

 

 

1,102

 

Write-offs, net of recoveries and other adjustments

 

 

(1,140

)

 

 

(832

)

Balance at end of period

 

$

1,513

 

 

$

1,229

 

 

Advertising Costs

Advertising costs are generally expensed as incurred in connection with the requisite service period. Certain advertising production costs are capitalized and expensed when the advertisement first takes place. For the years ended December 31, 2017, 2016 and 2015, expenses attributable to advertising totaled approximately $107.2 million, $75.5 million and $64.4 million, respectively. Advertising costs are recorded in sales and marketing expense on the Company’s consolidated statements of operations.

Stock-Based Compensation

The Company measures compensation expense for all stock-based awards, including stock options, restricted stock units and restricted stock awards, at fair value on the date of grant and recognizes compensation expense over the service period on a straight-line basis for awards expected to vest.

The Company uses the Black-Scholes option-pricing model to determine the fair value for stock options. Management has determined the Black-Scholes fair value of stock option awards and related stock-based compensation expense with the assistance of third-party valuations. Determining the fair value of stock-based awards at the grant date requires judgment. The determination of the grant date fair value of options using an option-pricing model is affected by the Company’s estimated common stock fair value as well as assumptions regarding a number of other complex and subjective variables. If any of the assumptions used in the Black-Scholes model changes significantly, stock-based compensation for future awards may differ materially compared with the awards granted previously. In valuing the Company’s options, the Company makes assumptions about risk-free interest rates, dividend yields, volatility and weighted-average expected lives, including estimated forfeiture rates.

The Black-Scholes option-pricing model requires the use of highly subjective and complex assumptions, including the expected term and the price volatility of the underlying stock, which determine the fair value of stock-based awards. These assumptions include:

 

Risk-free rate. Risk-free interest rates are derived from U.S. Treasury securities as of the option grant date.

 

Expected dividend yields. Expected dividend yields are based on our historical dividend payments, which have been zero to date (excluding the preferred stock tax distributions made by Seamless Holdings).

 

Volatility. Because the Company has a limited trading history and did not have public trading history for its common shares until April of 2014, we estimate volatility of our share price based on a combination of the published historical volatilities of comparable publicly-traded companies in our vertical markets and the historical volatility of our common stock.

 

Expected term. Beginning in the first quarter of 2017, the expected term calculation for option awards considers a combination of the Company’s historical and estimated future exercise behavior. The Company transitioned from using a simplified method for calculating the expected term of its plain vanilla stock options as it has obtained sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term. Prior to 2017, the Company applied a simplified method which estimated the weighted-average expected life of the options as the average of the vesting option schedule and the term of the award due to the limited period of time stock-based awards had been exercisable.

 

Forfeiture rate. Forfeiture rates are estimated using historical actual forfeiture trends as well as our judgment of future forfeitures. These rates are evaluated at least annually and any change in compensation expense is recognized in the period of the change. The estimation of stock awards that will ultimately vest requires judgment and, to the extent actual results or updated estimates differ from our current estimates, such amounts will be recorded as a cumulative adjustment in the period in which the estimates are revised. The Company considers many factors when estimating expected forfeitures, including the types of awards and employee class. Actual results, and future changes in estimates, may differ substantially from management’s current estimates. The Company will continue to estimate forfeitures as described above in accordance with the policy alternatives available under Accounting Standards Update No. 2016-09, “Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” (“ASU 2016-09”), effective in the first quarter of 2017.

See Note 9, Stock-Based Compensation, for the weighted-average assumptions used to estimate the fair value of options granted during the years ended December 31, 2017, 2016 and 2015.

Beginning in the first quarter of 2017, the Company recognizes tax benefits and deficiencies for stock-based awards in income tax (benefit) expense within the consolidated statements of operations. See “Recently Issued Accounting Pronouncements” below and Note 9, “Stock-Based Compensation”, for further discussion. Prior to the adoption of ASU 2016-09, the Company elected to use the with-and-without method in determining the order in which tax attributes are utilized. As a result, the Company only recognized a tax benefit for stock-based awards in additional paid-in capital if an incremental tax benefit was realized after all other tax attributes available to the Company had been utilized.

Income Tax (Benefit) Expense

Income tax (benefit) expense is determined using the asset and liability method. Under this method, deferred tax assets and liabilities are calculated based upon the temporary differences between the financial statement and income tax bases of assets and liabilities using the enacted tax rates that are applicable in a given year. The utilization of deferred tax assets is limited by the amount of taxable income expected to be generated within the allowable carryforward period and other factors. The Company records a valuation allowance to reduce deferred tax assets to the amount management believes is more likely than not to be realized. As of December 31, 2017 and 2016, a valuation allowance of $4.8 million and $1.6 million, respectively, was recorded the Company’s consolidated balance sheets.

The Company utilizes a two-step approach to recognizing and measuring uncertain tax positions (“tax contingencies”). The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount which is more than 50% likely to be realized upon ultimate settlement. The Company considers many factors when evaluating and estimating its tax positions and tax benefits, which may require periodic adjustments, and which may not accurately forecast actual outcomes.

Management believes that it is more likely than not that forecasted income, including future reversals of existing taxable temporary differences, will be sufficient to fully recover the net deferred tax assets. In the event the Company determines that all or part of the net deferred tax assets are not realizable in the future, we will adjust the valuation allowance with the adjustment recognized as expense in the period in which such determination is made. The calculation of income tax liabilities involves significant judgment in estimating the impact of uncertainties and complex tax laws. In addition, the Company’s tax returns are subject to audit by various U.S. and foreign tax authorities. Resolution of these uncertainties in a manner inconsistent with our expectations could have a material impact on the Company’s financial position and results of operations.

In accordance with U.S. tax legislation signed into law in December of 2017, the Tax Cuts and Jobs Act (the “Tax Act”), the Company has recorded a tax liability of $0.4 million as of December 31, 2017 related to the one-time tax on the unremitted foreign earnings of our U.K. subsidiary. Due to the reduced cost of repatriating unremitted earnings, the Company plans to repatriate cash from the U.K. to the U.S. The Company estimated no additional tax liability as of December 31, 2017 as there are no applicable withholding taxes for the transaction. Management regularly evaluates whether foreign earnings are expected to be permanently reinvested. This evaluation requires judgment about the future operating and liquidity needs of the Company’s foreign subsidiary. Changes in economic and business conditions, foreign or U.S. tax laws, or the Company’s financial situation could result in changes in these judgments and the need to record additional tax liabilities.

The Company includes interest and penalties related to tax contingencies in the provision for income taxes in the consolidated statements of operations. See Note 10, Income Taxes. Management does not expect the total amount of unrecognized tax benefits to significantly change in the next twelve months.

