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1. Organization
Grubhub Inc., a Delaware corporation, and its wholly-owned subsidiaries (collectively referred to as the “Company”) provide an online and mobile platform 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.
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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.
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 general and administrative 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:
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|
Estimated Useful Life |
Computer equipment |
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2-3 years |
Furniture and fixtures |
|
5 years |
Developed software |
|
1-3 years |
Purchased software and digital assets |
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3-5 years |
Leasehold improvements |
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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:
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Year Ended December 31, |
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|||||
|
|
2016 |
|
|
2015 |
|
||
Balance at beginning of period |
|
$ |
959 |
|
|
$ |
723 |
|
Additions to expense |
|
|
1,102 |
|
|
|
850 |
|
Writeoffs, net of recoveries and other adjustments |
|
|
(832 |
) |
|
|
(614 |
) |
Balance at end of period |
|
$ |
1,229 |
|
|
$ |
959 |
|
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, 2016, 2015 and 2014, expenses attributable to advertising totaled approximately $75.5 million, $64.4 million and $45.9 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. 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. Risk-free interest rates are derived from U.S. Treasury securities as of the option grant date. Expected dividend yield is based on the Company’s historical dividend payments, which have been zero to date. As the Company did not have public trading history for its common shares until April of 2014, the expected volatility for the Company’s common stock is estimated using a combination of the published historical and implied volatilities of industry peers representing the verticals in which the Company operates and the historical volatility of the Company’s own common stock. The Company estimates the weighted-average expected life of the options as the average of the vesting option schedule and the term of the award, since the Company does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term due to the limited period of time stock-based awards have been exercisable. The term of the award is estimated using the simplified method. Forfeiture rates are estimated using historical actual forfeiture trends as well as the Company’s judgment of future forfeitures. These rates are evaluated quarterly 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 the Company’s current estimates, such amounts will be recorded as a cumulative adjustment in the period 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, effective in the first quarter of 2017.
The Company has elected to use the with-and-without method in determining the order in which tax attributes are utilized. As a result, the Company has 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 have been utilized. See Note 9, “Stock-Based Compensation” for further discussion. Beginning in the first quarter of 2017, the Company will recognize tax benefits and deficiencies for stock-based awards in the income statement. See “Recently Issued Accounting Pronouncements” below for further discussion.
Provision for Income Taxes
The provision for income taxes 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 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. 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 of the Company 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 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, 2016, 2015 or 2014.
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 $15.6 million, $8.0 million and $3.6 million of website development costs during the years ended December 31, 2016, 2015 and 2014, 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. 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 tests for impairment using a two-step process. The first step of the goodwill impairment test identifies if there is potential goodwill impairment. If step one indicates that an impairment may exist, a second step is performed to measure the amount of the goodwill impairment, if any, by comparing the implied fair value of goodwill with the carrying amount. If the implied fair value of goodwill is less than the carrying amount, a write-down is recorded. The Company determined there was no goodwill impairment during the years ended December 31, 2016, 2015 and 2014.
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, 2016, 2015 and 2014, 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 January 2017, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update No. 2017-04, “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment” (“ASU 2017-04”). ASU 2017-04 eliminates Step 2 from the goodwill impairment test, which 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 has elected to early adopt ASU 2017-04 beginning in the first quarter of 2017 and will apply the standard prospectively. The adoption of ASU 2017-04 may reduce the cost and complexity of evaluating goodwill for impairment, but 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 has elected to adopt ASU 2017-01 early. ASU 2017-01 will be effective for transactions beginning in the first quarter of 2017 and will be applied prospectively. The adoption of ASU 2017-01 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 Accounting Standards Update No. 2016-09, “Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” (“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. The Company believes the most significant impact of the adoption of ASU 2016-09 to the Company’s consolidated financial statements will be to recognize certain tax benefits or tax shortfalls upon a restricted-stock award or unit vesting or stock option exercise relative to the deferred tax asset position established in the provision for income taxes line of the consolidated statement of operations instead of to consolidated stockholders’ equity. During the years ended December 31, 2016, 2015 and 2014, the Company recorded $24.9 million, $27.8 million and $13.0 million to consolidated stockholders’ equity as tax benefits related to stock-based compensation, respectively. ASU 2016-09 is effective beginning in the first quarter of 2017 with early adoption permitted. The Company plans to adopt ASU 2016-09 during the first quarter of 2017. Upon the adoption of ASU 2016-09, the Company will record state net operating losses, including excess tax benefits, of $4.5 million to retained earnings on the consolidated balance sheets as of January 1, 2017.
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 (the lease liability) 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, but anticipates that it will result in a significant increase in its long-term assets and liabilities and minimal impact to its results of operations and cash flows.
In September 2015, the FASB issued Accounting Standards Update No. 2015-16, “Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments” (“ASU 2015-16”), which eliminates the requirement to account for adjustments identified during the measurement-period in a business combination retrospectively. Instead, the acquirer must recognize measurement-period adjustments during the period in which they are identified, including the effect on earnings of any amounts that would have been recorded in previous periods had the purchase accounting been completed at the acquisition date. ASU 2015-16 was effective for and adopted by the Company in the first quarter of 2016. The adoption of ASU 2015-16 eliminates costs related to retrospective application of any measurement-period adjustments that may be identified, but has not had a material impact on the Company’s consolidated financial position, results of operations or cash flows.
In April 2015, the FASB issued Accounting Standards Update 2015-05, “Intangibles -Goodwill and Other – Internal Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement” (“ASU 2015-05”), which provides guidance on accounting for fees paid in a cloud computing arrangement. Under ASU 2015-05, if a cloud computing arrangement includes a software license, the software license element should be accounted for consistent with the purchase of other software licenses. If the cloud computing arrangement does not include a software license, it should be accounted for as a service contract. ASU 2015-05 was effective for and adopted by the Company in the first quarter of 2016. The Company elected to apply ASU 2015-05 prospectively; however, its adoption did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.
In April 2015, the FASB issued Accounting Standards Update No. 2015-03, “Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs” (“ASU 2015-03”). ASU 2015-03 simplifies the presentation of debt issuance costs by requiring that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. Under the previous practice, debt issuance costs were recognized as a deferred charge (that is, an asset). The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU. In August 2015, the FASB issued ASU 2015-15 “Interest - Imputed Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements” (“ASU 2015-15”), which clarifies that the guidance in ASU 2015-03 does not apply to line-of-credit arrangements. According to ASU 2015-15, debt issuance costs related to line-of-credit arrangements will continue to be deferred and presented as an asset and subsequently amortized ratably over the term of the arrangement. The amendments in ASU 2015-03 and clarifications of ASU 2015-15 are effective for the Company in the first quarter of 2016. The Company entered into a credit agreement on April 29, 2016 (see Note 8, Debt, for additional details). The adoption of ASU 2015-03 and ASU 2015-15 have not had a material impact on the Company’s consolidated financial position, results of operations or 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 will be effective for the Company in the first quarter of 2018. The Company currently anticipates applying the modified retrospective approach when adopting these ASUs. Based on the Company’s initial assessment, the adoption of these ASUs is expected to 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 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.
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3. Acquisitions
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 and have not had a material impact on the Company’s consolidated results of operations as of December 31, 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 networks. Of the $40.2 million of goodwill related to the acquisition, $5.0 million is expected to be deductible for income tax purposes.
The Company incurred certain expenses directly and indirectly related to acquisitions for the year ended December 31, 2016 of $2.0 million, which were recognized in general and administrative expenses within the consolidated statements of operations.
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 |
|
Customer and vendor 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 networks. The goodwill related to these acquisitions of $43.4 million is expected to be deductible for income tax purposes.
During the year ended December 31, 2015, the Company incurred certain expenses directly and indirectly related to acquisitions of $1.1 million, which were recognized in general and administrative expenses within the consolidated statements of operations.
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 |
|
Customer and vendor 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 |
|
2014 Acquisitions
There were no acquisitions during the year ended December 31, 2014.
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 customer (restaurant) relationships, 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. The income approach, specifically the multi-period excess earnings method, was used to value the customer (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.
