Notes to Consolidated Financial Statements
1. Organization
Grubhub Inc., a Delaware corporation, and its wholly-owned subsidiaries (collectively referred to as the “Company”) provide an online and mobile takeout marketplace for restaurant pick-up and delivery orders. Diners enter their delivery address or use geo-location within the mobile applications and the Company displays the menus and other relevant information for restaurants in its network. Orders may be placed directly online, via mobile applications or over the phone at no cost to the diner. The Company charges the restaurant a per order commission that is largely fee based.
In many markets, the Company also provides delivery services to restaurants on its platform that do not have their own delivery operations.
2. Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The Company’s consolidated financial statements were prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The accompanying consolidated financial statements include all wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. The consolidated statements of operations include the results of entities acquired from the dates of the acquisitions for accounting purposes.
Changes in Accounting Principle
See “
Recently Issued Accounting Pronouncements
” below for a description of accounting principle changes adopted during the year ended December 31, 2017 related to goodwill, business combinations and stock-based compensation.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and the related disclosures at the date of the financial statements, as well as the reported amounts of revenue and expenses during the periods presented. Estimates include revenue recognition, the allowance for doubtful accounts, website and internal-use software development costs, goodwill, depreciable lives of property and equipment, recoverability of intangible assets with finite lives and other long-lived assets and stock-based compensation. To the extent there are material differences between these estimates, judgments or assumptions and actual results, the Company’s consolidated financial statements will be affected. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management’s judgment in its application.
Cash and Cash Equivalents
Cash includes demand deposits with banks or financial institutions. Cash equivalents include short-term, highly liquid investments that are both readily convertible to known amounts of cash, and that are so near their maturity that they present minimal risk of changes in value because of changes in interest rates. The Company’s cash equivalents include only investments with original maturities of three months or less. The Company regularly maintains cash in excess of federally insured limits at financial institutions.
Marketable Securities
Marketable securities consist primarily of commercial paper and investment grade U.S. and non-U.S.-issued corporate and U.S. government agency debt securities. The Company invests in a diversified portfolio of marketable securities and limits the concentration of its investment in any particular security. Marketable securities with original maturities of three months or less are included in cash and cash equivalents and marketable securities with original maturities greater than three months, but less than one year, are included in short term investments on the consolidated balance sheets. The Company determines the classification of its marketable securities as available-for-sale or held-to-maturity at the time of purchase and reassesses these determinations at each balance sheet date. Debt securities are classified as held-to-maturity when the Company has the intent to hold the securities to maturity. Held-to-maturity securities are stated at amortized cost and are periodically assessed for other-than-temporary impairment. The amortized cost of debt securities is adjusted for the amortization of premiums and accretion of discounts to maturity, which is recognized as interest income within interest (income) expense in the consolidated statements of operations. Interest income is recognized when earned.
Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss consists of foreign currency translation adjustments. The financial statements of the Company’s U.K. subsidiary are translated from their functional currency into U.S. dollars. Assets and liabilities are translated at period end rates of exchange, and revenue and expenses are translated using average rates of exchange. The resulting gain or loss is included in accumulated other comprehensive loss on the consolidated balance sheets.
46
GRUBHUB INC.
Notes to Consolidated Financial Statements (Continued)
Property and Equipment, Net
Property and equipment is recorded at cost and depreciated using the straight-line method over the estimated useful lives of the related assets. The useful lives are as follows:
|
|
Estimated Useful Life
|
Computer equipment
|
|
2-3 years
|
Furniture and fixtures
|
|
5 years
|
Developed software
|
|
1-3 years
|
Purchased software and digital assets
|
|
3-5 years
|
Leasehold improvements
|
|
Shorter of expected useful life or lease term
|
Maintenance and repair costs are charged to expense as incurred. Major improvements, which extend the useful life of the related asset, are capitalized. Upon disposal of a fixed asset, the Company records a gain or loss based on the difference between the proceeds received and the net book value of the disposed asset.
Accounts Receivable, Net
Accounts receivable primarily represent the net cash due from the Company’s payment processor for cleared transactions and amounts owed from corporate customers. The carrying amount of the Company’s receivables is reduced by an allowance for doubtful accounts that reflects management’s best estimate of amounts that will not be collected. These uncollected amounts are generally not recovered from the restaurants. The allowance is recorded through a charge to bad debt expense which is recognized within general and administrative expense in the consolidated statements of operations. The allowance is based on historical loss experience and any specific risks, current or forecasted, identified in collection matters.
Management provides for probable uncollectible amounts through a charge against bad debt expense and a credit to an allowance based on its assessment of the current status of individual accounts. Balances still outstanding after management has used reasonable collection efforts are written off against the allowance. The Company does not charge interest on trade receivables.
The Company incurs expenses for uncollected credit card receivables (or “chargebacks”), including fraudulent orders, when a diner’s card is authorized but fails to process, and for other unpaid credit card receivables. The majority of the Company’s chargeback expense is recorded directly to general and administrative expense in the consolidated statements of operations as the charges are incurred; however, a portion of the allowance for doubtful accounts includes a reserve for estimated chargebacks on the net cash due from the Company’s payment processors as of the end of the period.
Changes in the Company’s allowance for doubtful accounts for the periods presented were as follows:
|
|
Year Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Balance at beginning of period
|
|
$
|
1,229
|
|
|
$
|
959
|
|
Additions to expense
|
|
|
1,424
|
|
|
|
1,102
|
|
Write-offs, net of recoveries and other adjustments
|
|
|
(1,140
|
)
|
|
|
(832
|
)
|
Balance at end of period
|
|
$
|
1,513
|
|
|
$
|
1,229
|
|
Advertising Costs
Advertising costs are generally expensed as incurred in connection with the requisite service period. Certain advertising production costs are capitalized and expensed when the advertisement first takes place. For the years ended December 31, 2017, 2016 and 2015, expenses attributable to advertising totaled approximately $107.2 million, $75.5 million and $64.4 million, respectively. Advertising costs are recorded in sales and marketing expense on the Company’s consolidated statements of operations.
Stock-Based Compensation
The Company measures compensation expense for all stock-based awards, including stock options, restricted stock units and restricted stock awards, at fair value on the date of grant and recognizes compensation expense over the service period on a straight-line basis for awards expected to vest.
The Company uses the Black-Scholes option-pricing model to determine the fair value for stock options. Management has determined the Black-Scholes fair value of stock option awards and related stock-based compensation expense with the assistance of third-party valuations. Determining the fair value of stock-based awards at the grant date requires judgment. The determination of the grant date fair value of options using an option-pricing model is affected by the Company’s estimated common stock fair value as well as assumptions regarding a number of other complex and subjective variables. If any of the assumptions used in the Black-Scholes model changes significantly, stock-based compensation for future awards may differ materially compared with the awards granted
47
GRUBHUB INC.
Notes to Consolidated Financial Statements (Continued)
previously. In valuing the Company’s options, the Company makes assumptions about risk-free interest rates, dividend yields, volatility and weighted-average expected lives, including estimat
ed forfeiture rates.
The Black-Scholes option-pricing model requires the use of highly subjective and complex assumptions, including the expected term and the price volatility of the underlying stock, which determine the fair value of stock-based awards. These assumptions include:
|
•
|
Risk-free rate.
Risk-free interest rates are derived from U.S. Treasury securities as of the option grant date.
|
|
•
|
Expected dividend yields.
Expected dividend yields are based on our historical dividend payments, which have been zero to date (excluding the preferred stock tax distributions made by Seamless Holdings).
|
|
•
|
Volatility.
Because the Company has a limited trading history and did not have public trading history for its common shares until April of 2014, we estimate volatility of our share price based on a combination of the published historical volatilities of comparable publicly-traded companies in our vertical markets and the historical volatility of our common stock.
|
|
•
|
Expected term.
Beginning in the first quarter of 2017, the expected term calculation for option awards considers a combination of the Company’s historical and estimated future exercise behavior.
The Company transitioned from using a simplified method for calculating the expected term of its
plain vanilla stock
options as it has obtained sufficient
historical exercise data to provide a reasonable basis upon which to estimate expected term
.
Prior to 2017, t
he Company applied a simplified method which estimated the weighted-average expected life of the options as the average of the vesting option schedule and the term of the award due to the limited period of time stock-based awards had been exercisable.
|
|
•
|
Forfeiture rate.
Forfeiture rates are estimated using historical actual forfeiture trends as well as our judgment of future forfeitures. These rates are evaluated at least annually and any change in compensation expense is recognized in the period of the change. The estimation of stock awards that will ultimately vest requires judgment and, to the extent actual results or updated estimates differ from our current estimates, such amounts will be recorded as a cumulative adjustment in the period in which the estimates are revised. The Company considers many factors when estimating expected forfeitures, including the types of awards and employee class. Actual results, and future changes in estimates, may differ substantially from management’s current estimates. The Company will continue to estimate forfeitures as described above in accordance with the policy alternatives available under
Accounting Standards Update No. 2016-09, “Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” (“ASU 2016-09”)
, effective in the first quarter of 2017.
|
See Note
9
,
Stock-Based Compensation,
for the weighted-average assumptions used to estimate the fair value of options granted during the years ended December 31, 2017, 2016 and 2015.
Beginning in the first quarter of 2017, the Company recognizes tax benefits and deficiencies for stock-based awards in income tax (benefit) expense within the consolidated statements of operations. See “
Recently Issued Accounting Pronouncements”
below and Note 9,
“Stock-Based Compensation”,
for further discussion. Prior to the adoption of ASU 2016-09,
the Company elected to use the with-and-without method in determining the order in which tax attributes are utilized. As a result, the Company only recognized a tax benefit for stock-based awards in additional paid-in capital if an incremental tax benefit was realized after all
other tax attributes available to the Company had been utilized.
Income Tax (Benefit) Expense
Income tax (benefit) expense is determined using the asset and liability method. Under this method, deferred tax assets and liabilities are calculated based upon the temporary differences between the financial statement and income tax bases of assets and liabilities using the enacted tax rates that are applicable in a given year. The utilization of deferred tax assets is limited by the amount of taxable income expected to be generated within the allowable carryforward period and other factors. The Company records a valuation allowance to reduce deferred tax assets to the amount management believes is more likely than not to be realized. As of December 31, 2017 and 2016, a valuation allowance of $4.8 million and $1.6 million, respectively, was recorded the Company’s consolidated balance sheets.
