GRUBHUB INC., 10-K filed on 2/28/2017
Annual Report
Document and Entity Information (USD $)
12 Months Ended
Dec. 31, 2016
Feb. 17, 2017
Jun. 30, 2016
Document And Entity Information [Abstract]
 
 
 
Document Type
10-K 
 
 
Amendment Flag
false 
 
 
Document Period End Date
Dec. 31, 2016 
 
 
Document Fiscal Year Focus
2016 
 
 
Document Fiscal Period Focus
FY 
 
 
Trading Symbol
GRUB 
 
 
Entity Registrant Name
GRUBHUB INC. 
 
 
Entity Central Index Key
0001594109 
 
 
Current Fiscal Year End Date
--12-31 
 
 
Entity Filer Category
Large Accelerated Filer 
 
 
Entity Common Stock, Shares Outstanding
 
85,903,320 
 
Entity Current Reporting Status
Yes 
 
 
Entity Voluntary Filers
No 
 
 
Entity Well-known Seasoned Issuer
Yes 
 
 
Entity Public Float
 
 
$ 2,233,206,117 
Consolidated Statements of Operations (USD $)
In Thousands, except Per Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2016
Dec. 31, 2015
Dec. 31, 2014
Income Statement [Abstract]
 
 
 
Revenues
$ 493,331 
$ 361,825 
$ 253,873 
Costs and expenses:
 
 
 
Sales and marketing
110,323 
91,150 
66,201 
Operations and support
171,756 
107,424 
62,509 
Technology (exclusive of amortization)
42,454 
32,782 
25,185 
General and administrative
49,753 
40,506 
32,307 
Depreciation and amortization
35,193 
28,034 
22,687 
Total costs and expenses
409,479 
299,896 
208,889 
Income before provision for income taxes
83,852 
61,929 
44,984 
Provision for income taxes
34,295 
23,852 
20,721 
Net income
49,557 
38,077 
24,263 
Preferred stock tax distributions
 
 
(320)
Net income attributable to common stockholders
$ 49,557 
$ 38,077 
$ 23,943 
Net income per share attributable to common stockholders:
 
 
 
Basic
$ 0.58 
$ 0.45 
$ 0.33 
Diluted
$ 0.58 
$ 0.44 
$ 0.30 
Weighted-average shares used to compute net income per share attributable to common stockholders:
 
 
 
Basic
85,069 
84,076 
73,571 
Diluted
86,135 
85,706 
81,698 
Consolidated Statements of Comprehensive Income (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2016
Dec. 31, 2015
Dec. 31, 2014
Statement Of Income And Comprehensive Income [Abstract]
 
 
 
Net income
$ 49,557 
$ 38,077 
$ 24,263 
OTHER COMPREHENSIVE LOSS
 
 
 
Foreign currency translation adjustments
(1,474)
(342)
(394)
COMPREHENSIVE INCOME
$ 48,083 
$ 37,735 
$ 23,869 
Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Dec. 31, 2016
Dec. 31, 2015
CURRENT ASSETS:
 
 
Cash and cash equivalents
$ 239,528 
$ 169,293 
Short term investments
84,091 
141,448 
Accounts receivable, less allowances for doubtful accounts
60,550 
42,051 
Prepaid expenses
12,168 
3,482 
Total current assets
396,337 
356,274 
PROPERTY AND EQUIPMENT:
 
 
Property and equipment, net of depreciation and amortization
46,555 
19,082 
OTHER ASSETS:
 
 
Other assets
4,530 
3,105 
Goodwill
436,455 
396,220 
Acquired intangible assets, net of amortization
313,630 
285,567 
Total other assets
754,615 
684,892 
TOTAL ASSETS
1,197,507 
1,060,248 
CURRENT LIABILITIES:
 