Pro Forma
The following unaudited pro forma information presents a summary of the operating results of the Company for the years ended December 31, 2016 and 2015 as if the acquisitions had occurred as of January 1 of the year prior to acquisition:
|
Year Ended December 31, |
|
|||||
|
2016 |
|
|
2015 |
|
||
|
(in thousands, except per share data) |
|
|||||
Revenues |
$ |
502,290 |
|
|
$ |
393,144 |
|
Net income |
|
48,675 |
|
|
|
38,995 |
|
Net income per share attributable to common shareholders: |
|
|
|
|
|
|
|
Basic |
$ |
0.57 |
|
|
$ |
0.46 |
|
Diluted |
$ |
0.57 |
|
|
$ |
0.45 |
|
The pro forma adjustments reflect the amortization that would have been recognized for intangible assets, elimination of transaction costs incurred and pro forma tax adjustments for the years ended December 31, 2016 and 2015 as follows:
|
Year Ended December 31, |
|
|||||
|
2016 |
|
|
2015 |
|
||
|
(in thousands) |
|
|||||
Depreciation and amortization |
$ |
1,364 |
|
|
$ |
4,115 |
|
Transaction costs |
|
(1,978 |
) |
|
|
(1,055 |
) |
Income tax expense (benefit) |
|
257 |
|
|
|
(1,316 |
) |
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.
|
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, 2016 and 2015 were as follows:
|
|
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 |
|
|
|
December 31, 2015 |
|
|||||||||||||
|
|
Amortized Cost |
|
|
Unrealized Gains |
|
|
Unrealized Losses |
|
|
Estimated Fair Value |
|
||||
|
|
(in thousands) |
|
|||||||||||||
Cash and cash equivalents |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper |
|
$ |
22,744 |
|
|
$ |
— |
|
|
$ |
(5 |
) |
|
$ |
22,739 |
|
Short term investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper |
|
|
90,949 |
|
|
|
— |
|
|
|
(102 |
) |
|
|
90,847 |
|
Corporate bonds |
|
|
41,503 |
|
|
|
9 |
|
|
|
(39 |
) |
|
|
41,473 |
|
U.S. government agency bonds |
|
|
8,996 |
|
|
|
8 |
|
|
|
— |
|
|
|
9,004 |
|
Total |
|
$ |
164,192 |
|
|
$ |
17 |
|
|
$ |
(146 |
) |
|
$ |
164,063 |
|
All of the Company’s marketable securities were classified as held-to-maturity investments and have maturities within one year of December 31, 2016.
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, 2016 and 2015 were as follows:
|
|
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 |
) |
|
|
December 31, 2015 |
|
|||||||||||||||||||||||
|
|
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 |
|
$ |
113,586 |
|
|
$ |
(107 |
) |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
113,586 |
|
|
$ |
(107 |
) |
||
Corporate bonds |
|
|
31,952 |
|
|
|
(39 |
) |
|
|
— |
|
|
|
— |
|
|
|
31,952 |
|
|
|
(39 |
) |
||
Total |
|
$ |
145,538 |
|
|
$ |
(146 |
) |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
145,538 |
|
|
$ |
(146 |
) |
During the years ended December 31, 2016, 2015 and 2014, 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).
|
5. Goodwill and Acquired Intangible Assets
The components of acquired intangible assets as of December 31, 2016 and 2015 were as follows:
|
|
December 31, 2016 |
|
|
December 31, 2015 |
|
||||||||||||||||||
|
|
Gross Carrying Amount |
|
|
Accumulated Amortization |
|
|
Net Carrying Value |
|
|
Gross Carrying Amount |
|
|
Accumulated Amortization |
|
|
Net Carrying Value |
|
||||||
|
|
(in thousands) |
|
|||||||||||||||||||||
Developed technology |
|
$ |
10,640 |
|
|
$ |
(9,575 |
) |
|
$ |
1,065 |
|
|
$ |
9,819 |
|
|
$ |
(6,288 |
) |
|
$ |
3,531 |
|
Customer and vendor relationships, databases |
|
|
282,751 |
|
|
|
(60,437 |
) |
|
|
222,314 |
|
|
|
236,238 |
|
|
|
(44,192 |
) |
|
|
192,046 |
|
Trademarks |
|
|
969 |
|
|
|
(582 |
) |
|
|
387 |
|
|
|
529 |
|
|
|
(215 |
) |
|
|
314 |
|
Other |
|
|
250 |
|
|
|
(62 |
) |
|
|
188 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Total amortizable intangible assets |
|
|
294,610 |
|
|
|
(70,656 |
) |
|
|
223,954 |
|
|
|
246,586 |
|
|
|
(50,695 |
) |
|
|
195,891 |
|
Indefinite-lived trademarks |
|
|
89,676 |
|
|
|
— |
|
|
|
89,676 |
|
|
|
89,676 |
|
|
|
— |
|
|
|
89,676 |
|
Total acquired intangible assets |
|
$ |
384,286 |
|
|
$ |
(70,656 |
) |
|
$ |
313,630 |
|
|
$ |
336,262 |
|
|
$ |
(50,695 |
) |
|
$ |
285,567 |
|
The gross carrying amount and accumulated amortization of the Company’s developed technology intangible assets were adjusted by $0.9 million as of June 30, 2016 for certain fully amortized assets that were no longer in use. Amortization expense for acquired intangible assets was $20.9 million, $18.2 million and $14.1 million for the years ended December 31, 2016, 2015 and 2014, respectively.
The changes in the carrying amount of goodwill for the years ended December 31, 2016 and 2015 were as follows.
|
|
Goodwill |
|
|
Accumulated Impairment Losses |
|
|
Net Book Value |
|
|||
|
|
(in thousands) |
|
|||||||||
Balance as of December 31, 2014 |
|
$ |
352,788 |
|
|
$ |
— |
|
|
$ |
352,788 |
|
Acquisitions |
|
|
43,432 |
|
|
|
— |
|
|
|
43,432 |
|
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 |
|
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. During the year ended December 31, 2015, the Company recorded additions to acquired intangible assets of $49.5 million as a result of the acquisitions of DiningIn, Restaurants on the Run and Delivered Dish. The components of the acquired intangibles assets added during the years ended December 31, 2016 and 2015 were as follows:
|
|
Year Ended December 31, 2016 |
|
|
Year Ended December 31, 2015 |
|
||||||||||
|
|
Amount |
|
|
Weighted-Average Amortization Period |
|
|
Amount |
|
|
Weighted-Average Amortization Period |
|
||||
|
|
(in thousands) |
|
|
(years) |
|
|
(in thousands) |
|
|
(years) |
|
||||
Customer and vendor relationships |
|
$ |
46,513 |
|
|
|
20.0 |
|
|
$ |
44,259 |
|
|
|
18.7 |
|
Developed technology |
|
|
1,731 |
|
|
|
2.7 |
|
|
|
4,676 |
|
|
|
1.5 |
|
Trademarks |
|
|
440 |
|
|
|
2.0 |
|
|
|
529 |
|
|
|
1.8 |
|
Other |
|
|
250 |
|
|
|
3.0 |
|
|
|
— |
|
|
|
|
|
Total |
|
$ |
48,934 |
|
|
|
|
|
|
$ |
49,464 |
|
|
|
|
|
Estimated future amortization expense of acquired intangible assets as of December 31, 2016 was as follows:
|
|
(in thousands) |
|
|
2017 |
|
$ |
17,844 |
|
2018 |
|
|
17,336 |
|
2019 |
|
|
15,389 |
|
2020 |
|
|
14,987 |
|
2021 |
|
|
14,987 |
|
Thereafter |
|
|
143,411 |
|
Total |
|
$ |
223,954 |
|
As of December 31, 2016, the estimated remaining weighted-average useful life of the Company’s acquired intangibles was 14.7 years. The Company recognizes amortization expense for acquired intangibles on a straight-line basis.
|
6. Property and Equipment
The components of the Company’s property and equipment as of December 31, 2016 and 2015 were as follows:
|
|
December 31, 2016 |
|
|
December 31, 2015 |
|
||
|
|
(in thousands) |
|
|||||
Computer equipment |
|
$ |
17,548 |
|
|
$ |
10,080 |
|
Delivery equipment |
|
|
— |
|
|
|
555 |
|
Furniture and fixtures |
|
|
4,842 |
|
|
|
2,092 |
|
Developed software |
|
|
26,460 |
|
|
|
11,129 |
|
Purchased software and digital assets |
|
|
1,360 |
|
|
|
361 |
|
Leasehold improvements |
|
|
19,038 |
|
|
|
6,050 |
|
Property and equipment |
|
|
69,248 |
|
|
|
30,267 |
|
Accumulated amortization and depreciation |
|
|
(22,693 |
) |
|
|
(11,185 |
) |
Property and equipment, net |
|
$ |
46,555 |
|
|
$ |
19,082 |
|
The gross carrying amount and accumulated depreciation of the Company’s delivery equipment as of December 31, 2016 have been adjusted for certain fully depreciated assets and the reclassification of the remaining net book value to prepaid expenses due to accelerated patterns of use and resulting change in the estimated useful life.
The gross carrying amount and accumulated amortization and depreciation of the Company’s property and equipment as of December 31, 2015 have been adjusted for certain fully depreciated 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 and certain other computer equipment that were fully depreciated and disposed of during the fourth quarter of 2015. During the year ended December 31, 2015, the Company recorded approximately $1.9 million of accelerated depreciation and amortization expense related to these retired assets.
The Company recorded depreciation and amortization expense for property and equipment other than developed software for the years ended December 31, 2016, 2015 and 2014 of $8.9 million, $5.7 million and $5.7 million, respectively.