The Company utilizes a two-step approach to recognizing and measuring uncertain tax positions (“tax contingencies”). The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount which is more than 50% likely to be realized upon ultimate settlement. The Company considers many factors when evaluating and estimating its tax positions and tax benefits, which may require periodic adjustments, and which may not accurately forecast actual outcomes.
48
GRUBHUB INC.
Notes to Consolidated Financial Statements (Continued)
Management believes that it is more likely than not that forecasted income, including future reversals of existing taxable temporary differences, will be sufficient to fully recover the net deferred tax assets. In the event the Company determines that all
or part of the net deferred tax assets are not realizable in the future, we will adjust the valuation allowance with the adjustment recognized as expense in the period in which such determination is made. The calculation of income tax liabilities involves
significant judgment in estimating the impact of uncertainties and complex tax laws. In addition, the Company’s tax returns are subject to audit by various U.S. and foreign tax authorities. Resolution of these uncertainties in a manner inconsistent with ou
r expectations could have a material impact on the Company’s financial position and results of operations.
In accordance with U.S. tax legislation signed into law in December of 2017, the
Tax Cuts and Jobs Act (the “Tax Act”)
, the Company has recorded a tax liability of $0.4 million as of December 31, 2017 related to the one-time tax on the unremitted foreign earnings of our U.K. subsidiary. Due to the reduced cost of repatriating unremitted earnings, the Company plans to repatriate cash from the U.K. to the U.S. The Company estimated no additional tax liability as of December 31, 2017 as there are no applicable withholding taxes for the transaction. Management regularly evaluates whether foreign earnings are expected to be permanently reinvested. This evaluation requires judgment about the future operating and liquidity needs of the Company’s foreign subsidiary. Changes in economic and business conditions, foreign or U.S. tax laws, or the Company’s financial situation could result in changes in these judgments and the need to record additional tax liabilities.
The Company includes interest and penalties related to tax contingencies in the provision for income taxes in the consolidated statements of operations. See Note 10,
Income Taxes
. Management does not expect the total amount of unrecognized tax benefits to significantly change in the next twelve months.
Intangible Assets
Intangible assets with finite useful lives are amortized using the straight-line method over their useful lives and are reviewed for impairment. The Company evaluates intangible assets with finite and indefinite useful lives and other long-lived assets for impairment whenever events or circumstances indicate that they may not be recoverable, or at least annually. Recoverability of finite and other long-lived assets is measured by comparing the carrying amount of an asset group to the future undiscounted net cash flows expected to be generated by that asset group. The Company groups assets for purposes of such review at the lowest level for which identifiable cash flows of the asset group are largely independent of the cash flows of the other groups of assets and liabilities. The amount of impairment to be recognized for finite and indefinite-lived intangible assets and other long-lived assets is calculated as the difference between the carrying value and the fair value of the asset group, generally measured by discounting estimated future cash flows. There were no impairment indicators present during the years ended December 31, 2017, 2016 or 2015.
Website and Software Development Costs
The costs incurred in the preliminary stages of website and software development are expensed as incurred. Once an application has reached the development stage, internal and external costs, if direct and incremental and deemed by management to be significant, are capitalized and amortized on a straight-line basis over the estimated useful life of the application. Maintenance and enhancement costs, including those costs in the post-implementation stages, are typically expensed as incurred, unless such costs relate to substantial upgrades and enhancements to the website or software that result in added functionality, in which case the costs are capitalized and amortized on a straight-line basis over the estimated useful lives. Amortization expense related to capitalized website and software development costs is included in depreciation and amortization in the consolidated statements of operations. The Company capitalized $26.0 million, $15.6 million and $8.0 million of website development costs during the years ended December 31, 2017, 2016 and 2015, respectively.
Goodwill
Goodwill represents the excess of the cost of an acquired business over the fair value of the assets acquired at the date of acquisition. The Company’s methodology for allocating the purchase price of acquisitions is based on established valuation techniques that consider a number of factors, including valuations performed by third-party appraisers. As of December 31, 2017, the Company had $589.9 million in goodwill on its consolidated balance sheets. The Company assesses the impairment of goodwill at least annually and whenever events or changes in circumstances indicate that goodwill may be impaired. Absent any special circumstances that could require an interim test, the Company has elected to test for goodwill impairment at September 30 of each year. The Company has one reporting unit in testing goodwill for impairment.
In testing goodwill for impairment, the Company may elect to utilize a qualitative assessment to evaluate whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the qualitative assessment indicates that goodwill impairment is more likely than not, the Company performs a quantitative impairment test. In the first quarter of 2017, the Company adopted
Accounting Standards Update No. 2017-04, “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment” (“ASU 2017-04”). Under 2017-04, the Company would recognize an impairment charge for the amount by which the reporting unit’s carrying amount exceeds its fair value, if any, not to exceed the carrying amount of goodwill.
49
GRUBHUB INC.
Notes to Consolidated Financial Statements (Continued)
Management determined the fair value of the Company as of September 30, 2017 by using a market-based approach that utilized ou
r market capitalization, as adjusted for factors such as a control premium. After consideration of the Company’s market capitalization, business growth and other factors, management determined that it was more likely than not that the fair value of the Com
pany exceeded its carrying amount at September 30, 2017 and that further analysis was not required.
Additionally, as part of the interim review for indicators of impairment, management analyzed potential changes in value based on operating results for the three months ended December 31, 2017 compared to expected results. Management also considered how the Company’s market capitalization, business growth and other factors used in the September 30, 2017 impairment analysis, could be impacted by changes in market conditions and economic events. For example, the fair market value of the Company’s stock has increased since September 30, 2017. Management considered these trends in performing its assessment of whether an interim impairment review was required. Based on this interim assessment, management concluded that as of December 31, 2017, there were no events or changes in circumstances that indicated it was more likely than not that the Company’s fair value was below its carrying value.
The Company determined there was no goodwill impairment during the years ended December 31, 2017, 2016 and 2015. Nevertheless, significant changes in global economic and market conditions could result in changes to expectations of future financial results and key valuation assumptions. Such changes could result in revisions of management’s estimates of the Company’s fair value and could result in a material impairment of goodwill.
D
ebt Issuance Costs
The Company incurred debt issuance costs in connection with its debt facilities and related amendments. Amounts paid directly to lenders are classified as issuance costs and are recorded as a reduction in the carrying value of the debt. Commitment fees and other costs directly associated with obtaining credit facilities are deferred financing costs which are recorded in the consolidated balance sheets and amortized over the term of the facility.
The Company allocated deferred debt issuance costs incurred for its current credit facility between the revolver and term loan based on their relative borrowing capacity. Deferred debt issuance costs associated with the revolving credit facility are recorded within other assets and those associated with the term loan are recorded as a reduction of the carrying value of the debt on the consolidated balance sheets.
All deferred debt issuance costs are amortized using the effective interest
rate method to interest expense within net interest (income) expense on the Company’s consolidated statements of operations. See Note 8,
Debt
, for additional details.
Fair Value
Accounting standards define fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market in an orderly transaction between market participants on the measurement date. The standards also establish a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. See Note 14,
Fair Value Measurement,
for details of the fair value hierarchy and the related inputs used by the Company.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of accounts receivable. For the years ended December 31, 2017, 2016 and 2015, the Company had no customers which accounted for more than 1% of revenue or 10% of accounts receivable.
Revenue Recognition
In general, the Company recognizes revenue when (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered to the customer, (iii) the fee is fixed or determinable and (iv) collectability is reasonably assured. The Company considers persuasive evidence of an arrangement to be a signed agreement, a binding contract with the restaurant or other similar documentation reflecting the terms and conditions under which products or services will be provided.
The Company generates revenues primarily when diners place an order on the platform through its mobile applications, its websites, third-party websites that incorporate API or one of the Company’s listed phone numbers. Restaurants pay a commission, typically a percentage of the transaction, on orders that are processed through the platform. Most of the restaurants on the Company’s platform can choose their level of commission rate, at or above a base rate. A restaurant can choose to pay a higher rate which affects its prominence and exposure to diners on the platform. Additionally, restaurants that use the Company’s delivery services pay an additional commission for the use of those services. As an agent of the merchant in the transaction, the Company recognizes as revenues only the commissions from the transaction, which are a percentage of the total Gross Food Sales for such transaction.
The Company periodically provides incentive offers to restaurants and diners to use the platform. These promotions are generally cash credits to be applied against purchases. These incentive offers are recorded as reductions in revenues, generally on the date the corresponding revenue is recorded. The Company also accepts payment for orders via gift cards offered on its platform.
If a
50
GRUBHUB INC.
Notes to Consolidated Financial Statements (Continued)
gift card that is not subject to unclaimed property laws is not redeemed, the Company recognizes revenue when the gift card expires or when the likelihood of its redemption becomes remote.
Revenues from online and phone delivery orders are recognized when these orders are placed at the restaurants. The amount of revenue recorded by the Company is based on the arrangement with the related restaurant, and is adjusted for any cash credits, including incentive offers provided to restaurants and diners, related to the transaction. The Company also recognizes as revenue any fees charged to the diner for delivery services provided by the Company. Although the Company will process the entire amount of the transaction with the diner, it will record revenue on a net basis because the Company is acting as an agent of the merchant in the transaction. The Company will record an amount representing the restaurant food liability for the net balance due the restaurant. Costs incurred for processing the transactions and providing delivery services are included in operations and support in the consolidated statements of operations.
Deferred Rent
For the Company’s operating leases, the Company recognizes rent expenses on a straight-line basis over the terms of the leases. Accordingly, the Company records the difference between cash rent payments and the recognition of rent expenses as a deferred rent liability in the consolidated balance sheets. The Company has landlord-funded leasehold improvements that are recorded as tenant allowances which are being amortized as a reduction of rent expense over the noncancelable terms of the operating leases.