Intangible Assets

Intangible assets with finite useful lives are amortized using the straight-line method over their useful lives and are reviewed for impairment. The Company evaluates intangible assets with finite and indefinite useful lives and other long-lived assets for impairment whenever events or circumstances indicate that they may not be recoverable, or at least annually. Recoverability of finite and other long-lived assets is measured by comparing the carrying amount of an asset group to the future undiscounted net cash flows expected to be generated by that asset group. The Company groups assets for purposes of such review at the lowest level for which identifiable cash flows of the asset group are largely independent of the cash flows of the other groups of assets and liabilities. The amount of impairment to be recognized for finite and indefinite-lived intangible assets and other long-lived assets is calculated as the difference between the carrying value and the fair value of the asset group, generally measured by discounting estimated future cash flows. There were no impairment indicators present during the years ended December 31, 2017, 2016 or 2015.

Website and Software Development Costs

The costs incurred in the preliminary stages of website and software development are expensed as incurred. Once an application has reached the development stage, internal and external costs, if direct and incremental and deemed by management to be significant, are capitalized and amortized on a straight-line basis over the estimated useful life of the application. Maintenance and enhancement costs, including those costs in the post-implementation stages, are typically expensed as incurred, unless such costs relate to substantial upgrades and enhancements to the website or software that result in added functionality, in which case the costs are capitalized and amortized on a straight-line basis over the estimated useful lives. Amortization expense related to capitalized website and software development costs is included in depreciation and amortization in the consolidated statements of operations. The Company capitalized $26.0 million, $15.6 million and $8.0 million of website development costs during the years ended December 31, 2017, 2016 and 2015, respectively.

Goodwill

Goodwill represents the excess of the cost of an acquired business over the fair value of the assets acquired at the date of acquisition. The Company’s methodology for allocating the purchase price of acquisitions is based on established valuation techniques that consider a number of factors, including valuations performed by third-party appraisers. As of December 31, 2017, the Company had $589.9 million in goodwill on its consolidated balance sheets. The Company assesses the impairment of goodwill at least annually and whenever events or changes in circumstances indicate that goodwill may be impaired. Absent any special circumstances that could require an interim test, the Company has elected to test for goodwill impairment at September 30 of each year. The Company has one reporting unit in testing goodwill for impairment.

In testing goodwill for impairment, the Company may elect to utilize a qualitative assessment to evaluate whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the qualitative assessment indicates that goodwill impairment is more likely than not, the Company performs a quantitative impairment test. In the first quarter of 2017, the Company adopted Accounting Standards Update No. 2017-04, “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment” (“ASU 2017-04”). Under 2017-04, the Company would recognize an impairment charge for the amount by which the reporting unit’s carrying amount exceeds its fair value, if any, not to exceed the carrying amount of goodwill.

Management determined the fair value of the Company as of September 30, 2017 by using a market-based approach that utilized our market capitalization, as adjusted for factors such as a control premium. After consideration of the Company’s market capitalization, business growth and other factors, management determined that it was more likely than not that the fair value of the Company exceeded its carrying amount at September 30, 2017 and that further analysis was not required.

Additionally, as part of the interim review for indicators of impairment, management analyzed potential changes in value based on operating results for the three months ended December 31, 2017 compared to expected results. Management also considered how the Company’s market capitalization, business growth and other factors used in the September 30, 2017 impairment analysis, could be impacted by changes in market conditions and economic events. For example, the fair market value of the Company’s stock has increased since September 30, 2017. Management considered these trends in performing its assessment of whether an interim impairment review was required. Based on this interim assessment, management concluded that as of December 31, 2017, there were no events or changes in circumstances that indicated it was more likely than not that the Company’s fair value was below its carrying value.

The Company determined there was no goodwill impairment during the years ended December 31, 2017, 2016 and 2015. Nevertheless, significant changes in global economic and market conditions could result in changes to expectations of future financial results and key valuation assumptions. Such changes could result in revisions of management’s estimates of the Company’s fair value and could result in a material impairment of goodwill.

Debt Issuance Costs

The Company incurred debt issuance costs in connection with its debt facilities and related amendments. Amounts paid directly to lenders are classified as issuance costs and are recorded as a reduction in the carrying value of the debt. Commitment fees and other costs directly associated with obtaining credit facilities are deferred financing costs which are recorded in the consolidated balance sheets and amortized over the term of the facility. The Company allocated deferred debt issuance costs incurred for its current credit facility between the revolver and term loan based on their relative borrowing capacity. Deferred debt issuance costs associated with the revolving credit facility are recorded within other assets and those associated with the term loan are recorded as a reduction of the carrying value of the debt on the consolidated balance sheets. All deferred debt issuance costs are amortized using the effective interest rate method to interest expense within net interest (income) expense on the Company’s consolidated statements of operations. See Note 8, Debt, for additional details.

Fair Value

Accounting standards define fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market in an orderly transaction between market participants on the measurement date. The standards also establish a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. See Note 14, Fair Value Measurement, for details of the fair value hierarchy and the related inputs used by the Company.

Concentration of Credit Risk

Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of accounts receivable. For the years ended December 31, 2017, 2016 and 2015, the Company had no customers which accounted for more than 1% of revenue or 10% of accounts receivable.

Revenue Recognition

In general, the Company recognizes revenue when (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered to the customer, (iii) the fee is fixed or determinable and (iv) collectability is reasonably assured. The Company considers persuasive evidence of an arrangement to be a signed agreement, a binding contract with the restaurant or other similar documentation reflecting the terms and conditions under which products or services will be provided.

The Company generates revenues primarily when diners place an order on the platform through its mobile applications, its websites, third-party websites that incorporate API or one of the Company’s listed phone numbers. Restaurants pay a commission, typically a percentage of the transaction, on orders that are processed through the platform. Most of the restaurants on the Company’s platform can choose their level of commission rate, at or above a base rate. A restaurant can choose to pay a higher rate which affects its prominence and exposure to diners on the platform. Additionally, restaurants that use the Company’s delivery services pay an additional commission for the use of those services. As an agent of the merchant in the transaction, the Company recognizes as revenues only the commissions from the transaction, which are a percentage of the total Gross Food Sales for such transaction.

The Company periodically provides incentive offers to restaurants and diners to use the platform. These promotions are generally cash credits to be applied against purchases. These incentive offers are recorded as reductions in revenues, generally on the date the corresponding revenue is recorded. The Company also accepts payment for orders via gift cards offered on its platform. If a gift card that is not subject to unclaimed property laws is not redeemed, the Company recognizes revenue when the gift card expires or when the likelihood of its redemption becomes remote.

Revenues from online and phone delivery orders are recognized when these orders are placed at the restaurants. The amount of revenue recorded by the Company is based on the arrangement with the related restaurant, and is adjusted for any cash credits, including incentive offers provided to restaurants and diners, related to the transaction. The Company also recognizes as revenue any fees charged to the diner for delivery services provided by the Company. Although the Company will process the entire amount of the transaction with the diner, it will record revenue on a net basis because the Company is acting as an agent of the merchant in the transaction. The Company will record an amount representing the restaurant food liability for the net balance due the restaurant. Costs incurred for processing the transactions and providing delivery services are included in operations and support in the consolidated statements of operations.