The Company capitalized developed software costs of $15.6 million, $8.0 million and $3.6 million for the years ended December 31, 2016, 2015 and 2014, respectively. Amortization expense for developed software costs, recognized in depreciation and amortization in the consolidated statements of operations, for the years ended December 31, 2016, 2015 and 2014 was $5.4 million, $4.1 million and $2.9 million, respectively.
|
7. Commitments and Contingencies
Office Facility Leases
The Company has various operating lease agreements for its office facilities which expire at various dates through March 2026. 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 $5.6 million, $4.1 million and $3.6 million for the years ended December 31, 2016, 2015 and 2014, 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, 2016 were as follows:
|
|
(in thousands) |
|
|
2017 |
|
$ |
5,302 |
|
2018 |
|
|
5,652 |
|
2019 |
|
|
5,532 |
|
2020 |
|
|
5,013 |
|
2021 |
|
|
5,084 |
|
Thereafter |
|
|
15,225 |
|
Total |
|
$ |
41,808 |
|
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 September 2011, Ameranth amended its complaint in the ’1810 action to also allege patent infringement against Seamless North America, LLC. Ameranth alleged that the Grubhub Holdings Inc. and Seamless North America, LLC ordering systems, products and services infringe claims 12 through 15 of U.S. Patent No. 6,384,850 (“’850 patent”) and claims 11 and 15 of U.S. Patent No. 6,871,325 (“’325 patent”). In August and September 2016, the Patent and Trademark Office (“PTO”) issued final written decisions determining the infringement claims by Ameranth of the ’850 and ’325 patents are invalid. Ameranth will not seek review of the PTO decisions on those patents.
In March 2012, Ameranth initiated eight additional actions for infringement of a third, 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.
No trial date has been set for this case. 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 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, 2016, 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. For example, in the ordinary course of business, the Company receives labor and employment claims, including those related to misclassification of independent contractors. The Company does not believe these claims will have a material impact on its consolidated financial statements. However, there is no assurance that these claims 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.
Restructuring
During the year ended December 31, 2014, the Company recognized total restructuring costs associated with the closing of its Sandy, Utah office of approximately $1.3 million, including lease termination costs of $0.5 million and payroll related expense for the service vesting requirements for identified employees who worked for various periods beyond the communication date. The Company did not incur any restructuring expense related to the Sandy, Utah facility closure during the years ended December 31, 2015 and 2016.
|
8. Debt
On April 29, 2016, the Company entered into a secured revolving credit facility (the “Credit Agreement”), which provides for aggregate revolving loans up to $185.0 million, subject to an increase of up to an additional $30 million under certain conditions. The credit facility will be available to the Company until April 28, 2021. There were no borrowings outstanding under the Credit Agreement as of December 31, 2016.
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 origination fees at closing of the Credit Agreement of $1.5 million, which were recorded in other assets on the condensed consolidated balance sheet and will be amortized over the term of the facility.
The Credit Agreement will be used for general corporate purposes, including funding working capital and acquisitions. The Company’s obligations under the Credit Agreement are secured by a lien on substantially all of the tangible and intangible property of the Company and by a pledge of all of the equity interests of the Company’s domestic subsidiaries.
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. Non-compliance with one or more of the covenants could result in the amounts outstanding, if any, under the Credit Agreement becoming immediately due and payable and termination of the commitments. The Company was in compliance with the covenants as of December 31, 2016.
|
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, 2016, there were 8,062,345 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, 2016, 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 shares and, upon the full vesting of the restricted stock awards, the right to tender such shares. The payment of any dividends will be deferred until the restricted stock awards have fully vested. The Company’s restricted stock awards generally vest over 2 years and are subject to forfeiture upon termination of employment prior to vesting unless otherwise provided in the terms of the award agreement.
Stock-based Compensation Expense
The total stock-based compensation expense related to all stock-based awards was $23.6 million, $13.5 million and $9.4 million during the years ended December 31, 2016, 2015 and 2014, respectively. During the years ended December 31, 2016, 2015 and 2014, the Company reported excess tax benefits as a decrease in cash flows from operations and an increase in cash flows from financing activities of $24.9 million, $27.8 million and $13.0 million, respectively. Excess tax benefits reflect the total of the individual stock option exercise transactions and vesting of restricted stock awards and restricted stock units in which the reduction to the Company’s income tax liability is greater than the deferred tax assets that were previously recorded. The Company capitalized stock-based compensation expense as website and software development costs of $2.1 million, $0.5 million and $0.1 million for the years ended December 31, 2016, 2015 and 2014, respectively. As of December 31, 2016, $52.3 million of total unrecognized stock-based compensation expense is expected to be recognized over a weighted-average period of 2.7 years. The total unrecognized stock-based compensation expense to be recognized in future periods as of December 31, 2016 does not consider the effect of stock-based awards that may be granted in subsequent periods.
Stock Options
The Company granted 166,272, 2,542,523 and 2,019,413 stock options during the years ended December 31, 2016, 2015 and 2014, respectively. The fair value of each stock option award was estimated based on the assumptions below as of the grant date using the Black-Scholes-Merton option pricing model. Expected volatilities are based on a combination of the historical and implied volatilities of comparable publicly-traded companies and the historical volatility of the Company’s own common stock due to its limited trading history as there was no active external or internal market for the Company’s common stock prior to the Company’s initial public offering in April 2014 (the “IPO”). The Company uses historical data to estimate option exercises and employee terminations within the valuation model. Separate groups of employees that have similar historical exercise behavior are considered separately for valuation purposes. The expected term of the award is estimated using a simplified method. The fair value at grant date prior to the IPO was determined considering the performance of the Company at the grant date as well as future growth and profitability expectations by applying market and income approaches. The risk-free rate for the period within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The assumptions used to determine the fair value of the stock options granted during the years ended December 31, 2016, 2015 and 2014 were as follows:
|
|
2016 |
|
|
2015 |
|
|
2014 |
|
|||
Weighted-average fair value options granted |
|
$ |
12.59 |
|
|
$ |
14.66 |
|
|
$ |
13.87 |
|
Average risk-free interest rate |
|
|
1.41 |
% |
|
|
1.65 |
% |
|
|
1.97 |
% |
Expected stock price volatilities |
|
|
49.7 |
% |
|
|
48.4 |
% |
|
|
50.3 |
% |
Dividend yield |
|
None |
|
|
None |
|
|
None |
|
|||
Expected stock option life (years) |
|
|
5.84 |
|
|
|
6.07 |
|
|
|
6.26 |
|
|
Stock option awards as of December 31, 2016 and 2015, and changes during the year ended December 31, 2016, were as follows:
|
|
Options |
|
|
Weighted-Average Exercise Price |
|
|
Aggregate Intrinsic Value (thousands) |
|
|
Weighted-Average Exercise Term (years) |
|
||||
Outstanding at December 31, 2015 |
|
|
5,078,297 |
|
|
$ |
19.66 |
|
|
$ |
41,107 |
|
|
|
8.21 |
|
Granted |
|
|
166,272 |
|
|
|
26.58 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(894,138 |
) |
|
|
26.48 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(1,357,707 |
) |
|
|
9.92 |
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2016 |
|
|
2,992,724 |
|
|
|
22.43 |
|
|
|
46,608 |
|
|
|
7.68 |
|
Vested and expected to vest at December 31, 2016 |
|
|
2,598,779 |
|
|
|
21.78 |
|
|
|
42,216 |
|
|
|
7.68 |
|
Exercisable at December 31, 2016 |
|
|
1,131,011 |
|
|
$ |
17.22 |
|
|
$ |
23,517 |
|
|
|
6.64 |
|
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the fair value of the common stock and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their in-the-money options on each date. This amount will change in future periods based on the fair value of the Company’s stock and the number of options outstanding. The aggregate intrinsic value of awards exercised during the years ended December 31, 2016, 2015 and 2014 was $30.2 million, $87.6 million and $74.0 million, respectively.
The Company recorded compensation expense for stock options of $12.3 million, $9.9 million and $9.4 million for the years ended December 31, 2016, 2015 and 2014, respectively. As of December 31, 2016, total unrecognized compensation cost, adjusted for estimated forfeitures, related to non-vested stock options was $17.7 million and is expected to be recognized over a weighted-average period of 2.4 years.