Segments
The Company has one reportable segment, which has been identified based on how the chief operating decision maker manages the business, makes operating decisions and evaluates operating performance.
Recently Issued Accounting Pronouncements
In May 2017,
the Financial Accounting Standards Board (the “FASB”)
issued Accounting Standards Update No. 2017
-09, “Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting” (“ASU 2017-09”). ASU 2017-09 provides clarification on when modification accounting should be used for changes to the terms or conditions of a share-based payment award. This ASU does not change the accounting for modifications but clarifies that modification accounting guidance should only be applied if there is a change to the value, vesting conditions, or award classification and would not be required if the changes are considered non-substantive. ASU 2017-09 is effective for the Company beginning in the first quarter of 2018 on a prospective basis and early adoption is permitted. The adoption of ASU 2017-09 is not expected to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.
In January 2017, the FASB issued ASU 2017-04, which eliminates Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with its carrying amount. Under the amendment, an entity should recognize an impairment charge for the amount by which the reporting unit’s carrying amount exceeds its fair value, not to exceed the carrying amount of goodwill. The Company elected to early adopt ASU 2017-04 beginning in the first quarter of 2017 and will apply the standard prospectively. The Company performed its annual goodwill impairment test as of September 30
th
and found no indicators of impairment, therefore no goodwill impairment charge was recognized. The adoption of ASU 2017-04 may reduce the cost and complexity of evaluating goodwill for impairment, but has not had, and is not expected to have, a material impact on the Company’s consolidated financial position, results of operations or cash flows.
In January 2017, the FASB issued Accounting Standards Update No. 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business” (“ASU 2017-01”). ASU 2017-01 provides that when substantially all the fair value of the assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. The Company elected to adopt ASU 2017-01 early; therefore, ASU 2017-01 is effective for transactions beginning in the first quarter of 2017 on a prospective basis. The Company evaluated current year transactions under the guidance set forth by ASU 2017-01. See Note
3
,
Acquisitions
, and Note
5
,
Goodwill and Acquired Intangible Assets
, for details of the Company’s business combinations and other acquired assets during the year ended December 31, 2017. The adoption of ASU 2017-01 did not have, and is not expected to have, a material impact on the Company’s consolidated financial position, results of operations or cash flows.
In August 2016, the FASB issued Accounting Standards Update No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments” (“ASU 2016-15”). ASU 2016-15 adds or clarifies guidance on the classification of certain cash receipts and payments in the statement of cash flows with the intent of reducing diversity in practice related to eight types of cash flows including, among others, debt prepayment or debt extinguishment costs, contingent consideration payments made after a business combination, and separately identifiable cash flows and application of the predominance principle. In addition, in November 2016, the FASB issued Accounting Standards Update No. 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash” (“ASU 2016-18”). ASU 2016-18
requires companies to include amounts generally described as restricted cash and restricted cash equivalents in cash and cash equivalents when reconciling beginning-of-period and end-of-period total amounts shown on the statement of cash flow
. ASU 2016-15 and ASU 2016-18 are effective for the Company beginning in first quarter of 2018 and
51
GRUBHUB INC.
Notes to Consolidated Financial Statements (Continued)
early adoption is permitted. Th
e 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 fi
nancial position, results of operations or cash flows
.
In June 2016, the FASB issued Accounting Standards Update No. 2016-13, “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”). ASU 2016-13 introduces a new forward-looking approach, based on expected losses, to estimate credit losses on certain types of financial instruments, including trade receivables and held-to-maturity debt securities, which will require entities to incorporate considerations of historical information, current information and reasonable and supportable forecasts. This ASU also expands disclosure requirements. ASU 2016-13 is effective for the Company beginning the first quarter of 2020 and early adoption is permitted. The guidance will be applied using the modified-retrospective approach. The adoption of ASU 2016-13 is not expected to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.
In March 2016, the
FASB issued ASU 2016-09, which simplifies several aspects of the accounting for share-based payment transactions
. Under ASU 2016-09, excess tax benefits and tax deficiencies are recognized as income tax expense or benefit in the income statement. ASU 2016-09 also provides entities with the option to elect an accounting policy to continue to estimate forfeitures of stock-based awards over the service period (current GAAP) or account for forfeitures when they occur
. Under ASU 2016-09,
previously unrecognized excess tax benefits should be recognized using a modified retrospective transition. In addition, amendments requiring recognition of excess tax benefits and tax deficiencies in the income statement, as well as changes in the computation of weighted-average diluted shares outstanding, should be applied prospectively.
ASU 2016-09 is effective for and was adopted by the Company beginning in the first quarter of 2017
and the impact of the adoption resulted in the following
:
|
•
|
During the year ended December 31, 2017, the Company recognized excess tax benefits from stock-based compensation of $7.1 million within income tax (benefit) expense on the consolidated statements of operations and within net income on the consolidated statements of cash flows
(adopted prospectively)
.
Prior to adoption, the tax effect of stock-based awards was recognized in additional paid-in capital on the consolidated balance sheets and separately stated in financing activities in the consolidated statements of cash flows.
|
|
•
|
The Company has elected to continue to estimate forfeitures of stock-based awards over the service period.
|
|
•
|
The Company
recorded a
cumulative-effect adjustment for previously unrecognized excess tax benefits of
$2.6 million to opening retained
earnings on the consolidated balance sheets as of January 1, 2017.
|
|
•
|
The excess tax benefits from the assumed proceeds available to repurchase shares were excluded in the computation of diluted earnings per share for the year ended December 31, 2017 (adopted prospectively).
|
In February 2016, the FASB issued
Accounting Standards Update No.
2016-02, “Leases (Topic 842)” (“ASU 2016-02”). Under ASU 2016-02, a lessee will recognize in the statement of financial position a liability to make lease payments and a right-of-use asset for all leases (with the exception of short-term leases) at the commencement date. The recognition, measurement, and presentation of expenses and cash flows arising from a lease under ASU 2016-02 will not significantly change from current GAAP. ASU 2016-02 is effective beginning in the first quarter of 2019 with early adoption permitted. The Company will be required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The Company is currently evaluating the impact of adoption of ASU 2016-02 on its consolidated financial statements and anticipates that it will result in a significant increase in its long-term assets and liabilities but will have no material impact to its results of operations and cash flows.
In May 2014, the FASB issued
Accounting Standards Update No.
2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”)
,
which supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, including most
industry-specific requirements. ASU 2014-09 establishes a five-step revenue recognition process in which an entity will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. ASU 2014-09 also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenues and cash flows from contracts with customers. In August 2015, the FASB issued Accounting Standards Update No. 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date”, which defers the effective date of ASU 2014-09 by one year.
In March 2016, the FASB issued Accounting Standards Update No. 2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)” (“ASU 2016-08”), which clarifies the implementation guidance on principal versus agent considerations in the new revenue recognition standard. ASU 2016-08 clarifies how an entity should identify the unit of accounting (i.e. the specified good or service) for the principal versus agent evaluation and how it should apply the control principle to certain types of arrangements.
In April 2016, the FASB issued Accounting Standards Update No. 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing” (“ASU 2016-10”)
,
which clarifies the implementation guidance on identifying performance obligations and licensing. ASU 2016-10 reduces the cost and complexity of identifying promised goods or services and improves the guidance for determining whether promises are separately identifiable. In May 2016, the FASB issued
52
GRUBHUB INC.
Notes to Consolidated Financial Statements (Continued)
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 collectab
ility, non-cash consideration, presentation of sales tax, and transition. In December 2016, the FASB issued Account Standards Update No. 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers” (“ASU 2016-20”),
which contains additional technical corrections and improvements to the revenue standard but doesn’t change any of the principles in the new revenue guidance.
ASU 2014-09, ASU 2016-08, ASU 2016-10, ASU 2016-12 and ASU 2016-20 became effective for and were
adopted by the Company on January 1, 2018.
The Company applied the modified retrospective approach when adopting these ASUs to contracts that were not completed as of December 31, 2017
. Based on the Company’s assessment, the adoption of these ASUs will hav
e an immaterial impact on the timing of recognition of certain revenues and result in the deferral of certain incremental costs of obtaining a contract. Management does not expect the impact from the adoption of these ASUs to have a material impact on the
Company’s consolidated financial position, results of operations or cash flows or its business processes, systems and controls. However, the Company will provide additional disclosures as required under the ASUs beginning in the first quarter of 2018.
3. Acquisitions
2017 Acquisitions
On October 10, 2017, the Company acquired all of the issued and outstanding equity interests of Eat24, LLC (“Eat24”), a wholly owned subsidiary of Yelp Inc., for approximately $281.8 million, including $281.4 million in net cash paid and $0.3 million of other non-cash consideration. Of such amount, $28.8 million will be held in escrow for an 18-month period after closing to secure the Company’s indemnification rights under the purchase agreement.
Eat24 provides online and mobile food ordering for restaurants and diners across the United States.
The acquisition expanded the breadth and depth of the Company’s national network of restaurant partners and active diners.
The Company granted RSU awards to acquired Eat24 employees in replacement of their unvested equity awards as of the closing date.
Approximately $0.3 million of the fair value of the replacement RSU awards granted to acquired Eat24 employees was attributable to the pre-combination services of the Eat24 awardees and was included in the $281.8 million purchase price. This amount is reflected within goodwill in the purchase price allocation. As of the acquisition date, post-combination expense of approximately $4.1 million is expected to be recognized related to the replacement awards over the remaining post-combination service period.
On August 23, 2017, the Company acquired substantially all of the assets and certain expressly specified liabilities of A&D Network Solutions, Inc. and Dashed, Inc. (collectively, “Foodler”). The purchase price for Foodler was $51.2 million in cash, net of a net working capital adjustment receivable of $0.7 million and cash acquired of $0.1 million. Foodler is an independent online food-ordering company with an established diner base in the Northeast United States. The acquisition expanded the breadth and depth of the Company’s restaurant network, active diners and delivery network.
The results of operations of Eat24 and Foodler have been included in the Company’s financial statements since October 10, 2017 and August 23, 2017, respectively, but did not have a material impact on the Company’s consolidated results of operations for the year ended December 31, 2017.