Deferred Rent

For the Company’s operating leases, the Company recognizes rent expenses on a straight-line basis over the terms of the leases. Accordingly, the Company records the difference between cash rent payments and the recognition of rent expenses as a deferred rent liability in the consolidated balance sheets. The Company has landlord-funded leasehold improvements that are recorded as tenant allowances which are being amortized as a reduction of rent expense over the noncancelable terms of the operating leases.

Segments

The Company has one reportable segment, which has been identified based on how the chief operating decision maker manages the business, makes operating decisions and evaluates operating performance.

Recently Issued Accounting Pronouncements

 

In May 2017, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update No. 2017-09, “Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting” (“ASU 2017-09”). ASU 2017-09 provides clarification on when modification accounting should be used for changes to the terms or conditions of a share-based payment award. This ASU does not change the accounting for modifications but clarifies that modification accounting guidance should only be applied if there is a change to the value, vesting conditions, or award classification and would not be required if the changes are considered non-substantive. ASU 2017-09 is effective for the Company beginning in the first quarter of 2018 on a prospective basis and early adoption is permitted. The adoption of ASU 2017-09 is not expected to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

In January 2017, the FASB issued ASU 2017-04, which eliminates Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with its carrying amount. Under the amendment, an entity should recognize an impairment charge for the amount by which the reporting unit’s carrying amount exceeds its fair value, not to exceed the carrying amount of goodwill. The Company elected to early adopt ASU 2017-04 beginning in the first quarter of 2017 and will apply the standard prospectively. The Company performed its annual goodwill impairment test as of September 30th and found no indicators of impairment, therefore no goodwill impairment charge was recognized. The adoption of ASU 2017-04 may reduce the cost and complexity of evaluating goodwill for impairment, but has not had, and is not expected to have, a material impact on the Company’s consolidated financial position, results of operations or cash flows.

In January 2017, the FASB issued Accounting Standards Update No. 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business” (“ASU 2017-01”). ASU 2017-01 provides that when substantially all the fair value of the assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. The Company elected to adopt ASU 2017-01 early; therefore, ASU 2017-01 is effective for transactions beginning in the first quarter of 2017 on a prospective basis. The Company evaluated current year transactions under the guidance set forth by ASU 2017-01. See Note 3, Acquisitions, and Note 5, Goodwill and Acquired Intangible Assets, for details of the Company’s business combinations and other acquired assets during the year ended December 31, 2017. The adoption of ASU 2017-01 did not have, and is not expected to have, a material impact on the Company’s consolidated financial position, results of operations or cash flows.

In August 2016, the FASB issued Accounting Standards Update No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments” (“ASU 2016-15”). ASU 2016-15 adds or clarifies guidance on the classification of certain cash receipts and payments in the statement of cash flows with the intent of reducing diversity in practice related to eight types of cash flows including, among others, debt prepayment or debt extinguishment costs, contingent consideration payments made after a business combination, and separately identifiable cash flows and application of the predominance principle. In addition, in November 2016, the FASB issued Accounting Standards Update No. 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash” (“ASU 2016-18”). ASU 2016-18 requires companies to include amounts generally described as restricted cash and restricted cash equivalents in cash and cash equivalents when reconciling beginning-of-period and end-of-period total amounts shown on the statement of cash flow. ASU 2016-15 and ASU 2016-18 are effective for the Company beginning in first quarter of 2018 and early adoption is permitted. The amendments should be applied using a retrospective transition method to each period presented. The adoption of ASU 2016-15 and ASU 2016-18 may impact the Company’s disclosures but is otherwise not expected to have a material impact on its consolidated financial position, results of operations or cash flows.

In June 2016, the FASB issued Accounting Standards Update No. 2016-13, “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”). ASU 2016-13 introduces a new forward-looking approach, based on expected losses, to estimate credit losses on certain types of financial instruments, including trade receivables and held-to-maturity debt securities, which will require entities to incorporate considerations of historical information, current information and reasonable and supportable forecasts. This ASU also expands disclosure requirements. ASU 2016-13 is effective for the Company beginning the first quarter of 2020 and early adoption is permitted. The guidance will be applied using the modified-retrospective approach. The adoption of ASU 2016-13 is not expected to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

In March 2016, the FASB issued ASU 2016-09, which simplifies several aspects of the accounting for share-based payment transactions. Under ASU 2016-09, excess tax benefits and tax deficiencies are recognized as income tax expense or benefit in the income statement. ASU 2016-09 also provides entities with the option to elect an accounting policy to continue to estimate forfeitures of stock-based awards over the service period (current GAAP) or account for forfeitures when they occur. Under ASU 2016-09, previously unrecognized excess tax benefits should be recognized using a modified retrospective transition. In addition, amendments requiring recognition of excess tax benefits and tax deficiencies in the income statement, as well as changes in the computation of weighted-average diluted shares outstanding, should be applied prospectively. ASU 2016-09 is effective for and was adopted by the Company beginning in the first quarter of 2017 and the impact of the adoption resulted in the following:

 

During the year ended December 31, 2017, the Company recognized excess tax benefits from stock-based compensation of $7.1 million within income tax (benefit) expense on the consolidated statements of operations and within net income on the consolidated statements of cash flows (adopted prospectively). Prior to adoption, the tax effect of stock-based awards was recognized in additional paid-in capital on the consolidated balance sheets and separately stated in financing activities in the consolidated statements of cash flows.

 

The Company has elected to continue to estimate forfeitures of stock-based awards over the service period.

 

The Company recorded a cumulative-effect adjustment for previously unrecognized excess tax benefits of $2.6 million to opening retained earnings on the consolidated balance sheets as of January 1, 2017.

 

The excess tax benefits from the assumed proceeds available to repurchase shares were excluded in the computation of diluted earnings per share for the year ended December 31, 2017 (adopted prospectively).

 

In February 2016, the FASB issued Accounting Standards Update No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”). Under ASU 2016-02, a lessee will recognize in the statement of financial position a liability to make lease payments and a right-of-use asset for all leases (with the exception of short-term leases) at the commencement date. The recognition, measurement, and presentation of expenses and cash flows arising from a lease under ASU 2016-02 will not significantly change from current GAAP. ASU 2016-02 is effective beginning in the first quarter of 2019 with early adoption permitted. The Company will be required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The Company is currently evaluating the impact of adoption of ASU 2016-02 on its consolidated financial statements and anticipates that it will result in a significant increase in its long-term assets and liabilities but will have no material impact to its results of operations and cash flows.