Restricted Stock Units and Restricted Stock Awards
Non-vested restricted stock units and restricted stock awards as of December 31, 2016 and 2015, and changes during the year ended December 31, 2016 were as follows:
|
|
Restricted Stock Units |
|
|
Restricted Stock Awards |
|
||||||||||
|
|
Shares |
|
|
Weighted-Average Grant Date Fair Value |
|
|
Shares |
|
|
Weighted-Average Grant Date Fair Value |
|
||||
Outstanding at December 31, 2015 |
|
|
888,483 |
|
|
$ |
27.85 |
|
|
|
67,744 |
|
|
$ |
42.01 |
|
Granted |
|
|
1,060,813 |
|
|
|
29.21 |
|
|
|
— |
|
|
|
— |
|
Forfeited |
|
|
(266,697 |
) |
|
|
27.55 |
|
|
|
— |
|
|
|
— |
|
Vested |
|
|
(166,245 |
) |
|
|
31.48 |
|
|
|
(67,744 |
) |
|
|
42.01 |
|
Outstanding at December 31, 2016 |
|
|
1,516,354 |
|
|
$ |
28.46 |
|
|
|
— |
|
|
$ |
— |
|
The fair value of these awards was determined based on the Company’s stock price at the grant date and assumes no expected dividend payments through the vesting period. During the year ended December 31, 2016, compensation expense recognized related to restricted stock awards and restricted stock units was $1.7 million and $9.6 million, respectively. During the year ended December 31, 2015, compensation expense recognized related to restricted stock awards and restricted stock units was $1.9 million and $1.7 million, respectively. During the year ended December 31, 2014, compensation expense recognized related to restricted stock units was nominal and there were no non-vested restricted stock awards or related expense. The aggregate fair value as of the vest date of restricted stock awards and restricted stock units that vested during the year ended December 31, 2016 was $1.7 million and $5.8 million, respectively. As of December 31, 2016, $34.6 million of total unrecognized compensation cost, adjusted for estimated forfeitures, related to 1,516,354 non-vested restricted stock units with a weighted-average grant date fair value of $28.46 is expected to be recognized over a weighted-average period of 2.9 years. As of December 31, 2016, there were no remaining non-vested restricted stock awards or related unrecognized compensation cost.
|
10. Income Taxes
The Company files income tax returns in the U.S. federal, the United Kingdom and various state jurisdictions.
For the years ended December 31, 2016, 2015 and 2014, the income tax provision was comprised of the following:
|
|
Year Ended December 31, |
|
|||||||||
|
|
2016 |
|
|
2015 |
|
|
2014 |
|
|||
|
|
(in thousands) |
|
|||||||||
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
24,509 |
|
|
$ |
20,947 |
|
|
$ |
8,073 |
|
State |
|
|
8,132 |
|
|
|
6,260 |
|
|
|
7,610 |
|
Foreign |
|
|
338 |
|
|
|
480 |
|
|
|
426 |
|
Total current |
|
|
32,979 |
|
|
|
27,687 |
|
|
|
16,109 |
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
800 |
|
|
|
(1,534 |
) |
|
|
1,056 |
|
State |
|
|
516 |
|
|
|
(2,301 |
) |
|
|
3,556 |
|
Total deferred |
|
|
1,316 |
|
|
|
(3,835 |
) |
|
|
4,612 |
|
Total income tax expense |
|
$ |
34,295 |
|
|
$ |
23,852 |
|
|
$ |
20,721 |
|
Income before provision for income taxes for the years ended December 31, 2016, 2015 and 2014, was as follows:
|
|
Year Ended December 31, |
|
|||||||||
|
|
2016 |
|
|
2015 |
|
|
2014 |
|
|||
|
|
(in thousands) |
|
|||||||||
Domestic source |
|
$ |
82,033 |
|
|
$ |
59,705 |
|
|
$ |
43,069 |
|
Foreign source |
|
|
1,819 |
|
|
|
2,224 |
|
|
|
1,915 |
|
Income before provision for income taxes |
|
$ |
83,852 |
|
|
$ |
61,929 |
|
|
$ |
44,984 |
|
The following is a reconciliation of income taxes computed at the U.S. federal statutory rate to the income taxes reported in the consolidated statements of operations for the years ended December 31, 2016, 2015 and 2014:
|
|
Year Ended December 31, |
|
|||||||||
|
|
2016 |
|
|
2015 |
|
|
2014 |
|
|||
|
|
(in thousands) |
|
|||||||||
Income tax expense at statutory rate |
|
$ |
29,348 |
|
|
$ |
21,675 |
|
|
$ |
15,747 |
|
State income taxes |
|
|
5,621 |
|
|
|
2,577 |
|
|
|
8,038 |
|
Deferred tax impact of reorganization |
|
|
— |
|
|
|
— |
|
|
|
(2,382 |
) |
Research and development tax credit |
|
|
(638 |
) |
|
|
(345 |
) |
|
|
— |
|
Foreign rate differential |
|
|
(273 |
) |
|
|
(328 |
) |
|
|
(253 |
) |
Deferred tax true-up |
|
|
— |
|
|
|
69 |
|
|
|
— |
|
All other |
|
|
237 |
|
|
|
204 |
|
|
|
(429 |
) |
Total income tax expense |
|
$ |
34,295 |
|
|
$ |
23,852 |
|
|
$ |
20,721 |
|
On December 31, 2014, the Company undertook a series of transactions intended to simplify its legal and tax structure in the U.S. The result of the reorganization was a combination of Grubhub Holdings Inc. and Seamless North America, LLC, which resulted in the deemed liquidation of the Seamless North America, LLC partnership status for tax purposes. The reorganization resulted in a net income tax benefit of $0.4 million for the year ended December 31, 2014. The income tax benefit consisted of a deferred tax benefit of $2.2 million as a result of converting the Seamless North America, LLC partnership into a division of Grubhub Holdings Inc., partially offset by an increase in deferred tax expense of $1.8 million as a result of the adjusted deferred state tax rate applicable to the Company’s U.S. operations.
The Company recorded a $2.0 million increase in deferred tax expense in 2014 as a result of a change in state tax law.
The tax effects of temporary differences giving rise to deferred income tax assets and liabilities as of December 31, 2016 and 2015 were as follows:
|
|
As of December 31, |
|
|||||
|
|
2016 |
|
|
2015 |
|
||
|
|
(in thousands) |
|
|||||
Deferred tax assets: |
|
|
|
|
|
|
|
|
Loss and credit carryforwards |
|
$ |
6,714 |
|
|
$ |
5,134 |
|
Accrued expenses |
|
|
2,096 |
|
|
|
1,934 |
|
Stock-based compensation |
|
|
9,823 |
|
|
|
8,330 |
|
Total deferred tax assets |
|
|
18,633 |
|
|
|
15,398 |
|
Valuation allowance |
|
|
(1,610 |
) |
|
|
(910 |
) |
Net deferred tax assets |
|
|
17,023 |
|
|
|
14,488 |
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Fixed assets |
|
|
(5,738 |
) |
|
|
(2,269 |
) |
Intangible assets |
|
|
(117,172 |
) |
|
|
(99,803 |
) |
Prepaid expenses |
|
|
(2,135 |
) |
|
|
— |
|
Total deferred tax liabilities |
|
|
(125,045 |
) |
|
|
(102,072 |
) |
Net deferred tax liability |
|
$ |
(108,022 |
) |
|
$ |
(87,584 |
) |
The Company classified its net deferred tax liabilities as long-term liabilities on the consolidated balance sheets as of December 31, 2016 and 2015.
A partial valuation reserve of $1.6 million and $0.9 million was recorded as of December 31, 2016 and 2015, respectively, against certain state-only credits as those credits have a short carryover period and the Company believes that this portion of the credit carryovers will more likely than not expire before they are utilized.
The Company has not provided U.S. income tax on the accumulated earnings of its U.K. subsidiary, Seamless Europe, Ltd. of approximately $9.7 million as of December 31, 2016, as it intends to permanently reinvest those undistributed earnings into future operations in that country. The Company estimates the potential additional U.S. tax liabilities that would result from the complete repatriation of those accumulated earnings to be approximately $3.4 million as of December 31, 2016.
The Company had the following tax loss and credit carryforwards as of December 31, 2016 and 2015:
|
|
2016 |
|
|
2015 |
|
|
Beginning Year of Expiration |
||
|
|
(in thousands) |
||||||||
U.S. federal loss carryforwards |
|
$ |
483 |
|
|
$ |
3,284 |
|
|
2027 |
U.S. state and local loss carryforwards |
|
|
5,265 |
|
|
|
5,753 |
|
|
2027 |
Illinois Edge Credits(a) |
|
|
5,045 |
|
|
|
3,829 |
|
|
2017 |
|
(a) |
Amounts are before the federal benefit of state tax |
Upon adoption of ASU 2016-09 (see Note 2, “Recently Issued Accounting Pronouncements”), the Company will record state net operating losses (“NOLs”), including excess tax benefits, of $4.5 million in retained earnings on the consolidated balance sheets as of January 1, 2017. For federal purposes, all excess tax benefits are estimated to be utilized in 2016 so no additional NOL will be recorded.