The excess of the consideration transferred in the acquisitions over the net amounts assigned to the fair value of the assets was recorded as goodwill,
which represents the value of increasing the breadth and depth of the Company’s network of restaurants and diners
. The total goodwill related to the acquisitions of Eat24 and Foodler of $153.4 million is expected to be deductible for income tax purposes.
53
GRUBHUB INC.
Notes to Consolidated Financial Statements (Continued)
The assets acquired and liabilities assumed of Eat24 and Foodler were recorded at their estimated fair values as of the closing dates of October 10, 2017 and August 23, 2
017, respectively. The following table summarizes the preliminary purchase price allocation acquisition-date fair values of the assets and liabilities acquired in connection with the Eat24 and Foodler acquisitions:
|
Eat24
|
|
|
Foodler
|
|
|
Total
|
|
|
(in thousands)
|
Cash
|
$
|
40
|
|
|
$
|
86
|
|
|
$
|
126
|
|
Accounts receivable
|
|
8,267
|
|
|
|
307
|
|
|
|
8,574
|
|
Prepaid expenses and other current assets
|
|
221
|
|
|
|
—
|
|
|
|
221
|
|
Property and equipment
|
|
1,113
|
|
|
|
—
|
|
|
|
1,113
|
|
Restaurant relationships
|
|
126,232
|
|
|
|
35,217
|
|
|
|
161,449
|
|
Diner acquisition
|
|
35,226
|
|
|
|
1,354
|
|
|
|
36,580
|
|
Trademarks
|
|
2,225
|
|
|
|
74
|
|
|
|
2,299
|
|
Developed technology
|
|
2,559
|
|
|
|
1,955
|
|
|
|
4,514
|
|
Goodwill
|
|
135,955
|
|
|
|
17,452
|
|
|
|
153,407
|
|
Accounts payable and accrued expenses
|
|
(30,082
|
)
|
|
|
(5,237
|
)
|
|
|
(35,319
|
)
|
Total purchase price plus cash acquired
|
|
281,756
|
|
|
|
51,208
|
|
|
|
332,964
|
|
Net working capital adjustment receivable
|
|
—
|
|
|
|
737
|
|
|
|
737
|
|
Fair value of replacement RSUs attributable to pre-combination service
|
|
(274
|
)
|
|
|
—
|
|
|
|
(274
|
)
|
Cash acquired
|
|
(40
|
)
|
|
|
(86
|
)
|
|
|
(126
|
)
|
Net cash paid
|
$
|
281,442
|
|
|
$
|
51,859
|
|
|
$
|
333,301
|
|
2016 Acquisitions
On May 5, 2016, the Company acquired all of the issued and outstanding stock of KMLEE Investments Inc. and LABite.com, Inc. (collectively, “LABite”). The purchase price for LABite was $65.8 million in cash, net of cash acquired of $2.6 million. LABite provides online and mobile food ordering and delivery services for restaurants in numerous western and southwestern cities of the United States. The acquisition has expanded the Company’s restaurant, diner and delivery networks.
The results of operations of LABite have been included in the Company’s financial statements since May 5, 2016.
The excess of the consideration transferred in the acquisition over the net amounts assigned to the fair value of the assets acquired was recorded as goodwill, which represents the opportunity to expand restaurant delivery services and enhance the breadth and depth of the Company’s restaurant partners. Of the $40.2 million of goodwill related to the acquisition, $5.0 million is expected to be deductible for income tax purposes.
The assets acquired and liabilities assumed of LABite were recorded at their estimated fair values as of the closing date of May 5, 2016. The following table summarizes the final purchase price allocation acquisition-date fair values of the assets and liabilities acquired in connection with the LABite acquisition:
|
(in thousands)
|
|
Cash and cash equivalents
|
$
|
2,566
|
|
Accounts receivable
|
|
2,320
|
|
Prepaid expenses and other assets
|
|
68
|
|
Restaurant relationships
|
|
46,513
|
|
Property and equipment
|
|
257
|
|
Developed technology
|
|
1,731
|
|
Goodwill
|
|
40,235
|
|
Trademarks
|
|
440
|
|
Accounts payable and accrued expenses
|
|
(6,303
|
)
|
Net deferred tax liability
|
|
(19,412
|
)
|
Total purchase price plus cash acquired
|
|
68,415
|
|
Cash acquired
|
|
(2,566
|
)
|
Net cash paid
|
$
|
65,849
|
|
54
GRUBHUB INC.
Notes to Consolidated Financial Statements (Continued)
2015 Acquisitions
On February 4, 2015, the Company acquired assets of DiningIn.com, Inc. and certain of its affiliates (collectively, “DiningIn”), on February 27, 2015, the Company acquired the membership units of Restaurants on the Run, LLC (“Restaurants on the Run”) and on December 4, 2015, the Company acquired the membership units of Mealport USA, LLC (“Delivered Dish”).
Aggregate consideration
for the three acquisitions was approximately $73.9 million in cash and 407,812 restricted shares of the Company’s common stock, or an estimated total transaction value of approximately $89.9 million based on the Company’s closing share price on the respective closing dates, net of cash acquired of $0.7 million. DiningIn, Restaurants on the Run and Delivered Dish provide delivery options for individual diners, group orders and corporate catering. The acquisitions have expanded and enhanced the Company’s service offerings for its customers, particularly in the delivery space.
The results of operations of DiningIn, Restaurants on the Run and Delivered Dish have been included in the Company’s financial statements since February 4, 2015, February 27, 2015 and December 4, 2015, respectively.
The excess of the consideration transferred in the acquisitions over the net amounts assigned to the fair value of the assets acquired was recorded as goodwill, which represents the opportunity to expand restaurant delivery services and enhance the breadth and depth of the Company’s restaurant network.
The goodwill related to these acquisitions of $43.4 million is expected to be deductible for income tax purposes.
The assets acquired and liabilities assumed of DiningIn, Restaurants on the Run and Delivered Dish were recorded at their estimated fair values as of the closing dates of February 4, 2015, February 27, 2015 and December 4, 2015, respectively. The following table summarizes the final purchase price allocation acquisition-date fair values of the assets and liabilities acquired in connection with the DiningIn, Restaurants on the Run and Delivered Dish acquisitions:
|
|
|
|
(in thousands)
|
|
Cash and cash equivalents
|
|
|
|
$
|
698
|
|
Accounts receivable
|
|
|
|
|
2,331
|
|
Prepaid expenses and other assets
|
|
|
|
|
325
|
|
Restaurant relationships
|
|
|
|
|
44,259
|
|
Property and equipment
|
|
|
|
|
161
|
|
Developed technology
|
|
|
|
|
4,676
|
|
Goodwill
|
|
|
|
|
43,432
|
|
Trademarks
|
|
|
|
|
529
|
|
Accounts payable and accrued expenses
|
|
|
|
|
(5,826
|
)
|
Total purchase price plus cash acquired
|
|
|
|
|
90,585
|
|
Cash acquired
|
|
|
|
|
(698
|
)
|
Fair value of common stock issued
|
|
|
|
|
(15,980
|
)
|
Net cash paid
|
|
|
|
$
|
73,907
|
|
Additional Information
The estimated fair values of the intangible assets acquired were determined based on a combination of the income, cost, and market approaches to measure the fair value of the restaurant relationships, diner acquisition, developed technology and trademarks. The fair value of the trademarks was measured based on the relief from royalty method. The cost approach, specifically the cost to recreate method, was used to value the developed technology and diner acquisition. The income approach, specifically the multi-period excess earnings method, was used to value the restaurant relationships. These fair value measurements were based on significant inputs not observable in the market and thus represent Level 3 measurements within the fair value hierarchy.
The Company incurred certain expenses directly and indirectly related to acquisitions which were recognized in general and administrative expenses within the consolidated statements of operations for the year ended December 31, 2017, 2016 and 2015
of $5.6
million, $2.0 million, and $1.1 million, respectively.
Pro Forma
55
GRUBHUB INC.
Notes to Consolidated Financial Statements (Continued)
The following unaudited pro forma information presents a summary of the operating results of the Company for the years ended December 31,
2017
and
2016
as if the acquisitio
ns of Eat24, Foodler and LABite had occurred as of January 1 of the year prior to acquisition:
|
Year Ended December 31,
|
|
|
2017
|
|
|
2016
|
|
|
(in thousands, except per share data)
|
|
Revenues
|
$
|
748,810
|
|
|
$
|
578,462
|
|
Net income
|
|
86,313
|
|
|
|
27,318
|
|
Net income per share attributable to common shareholders:
|
|
|
|
|
|
|
|
Basic
|
$
|
1.00
|
|
|
$
|
0.32
|
|
Diluted
|
$
|
0.98
|
|
|
$
|
0.32
|
|
The pro forma adjustments that reflect the amortization that would have been recognized for intangible assets, elimination of transaction costs incurred, stock-based compensation expense for replacement awards, interest expense for transaction financings and other adjustments, as well as the pro forma tax impact of such adjustments for the years ended December 31,
2017
and
2016
were as follows:
|
Year Ended December 31,
|
|
|
2017
|
|
|
2016
|
|
|
(in thousands)
|
|
Depreciation and amortization
|
$
|
8,533
|
|
|
$
|
17,832
|
|
Transaction costs
|
|
(5,630
|
)
|
|
|
5,630
|
|
Stock-based compensation
|
|
(2,085
|
)
|
|
|
(1,800
|
)
|
Interest expense
|
|
3,761
|
|
|
|
5,191
|
|
Other
|
|
4,690
|
|
|
|
4,118
|
|
Income tax benefit
|
|
(3,847
|
)
|
|
|
(12,977
|
)
|
The unaudited pro forma revenues and net income are not intended to represent or be indicative of the Company’s consolidated results of operations or financial condition that would have been reported had the acquisitions been completed as of the beginning of the
periods presented and should not be taken as indicative of the Company’s future consolidated results of operations or financial condition.