 
Restaurant food liability
83,349 
64,326 
Accounts payable
7,590 
8,189 
Accrued payroll
7,338 
4,841 
Taxes payable
865 
426 
Other accruals
11,348 
11,830 
Total current liabilities
110,490 
89,612 
LONG TERM LIABILITIES:
 
 
Deferred taxes, non-current
108,022 
87,584 
Other accruals
6,876 
5,456 
Total long term liabilities
114,898 
93,040 
Commitments and contingencies
   
   
STOCKHOLDERS’ EQUITY:
 
 
Series A Convertible Preferred Stock, $0.0001 par value. Authorized: 25,000,000 shares as of December 31, 2016 and December 31, 2015; issued and outstanding: no shares as of December 31, 2016 and December 31, 2015.
   
   
Common stock, $0.0001 par value. Authorized: 500,000,000 shares at December 31, 2016 and December 31, 2015; issued and outstanding: 85,692,333 and 84,979,869 shares as of December 31, 2016 and December 31, 2015, respectively
Accumulated other comprehensive loss
(2,078)
(604)
Additional paid-in capital
805,731 
759,292 
Retained earnings
168,457 
118,900 
Total Stockholders’ Equity
972,119 
877,596 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$ 1,197,507 
$ 1,060,248 
Consolidated Balance Sheets (Parenthetical) (USD $)
Dec. 31, 2016
Dec. 31, 2015
Statement Of Financial Position [Abstract]
 
 
Series A Convertible Preferred Stock, par value
$ 0.0001 
$ 0.0001 
Series A Convertible Preferred Stock, shares authorized
25,000,000 
25,000,000 
Series A Convertible Preferred Stock, shares issued
Series A Convertible Preferred Stock, shares outstanding
Common stock, par value
$ 0.0001 
$ 0.0001 
Common stock, shares authorized
500,000,000 
500,000,000 
Common stock, shares issued
85,692,333 
84,979,869 
Common stock, shares outstanding
85,692,333 
84,979,869 
Statements of Cash Flows (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2016
Dec. 31, 2015
Dec. 31, 2014
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net income
$ 49,557 
$ 38,077 
$ 24,263 
Adjustments to reconcile net income to net cash from operating activities:
 
 
 
Depreciation
8,921 
5,085 
5,032 
Provision for doubtful accounts
1,102 
850 
426 
Deferred taxes
1,027 
(3,835)
4,612 
Amortization of intangible assets
26,272 
22,949 
17,655 
Stock-based compensation
23,559 
13,450 
9,393 
Deferred rent
1,286 
32 
(17)
Other
(406)
529 
167 
Change in assets and liabilities, net of the effects of business acquisitions:
 
 
 
Accounts receivable
(17,488)
(4,343)
(7,394)
Prepaid expenses and other assets
(8,765)
242 
(1,669)
Restaurant food liability
16,451 
(29,409)
13,414 
Accounts payable
(3,204)
3,312 
(259)
Accrued payroll
1,819 
(2,104)
4,243 
Other accruals
(2,453)
(80)
3,038 
Net cash provided by operating activities
97,678 
44,755 
72,904 
CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
Purchases of investments
(226,694)
(220,667)
(113,156)
Proceeds from maturity of investments
284,662 
189,872 
1,500 
Capitalized website and development costs
(12,809)
(7,137)
(3,431)
Purchases of property and equipment
(24,087)
(4,150)
(3,653)
Acquisitions of businesses, net of cash acquired
(65,849)
(73,907)
 
Acquisition of other intangible assets
(250)
 
 
Other cash flows from investing activities
(492)
(408)
 
Net cash used in investing activities
(45,519)
(116,397)
(118,740)
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Net proceeds from the issuance of common stock
 
 
142,541 
Repurchases of common stock
(14,774)
 
(116)
Proceeds from exercise of stock options
13,468 
11,919 
8,322 
Excess tax benefits related to stock-based compensation
24,906 
27,830 
12,975 
Taxes paid related to net settlement of stock-based compensation awards
(2,779)
(345)
(2,070)
Payments for debt issuance costs
(1,477)
 