During the year ended December 31, 2016, the Illinois Department of Revenue completed an audit of Grubhub, Inc.’s and its subsidiaries’ corporate income tax returns for the years ended December 31, 2012 and 2013 and proposed no changes. Therefore, the Company does not expect any additional tax liabilities, penalties and/or interest as a result of the audit. The New York City Department of Finance is currently performing a routine examination of Seamless Holdings Corporation for General Corporation Tax for the short tax period from October 17, 2012 through August 8, 2013. The Company does not believe, but cannot predict with certainty whether, there will be any additional tax liabilities, penalties and/or interest as a result of the audit. The Company’s tax returns are subject to the normal statute of limitations, three years from the filing date for federal income tax purposes. The federal and state statute of limitations generally remain open for years in which tax losses are generated until three years from the year those losses are utilized. Under these rules, the 2007 and later year NOLs of Slick City Media, Inc. are still subject to audit by the IRS and state and local jurisdictions. Also, the 2007 and later year NOLs of Grubhub Holdings Inc. and its acquired businesses are still subject to audit by the IRS and state and local jurisdictions. The September 30, 2013 and later period U.K. returns of Seamless Europe Ltd. are subject to exam by the U.K. tax authorities.
The Company is subject to taxation in the U.S. federal and various state jurisdictions. Significant judgment is required in determining the provision for income taxes and recording the related income tax assets and liabilities. The Company’s practice for accounting for uncertainty in income taxes is to recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not criteria, the amount recognized in the financial statements is the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority.
The following table summarizes the Company’s unrecognized tax benefit activity during the years ended December 31, 2016 and 2015, excluding the related accrual for interest:
|
|
As of December 31, |
|
|||||
|
|
2016 |
|
|
2015 |
|
||
|
|
(in thousands) |
|
|||||
Balance at beginning of period |
|
$ |
2,932 |
|
|
$ |
3,188 |
|
Reductions for tax positions of prior years |
|
|
— |
|
|
|
(296 |
) |
Additions for tax positions of prior years |
|
|
413 |
|
|
|
40 |
|
Balance at end of period |
|
$ |
3,345 |
|
|
$ |
2,932 |
|
The Company records interest and penalties, if any, as a component of its income tax expense in the consolidated statements of operations. No interest expense or penalties were recognized during the years ended December 31, 2016 and 2015. At December 31, 2016, the Company did not anticipate any significant adjustments to its unrecognized tax benefits caused by the settlement of tax examinations or other factors, within the next twelve months. Included in the net deferred tax liabilities on the consolidated balance sheets at December 31, 2016 and 2015 were deferred tax assets that relate to the potential settlement of these unrecognized tax benefits. After consideration of these amounts, $1.0 million of the amount accrued at each of December 31, 2016 and 2015, would impact the effective tax rate if reversed.
|
11. Stockholders’ Equity
As of December 31, 2016 and 2015, the Company was authorized to issue two classes of stock: common stock and Series A Preferred Stock.
Common Stock
Each holder of common stock has one vote per share of common stock held on all matters that are submitted for stockholder vote. At December 31, 2016 and 2015, there were 500,000,000 shares of common stock authorized. At December 31, 2016 and 2015, there were 85,692,333 and 84,979,869 shares of common stock issued and outstanding, respectively. The Company did not hold any shares as treasury shares as of December 31, 2016 and 2015.
On January 22, 2016, the Company’s Board of Directors approved a program that authorizes the repurchase of up to $100 million of the Company’s common stock exclusive of any fees, commissions or other expenses relating to such repurchases through open market purchases or privately negotiated transactions at the prevailing market price at the time of purchase. The repurchase program was announced on January 25, 2016. The repurchased stock may be retired or held as authorized but unissued treasury shares. The repurchase authorizations do not obligate the Company to acquire any particular amount of common stock or adopt any particular method of repurchase and may be modified, suspended or terminated at any time at management’s discretion. Repurchased and retired shares will result in an immediate reduction of the outstanding shares used to calculate the weighted-average common shares outstanding for basic and diluted net income per share at the time of the transaction. During the year ended December 31, 2016, the Company repurchased and retired 724,473 shares of its common stock at a weighted-average share price of $20.37, or an aggregate of $14.8 million.
Series A Preferred Stock
The Company was authorized to issue 25,000,000 shares of preferred stock as of December 31, 2016 and 2015. There were no issued or outstanding shares of preferred stock as of December 31, 2016 and 2015.
|
12. Retirement Plan
Beginning February 1, 2012, the Company has maintained a defined contribution plan for employees. The plan is qualified under section 401(k) of the Internal Revenue Code. The Company may also make discretionary profit sharing contributions as determined by the Company’s Board of Directors. The Company matched 100% of the first 3% of employees’ contributions and 50% of the next 2% of employees’ contributions during the years ended December 31, 2016, 2015 and 2014 and recognized matching contributions expense of $1.7 million, $1.3 million and $1.0 million, respectively.
|
14. Fair Value Measurement
Certain assets and liabilities are required to be recorded at fair value on a recurring basis. 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.
The accounting guidance for fair value measurements prioritizes valuation methodologies based on the reliability of the inputs in the following three-tier value hierarchy:
|
Level 1 |
Quoted prices in active markets for identical assets or liabilities. |
|
Level 2 |
Assets and liabilities valued based on observable market data for similar instruments, such as quoted prices for similar assets or liabilities. |
|
Level 3 |
Unobservable inputs that are supported by little or no market activity; instruments valued based on the best available data, some of which is internally developed, and considers risk premiums that a market participant would require. |
The Company applied the following methods and assumptions in estimating its fair value measurements: the Company’s commercial paper, investments in corporate and U.S. government agency bonds and certain money market funds are classified as Level 2 within the fair value hierarchy because they are valued using inputs other than quoted prices in active markets that are observable directly or indirectly. Accounts receivable and accounts payable approximate fair value due to their generally short-term maturities.
The following table presents the balances of assets measured at fair value on a recurring basis as of December 31, 2016 and 2015:
|
|
December 31, 2016 |
|
|
December 31, 2015 |
|
||||||||||||||||||
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
||||||
|
|
(in thousands) |
|
|||||||||||||||||||||
Money market funds |
|
$ |
— |
|
|
$ |
1,723 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
1,083 |
|
|
$ |
— |
|
Commercial paper |
|
|
— |
|
|
|
131,937 |
|
|
|
— |
|
|
|
— |
|
|
|
113,586 |
|
|
|
— |
|
Corporate bonds |
|
|
— |
|
|
|
16,089 |
|
|
|
— |
|
|
|
— |
|
|
|
41,473 |
|
|
|
— |
|
U.S. government agency bonds |
|
|
— |
|
|
|
5,500 |
|
|
|
— |
|
|
|
— |
|
|
|
9,004 |
|
|
|
— |
|
Total |
|
$ |
— |
|
|
$ |
155,249 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
165,146 |
|
|
$ |
— |
|
In addition to assets and liabilities that are recorded at fair value on a recurring basis, the Company is required to record certain assets and liabilities at fair value on a nonrecurring basis, generally as a result of acquisitions. See Note 3, “Acquisitions,” for further discussion of the fair value of assets and liabilities associated with acquisitions.
|
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.
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 general and administrative 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, |
|
|||||
|
|
2016 |
|
|
2015 |
|
||
Balance at beginning of period |
|
$ |
959 |
|
|
$ |
723 |
|
Additions to expense |
|
|
1,102 |
|
|
|
850 |
|
Writeoffs, net of recoveries and other adjustments |
|
|
(832 |
) |
|
|
(614 |
) |
Balance at end of period |
|
$ |
1,229 |
|
|
$ |
959 |
|
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, 2016, 2015 and 2014, expenses attributable to advertising totaled approximately $75.5 million, $64.4 million and $45.9 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. 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. Risk-free interest rates are derived from U.S. Treasury securities as of the option grant date. Expected dividend yield is based on the Company’s historical dividend payments, which have been zero to date. As the Company did not have public trading history for its common shares until April of 2014, the expected volatility for the Company’s common stock is estimated using a combination of the published historical and implied volatilities of industry peers representing the verticals in which the Company operates and the historical volatility of the Company’s own common stock. The Company estimates the weighted-average expected life of the options as the average of the vesting option schedule and the term of the award, since the Company does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term due to the limited period of time stock-based awards have been exercisable. The term of the award is estimated using the simplified method. Forfeiture rates are estimated using historical actual forfeiture trends as well as the Company’s judgment of future forfeitures. These rates are evaluated quarterly 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 the Company’s current estimates, such amounts will be recorded as a cumulative adjustment in the period 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, effective in the first quarter of 2017.
The Company has elected to use the with-and-without method in determining the order in which tax attributes are utilized. As a result, the Company has 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 have been utilized. See Note 9, “Stock-Based Compensation” for further discussion. Beginning in the first quarter of 2017, the Company will recognize tax benefits and deficiencies for stock-based awards in the income statement. See “Recently Issued Accounting Pronouncements” below for further discussion.