4. Marketable Securities
The amortized cost, unrealized gains and losses and estimated fair value of the Company’s held-to-maturity marketable securities as of December 31, 2017 and 2016 were as follows:
|
|
December 31, 2017
|
|
|
|
Amortized Cost
|
|
|
Unrealized Gains
|
|
|
Unrealized Losses
|
|
|
Estimated
Fair Value
|
|
|
|
(in thousands)
|
|
Cash and cash equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper
|
|
$
|
39,979
|
|
|
$
|
—
|
|
|
$
|
(43
|
)
|
|
$
|
39,936
|
|
Corporate bonds
|
|
|
1,250
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,250
|
|
Short-term investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper
|
|
|
21,480
|
|
|
|
—
|
|
|
|
(99
|
)
|
|
|
21,381
|
|
Corporate bonds
|
|
|
2,125
|
|
|
|
—
|
|
|
|
(1
|
)
|
|
|
2,124
|
|
Total
|
|
$
|
64,834
|
|
|
$
|
—
|
|
|
$
|
(143
|
)
|
|
$
|
64,691
|
|
56
GRUBHUB INC.
Notes to Consolidated Financial Statements (Continued)
|
|
December 31, 2016
|
|
|
|
Amortized Cost
|
|
|
Unrealized Gains
|
|
|
Unrealized Losses
|
|
|
Estimated
Fair Value
|
|
|
|
(in thousands)
|
|
Cash and cash equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper
|
|
$
|
59,175
|
|
|
$
|
2
|
|
|
$
|
(28
|
)
|
|
$
|
59,149
|
|
Corporate bonds
|
|
|
5,000
|
|
|
|
1
|
|
|
|
—
|
|
|
|
5,001
|
|
U.S. government agency bonds
|
|
|
5,500
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,500
|
|
Short term investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper
|
|
|
73,002
|
|
|
|
—
|
|
|
|
(214
|
)
|
|
|
72,788
|
|
Corporate bonds
|
|
|
11,089
|
|
|
|
4
|
|
|
|
(5
|
)
|
|
|
11,088
|
|
Total
|
|
$
|
153,766
|
|
|
$
|
7
|
|
|
$
|
(247
|
)
|
|
$
|
153,526
|
|
All of the Company’s marketable securities were classified as held-to-maturity investments and have maturities within one year of December 31, 2017.
Approximately $80 million of the Company’s marketable securities matured during the year ended December 31, 2017, which was invested in money market funds as of December 31, 2017. See Note
14
,
Fair Value Measurement
, for additional details.
The gross unrealized losses, estimated fair value and length of time the individual marketable securities were in a continuous loss position for those marketable securities in an unrealized loss position as of December 31, 2017 and 2016 were as follows:
|
|
December 31, 2017
|
|
|
|
Less Than 12 Months
|
|
|
12 Months or Greater
|
|
|
Total
|
|
|
|
Estimated
Fair Value
|
|
|
Unrealized Loss
|
|
|
Estimated
Fair Value
|
|
|
Unrealized
Loss
|
|
|
Estimated
Fair Value
|
|
|
Unrealized Loss
|
|
|
|
(in thousands)
|
|
Commercial paper
|
|
$
|
61,317
|
|
|
$
|
(142
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
61,317
|
|
|
$
|
(142
|
)
|
Corporate bonds
|
|
|
3,374
|
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
3,374
|
|
|
|
(1
|
)
|
Total
|
|
$
|
64,691
|
|
|
$
|
(143
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
64,691
|
|
|
$
|
(143
|
)
|
|
|
December 31, 2016
|
|
|
|
Less Than 12 Months
|
|
|
12 Months or Greater
|
|
|
Total
|
|
|
|
Estimated
Fair Value
|
|
|
Unrealized Loss
|
|
|
Estimated
Fair Value
|
|
|
Unrealized
Loss
|
|
|
Estimated
Fair Value
|
|
|
Unrealized Loss
|
|
|
|
(in thousands)
|
|
Commercial paper
|
|
$
|
130,938
|
|
|
$
|
(242
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
130,938
|
|
|
$
|
(242
|
)
|
Corporate bonds
|
|
|
6,556
|
|
|
|
(5
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
6,556
|
|
|
|
(5
|
)
|
Total
|
|
$
|
137,494
|
|
|
$
|
(247
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
137,494
|
|
|
$
|
(247
|
)
|
The Company recognized interest income during the years ended December 31, 2017, 2016 and 2015 of $2.0 million, $1.3 million and $0.5 million, respectively, within net interest (income) expense on the consolidated statements of operations.
During the years ended December 31, 2017, 2016 and 2015, the Company did not recognize any other-than-temporary impairment losses related to its marketable securities.
The Company’s marketable securities are classified within Level 2 of the fair value hierarchy (see Note 14,
Fair Value Measurement,
for further details).
57
GRUBHUB INC.
Notes to Consolidated Financial Statements (Continued)
5
. Goodwill and Acquired Intangible Assets
The components of acquired intangible assets as of December 31, 2017 and 2016 were as follows:
|
|
December 31, 2017
|
|
|
December 31, 2016
|
|
|
|
Gross Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Value
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Value
|
|
|
|
(in thousands)
|
|
Restaurant relationships
|
|
$
|
457,580
|
|
|
$
|
(76,852
|
)
|
|
$
|
380,728
|
|
|
$
|
279,651
|
|
|
$
|
(57,765
|
)
|
|
$
|
221,886
|
|
Developed technology
|
|
|
8,523
|
|
|
|
(6,418
|
)
|
|
|
2,105
|
|
|
|
10,640
|
|
|
|
(9,575
|
)
|
|
|
1,065
|
|
Diner acquisition
|
|
|
40,247
|
|
|
|
(1,906
|
)
|
|
|
38,341
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Trademarks
|
|
|
2,225
|
|
|
|
(402
|
)
|
|
|
1,823
|
|
|
|
969
|
|
|
|
(582
|
)
|
|
|
387
|
|
Other
|
|
|
6,888
|
|
|
|
(4,008
|
)
|
|
|
2,880
|
|
|
|
3,350
|
|
|
|
(2,734
|
)
|
|
|
616
|
|
Total amortizable intangible assets
|
|
|
515,463
|
|
|
|
(89,586
|
)
|
|
|
425,877
|
|
|
|
294,610
|
|
|
|
(70,656
|
)
|
|
|
223,954
|
|
Indefinite-lived trademarks
|
|
|
89,676
|
|
|
|
—
|
|
|
|
89,676
|
|
|
|
89,676
|
|
|
|
—
|
|
|
|
89,676
|
|
Total acquired intangible assets
|
|
$
|
605,139
|
|
|
$
|
(89,586
|
)
|
|
$
|
515,553
|
|
|
$
|
384,286
|
|
|
$
|
(70,656
|
)
|
|
$
|
313,630
|
|
The gross carrying amount and accumulated amortization of the Company’s developed technology, trademark and other intangible assets as of December 31, 2017 were adjusted by $9.1 million for certain fully amortized assets that were no longer in use.
Amortization expense for acquired intangible assets was $28.1 million, $20.9 million and $18.2 million for the years ended December 31, 2017, 2016 and 2015, respectively.
The changes in the carrying amount of goodwill for the years ended December 31, 2017 and 2016 were as follows.
|
|
Goodwill
|
|
|
Accumulated Impairment Losses
|
|
|
Net Book Value
|
|
|
|
(in thousands)
|
|
Balance as of December 31, 2015
|
|
$
|
396,220
|
|
|
$
|
—
|
|
|
$
|
396,220
|
|
Acquisitions
|
|
|
40,235
|
|
|
|
—
|
|
|
|
40,235
|
|
Balance as of December 31, 2016
|
|
|
436,455
|
|
|
|
—
|
|
|
|
436,455
|
|
Acquisitions
|
|
|
153,407
|
|
|
|
—
|
|
|
|
153,407
|
|
Balance as of December 31, 2017
|
|
$
|
589,862
|
|
|
$
|
—
|
|
|
$
|
589,862
|
|
In January 2017, the Company
entered into an agreement with Zoomer Inc. (“Zoomer”) whereby Zoomer waived non-solicitation provisions allowing the Company to engage the services of certain former Zoomer employees and consultants.
In September of 2017, the Company acquired certain assets of OrderUp, Inc. (“OrderUp”), a wholly-owned subsidiary of Groupon, Inc. OrderUp provides online and mobile food ordering for restaurants across the United States.
During the
year ended December 31, 2017, the Company recorded additions to acquired intangible assets of $230.0 million as a result of the acquisitions of Eat24 and Foodler, the acquisition of certain assets of OrderUp and payments made to Zoomer. During the year ended December 31,
2016
, the Company recorded additions to acquired intangible assets of
$48.9
million as a result of the acquisition of LABite and the purchase of other assets. The components of the acquired intangible assets added during the years ended December 31, 2017 and 2016 were as follows:
|
|
Year Ended December 31, 2017
|
|
|
Year Ended December 31, 2016
|
|
|
|
Amount
|
|
|
Weighted-Average
Amortization
Period
|
|
|
Amount
|
|
|
Weighted-Average
Amortization
Period
|
|
|
|
(in thousands)
|
|
|
(years)
|
|
|
(in thousands)
|
|
|
(years)
|
|
Restaurant relationships
|
|
$
|
177,929
|
|
|
|
19.3
|
|
|
$
|
46,513
|
|
|
|
20.0
|
|
Diner acquisition
|
|
|
40,247
|
|
|
|
5.0
|
|
|
|
—
|
|
|
|
|
|
Developed technology
|
|
|
4,514
|
|
|
|
0.5
|
|
|
|
1,731
|
|
|
|
2.7
|
|
Trademarks
|
|
|
2,299
|
|
|
|
1.2
|
|
|
|
440
|
|
|
|
2.0
|
|
Other
|
|
|
5,000
|
|
|
|
2.8
|
|
|
|
250
|
|
|
|
3.0
|
|
Total
|
|
$
|
229,989
|
|
|
|
|
|
|
$
|
48,934
|
|
|
|
|
|
58
GRUBHUB INC.