In May 2014, the FASB issued Accounting Standards Update No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”)which supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, including most industry-specific requirements. ASU 2014-09 establishes a five-step revenue recognition process in which an entity will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. ASU 2014-09 also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenues and cash flows from contracts with customers. In August 2015, the FASB issued Accounting Standards Update No. 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date”, which defers the effective date of ASU 2014-09 by one year. In March 2016, the FASB issued Accounting Standards Update No. 2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)” (“ASU 2016-08”), which clarifies the implementation guidance on principal versus agent considerations in the new revenue recognition standard. ASU 2016-08 clarifies how an entity should identify the unit of accounting (i.e. the specified good or service) for the principal versus agent evaluation and how it should apply the control principle to certain types of arrangements. In April 2016, the FASB issued Accounting Standards Update No. 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing” (“ASU 2016-10”), which clarifies the implementation guidance on identifying performance obligations and licensing. ASU 2016-10 reduces the cost and complexity of identifying promised goods or services and improves the guidance for determining whether promises are separately identifiable. In May 2016, the FASB issued Accounting Standards Update No. 2016-12, “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients” (“ASU 2016-12”), which amends the guidance in the new revenue standard on collectability, non-cash consideration, presentation of sales tax, and transition. In December 2016, the FASB issued Account Standards Update No. 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers” (“ASU 2016-20”), which contains additional technical corrections and improvements to the revenue standard but doesn’t change any of the principles in the new revenue guidance. ASU 2014-09, ASU 2016-08, ASU 2016-10, ASU 2016-12 and ASU 2016-20 became effective for and were adopted by the Company on January 1, 2018. The Company applied the modified retrospective approach when adopting these ASUs to contracts that were not completed as of December 31, 2017. Based on the Company’s assessment, the adoption of these ASUs will have an immaterial impact on the timing of recognition of certain revenues and result in the deferral of certain incremental costs of obtaining a contract. Management does not expect the impact from the adoption of these ASUs to have a material impact on the Company’s consolidated financial position, results of operations or cash flows or its business processes, systems and controls. However, the Company will provide additional disclosures as required under the ASUs beginning in the first quarter of 2018.

 

Acquisitions
Acquisitions

3. Acquisitions

2017 Acquisitions

On October 10, 2017, the Company acquired all of the issued and outstanding equity interests of Eat24, LLC (“Eat24”), a wholly owned subsidiary of Yelp Inc., for approximately $281.8 million, including $281.4 million in net cash paid and $0.3 million of other non-cash consideration. Of such amount, $28.8 million will be held in escrow for an 18-month period after closing to secure the Company’s indemnification rights under the purchase agreement. Eat24 provides online and mobile food ordering for restaurants and diners across the United States. The acquisition expanded the breadth and depth of the Company’s national network of restaurant partners and active diners.

The Company granted RSU awards to acquired Eat24 employees in replacement of their unvested equity awards as of the closing date. Approximately $0.3 million of the fair value of the replacement RSU awards granted to acquired Eat24 employees was attributable to the pre-combination services of the Eat24 awardees and was included in the $281.8 million purchase price. This amount is reflected within goodwill in the purchase price allocation. As of the acquisition date, post-combination expense of approximately $4.1 million is expected to be recognized related to the replacement awards over the remaining post-combination service period.

On August 23, 2017, the Company acquired substantially all of the assets and certain expressly specified liabilities of A&D Network Solutions, Inc. and Dashed, Inc. (collectively, “Foodler”). The purchase price for Foodler was $51.2 million in cash, net of a net working capital adjustment receivable of $0.7 million and cash acquired of $0.1 million. Foodler is an independent online food-ordering company with an established diner base in the Northeast United States. The acquisition expanded the breadth and depth of the Company’s restaurant network, active diners and delivery network.

The results of operations of Eat24 and Foodler have been included in the Company’s financial statements since October 10, 2017 and August 23, 2017, respectively, but did not have a material impact on the Company’s consolidated results of operations for the year ended December 31, 2017.

The excess of the consideration transferred in the acquisitions over the net amounts assigned to the fair value of the assets was recorded as goodwill, which represents the value of increasing the breadth and depth of the Company’s network of restaurants and diners. The total goodwill related to the acquisitions of Eat24 and Foodler of $153.4 million is expected to be deductible for income tax purposes.

The assets acquired and liabilities assumed of Eat24 and Foodler were recorded at their estimated fair values as of the closing dates of October 10, 2017 and August 23, 2017, respectively. The following table summarizes the preliminary purchase price allocation acquisition-date fair values of the assets and liabilities acquired in connection with the Eat24 and Foodler acquisitions:

 

 

Eat24

 

 

Foodler

 

 

Total

 

 

(in thousands)

Cash

$

40

 

 

$

86

 

 

$

126

 

Accounts receivable

 

8,267

 

 

 

307

 

 

 

8,574

 

Prepaid expenses and other current assets

 

221

 

 

 

 

 

 

221

 

Property and equipment

 

1,113

 

 

 

 

 

 

1,113

 

Restaurant relationships

 

126,232

 

 

 

35,217

 

 

 

161,449

 

Diner acquisition

 

35,226

 

 

 

1,354

 

 

 

36,580

 

Trademarks

 

2,225

 

 

 

74

 

 

 

2,299

 

Developed technology

 

2,559

 

 

 

1,955

 

 

 

4,514

 

Goodwill

 

135,955

 

 

 

17,452

 

 

 

153,407

 

Accounts payable and accrued expenses

 

(30,082

)

 

 

(5,237

)

 

 

(35,319

)

Total purchase price plus cash acquired

 

281,756

 

 

 

51,208

 

 

 

332,964

 

Net working capital adjustment receivable

 

 

 

 

737

 

 

 

737

 

Fair value of replacement RSUs attributable to pre-combination service

 

(274

)

 

 

 

 

 

(274

)

Cash acquired

 

(40

)

 

 

(86

)

 

 

(126

)

Net cash paid

$

281,442

 

 

$

51,859

 

 

$

333,301

 

2016 Acquisitions

On May 5, 2016, the Company acquired all of the issued and outstanding stock of KMLEE Investments Inc. and LABite.com, Inc. (collectively, “LABite”). The purchase price for LABite was $65.8 million in cash, net of cash acquired of $2.6 million. LABite provides online and mobile food ordering and delivery services for restaurants in numerous western and southwestern cities of the United States. The acquisition has expanded the Company’s restaurant, diner and delivery networks.

The results of operations of LABite have been included in the Company’s financial statements since May 5, 2016.

The excess of the consideration transferred in the acquisition over the net amounts assigned to the fair value of the assets acquired was recorded as goodwill, which represents the opportunity to expand restaurant delivery services and enhance the breadth and depth of the Company’s restaurant partners. Of the $40.2 million of goodwill related to the acquisition, $5.0 million is expected to be deductible for income tax purposes.