Provision for Income Taxes
The provision for income taxes 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 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. 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 of the Company 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 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, 2016, 2015 or 2014.
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 $15.6 million, $8.0 million and $3.6 million of website development costs during the years ended December 31, 2016, 2015 and 2014, 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. 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 tests for impairment using a two-step process. The first step of the goodwill impairment test identifies if there is potential goodwill impairment. If step one indicates that an impairment may exist, a second step is performed to measure the amount of the goodwill impairment, if any, by comparing the implied fair value of goodwill with the carrying amount. If the implied fair value of goodwill is less than the carrying amount, a write-down is recorded. The Company determined there was no goodwill impairment during the years ended December 31, 2016, 2015 and 2014.
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, 2016, 2015 and 2014, 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 January 2017, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update No. 2017-04, “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment” (“ASU 2017-04”). ASU 2017-04 eliminates Step 2 from the goodwill impairment test, which 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 has elected to early adopt ASU 2017-04 beginning in the first quarter of 2017 and will apply the standard prospectively. The adoption of ASU 2017-04 may reduce the cost and complexity of evaluating goodwill for impairment, but 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 has elected to adopt ASU 2017-01 early. ASU 2017-01 will be effective for transactions beginning in the first quarter of 2017 and will be applied prospectively. The adoption of ASU 2017-01 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 Accounting Standards Update No. 2016-09, “Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” (“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. The Company believes the most significant impact of the adoption of ASU 2016-09 to the Company’s consolidated financial statements will be to recognize certain tax benefits or tax shortfalls upon a restricted-stock award or unit vesting or stock option exercise relative to the deferred tax asset position established in the provision for income taxes line of the consolidated statement of operations instead of to consolidated stockholders’ equity. During the years ended December 31, 2016, 2015 and 2014, the Company recorded $24.9 million, $27.8 million and $13.0 million to consolidated stockholders’ equity as tax benefits related to stock-based compensation, respectively. ASU 2016-09 is effective beginning in the first quarter of 2017 with early adoption permitted. The Company plans to adopt ASU 2016-09 during the first quarter of 2017. Upon the adoption of ASU 2016-09, the Company will record state net operating losses, including excess tax benefits, of $4.5 million to retained earnings on the consolidated balance sheets as of January 1, 2017.
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 (the lease liability) 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, but anticipates that it will result in a significant increase in its long-term assets and liabilities and minimal impact to its results of operations and cash flows.
In September 2015, the FASB issued Accounting Standards Update No. 2015-16, “Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments” (“ASU 2015-16”), which eliminates the requirement to account for adjustments identified during the measurement-period in a business combination retrospectively. Instead, the acquirer must recognize measurement-period adjustments during the period in which they are identified, including the effect on earnings of any amounts that would have been recorded in previous periods had the purchase accounting been completed at the acquisition date. ASU 2015-16 was effective for and adopted by the Company in the first quarter of 2016. The adoption of ASU 2015-16 eliminates costs related to retrospective application of any measurement-period adjustments that may be identified, but has not had a material impact on the Company’s consolidated financial position, results of operations or cash flows.
In April 2015, the FASB issued Accounting Standards Update 2015-05, “Intangibles -Goodwill and Other – Internal Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement” (“ASU 2015-05”), which provides guidance on accounting for fees paid in a cloud computing arrangement. Under ASU 2015-05, if a cloud computing arrangement includes a software license, the software license element should be accounted for consistent with the purchase of other software licenses. If the cloud computing arrangement does not include a software license, it should be accounted for as a service contract. ASU 2015-05 was effective for and adopted by the Company in the first quarter of 2016. The Company elected to apply ASU 2015-05 prospectively; however, its adoption did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.
In April 2015, the FASB issued Accounting Standards Update No. 2015-03, “Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs” (“ASU 2015-03”). ASU 2015-03 simplifies the presentation of debt issuance costs by requiring that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. Under the previous practice, debt issuance costs were recognized as a deferred charge (that is, an asset). The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU. In August 2015, the FASB issued ASU 2015-15 “Interest - Imputed Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements” (“ASU 2015-15”), which clarifies that the guidance in ASU 2015-03 does not apply to line-of-credit arrangements. According to ASU 2015-15, debt issuance costs related to line-of-credit arrangements will continue to be deferred and presented as an asset and subsequently amortized ratably over the term of the arrangement. The amendments in ASU 2015-03 and clarifications of ASU 2015-15 are effective for the Company in the first quarter of 2016. The Company entered into a credit agreement on April 29, 2016 (see Note 8, Debt, for additional details). The adoption of ASU 2015-03 and ASU 2015-15 have not had a material impact on the Company’s consolidated financial position, results of operations or 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 will be effective for the Company in the first quarter of 2018. The Company currently anticipates applying the modified retrospective approach when adopting these ASUs. Based on the Company’s initial assessment, the adoption of these ASUs is expected to 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 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.
|
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 |
Changes in the Company’s allowance for doubtful accounts for the periods presented were as follows:
|
|
Year Ended December 31, |
|
|||||
|
|
2016 |
|
|
2015 |
|
||
Balance at beginning of period |
|
$ |
959 |
|
|
$ |
723 |
|
Additions to expense |
|
|
1,102 |
|
|
|
850 |
|
Writeoffs, net of recoveries and other adjustments |
|
|
(832 |
) |
|
|
(614 |
) |
Balance at end of period |
|
$ |
1,229 |
|
|
$ |
959 |
|
|
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 |
|
Customer and vendor 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 |
|
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 |