Notes to Consolidated Financial Statements (Continued)
Estimated future amortization expense of acquired intangible assets as of December 31, 2017 was as follows:
|
|
(in thousands)
|
|
2018
|
|
$
|
39,310
|
|
2019
|
|
|
33,827
|
|
2020
|
|
|
32,254
|
|
2021
|
|
|
32,254
|
|
2022
|
|
|
30,292
|
|
Thereafter
|
|
|
257,940
|
|
Total
|
|
$
|
425,877
|
|
As of December 31, 2017, the estimated remaining weighted-average useful life of the Company’s acquired intangibles was 15.0 years. The Company recognizes amortization expense for acquired intangibles on a straight-line basis.
6. Property and Equipment
The components of the Company’s property and equipment as of December 31, 2017 and 2016 were as follows:
|
|
December 31, 2017
|
|
|
December 31, 2016
|
|
|
|
(in thousands)
|
|
Computer equipment
|
|
$
|
31,601
|
|
|
$
|
17,548
|
|
Furniture and fixtures
|
|
|
6,857
|
|
|
|
4,842
|
|
Developed software
|
|
|
52,041
|
|
|
|
26,460
|
|
Purchased software and digital assets
|
|
|
2,881
|
|
|
|
1,360
|
|
Leasehold improvements
|
|
|
23,400
|
|
|
|
19,038
|
|
Property and equipment
|
|
|
116,780
|
|
|
|
69,248
|
|
Accumulated amortization and depreciation
|
|
|
(45,396
|
)
|
|
|
(22,693
|
)
|
Property and equipment, net
|
|
$
|
71,384
|
|
|
$
|
46,555
|
|
The Company recorded depreciation and amortization expense for property and equipment other than developed software for the years ended December 31, 2017, 2016 and 2015 of $11.7 million, $8.9 million and $5.7 million, respectively.
During the year ended December 31, 2015, the Company recorded approximately $1.9 million of accelerated depreciation and amortization expense related to developed and
purchased software and computer equipment assets that were disposed of with the migration of nearly all of the Seamless consumer diner traffic to a new web and mobile platform during the second quarter of 2015
.
The Company capitalized developed software costs of $26.0 million, $15.6 million and $8.0 million for the years ended December 31, 2017, 2016 and 2015, respectively. Amortization expense for developed software costs, recognized in depreciation and amortization in the consolidated statements of operations, for the years ended December 31, 2017, 2016 and 2015 was $12.0 million, $5.4 million and $4.1 million, respectively.
7. Commitments and Contingencies
Office Facility Leases
The Company has various operating lease agreements for its office facilities which expire at various dates through September 2029. The terms of the lease agreements provide for rental payments on a graduated basis. For its primary operating leases, the Company can, after the initial lease term, renew its leases under right of first offer terms at fair value at the time of renewal for a period of five years. The Company recognizes rent expense on a straight-line basis over the lease term.
Rental expense, primarily for leased office space under the operating lease commitments, was $7.5 million, $5.6 million and $4.1 million for the years ended December 31, 2017, 2016 and 2015, respectively.
59
GRUBHUB INC.
Notes to Consolidated Financial Statements (Continued)
Future minimum lease payments under the Company’s operating lease agreements that have initial or remaining non-cancelable lease terms in excess of one year as of December 31, 2017 were as follows:
|
|
(in thousands)
|
|
2018
|
|
$
|
7,714
|
|
2019
|
|
|
10,822
|
|
2020
|
|
|
11,566
|
|
2021
|
|
|
11,527
|
|
2022
|
|
|
9,952
|
|
Thereafter
|
|
|
64,546
|
|
Total
|
|
$
|
116,127
|
|
The table above does not reflect the Company’s option to exercise early termination rights or the payment of related early termination fees.
Legal
In August 2011, Ameranth, Inc. (“Ameranth”) filed a patent infringement action against a number of defendants, including Grubhub Holdings Inc., in the U.S. District Court for the Southern District of California (the “Court”), Case No. 3:11-cv-1810 (“’1810 action”).
In March 2012, Ameranth initiated eight additional actions for infringement of a related patent, U.S. Patent No. 8,146,077 (“’077 patent”), in the same forum, including separate actions against Grubhub Holdings Inc., Case No. 3:12-cv-739 (“’739 action”), and Seamless North America, LLC, Case No. 3:12-cv-737 (“’737 action”). In August 2012, the Court severed the claims against Grubhub Holdings Inc. and Seamless North America, LLC in the ’1810 action and consolidated them with the ’739 action and the ’737 action, respectively. Later, the Court consolidated these separate cases against Grubhub Holdings Inc. and Seamless North America, LLC, along with the approximately 40 other cases Ameranth filed in the same district, with the original ’1810 action. In their answers, Grubhub Holdings Inc. and Seamless North America, LLC denied infringement and interposed various defenses, including non-infringement, invalidity, unenforceability and inequitable conduct.
The consolidated district court case was stayed until January 2017, when Ameranth’s motion to lift the stay and proceed on only the ‘077 patent was granted.
The court set a jury trial date of December 3, 2018 for the claims against Grubhub Holdings Inc. and Seamless North America, LLC.
The Company believes this case lacks merit and that it has strong defenses to all of the infringement claims. The Company intends to defend the suit vigorously. However, the Company is unable to predict the likelihood of success of Ameranth’s infringement claims and is unable to predict the likelihood of success of its counterclaims. The Company has not recorded an accrual related to this lawsuit as of
December 31, 2017,
as it does not believe a material loss is probable. It is a reasonable possibility that a loss may be incurred; however, the possible range of loss is not estimable given the status of the case and the uncertainty as to whether the claims at issue are with or without merit, will be settled out of court, or will be determined in the Company’s favor, whether the Company may be required to expend significant management time and financial resources on the defense of such claims, and whether the Company will be able to recover any losses under its insurance policies.
In addition to the matter described above, from time to time, the Company is involved in various other legal proceedings arising from the normal course of business activities, including labor and employment claims, some of which relate to the alleged misclassification of independent contractors. In September 2015, a claim was brought in the United States District Court for the Northern District of California under the Private Attorneys General Act by an individual plaintiff on behalf of himself and seeking to represent other drivers and the State of California. The claim sought monetary penalties and injunctive relief for alleged violations of the California Labor Code based on the alleged misclassification of drivers as independent contractors.
A decision was issued on February 8, 2018, and the court ruled in favor of the Company, finding that plaintiff was properly classified as an independent contractor.
The Company does not believe any of the foregoing claims will have a material impact on its consolidated financial statements. However,
there is no assurance that any claim will not be combined into a collective or class action.
Indemnification
In connection with the merger of Seamless North America, LLC, Seamless Holdings Corporation and Grubhub Holdings Inc. in August 2013, the Company agreed to indemnify Aramark Holdings Corporation for negative income tax consequences associated with the October 2012 spin-off of Seamless Holdings Corporation that were the result of certain actions taken by the Company through October 29, 2014, in certain instances subject to a $15.0 million limitation. Management is not aware of any actions that would impact the indemnification obligation.
60
GRUBHUB INC.
Notes to Consolidated Financial Statements (Continued)
8
. Debt
The following table summarizes the carrying value of the Company’s debt as of December 31, 2017:
|
|
December 31, 2017
|
|
|
|
(in thousands)
|
|
Term loan
|
|
$
|
124,219
|
|
Revolving loan
|
|
|
50,000
|
|
Total debt
|
|
|
174,219
|
|
Less current portion
|
|
|
(3,906
|
)
|
Less unamortized deferred debt issuance costs
|
|
|
(668
|
)
|
Long-term debt
|
|
$
|
169,645
|
|
On October 10, 2017, the Company entered into a credit agreement which provides, among other things, for aggregate revolving loans up to $225 million and term loans in an aggregate principal amount of $125 million (the “Credit Agreement”). In addition, the Company may incur up to $150 million of incremental revolving loans or incremental revolving term loans pursuant to the terms and conditions of the Credit Agreement. The credit facility will be available to the Company until October 9, 2022. The Credit Agreement replaced the Company’s $185.0 million secured revolving credit facility (the “Previous Credit Agreement”), which was due to expire on April 28, 2021.
On October 10, 2017, the Company borrowed $200 million under the Credit Agreement, including $125.0 million of term loans and $75.0 million of revolving loans. The Company utilized the term loans to finance a portion of the purchase price and transaction costs in connection with the acquisition of Eat24, LLC (“Eat24”).
During the year ended December 31, 2017, the Company made principal payments of $25.8 million from cash flows from operations.
As of December 31, 2017, outstanding borrowings under the Credit Agreement were $174.2 million.
The fair value of the Company’s outstanding debt approximates its carrying value as of December 31, 2017. Additional capacity on the Credit Agreement may be used for general corporate purposes, including funding working capital and future acquisitions
.
Under the Credit Agreement, borrowings bear interest, at the Company’s option, based on LIBOR or an alternate base rate plus a margin. In the case of LIBOR loans, the margin ranges between 1.25% and 2.00% and, in the case of alternate base rate loans, between 0.25% and 1.0%, in each case, based upon the Company’s consolidated leverage ratio (as defined in the Credit Agreement).
The Company is also required to pay a commitment fee on the undrawn portion available under the revolving loan facility of between 0.20% and 0.30% per annum, based upon the Company’s consolidated leverage ratio.
The Company incurred loan origination fees at closing of the Credit Agreement and other expenses related to the financing of the facility of $2.0 million, which, in addition to the $0.7 million remaining balance of loan origination costs under the Previous Credit Agreement, will be amortized over the term of the facility
. As of December 31, 2017, total unamortized debt issuance costs of $2.6 million were recorded as other assets and as a reduction of long-term debt on the consolidated balance sheets in proportion to the borrowing capacities of the revolving and term loans.
Interest expense includes interest on outstanding borrowings, amortization of debt issuance costs and commitment fees on the undrawn portion available under the credit facility. During the years ended December 31, 2017 and 2016, the Company recognized interest expense of $2.1 million and $0.6 million, respectively. The effective interest rate, including amortization of debt issuance costs and commitment fees, for borrowings under the Credit Agreement for the year ended December 31, 2017 was 3.00%.
The obligations under the Credit Agreement and the guarantees are secured by a lien on substantially all of the tangible and intangible property of the Company and the domestic subsidiaries that are guarantors, and by a pledge of all of the equity interests of the Company’s domestic subsidiaries, subject to certain exceptions set forth in the Credit Agreement.