The assets acquired and liabilities assumed of LABite were recorded at their estimated fair values as of the closing date of May 5, 2016. The following table summarizes the final purchase price allocation acquisition-date fair values of the assets and liabilities acquired in connection with the LABite acquisition: 

 

(in thousands)

 

Cash and cash equivalents

$

2,566

 

Accounts receivable

 

2,320

 

Prepaid expenses and other assets

 

68

 

Restaurant relationships

 

46,513

 

Property and equipment

 

257

 

Developed technology

 

1,731

 

Goodwill

 

40,235

 

Trademarks

 

440

 

Accounts payable and accrued expenses

 

(6,303

)

Net deferred tax liability

 

(19,412

)

Total purchase price plus cash acquired

 

68,415

 

Cash acquired

 

(2,566

)

Net cash paid

$

65,849

 

 

2015 Acquisitions

On February 4, 2015, the Company acquired assets of DiningIn.com, Inc. and certain of its affiliates (collectively, “DiningIn”), on February 27, 2015, the Company acquired the membership units of Restaurants on the Run, LLC (“Restaurants on the Run”) and on December 4, 2015, the Company acquired the membership units of Mealport USA, LLC (“Delivered Dish”). Aggregate consideration for the three acquisitions was approximately $73.9 million in cash and 407,812 restricted shares of the Company’s common stock, or an estimated total transaction value of approximately $89.9 million based on the Company’s closing share price on the respective closing dates, net of cash acquired of $0.7 million. DiningIn, Restaurants on the Run and Delivered Dish provide delivery options for individual diners, group orders and corporate catering. The acquisitions have expanded and enhanced the Company’s service offerings for its customers, particularly in the delivery space.

The results of operations of DiningIn, Restaurants on the Run and Delivered Dish have been included in the Company’s financial statements since February 4, 2015, February 27, 2015 and December 4, 2015, respectively.

The excess of the consideration transferred in the acquisitions over the net amounts assigned to the fair value of the assets acquired was recorded as goodwill, which represents the opportunity to expand restaurant delivery services and enhance the breadth and depth of the Company’s restaurant network. The goodwill related to these acquisitions of $43.4 million is expected to be deductible for income tax purposes.

The assets acquired and liabilities assumed of DiningIn, Restaurants on the Run and Delivered Dish were recorded at their estimated fair values as of the closing dates of February 4, 2015, February 27, 2015 and December 4, 2015, respectively. The following table summarizes the final purchase price allocation acquisition-date fair values of the assets and liabilities acquired in connection with the DiningIn, Restaurants on the Run and Delivered Dish acquisitions:

 

 

 

 

 

(in thousands)

 

Cash and cash equivalents

 

 

 

$

698

 

Accounts receivable

 

 

 

 

2,331

 

Prepaid expenses and other assets

 

 

 

 

325

 

Restaurant relationships

 

 

 

 

44,259

 

Property and equipment

 

 

 

 

161

 

Developed technology

 

 

 

 

4,676

 

Goodwill

 

 

 

 

43,432

 

Trademarks

 

 

 

 

529

 

Accounts payable and accrued expenses

 

 

 

 

(5,826

)

Total purchase price plus cash acquired

 

 

 

 

90,585

 

Cash acquired

 

 

 

 

(698

)

Fair value of common stock issued

 

 

 

 

(15,980

)

Net cash paid

 

 

 

$

73,907

 

Additional Information

The estimated fair values of the intangible assets acquired were determined based on a combination of the income, cost, and market approaches to measure the fair value of the restaurant relationships, diner acquisition, developed technology and trademarks. The fair value of the trademarks was measured based on the relief from royalty method. The cost approach, specifically the cost to recreate method, was used to value the developed technology and diner acquisition. The income approach, specifically the multi-period excess earnings method, was used to value the restaurant relationships. These fair value measurements were based on significant inputs not observable in the market and thus represent Level 3 measurements within the fair value hierarchy.

The Company incurred certain expenses directly and indirectly related to acquisitions which were recognized in general and administrative expenses within the consolidated statements of operations for the year ended December 31, 2017, 2016 and 2015 of $5.6 million, $2.0 million, and $1.1 million, respectively.

Pro Forma

The following unaudited pro forma information presents a summary of the operating results of the Company for the years ended December 31, 2017 and 2016 as if the acquisitions of Eat24, Foodler and LABite had occurred as of January 1 of the year prior to acquisition:

 

Year Ended December 31,

 

 

2017

 

 

2016

 

 

(in thousands, except per share data)

 

Revenues

$

748,810

 

 

$

578,462

 

Net income

 

86,313

 

 

 

27,318

 

Net income per share attributable to common shareholders:

 

 

 

 

 

 

 

Basic

$

1.00

 

 

$

0.32

 

Diluted

$

0.98

 

 

$

0.32

 

 

The pro forma adjustments that reflect the amortization that would have been recognized for intangible assets, elimination of transaction costs incurred, stock-based compensation expense for replacement awards, interest expense for transaction financings and other adjustments, as well as the pro forma tax impact of such adjustments for the years ended December 31, 2017 and 2016 were as follows:

 

 

Year Ended December 31,

 

 

2017

 

 

2016

 

 

(in thousands)

 

Depreciation and amortization

$

8,533

 

 

$

17,832

 

Transaction costs

 

(5,630

)

 

 

5,630

 

Stock-based compensation

 

(2,085

)

 

 

(1,800

)

Interest expense

 

3,761

 

 

 

5,191

 

Other

 

4,690

 

 

 

4,118

 

Income tax benefit

 

(3,847

)

 

 

(12,977

)

 

The unaudited pro forma revenues and net income are not intended to represent or be indicative of the Company’s consolidated results of operations or financial condition that would have been reported had the acquisitions been completed as of the beginning of the periods presented and should not be taken as indicative of the Company’s future consolidated results of operations or financial condition.

 

Marketable Securities
Marketable Securities

4. Marketable Securities

The amortized cost, unrealized gains and losses and estimated fair value of the Company’s held-to-maturity marketable securities as of December 31, 2017 and 2016 were as follows:

 

 

 

December 31, 2017

 

 

 

Amortized Cost

 

 

Unrealized Gains

 

 

Unrealized Losses

 

 

Estimated

Fair Value

 

 

 

(in thousands)

 

Cash and cash equivalents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

$

39,979

 

 

$

 

 

$

(43

)

 

$

39,936

 

Corporate bonds

 

 

1,250

 

 

 

 

 

 

 

 

 

1,250

 

Short-term investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

 

21,480

 

 

 

 

 

 

(99

)

 

 

21,381

 

Corporate bonds

 

 

2,125

 

 

 

 

 

 

(1

)

 

 

2,124

 

Total

 

$

64,834

 

 

$

 

 

$

(143

)

 

$

64,691

 

 

 

 

December 31, 2016

 

 

 

Amortized Cost

 

 

Unrealized Gains

 

 

Unrealized Losses

 

 

Estimated

Fair Value

 

 

 

(in thousands)

 

Cash and cash equivalents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

$

59,175

 

 

$

2

 

 

$

(28

)

 

$

59,149

 

Corporate bonds

 

 

5,000

 

 

 

1

 

 

 

 

 

 

5,001

 

U.S. government agency bonds

 

 

5,500

 

 

 

 

 

 

 

 

 

5,500

 

Short term investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

 

73,002

 

 

 

 

 

 

(214

)

 

 

72,788

 

Corporate bonds

 

 

11,089

 

 

 

4

 

 

 

(5

)

 

 

11,088

 

Total

 

$

153,766

 

 

$

7

 

 

$

(247

)

 

$

153,526

 

 

All of the Company’s marketable securities were classified as held-to-maturity investments and have maturities within one year of December 31, 2017. Approximately $80 million of the Company’s marketable securities matured during the year ended December 31, 2017, which was invested in money market funds as of December 31, 2017. See Note 14, Fair Value Measurement, for additional details.