 
Preferred stock tax distributions
 
 
(320)
Net cash provided by financing activities
19,344 
39,404 
161,332 
Net change in cash and cash equivalents
71,503 
(32,238)
115,496 
Effect of exchange rates on cash
(1,268)
(265)
(242)
Cash and cash equivalents at beginning of year
169,293 
201,796 
86,542 
Cash and cash equivalents at end of the period
239,528 
169,293 
201,796 
SUPPLEMENTAL DISCLOSURE OF NON CASH ITEMS
 
 
 
Fair value of common stock issued for acquisitions
 
15,980 
 
Cash paid for income taxes
8,722 
 
1,326 
Capitalized property, equipment and website and development costs in accounts payable at period end
2,583 
927 
 
Cashless exercise of stock options
 
 
1,054 
Settlement of receivable through cashless acquisition of treasury shares in connection with the net settlement of stock-based awards
 
$ (345)
$ (3,123)
Consolidated Statements of Changes in Stockholders' Equity and Redeemable Common Stock (USD $)
In Thousands, except Share data
Total
Common stock
Preferred Stock
Additional Paid-in Capital
Accumulated Other Comprehensive Income (Loss)
Retained Earnings
Redeemable Common Stock
Balance, beginning, redeemable stock at Dec. 31, 2013
 
 
 
 
 
 
$ 18,415 
Balance, beginning at Dec. 31, 2013
557,375 
500,356 
132 
56,880 
 
Balance, beginning, redeemable stock (in shares) at Dec. 31, 2013
 
 
 
 
 
 
1,344,236 
Balance, beginning (in shares) at Dec. 31, 2013
 
53,757,437 
19,284,113 
 
 
 
 
Net income
24,263 
 
 
 
 
24,263 
 
Currency translation
(394)
 
 
 
(394)
 
 
Termination of put rights of redeemable common stock, in connection with the IPO
34,950 
 
 
34,950 
 
 
(34,950)
Termination of put rights of redeemable common stock in connection with the IPO (in shares)
 
1,344,236 
 
 
 
 
(1,344,236)
Conversion of preferred stock upon IPO
 
(2)
 
 
 
 
Conversion of preferred stock upon IPO (in shares)
 
19,284,113 
(19,284,113)
 
 
 
 
Issuance of common stock, net of issuance costs
142,541 
 
142,540 
 
 
 
Issuance of common stock, net of issuance costs (in shares)
 
5,250,000 
 
 
 
 
 
Change in fair value of redeemable common stock
(16,535)
 
 
(16,535)
 
 
16,535 
Stock-based compensation
9,530 
 
 
9,530 
 
 
 
Tax benefit related to stock-based compensation
12,975 
 
 
12,975 
 
 
 
Stock option exercises, net of withholdings and other
9,376 
 
 
9,376 
 
 
 
Stock option exercises, net of withholdings and other (in shares)
 
2,416,651 
 
 
 
 
 
Preferred stock tax distributions
(320)
 
 
 
 
(320)
 
Common stock repurchases and retirements
(3,239)
 
 
(3,239)
 
 
 
Common stock repurchases and retirements (in shares)
 
(147,112)
 
 
 
 
 
Balance, ending at Dec. 31, 2014
770,522 
 
689,953 
(262)
80,823 
 
Balance, ending (in shares) at Dec. 31, 2014
 
81,905,325 
 
 
 
 
 
Net income
38,077 
 
 
 
 
38,077 
 
Currency translation
(342)
 
 
 
(342)
 
 
Stock-based compensation
13,955 
 
 
13,955 
 
 
 
Tax benefit related to stock-based compensation
27,830 
 
 
27,830 
 
 
 
Stock option exercises, net of withholdings and other
11,919 
 
 
11,919 
 
 
 
Stock option exercises, net of withholdings and other (in shares)
 