The Credit Agreement contains customary covenants that, among other things, require the Company to satisfy certain financial covenants and may restrict the Company’s ability to incur additional debt, pay dividends and make distributions, make certain investments and acquisitions, create liens, transfer and sell material assets and merge or consolidate.
The Company was in compliance with the covenants as of December 31, 2017.
Future maturities of principal payments, excluding potential early payments, as of December 31, 2017 are expected to be as follows:
61
GRUBHUB INC.
Notes to Consolidated Financial Statements (Continued)
|
|
(in thousands)
|
|
2018
|
|
$
|
3,906
|
|
2019
|
|
|
6,250
|
|
2020
|
|
|
6,250
|
|
2021
|
|
|
7,031
|
|
2022
|
|
|
7,031
|
|
Thereafter
|
|
|
143,751
|
|
Total
|
|
$
|
174,219
|
|
9. Stock-Based Compensation
In May 2015, the Company’s stockholders approved the Grubhub Inc. 2015 Long-Term Incentive Plan (the “2015 Plan”), pursuant to which the Compensation Committee of the Board of Directors may grant stock options, stock appreciation rights, restricted stock awards, restricted stock units, performance awards and other stock-based and cash-based awards. On May 20, 2015, the Company filed a registration statement on Form S-8 to register up to 14,256,901 shares of common stock reserved for issuance pursuant to awards granted under the 2015 Plan. Effective May 20, 2015, no further grants will be made under the Company’s 2013 Omnibus Incentive Plan (the “2013 Plan”).
As of December 31,
2017
, there were 5,081,599 shares of common stock authorized and available
for issuance pursuant to awards granted under the 2015 Plan
.
The Board of Directors of the Company and committee or subcommittee of the Board of Directors has discretion to establish the terms and conditions for grants, including, but not limited to, the number of shares and vesting and forfeiture provisions.
The Company has granted stock options, restricted stock units and restricted stock awards under its incentive plans. The Company recognizes compensation expense based on estimated grant date fair values for all stock-based awards issued to employees and directors, including stock options, restricted stock units and restricted stock awards. For all stock options outstanding as of December 31, 2017, the exercise price of the stock options equals the fair value of the stock option on the grant date. The stock options and restricted stock units vest over different lengths of time, but generally over 4 years, and are subject to forfeiture upon termination of employment prior to vesting. The maximum term for stock options issued to employees under the 2015 Plan and the 2013 Plan is 10 years, and they expire 10 years from the date of grant. Compensation expense for stock options, restricted stock units and restricted stock awards is recognized ratably over the vesting period.
The rights granted to the recipient of a restricted stock unit generally accrue over the vesting period. Participants holding restricted stock units are not entitled to any ordinary cash dividends paid by the Company with respect to such shares unless otherwise provided by the terms of the award. The Company does not expect to pay any dividends in the foreseeable future.
The recipient of a restricted stock award shall have all of the rights of a holder of shares of the Company’s common stock, including the right to receive dividends, if any, the right to vote such 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 $32.7 million, $23.6 million and $13.5
million during the years ended December 31, 2017, 2016 and 2015, respectively.
As of December 31,
2017
, $95.1 million of total unrecognized stock-based compensation expense is expected to be recognized over a weighted-average period of 2.9 years.
Excess tax benefits reflect the total realized value of the Company’s tax deductions from individual stock option exercise transactions and the vesting of restricted stock awards and restricted stock units in excess of the deferred tax assets that were previously recorded.
During the year ended December 31, 2017, the Company
recognized excess tax benefits from stock-based compensation of $7.1 million within income tax (benefit) expense on the consolidated statements of operations and within cash flows from operating activities on the consolidated statements of cash flows.
During the years ended December 31, 2016 and 2015, 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 and $27.8 million, respectively. The change in presentation of excess tax benefits during the
year
ended December 31, 2017 is a result of the adoption of ASU 2016-09. See Note 2,
Summary of Significant Accounting Policies,
for additional information related to the impact of the adoption of ASU 2016-09.
62
GRUBHUB INC.
Notes to Consolidated Financial Statements (Continued)
The Company capitalized stock-based compensation expense as website and software development costs of
$4.5 million, $2.1 million and $0.5 million for the years ended December 31, 2017, 2016 and 2015, respectively.
Stock Options
The Company granted 618,899, 166,272 and 2,542,523 stock options during the years ended December 31, 2017, 2016 and 2015, 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 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 Company transitioned from using a simplified method for calculating the expected term of its options as it has obtained sufficient historical information to derive a reasonable estimate, therefore, beginning in the first quarter of 2017 the expected term calculation for option awards considers a combination of the Company’s historical and estimated future exercise behavior.
The 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, 2017, 2016 and 2015 were as follows:
|
|
Year Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Weighted-average fair value options granted
|
|
$
|
15.19
|
|
|
$
|
12.59
|
|
|
$
|
14.66
|
|
Average risk-free interest rate
|
|
|
1.65
|
%
|
|
|
1.41
|
%
|
|
|
1.65
|
%
|
Expected stock price volatilities
|
|
|
48.7
|
%
|
|
|
49.7
|
%
|
|
|
48.4
|
%
|
Dividend yield
|
|
None
|
|
|
None
|
|
|
None
|
|
Expected stock option life (years)
(a)
|
|
|
4.00
|
|
|
|
5.84
|
|
|
|
6.07
|
|
|
(a)
|
During the year ended December 31, 2017, the expected term calculation for option awards was based on the Company’s historical exercise experience and estimated future exercise behavior. During the years ended December 31, 2016 and 2015, the expected term of option awards was estimated using a simplified method due to the limited period of time stock-based awards had been exercisable.
|
|
Stock option awards as of December 31, 2017 and 2016, and changes during the year ended December 31, 2017, were as follows:
|
|
Options
|
|
|
Weighted-Average
Exercise Price
|
|
|
Aggregate Intrinsic
Value
(thousands)
|
|
|
Weighted-Average
Exercise Term
(years)
|
|
Outstanding at December 31, 2016
|
|
|
2,992,724
|
|
|
$
|
22.43
|
|
|
$
|
46,608
|
|
|
|
7.68
|
|
Granted
|
|
|
618,899
|
|
|
|
38.49
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(177,064
|
)
|
|
|
30.91
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(728,710
|
)
|
|
|
22.47
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2017
|
|
|
2,705,849
|
|
|
|
25.53
|
|
|
|
125,197
|
|
|
|
7.28
|
|
Vested and expected to vest at December 31, 2017
|
|
|
2,639,619
|
|
|
|
25.53
|
|
|
|
121,850
|
|
|
|
7.28
|
|
Exercisable at December 31, 2017
|
|
|
1,286,981
|
|
|
$
|
19.14
|
|
|
$
|
67,770
|
|
|
|
6.36
|
|
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, 2017, 2016 and 2015 was $19.5 million, $30.2 million and $87.6 million, respectively.
The Company recorded compensation expense for stock options of $11.8 million, $12.3 million and $9.9 million for the years ended December 31, 2017, 2016 and 2015, respectively. As of December 31, 2017, total unrecognized compensation cost, adjusted for estimated forfeitures, related to non-vested stock options was $16.3 million and is expected to be recognized over a weighted-average period of 2.2 years.
63
GRUBHUB INC.
Notes to Consolidated Financial Statements (Continued)
Restricted Stock Units and Restricted Stock Awards
Non-vested restricted stock units as of December 31, 2017 and 2016, and changes during the year ended December 31, 2017 were as follows:
|
|
Restricted Stock Units
|
|
|
|
Shares
|
|
|
Weighted-Average
Grant Date Fair
Value
|
|
Outstanding at December 31, 2016
|
|
|
1,516,354
|
|
|
$
|
28.46
|
|
Granted
|
|
|
1,943,467
|
|
|
|
40.99
|
|
Forfeited
|
|
|
(402,647
|
)
|
|
|
34.01
|
|
Vested
|
|
|
(602,373
|
)
|
|
|
28.11
|
|
Outstanding at December 31, 2017
|
|
|
2,454,801
|
|
|
$
|
37.56
|
|
C
ompensation expense related to restricted stock units was
$20.9 million, $9.6 million and $1.7 million during the years ended
December 31, 2017, 2016 and
2015
, respectively
. The aggregate fair value as of the vest date of restricted stock units that vested during years ended December 31, 2017 and 2016 was $27.3 million and $5.8 million, respectively. No restricted stock units vested during the year ended December 31, 2015. As of
December 31, 2017
, $78.8 million of total unrecognized compensation cost, adjusted for estimated forfeitures, related to 2,441,460 non-vested restricted stock units expected to vest with weighted-average grant date fair values of $37.56 is expected to be recognized over a weighted-average period of 3.0 years. 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.
Compensation expense recognized related to restricted stock awards was $1.7 million and $1.9 million during the years ended December 31, 2016 and 2015, respectively
. There were no non-vested restricted stock awards or related expense during the year ended
December 31, 2017
.
The aggregate fair value as of the vest date of restricted stock awards that vested during the years ended December 31, 2016 and 2015 was $1.7 million and $1.4 million, respectively. As of
December 31, 2017
, 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 (“U.K.”) and various state jurisdictions.
For the years ended December 31, 2017, 2016 and 2015, the income tax provision was comprised of the following:
|
|
Year Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
(in thousands)
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
16,852
|
|
|
$
|
24,509
|
|
|
$
|
20,947
|
|
State
|
|
|
4,721
|
|
|
|
8,132
|
|
|
|
6,260
|
|
Foreign
|
|
|
271
|
|
|
|
338
|
|
|
|
480
|
|
Total current
|
|
|
21,844
|
|
|
|
32,979
|
|
|
|
27,687
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(30,794
|
)
|
|
|
800
|
|
|
|
(1,534
|
)
|
State
|
|
|
(385
|
)
|
|
|
516
|
|
|
|
(2,301
|
)
|
Total deferred
|
|
|
(31,179
|
)
|
|
|
1,316
|
|
|
|
(3,835
|
)
|
Total income tax (benefit) expense
|
|
$
|
(9,335
|
)
|
|
$
|
34,295
|
|
|
$
|
23,852
|
|
64
GRUBHUB INC.