The gross unrealized losses, estimated fair value and length of time the individual marketable securities were in a continuous loss position for those marketable securities in an unrealized loss position as of December 31, 2017 and 2016 were as follows:

 

 

 

December 31, 2017

 

 

 

Less Than 12 Months

 

 

12 Months or Greater

 

 

Total

 

 

 

Estimated

Fair Value

 

 

Unrealized Loss

 

 

Estimated

Fair Value

 

 

Unrealized Loss

 

 

Estimated

Fair Value

 

 

Unrealized Loss

 

 

 

(in thousands)

 

Commercial paper

 

$

61,317

 

 

$

(142

)

 

$

 

 

$

 

 

$

61,317

 

 

$

(142

)

Corporate bonds

 

 

3,374

 

 

 

(1

)

 

 

 

 

 

 

 

 

3,374

 

 

 

(1

)

Total

 

$

64,691

 

 

$

(143

)

 

$

 

 

$

 

 

$

64,691

 

 

$

(143

)

 

 

 

 

December 31, 2016

 

 

 

Less Than 12 Months

 

 

12 Months or Greater

 

 

Total

 

 

 

Estimated

Fair Value

 

 

Unrealized Loss

 

 

Estimated

Fair Value

 

 

Unrealized Loss

 

 

Estimated

Fair Value

 

 

Unrealized Loss

 

 

 

(in thousands)

 

Commercial paper

 

$

130,938

 

 

$

(242

)

 

$

 

 

$

 

 

$

130,938

 

 

$

(242

)

Corporate bonds

 

 

6,556

 

 

 

(5

)

 

 

 

 

 

 

 

 

6,556

 

 

 

(5

)

Total

 

$

137,494

 

 

$

(247

)

 

$

 

 

$

 

 

$

137,494

 

 

$

(247

)

 

The Company recognized interest income during the years ended December 31, 2017, 2016 and 2015 of $2.0 million, $1.3 million and $0.5 million, respectively, within net interest (income) expense on the consolidated statements of operations. During the years ended December 31, 2017, 2016 and 2015, the Company did not recognize any other-than-temporary impairment losses related to its marketable securities.

The Company’s marketable securities are classified within Level 2 of the fair value hierarchy (see Note 14, Fair Value Measurement, for further details).

Goodwill and Acquired Intangible Assets
Goodwill and Acquired Intangible Assets

5. Goodwill and Acquired Intangible Assets

The components of acquired intangible assets as of December 31, 2017 and 2016 were as follows:

 

 

 

December 31, 2017

 

 

December 31, 2016

 

 

 

Gross Carrying

Amount

 

 

Accumulated

Amortization

 

 

Net Carrying

Value

 

 

Gross Carrying

Amount

 

 

Accumulated

Amortization

 

 

Net Carrying

Value

 

 

 

(in thousands)

 

Restaurant relationships

 

$

457,580

 

 

$

(76,852

)

 

$

380,728

 

 

$

279,651

 

 

$

(57,765

)

 

$

221,886

 

Developed technology

 

 

8,523

 

 

 

(6,418

)

 

 

2,105

 

 

 

10,640

 

 

 

(9,575

)

 

 

1,065

 

Diner acquisition

 

 

40,247

 

 

 

(1,906

)

 

 

38,341

 

 

 

 

 

 

 

 

 

 

Trademarks

 

 

2,225

 

 

 

(402

)

 

 

1,823

 

 

 

969

 

 

 

(582

)

 

 

387

 

Other

 

 

6,888

 

 

 

(4,008

)

 

 

2,880

 

 

 

3,350

 

 

 

(2,734

)

 

 

616

 

Total amortizable intangible assets

 

 

515,463

 

 

 

(89,586

)

 

 

425,877

 

 

 

294,610

 

 

 

(70,656

)

 

 

223,954

 

Indefinite-lived trademarks

 

 

89,676

 

 

 

 

 

 

89,676

 

 

 

89,676

 

 

 

 

 

 

89,676

 

Total acquired intangible assets

 

$

605,139

 

 

$

(89,586

)

 

$

515,553

 

 

$

384,286

 

 

$

(70,656

)

 

$

313,630

 

 

The gross carrying amount and accumulated amortization of the Company’s developed technology, trademark and other intangible assets as of December 31, 2017 were adjusted by $9.1 million for certain fully amortized assets that were no longer in use. Amortization expense for acquired intangible assets was $28.1 million, $20.9 million and $18.2 million for the years ended December 31, 2017, 2016 and 2015, respectively.

The changes in the carrying amount of goodwill for the years ended December 31, 2017 and 2016 were as follows.

 

 

 

Goodwill

 

 

Accumulated Impairment Losses

 

 

Net Book Value

 

 

 

(in thousands)

 

Balance as of December 31, 2015

 

$

396,220

 

 

$

 

 

$

396,220

 

Acquisitions

 

 

40,235

 

 

 

 

 

 

40,235

 

Balance as of December 31, 2016

 

 

436,455

 

 

 

 

 

 

436,455

 

Acquisitions

 

 

153,407

 

 

 

 

 

 

153,407

 

Balance as of December 31, 2017

 

$

589,862

 

 

$

 

 

$

589,862

 

 

In January 2017, the Company entered into an agreement with Zoomer Inc. (“Zoomer”) whereby Zoomer waived non-solicitation provisions allowing the Company to engage the services of certain former Zoomer employees and consultants.

 In September of 2017, the Company acquired certain assets of OrderUp, Inc. (“OrderUp”), a wholly-owned subsidiary of Groupon, Inc. OrderUp provides online and mobile food ordering for restaurants across the United States.