2,578,398 
 
 
 
 
 
Issuance of restricted stock awards (in shares)
 
101,616 
 
 
 
 
 
Issuance of common stock, acquisitions
15,980 
 
 
15,980 
 
 
 
Issuance of common stock, acquisitions (in shares)
 
407,812 
 
 
 
 
 
Shares repurchased and retired to satisfy tax withholding upon vesting
(345)
 
 
(345)
 
 
 
Shares repurchased and retired to satisfy tax withholding upon vesting (in shares)
 
(13,282)
 
 
 
 
 
Balance, ending at Dec. 31, 2015
877,596 
 
759,292 
(604)
118,900 
 
Balance, ending (in shares) at Dec. 31, 2015
 
84,979,869 
 
 
 
 
 
Net income
49,557 
 
 
 
 
49,557 
 
Currency translation
(1,474)
 
 
 
(1,474)
 
 
Stock-based compensation
25,619 
 
 
25,619 
 
 
 
Tax benefit related to stock-based compensation
24,906 
 
 
24,906 
 
 
 
Stock option exercises, net of withholdings and other (in shares)
1,357,707 
 
 
 
 
 
 
Stock option exercises and vesting of restricted stock units, net of withholdings and other
13,468 
 
13,467 
 
 
 
Stock option exercises and vesting of restricted stock units, net of withholdings and other (in shares)
 
1,523,952 
 
 
 
 
 
Repurchases of common stock
(14,774)
 
 
(14,774)
 
 
 
Repurchases of common stock (shares)
 
(724,473)
 
 
 
 
 
Shares repurchased and retired to satisfy tax withholding upon vesting
(2,779)
 
 
(2,779)
 
 
 
Shares repurchased and retired to satisfy tax withholding upon vesting (in shares)
 
(87,015)
 
 
 
 
 
Balance, ending at Dec. 31, 2016
$ 972,119 
$ 9 
 
$ 805,731 
$ (2,078)
$ 168,457 
 
Balance, ending (in shares) at Dec. 31, 2016
 
85,692,333 
 
 
 
 
 
Organization
Organization

1. Organization

Grubhub Inc., a Delaware corporation, and its wholly-owned subsidiaries (collectively referred to as the “Company”) provide an online and mobile 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.

Summary of Significant Accounting Policies
Summary of Significant Accounting Policies

2. Summary of Significant Accounting Policies

Basis of Presentation and Principles of Consolidation

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

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.

 

Acquisitions
Acquisitions

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.

Marketable Securities
Marketable Securities

4. Marketable Securities

The amortized cost, unrealized gains and losses and estimated fair value of the Company’s held-to-maturity marketable securities as of December 31, 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).

Goodwill and Acquired Intangible Assets
Goodwill and Acquired Intangible Assets

5. Goodwill and Acquired Intangible Assets

The components of acquired intangible assets as of December 31, 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.

Property and Equipment
Property and Equipment

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.

Commitments and Contingencies
Commitments and Contingencies

 7. Commitments and Contingencies

Office Facility Leases

The Company has various operating lease agreements for its office facilities which expire at various dates through 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.

 

Debt
Debt

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.

Stock-Based Compensation
Stock-Based Compensation

9. Stock-Based Compensation

In May 2015, the Company’s stockholders approved the Grubhub Inc. 2015 Long-Term Incentive Plan (the “2015 Plan”), pursuant to which the Compensation Committee of the Board of Directors may grant stock options, stock appreciation rights, restricted stock awards, restricted stock units, performance awards and other stock-based and cash-based awards. On May 20, 2015, the Company filed a registration statement on Form S-8 to register up to 14,256,901 shares of common stock reserved for issuance pursuant to awards granted under the 2015 Plan. Effective May 20, 2015, no further grants will be made under the Company’s 2013 Omnibus Incentive Plan (the “2013 Plan”). As of December 31, 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

)