|
Customer and vendor 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 |
|
The following unaudited pro forma information presents a summary of the operating results of the Company for the years ended December 31, 2016 and 2015 as if the acquisitions had occurred as of January 1 of the year prior to acquisition:
|
Year Ended December 31, |
|
|||||
|
2016 |
|
|
2015 |
|
||
|
(in thousands, except per share data) |
|
|||||
Revenues |
$ |
502,290 |
|
|
$ |
393,144 |
|
Net income |
|
48,675 |
|
|
|
38,995 |
|
Net income per share attributable to common shareholders: |
|
|
|
|
|
|
|
Basic |
$ |
0.57 |
|
|
$ |
0.46 |
|
Diluted |
$ |
0.57 |
|
|
$ |
0.45 |
|
The pro forma adjustments reflect the amortization that would have been recognized for intangible assets, elimination of transaction costs incurred and pro forma tax adjustments for the years ended December 31, 2016 and 2015 as follows:
|
Year Ended December 31, |
|
|||||
|
2016 |
|
|
2015 |
|
||
|
(in thousands) |
|
|||||
Depreciation and amortization |
$ |
1,364 |
|
|
$ |
4,115 |
|
Transaction costs |
|
(1,978 |
) |
|
|
(1,055 |
) |
Income tax expense (benefit) |
|
257 |
|
|
|
(1,316 |
) |
|
The amortized cost, unrealized gains and losses and estimated fair value of the Company’s held-to-maturity marketable securities as of December 31, 2016 and 2015 were as follows:
|
|
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 |
|
|
|
December 31, 2015 |
|
|||||||||||||
|
|
Amortized Cost |
|
|
Unrealized Gains |
|
|
Unrealized Losses |
|
|
Estimated Fair Value |
|
||||
|
|
(in thousands) |
|
|||||||||||||
Cash and cash equivalents |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper |
|
$ |
22,744 |
|
|
$ |
— |
|
|
$ |
(5 |
) |
|
$ |
22,739 |
|
Short term investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper |
|
|
90,949 |
|
|
|
— |
|
|
|
(102 |
) |
|
|
90,847 |
|
Corporate bonds |
|
|
41,503 |
|
|
|
9 |
|
|
|
(39 |
) |
|
|
41,473 |
|
U.S. government agency bonds |
|
|
8,996 |
|
|
|
8 |
|
|
|
— |
|
|
|
9,004 |
|
Total |
|
$ |
164,192 |
|
|
$ |
17 |
|
|
$ |
(146 |
) |
|
$ |
164,063 |
|
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, 2016 and 2015 were as follows:
|
|
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 |
) |
|
|
December 31, 2015 |
|
|||||||||||||||||||||||
|
|
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 |
|
$ |
113,586 |
|
|
$ |
(107 |
) |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
113,586 |
|
|
$ |
(107 |
) |
||
Corporate bonds |
|
|
31,952 |
|
|
|
(39 |
) |
|
|
— |
|
|
|
— |
|
|
|
31,952 |
|
|
|
(39 |
) |
||
Total |
|
$ |
145,538 |
|
|
$ |
(146 |
) |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
145,538 |
|
|
$ |
(146 |
) |
|
The components of acquired intangible assets as of December 31, 2016 and 2015 were as follows:
|
|
December 31, 2016 |
|
|
December 31, 2015 |
|
||||||||||||||||||
|
|
Gross Carrying Amount |
|
|
Accumulated Amortization |
|
|
Net Carrying Value |
|
|
Gross Carrying Amount |
|
|
Accumulated Amortization |
|
|
Net Carrying Value |
|
||||||
|
|
(in thousands) |
|
|||||||||||||||||||||
Developed technology |
|
$ |
10,640 |
|
|
$ |
(9,575 |
) |
|
$ |
1,065 |
|
|
$ |
9,819 |
|
|
$ |
(6,288 |
) |
|
$ |
3,531 |
|
Customer and vendor relationships, databases |
|
|
282,751 |
|
|
|
(60,437 |
) |
|
|
222,314 |
|
|
|
236,238 |
|
|
|
(44,192 |
) |
|
|
192,046 |
|
Trademarks |
|
|
969 |
|
|
|
(582 |
) |
|
|
387 |
|
|
|
529 |
|
|
|
(215 |
) |
|
|
314 |
|
Other |
|
|
250 |
|
|
|
(62 |
) |
|
|
188 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Total amortizable intangible assets |
|
|
294,610 |
|
|
|
(70,656 |
) |
|
|
223,954 |
|
|
|
246,586 |
|
|
|
(50,695 |
) |
|
|
195,891 |
|
Indefinite-lived trademarks |
|
|
89,676 |
|
|
|
— |
|
|
|
89,676 |
|
|
|
89,676 |
|
|
|
— |
|
|
|
89,676 |
|
Total acquired intangible assets |
|
$ |
384,286 |
|
|
$ |
(70,656 |
) |
|
$ |
313,630 |
|
|
$ |
336,262 |
|
|
$ |
(50,695 |
) |
|
$ |
285,567 |
|
The components of acquired intangible assets as of December 31, 2016 and 2015 were as follows:
|
|
December 31, 2016 |
|
|
December 31, 2015 |
|
||||||||||||||||||
|
|
Gross Carrying Amount |
|
|
Accumulated Amortization |
|
|
Net Carrying Value |
|
|
Gross Carrying Amount |
|
|
Accumulated Amortization |
|
|
Net Carrying Value |
|
||||||
|
|
(in thousands) |
|
|||||||||||||||||||||
Developed technology |
|
$ |
10,640 |
|
|
$ |
(9,575 |
) |
|
$ |
1,065 |
|
|
$ |
9,819 |
|
|
$ |
(6,288 |
) |
|
$ |
3,531 |
|
Customer and vendor relationships, databases |
|
|
282,751 |
|
|
|
(60,437 |
) |
|
|
222,314 |
|
|
|
236,238 |
|
|
|
(44,192 |
) |
|
|
192,046 |
|
Trademarks |
|
|
969 |
|
|
|
(582 |
) |
|
|
387 |
|
|
|
529 |
|
|
|
(215 |
) |
|
|
314 |
|
Other |
|
|
250 |
|
|
|
(62 |
) |
|
|
188 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Total amortizable intangible assets |
|
|
294,610 |
|
|
|
(70,656 |
) |
|
|
223,954 |
|
|
|
246,586 |
|
|
|
(50,695 |
) |
|
|
195,891 |
|
Indefinite-lived trademarks |
|
|
89,676 |
|
|
|
— |
|
|
|
89,676 |
|
|
|
89,676 |
|
|
|
— |
|
|
|
89,676 |
|
Total acquired intangible assets |
|
$ |
384,286 |
|
|
$ |
(70,656 |
) |
|
$ |
313,630 |
|
|
$ |
336,262 |
|
|
$ |
(50,695 |
) |
|
$ |
285,567 |
|
The components of the acquired intangibles assets added during the years ended December 31, 2016 and 2015 were as follows:
|
|
Year Ended December 31, 2016 |
|
|
Year Ended December 31, 2015 |
|
||||||||||
|
|
Amount |
|
|
Weighted-Average Amortization Period |
|
|
Amount |
|
|
Weighted-Average Amortization Period |
|
||||
|
|
(in thousands) |
|
|
(years) |
|
|
(in thousands) |
|
|
(years) |
|
||||
Customer and vendor relationships |
|
$ |
46,513 |
|
|
|
20.0 |
|
|
$ |
44,259 |
|
|
|
18.7 |
|
Developed technology |
|
|
1,731 |
|
|
|
2.7 |
|
|
|
4,676 |
|
|
|
1.5 |
|
Trademarks |
|
|
440 |
|
|
|
2.0 |
|
|
|
529 |
|
|
|
1.8 |
|
Other |
|
|
250 |
|
|
|
3.0 |
|
|
|
— |
|
|
|
|
|
Total |
|
$ |
48,934 |
|
|
|
|
|
|
$ |
49,464 |
|
|
|
|
|
The changes in the carrying amount of goodwill for the years ended December 31, 2016 and 2015 were as follows.
|
|
Goodwill |
|
|
Accumulated Impairment Losses |
|
|
Net Book Value |
|
|||
|
|
(in thousands) |
|
|||||||||
Balance as of December 31, 2014 |
|
$ |
352,788 |
|
|
$ |
— |
|
|
$ |
352,788 |
|
Acquisitions |
|
|
43,432 |
|
|
|
— |
|
|
|
43,432 |
|
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 |
|
The components of the acquired intangibles assets added during the years ended December 31, 2016 and 2015 were as follows:
|
|
Year Ended December 31, 2016 |
|
|
Year Ended December 31, 2015 |
|
||||||||||
|
|
Amount |
|
|
Weighted-Average Amortization Period |
|
|
Amount |
|
|
Weighted-Average Amortization Period |
|
||||
|
|
(in thousands) |
|
|
(years) |
|
|
(in thousands) |
|
|
(years) |
|
||||
Customer and vendor relationships |
|
$ |
46,513 |
|
|
|
20.0 |
|
|
$ |
44,259 |
|
|
|
18.7 |
|
Developed technology |
|
|
1,731 |
|
|
|
2.7 |
|
|
|
4,676 |
|
|
|
1.5 |
|
Trademarks |
|
|
440 |
|
|
|
2.0 |
|
|
|
529 |
|
|
|
1.8 |
|
Other |
|
|
250 |
|
|
|
3.0 |
|
|
|
— |
|
|
|
|
|
Total |
|
$ |
48,934 |
|
|
|
|
|
|
$ |
49,464 |
|
|
|
|
|
Estimated future amortization expense of acquired intangible assets as of December 31, 2016 was as follows:
|
|
(in thousands) |
|
|
2017 |
|
$ |
17,844 |
|
2018 |
|
|
17,336 |
|
2019 |
|
|
15,389 |
|
2020 |
|
|
14,987 |
|
2021 |
|
|
14,987 |
|
Thereafter |
|
|
143,411 |
|
Total |
|
$ |
223,954 |
|
|
The components of the Company’s property and equipment as of December 31, 2016 and 2015 were as follows:
|
|
December 31, 2016 |
|
|
December 31, 2015 |
|
||
|
|
(in thousands) |
|
|||||
Computer equipment |
|
$ |
17,548 |
|
|
$ |
10,080 |
|
Delivery equipment |
|
|
— |
|
|
|
555 |
|
Furniture and fixtures |
|
|
4,842 |
|
|
|
2,092 |
|
Developed software |