During the year ended December 31, 2017, the Company recorded additions to acquired intangible assets of $230.0 million as a result of the acquisitions of Eat24 and Foodler, the acquisition of certain assets of OrderUp and payments made to Zoomer. During the year ended December 31, 2016, the Company recorded additions to acquired intangible assets of $48.9 million as a result of the acquisition of LABite and the purchase of other assets. The components of the acquired intangible assets added during the years ended December 31, 2017 and 2016 were as follows: 

 

 

 

Year Ended December 31, 2017

 

 

Year Ended December 31, 2016

 

 

 

Amount

 

 

Weighted-Average

Amortization

Period

 

 

Amount

 

 

Weighted-Average

Amortization

Period

 

 

 

(in thousands)

 

 

(years)

 

 

(in thousands)

 

 

(years)

 

Restaurant relationships

 

$

177,929

 

 

 

19.3

 

 

$

46,513

 

 

 

20.0

 

Diner acquisition

 

 

40,247

 

 

 

5.0

 

 

 

 

 

 

 

 

Developed technology

 

 

4,514

 

 

 

0.5

 

 

 

1,731

 

 

 

2.7

 

Trademarks

 

 

2,299

 

 

 

1.2

 

 

 

440

 

 

 

2.0

 

Other

 

 

5,000

 

 

 

2.8

 

 

 

250

 

 

 

3.0

 

Total

 

$

229,989

 

 

 

 

 

 

$

48,934

 

 

 

 

 

 

Estimated future amortization expense of acquired intangible assets as of December 31, 2017 was as follows:

 

 

 

(in thousands)

 

2018

 

$

39,310

 

2019

 

 

33,827

 

2020

 

 

32,254

 

2021

 

 

32,254

 

2022

 

 

30,292

 

Thereafter

 

 

257,940

 

Total

 

$

425,877

 

 

As of December 31, 2017, the estimated remaining weighted-average useful life of the Company’s acquired intangibles was 15.0 years. The Company recognizes amortization expense for acquired intangibles on a straight-line basis.

Property and Equipment
Property and Equipment

6. Property and Equipment

The components of the Company’s property and equipment as of December 31, 2017 and 2016 were as follows:

 

 

 

December 31, 2017

 

 

December 31, 2016

 

 

 

(in thousands)

 

Computer equipment

 

$

31,601

 

 

$

17,548

 

Furniture and fixtures

 

 

6,857

 

 

 

4,842

 

Developed software

 

 

52,041

 

 

 

26,460

 

Purchased software and digital assets

 

 

2,881

 

 

 

1,360

 

Leasehold improvements

 

 

23,400

 

 

 

19,038

 

Property and equipment

 

 

116,780

 

 

 

69,248

 

Accumulated amortization and depreciation

 

 

(45,396

)

 

 

(22,693

)

Property and equipment, net

 

$

71,384

 

 

$

46,555

 

The Company recorded depreciation and amortization expense for property and equipment other than developed software for the years ended December 31, 2017, 2016 and 2015 of $11.7 million, $8.9 million and $5.7 million, respectively. During the year ended December 31, 2015, the Company recorded approximately $1.9 million of accelerated depreciation and amortization expense related to developed and purchased software and computer equipment assets that were disposed of with the migration of nearly all of the Seamless consumer diner traffic to a new web and mobile platform during the second quarter of 2015.

The Company capitalized developed software costs of $26.0 million, $15.6 million and $8.0 million for the years ended December 31, 2017, 2016 and 2015, respectively. Amortization expense for developed software costs, recognized in depreciation and amortization in the consolidated statements of operations, for the years ended December 31, 2017, 2016 and 2015 was $12.0 million, $5.4 million and $4.1 million, respectively.

Commitments and Contingencies
Commitments and Contingencies

 7. Commitments and Contingencies

Office Facility Leases

The Company has various operating lease agreements for its office facilities which expire at various dates through September 2029. The terms of the lease agreements provide for rental payments on a graduated basis. For its primary operating leases, the Company can, after the initial lease term, renew its leases under right of first offer terms at fair value at the time of renewal for a period of five years. The Company recognizes rent expense on a straight-line basis over the lease term.

Rental expense, primarily for leased office space under the operating lease commitments, was $7.5 million, $5.6 million and $4.1 million for the years ended December 31, 2017, 2016 and 2015, respectively.

Future minimum lease payments under the Company’s operating lease agreements that have initial or remaining non-cancelable lease terms in excess of one year as of December 31, 2017 were as follows:

 

 

 

(in thousands)

 

2018

 

$

7,714

 

2019

 

 

10,822

 

2020

 

 

11,566

 

2021

 

 

11,527

 

2022

 

 

9,952

 

Thereafter

 

 

64,546

 

Total

 

$

116,127

 

 

The table above does not reflect the Company’s option to exercise early termination rights or the payment of related early termination fees.

Legal

In August 2011, Ameranth, Inc. (“Ameranth”) filed a patent infringement action against a number of defendants, including Grubhub Holdings Inc., in the U.S. District Court for the Southern District of California (the “Court”), Case No. 3:11-cv-1810 (“’1810 action”).

In March 2012, Ameranth initiated eight additional actions for infringement of a related patent, U.S. Patent No. 8,146,077 (“’077 patent”), in the same forum, including separate actions against Grubhub Holdings Inc., Case No. 3:12-cv-739 (“’739 action”), and Seamless North America, LLC, Case No. 3:12-cv-737 (“’737 action”). In August 2012, the Court severed the claims against Grubhub Holdings Inc. and Seamless North America, LLC in the ’1810 action and consolidated them with the ’739 action and the ’737 action, respectively. Later, the Court consolidated these separate cases against Grubhub Holdings Inc. and Seamless North America, LLC, along with the approximately 40 other cases Ameranth filed in the same district, with the original ’1810 action. In their answers, Grubhub Holdings Inc. and Seamless North America, LLC denied infringement and interposed various defenses, including non-infringement, invalidity, unenforceability and inequitable conduct.

The consolidated district court case was stayed until January 2017, when Ameranth’s motion to lift the stay and proceed on only the ‘077 patent was granted. The court set a jury trial date of December 3, 2018 for the claims against Grubhub Holdings Inc. and Seamless North America, LLC. The Company believes this case lacks merit and that it has strong defenses to all of the infringement claims. The Company intends to defend the suit vigorously. However, the Company is unable to predict the likelihood of success of Ameranth’s infringement claims and is unable to predict the likelihood of success of its counterclaims. The Company has not recorded an accrual related to this lawsuit as of December 31, 2017, as it does not believe a material loss is probable. It is a reasonable possibility that a loss may be incurred; however, the possible range of loss is not estimable given the status of the case and the uncertainty as to whether the claims at issue are with or without merit, will be settled out of court, or will be determined in the Company’s favor, whether the Company may be required to expend significant management time and financial resources on the defense of such claims, and whether the Company will be able to recover any losses under its insurance policies.

In addition to the matter described above, from time to time, the Company is involved in various other legal proceedings arising from the normal course of business activities, including labor and employment claims, some of which relate to the alleged misclassification of independent contractors. In September 2015, a claim was brought in the United States District Court for the Northern District of California under the Private Attorneys General Act by an individual plaintiff on behalf of himself and seeking to represent other drivers and the State of California. The claim sought monetary penalties and injunctive relief for alleged violations of the California Labor Code based on the alleged misclassification of drivers as independent contractors. A decision was issued on February 8, 2018, and the court ruled in favor of the Company, finding that plaintiff was properly classified as an independent contractor. The Company does not believe any of the foregoing claims will have a material impact on its consolidated financial statements. However, there is no assurance that any claim will not be combined into a collective or class action.

Indemnification

In connection with the merger of Seamless North America, LLC, Seamless Holdings Corporation and Grubhub Holdings Inc. in August 2013, the Company agreed to indemnify Aramark Holdings Corporation for negative income tax consequences associated with the October 2012 spin-off of Seamless Holdings Corporation that were the result of certain actions taken by the Company through October 29, 2014, in certain instances subject to a $15.0 million limitation. Management is not aware of any actions that would impact the indemnification obligation.

 

Debt
Debt

8. Debt

 

The following table summarizes the carrying value of the Company’s debt as of December 31, 2017:

 

 

 

December 31, 2017

 

 

 

(in thousands)

 

Term loan

 

$

124,219

 

Revolving loan

 

 

50,000

 

Total debt

 

 

174,219

 

Less current portion

 

 

(3,906

)

Less unamortized deferred debt issuance costs

 

 

(668

)

Long-term debt

 

$

169,645

 

On October 10, 2017, the Company entered into a credit agreement which provides, among other things, for aggregate revolving loans up to $225 million and term loans in an aggregate principal amount of $125 million (the “Credit Agreement”). In addition, the Company may incur up to $150 million of incremental revolving loans or incremental revolving term loans pursuant to the terms and conditions of the Credit Agreement. The credit facility will be available to the Company until October 9, 2022. The Credit Agreement replaced the Company’s $185.0 million secured revolving credit facility (the “Previous Credit Agreement”), which was due to expire on April 28, 2021.

On October 10, 2017, the Company borrowed $200 million under the Credit Agreement, including $125.0 million of term loans and $75.0 million of revolving loans. The Company utilized the term loans to finance a portion of the purchase price and transaction costs in connection with the acquisition of Eat24, LLC (“Eat24”). During the year ended December 31, 2017, the Company made principal payments of $25.8 million from cash flows from operations. As of December 31, 2017, outstanding borrowings under the Credit Agreement were $174.2 million. The fair value of the Company’s outstanding debt approximates its carrying value as of December 31, 2017. Additional capacity on the Credit Agreement may be used for general corporate purposes, including funding working capital and future acquisitions.

Under the Credit Agreement, borrowings bear interest, at the Company’s option, based on LIBOR or an alternate base rate plus a margin. In the case of LIBOR loans, the margin ranges between 1.25% and 2.00% and, in the case of alternate base rate loans, between 0.25% and 1.0%, in each case, based upon the Company’s consolidated leverage ratio (as defined in the Credit Agreement). The Company is also required to pay a commitment fee on the undrawn portion available under the revolving loan facility of between 0.20% and 0.30% per annum, based upon the Company’s consolidated leverage ratio.

 

The Company incurred loan origination fees at closing of the Credit Agreement and other expenses related to the financing of the facility of $2.0 million, which, in addition to the $0.7 million remaining balance of loan origination costs under the Previous Credit Agreement, will be amortized over the term of the facility. As of December 31, 2017, total unamortized debt issuance costs of $2.6 million were recorded as other assets and as a reduction of long-term debt on the consolidated balance sheets in proportion to the borrowing capacities of the revolving and term loans.

 

Interest expense includes interest on outstanding borrowings, amortization of debt issuance costs and commitment fees on the undrawn portion available under the credit facility. During the years ended December 31, 2017 and 2016, the Company recognized interest expense of $2.1 million and $0.6 million, respectively. The effective interest rate, including amortization of debt issuance costs and commitment fees, for borrowings under the Credit Agreement for the year ended December 31, 2017 was 3.00%.

The obligations under the Credit Agreement and the guarantees are secured by a lien on substantially all of the tangible and intangible property of the Company and the domestic subsidiaries that are guarantors, and by a pledge of all of the equity interests of the Company’s domestic subsidiaries, subject to certain exceptions set forth in the Credit Agreement.

The Credit Agreement contains customary covenants that, among other things, require the Company to satisfy certain financial covenants and may restrict the Company’s ability to incur additional debt, pay dividends and make distributions, make certain investments and acquisitions, create liens, transfer and sell material assets and merge or consolidate. The Company was in compliance with the covenants as of December 31, 2017.

Future maturities of principal payments, excluding potential early payments, as of December 31, 2017 are expected to be as follows:

 

 

(in thousands)

 

2018

 

$

3,906

 

2019

 

 

6,250

 

2020

 

 

6,250

 

2021

 

 

7,031

 

2022

 

 

7,031

 

Thereafter

 

 

143,751

 

Total

 

$

174,219

 

 

Stock-Based Compensation
Stock-Based Compensation

9. Stock-Based Compensation

In May 2015, the Company’s stockholders approved the Grubhub Inc. 2015 Long-Term Incentive Plan (the “2015 Plan”), pursuant to which the Compensation Committee of the Board of Directors may grant stock options, stock appreciation rights, restricted stock awards, restricted stock units, performance awards and other stock-based and cash-based awards. On May 20, 2015, the Company filed a registration statement on Form S-8 to register up to 14,256,901 shares of common stock reserved for issuance pursuant to awards granted under the 2015 Plan. Effective May 20, 2015, no further grants will be made under the Company’s 2013 Omnibus Incentive Plan (the “2013 Plan”). As of December 31, 2017, there were 5,081,599 shares of common stock authorized and available for issuance pursuant to awards granted under the 2015 Plan. The Board of Directors of the Company and committee or subcommittee of the Board of Directors has discretion to establish the terms and conditions for grants, including, but not limited to, the number of shares and vesting and forfeiture provisions.

The Company has granted stock options, restricted stock units and restricted stock awards under its incentive plans. The Company recognizes compensation expense based on estimated grant date fair values for all stock-based awards issued to employees and directors, including stock options, restricted stock units and restricted stock awards. For all stock options outstanding as of December 31, 2017, the exercise price of the stock options equals the fair value of the stock option on the grant date. The stock options and restricted stock units vest over different lengths of time, but generally over 4 years, and are subject to forfeiture upon termination of employment prior to vesting. The maximum term for stock options issued to employees under the 2015 Plan and the 2013 Plan is 10 years, and they expire 10 years from the date of grant. Compensation expense for stock options, restricted stock units and restricted stock awards is recognized ratably over the vesting period.

The rights granted to the recipient of a restricted stock unit generally accrue over the vesting period. Participants holding restricted stock units are not entitled to any ordinary cash dividends paid by the Company with respect to such shares unless otherwise provided by the terms of the award. The Company does not expect to pay any dividends in the foreseeable future.

The recipient of a restricted stock award shall have all of the rights of a holder of shares of the Company’s common stock, including the right to receive dividends, if any, the right to vote such share