|
|
26,460 |
|
|
|
11,129 |
|
Purchased software and digital assets |
|
|
1,360 |
|
|
|
361 |
|
Leasehold improvements |
|
|
19,038 |
|
|
|
6,050 |
|
Property and equipment |
|
|
69,248 |
|
|
|
30,267 |
|
Accumulated amortization and depreciation |
|
|
(22,693 |
) |
|
|
(11,185 |
) |
Property and equipment, net |
|
$ |
46,555 |
|
|
$ |
19,082 |
|
|
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, 2016 were as follows:
|
|
(in thousands) |
|
|
2017 |
|
$ |
5,302 |
|
2018 |
|
|
5,652 |
|
2019 |
|
|
5,532 |
|
2020 |
|
|
5,013 |
|
2021 |
|
|
5,084 |
|
Thereafter |
|
|
15,225 |
|
Total |
|
$ |
41,808 |
|
|
The assumptions used to determine the fair value of the stock options granted during the years ended December 31, 2016, 2015 and 2014 were as follows:
|
|
2016 |
|
|
2015 |
|
|
2014 |
|
|||
Weighted-average fair value options granted |
|
$ |
12.59 |
|
|
$ |
14.66 |
|
|
$ |
13.87 |
|
Average risk-free interest rate |
|
|
1.41 |
% |
|
|
1.65 |
% |
|
|
1.97 |
% |
Expected stock price volatilities |
|
|
49.7 |
% |
|
|
48.4 |
% |
|
|
50.3 |
% |
Dividend yield |
|
None |
|
|
None |
|
|
None |
|
|||
Expected stock option life (years) |
|
|
5.84 |
|
|
|
6.07 |
|
|
|
6.26 |
|
Stock option awards as of December 31, 2016 and 2015, and changes during the year ended December 31, 2016, were as follows:
|
|
Options |
|
|
Weighted-Average Exercise Price |
|
|
Aggregate Intrinsic Value (thousands) |
|
|
Weighted-Average Exercise Term (years) |
|
||||
Outstanding at December 31, 2015 |
|
|
5,078,297 |
|
|
$ |
19.66 |
|
|
$ |
41,107 |
|
|
|
8.21 |
|
Granted |
|
|
166,272 |
|
|
|
26.58 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(894,138 |
) |
|
|
26.48 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(1,357,707 |
) |
|
|
9.92 |
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2016 |
|
|
2,992,724 |
|
|
|
22.43 |
|
|
|
46,608 |
|
|
|
7.68 |
|
Vested and expected to vest at December 31, 2016 |
|
|
2,598,779 |
|
|
|
21.78 |
|
|
|
42,216 |
|
|
|
7.68 |
|
Exercisable at December 31, 2016 |
|
|
1,131,011 |
|
|
$ |
17.22 |
|
|
$ |
23,517 |
|
|
|
6.64 |
|
Non-vested restricted stock units and restricted stock awards as of December 31, 2016 and 2015, and changes during the year ended December 31, 2016 were as follows:
|
|
Restricted Stock Units |
|
|
Restricted Stock Awards |
|
||||||||||
|
|
Shares |
|
|
Weighted-Average Grant Date Fair Value |
|
|
Shares |
|
|
Weighted-Average Grant Date Fair Value |
|
||||
Outstanding at December 31, 2015 |
|
|
888,483 |
|
|
$ |
27.85 |
|
|
|
67,744 |
|
|
$ |
42.01 |
|
Granted |
|
|
1,060,813 |
|
|
|
29.21 |
|
|
|
— |
|
|
|
— |
|
Forfeited |
|
|
(266,697 |
) |
|
|
27.55 |
|
|
|
— |
|
|
|
— |
|
Vested |
|
|
(166,245 |
) |
|
|
31.48 |
|
|
|
(67,744 |
) |
|
|
42.01 |
|
Outstanding at December 31, 2016 |
|
|
1,516,354 |
|
|
$ |
28.46 |
|
|
|
— |
|
|
$ |
— |
|
|
For the years ended December 31, 2016, 2015 and 2014, the income tax provision was comprised of the following:
|
|
Year Ended December 31, |
|
|||||||||
|
|
2016 |
|
|
2015 |
|
|
2014 |
|
|||
|
|
(in thousands) |
|
|||||||||
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
24,509 |
|
|
$ |
20,947 |
|
|
$ |
8,073 |
|
State |
|
|
8,132 |
|
|
|
6,260 |
|
|
|
7,610 |
|
Foreign |
|
|
338 |
|
|
|
480 |
|
|
|
426 |
|
Total current |
|
|
32,979 |
|
|
|
27,687 |
|
|
|
16,109 |
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
800 |
|
|
|
(1,534 |
) |
|
|
1,056 |
|
State |
|
|
516 |
|
|
|
(2,301 |
) |
|
|
3,556 |
|
Total deferred |
|
|
1,316 |
|
|
|
(3,835 |
) |
|
|
4,612 |
|
Total income tax expense |
|
$ |
34,295 |
|
|
$ |
23,852 |
|
|
$ |
20,721 |
|
Income before provision for income taxes for the years ended December 31, 2016, 2015 and 2014, was as follows:
|
|
Year Ended December 31, |
|
|||||||||
|
|
2016 |
|
|
2015 |
|
|
2014 |
|
|||
|
|
(in thousands) |
|
|||||||||
Domestic source |
|
$ |
82,033 |
|
|
$ |
59,705 |
|
|
$ |
43,069 |
|
Foreign source |
|
|
1,819 |
|
|
|
2,224 |
|
|
|
1,915 |
|
Income before provision for income taxes |
|
$ |
83,852 |
|
|
$ |
61,929 |
|
|
$ |
44,984 |
|
The following is a reconciliation of income taxes computed at the U.S. federal statutory rate to the income taxes reported in the consolidated statements of operations for the years ended December 31, 2016, 2015 and 2014:
|
|
Year Ended December 31, |
|
|||||||||
|
|
2016 |
|
|
2015 |
|
|
2014 |
|
|||
|
|
(in thousands) |
|
|||||||||
Income tax expense at statutory rate |
|
$ |
29,348 |
|
|
$ |
21,675 |
|
|
$ |
15,747 |
|
State income taxes |
|
|
5,621 |
|
|
|
2,577 |
|
|
|
8,038 |
|
Deferred tax impact of reorganization |
|
|
— |
|
|
|
— |
|
|
|
(2,382 |
) |
Research and development tax credit |
|
|
(638 |
) |
|
|
(345 |
) |
|
|
— |
|
Foreign rate differential |
|
|
(273 |
) |
|
|
(328 |
) |
|
|
(253 |
) |
Deferred tax true-up |
|
|
— |
|
|
|
69 |
|
|
|
— |
|
All other |
|
|
237 |
|
|
|
204 |
|
|
|
(429 |
) |
Total income tax expense |
|
$ |
34,295 |
|
|
$ |
23,852 |
|
|
$ |
20,721 |
|
The tax effects of temporary differences giving rise to deferred income tax assets and liabilities as of December 31, 2016 and 2015 were as follows:
|
|
As of December 31, |
|
|||||
|
|
2016 |
|
|
2015 |
|
||
|
|
(in thousands) |
|
|||||
Deferred tax assets: |
|
|
|
|
|
|
|
|
Loss and credit carryforwards |
|
$ |
6,714 |
|
|
$ |
5,134 |
|
Accrued expenses |
|
|
2,096 |
|
|
|
1,934 |
|
Stock-based compensation |
|
|
9,823 |
|
|
|
8,330 |
|
Total deferred tax assets |
|
|
18,633 |
|
|
|
15,398 |
|
Valuation allowance |
|
|
(1,610 |
) |
|
|
(910 |
) |
Net deferred tax assets |
|
|
17,023 |
|
|
|
14,488 |
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Fixed assets |
|
|
(5,738 |
) |
|
|
(2,269 |
) |
Intangible assets |
|
|
(117,172 |
) |
|
|
(99,803 |
) |
Prepaid expenses |
|
|
(2,135 |
) |
|
|
— |
|
Total deferred tax liabilities |
|
|
(125,045 |
) |
|
|
(102,072 |
) |
Net deferred tax liability |
|
$ |
(108,022 |
) |
|
$ |
(87,584 |
) |
The Company had the following tax loss and credit carryforwards as of December 31, 2016 and 2015:
|
|
2016 |
|
|
2015 |
|
|
Beginning Year of Expiration |
||
|
|
(in thousands) |
||||||||
U.S. federal loss carryforwards |
|
$ |
483 |
|
|
$ |
3,284 |
|
|
2027 |
U.S. state and local loss carryforwards |
|
|
5,265 |
|
|
|
5,753 |
|
|
2027 |
Illinois Edge Credits(a) |
|
|
5,045 |
|
|
|
3,829 |
|
|
2017 |
|
(a) |
Amounts are before the federal benefit of state tax |
The following table summarizes the Company’s unrecognized tax benefit activity during the years ended December 31, 2016 and 2015, excluding the related accrual for interest:
|
|
As of December 31, |
|
|||||
|
|
2016 |
|
|
2015 |
|
||
|
|
(in thousands) |
|
|||||
Balance at beginning of period |
|
$ |
2,932 |
|
|
$ |
3,188 |
|
Reductions for tax positions of prior years |
|
|
— |
|
|
|
(296 |
) |
Additions for tax positions of prior years |
|
|
413 |
|
|
|
40 |
|
Balance at end of period |
|
$ |
3,345 |
|
|
$ |
2,932 |
|
|
The following table presents the balances of assets measured at fair value on a recurring basis as of December 31, 2016 and 2015:
|
|
December 31, 2016 |
|
|
December 31, 2015 |
|
||||||||||||||||||
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
||||||
|
|
(in thousands) |
|
|||||||||||||||||||||
Money market funds |
|
$ |
— |
|
|
$ |
1,723 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
1,083 |
|
|
$ |
— |
|
Commercial paper |
|
|
— |
|
|
|
131,937 |
|
|
|
— |
|
|
|
— |
|
|
|
113,586 |
|
|
|
— |
|
Corporate bonds |
|
|
— |
|
|
|
16,089 |
|
|
|
— |
|
|
|
— |
|
|
|
41,473 |
|
|
|
— |
|
U.S. government agency bonds |
|
|
— |
|
|
|
5,500 |
|
|
|
— |
|
|
|
— |
|
|
|
9,004 |
|
|
|
— |
|
Total |
|
$ |
— |
|
|
$ |
155,249 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
165,146 |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|