Notes to Consolidated Financial Statements (Continued)
Income before provision for income taxes for the years ended December 31, 2017, 2016 and 2015, was as follows:
|
|
Year Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
(in thousands)
|
|
Domestic source
|
|
$
|
88,357
|
|
|
$
|
82,033
|
|
|
$
|
59,705
|
|
Foreign source
|
|
|
1,291
|
|
|
|
1,819
|
|
|
|
2,224
|
|
Income before provision for income taxes
|
|
$
|
89,648
|
|
|
$
|
83,852
|
|
|
$
|
61,929
|
|
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, 2017, 2016 and 2015:
|
|
Year Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
(in thousands)
|
|
Income tax expense at statutory rate
|
|
$
|
31,377
|
|
|
$
|
29,348
|
|
|
$
|
21,675
|
|
State income taxes
|
|
|
5,011
|
|
|
|
5,621
|
|
|
|
2,577
|
|
Effect of rate change
|
|
|
(36,768
|
)
|
|
|
—
|
|
|
|
—
|
|
Stock-based compensation
|
|
|
(7,072
|
)
|
|
|
—
|
|
|
|
—
|
|
Research and development tax credit
|
|
|
(800
|
)
|
|
|
(638
|
)
|
|
|
(345
|
)
|
Foreign rate differential
|
|
|
(203
|
)
|
|
|
(273
|
)
|
|
|
(328
|
)
|
Unremitted earnings tax
|
|
|
363
|
|
|
|
—
|
|
|
|
—
|
|
Uncertain tax position
|
|
|
(55
|
)
|
|
|
—
|
|
|
|
—
|
|
Deferred tax true-up
|
|
|
—
|
|
|
|
—
|
|
|
|
69
|
|
All other
|
|
|
(1,188
|
)
|
|
|
237
|
|
|
|
204
|
|
Total income tax (benefit) expense
|
|
$
|
(9,335
|
)
|
|
$
|
34,295
|
|
|
$
|
23,852
|
|
On December 22, 2017, the U.S. legislature enacted the Tax Act resulting in significant modifications to existing tax law. The Company has completed its determination of the accounting effects of the Tax Act for the year ended December 31, 2017. The Tax Act reduces the corporate income tax rate from 35% to 21%, subjects certain foreign earnings on which U.S. income tax was previously deferred to a one-time transition tax, as well as other changes. As a result of the Tax Act, the Company incurred an incremental income tax benefit of $34.1 million during the year ended December 31, 2017, which consisted primarily of the remeasurement of deferred tax assets and liabilities at the 21% corporate income tax rate and the one-time transition tax on accumulated foreign earnings of $0.4 million.
The tax effects of temporary differences giving rise to deferred income tax assets and liabilities as of December 31, 2017 and 2016 were as follows:
|
|
As of December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(in thousands)
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Loss and credit carryforwards
|
|
$
|
11,184
|
|
|
$
|
6,714
|
|
Accrued expenses
|
|
|
2,089
|
|
|
|
2,096
|
|
Stock-based compensation
|
|
|
9,914
|
|
|
|
9,823
|
|
Total deferred tax assets
|
|
|
23,187
|
|
|
|
18,633
|
|
Valuation allowance
|
|
|
(4,803
|
)
|
|
|
(1,610
|
)
|
Net deferred tax assets
|
|
|
18,384
|
|
|
|
17,023
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Fixed assets
|
|
|
(5,909
|
)
|
|
|
(5,738
|
)
|
Intangible assets
|
|
|
(86,462
|
)
|
|
|
(117,172
|
)
|
Prepaid expenses
|
|
|
(305
|
)
|
|
|
(2,135
|
)
|
Total deferred tax liabilities
|
|
|
(92,676
|
)
|
|
|
(125,045
|
)
|
Net deferred tax liability
|
|
$
|
(74,292
|
)
|
|
$
|
(108,022
|
)
|
65
GRUBHUB INC.
Notes to Consolidated Financial Statements (Continued)
The Company classified its net deferred tax liabilities as long-term liabilities on the consolidated balance sheets as of December 31, 2017 and 2016.
A partial valuation reserve of $4.8 million and $1.6 million was recorded as of December 31, 2017 and 2016, 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.
In accordance with the Tax Act, the Company recorded a tax liability of $0.4 million as of December 31, 2017 related to the one-time tax on the foreign earnings of its U.K. subsidiary. The Tax Act generally allows companies to repatriate future foreign source earnings without incurring additional U.S. taxes by providing a 100% exemption for the foreign source portion of dividends from certain foreign subsidiaries. As a result, the Company plans to repatriate cash from its U.K. subsidiary to the U.S. The Company estimates no additional tax liability as there are no applicable withholding taxes for the repatriation of unremitted earnings of its U.K. subsidiary.
The Company had the following tax loss and credit carryforwards as of December 31, 2017 and 2016:
|
|
2017
|
|
|
2016
|
|
|
Beginning
Year of
Expiration
|
|
|
(in thousands)
|
U.S. federal loss carryforwards
|
|
$
|
595
|
|
|
$
|
483
|
|
|
2027
|
U.S. state and local loss carryforwards
|
|
|
4,362
|
|
|
|
5,265
|
|
|
2027
|
Illinois Edge Credits
(a)
|
|
|
8,422
|
|
|
|
5,045
|
|
|
2018
|
|
(a)
|
Amounts are before the federal benefit of state tax
|
Upon adoption of ASU 2016-09 (see Note
2
,
Summary of Significant Accounting Policies, Recently Issued Accounting Pronouncements
), the Company recorded a net deferred tax asset for state net operating losses (“NOLs”), including excess tax benefits, of $4.1 million. The adoption of ASU 2016-09 resulted in a $2.6 million cumulative effect adjustment to retained earnings, including the federal benefit of state taxes, on the consolidated balance sheets as of January 1, 2017. The Company also recorded a net deferred tax asset of $0.7 million for the year ended December 31, 2017 related to Illinois Edge Credit carryforward to record the impact of excess tax benefits, fully offset by a valuation allowance. For federal purposes, $0.1 million of additional NOL was recorded during the year ended December 31, 2017 related to the adoption of ASU 2016-09.
The Company is currently under examination in New York for corporate income tax returns for the tax years ended December 31, 2014, 2015 and 2016. The Company cannot predict with certainty whether there will be any additional tax liabilities, penalties and/or interest as a result of the audit. In June of 2017
, the New York City Department of Finance completed a routine examination of Seamless Holdings Corporation for General Corporation Tax for the short tax period from October 17, 2012 through August 8, 2013 and proposed no changes.
The Company does not expect 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 2006 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 December 31, 2014 and later period U.K. returns of Seamless Europe Ltd., the Company’s U.K. subsidiary, 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.
66
GRUBHUB INC.
Notes to Consolidated Financial Statements (Continued)
The following table summarizes the Company’s unrecognized tax benefit activity during the years ended December 31, 2
017 and 2016, excluding the related accrual for interest:
|
|
As of December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(in thousands)
|
|
Balance at beginning of period
|
|
$
|
3,345
|
|
|
$
|
2,932
|
|
Reductions for tax positions taken in prior years
|
|
|
(937
|
)
|
|
|
—
|
|
Additions for tax positions taken in prior years
|
|
|
—
|
|
|
|
413
|
|
Additions for tax positions taken in the current year
|
|
|
456
|
|
|
|
—
|
|
Balance at end of period
|
|
$
|
2,864
|
|
|
$
|
3,345
|
|
Included in the net deferred tax liabilities on the consolidated balance sheets at December 31, 2017 and 2016 were deferred tax assets that relate to the potential settlement of these unrecognized tax benefits. After consideration of these amounts, $1.3 million and $1.0 million of the amount accrued December 31, 2017 and 2016, respectively, would impact the effective tax rate if reversed. As of December 31, 2017, the Company anticipates that a portion of the unrecognized tax benefit will be reversed in 2018 due to the closing of the statute of limitations for one of its tax positions. Should the statute of limitations close, the impact of the benefit is estimated to be $0.8 million.
The Company records interest and penalties, if any, as a component of its income tax (benefit) expense in the consolidated statements of operations. Interest expense of less than $0.1 million and no penalties were recognized during each of the years ended December 31, 2017 and 2016.
11. Stockholders’ Equity
As of December 31, 2017 and 2016, the Company was authorized to issue two classes of stock: common stock and 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, 2017 and 2016, there were 500,000,000 shares of common stock authorized. At December 31, 2017 and 2016, there were 86,790,624 and 85,692,333 shares of common stock issued and outstanding, respectively. The Company did not hold any shares as treasury shares as of December 31, 2017 and 2016.
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. 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, 2017, the Company did not repurchase any shares of its common stock. 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.
Preferred Stock
The Company was authorized to issue 25,000,000 shares of preferred stock as of December 31, 2017 and 2016. There were no issued or outstanding shares of preferred stock as of December 31, 2017 and 2016.
67
GRUBHUB INC.
Notes to Consolidated Financial Statements (Continued)
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 of eligible compensation and 50% of the next 2% of employees’ contributions of eligible compensation during the years ended December 31, 2017, 2016 and 2015 and recognized matching contributions expense of $2.3 million, $1.7 million and $1.3 million, respectively.
13. Earnings Per Share Attributable to Common Stockholders
Basic earnings per share is computed by dividing net income attributable to common stockholders by the weighted-average number of common shares outstanding during the period without consideration for common stock equivalents. Diluted net income per share attributable to common stockholders is computed by dividing net income by the weighted-average number of common shares outstanding during the period and potentially dilutive common stock equivalents, including stock options, restricted stock units and restricted stock awards, except in cases where the effect of the common stock equivalent would be antidilutive. Potential common stock equivalents consist of common stock issuable upon exercise of stock options and vesting of restricted stock units and restricted stock awards using the treasury stock method. The calculation of weighted-average dilutive shares outstanding for the
year
ended December 31, 2017 was impacted by the adoption of ASU 2016-09. See Note
2
,
Summary of
Significant Accounting Policies
, for additional details.
The following table presents the calculation of basic and diluted net income per share attributable to common stockholders for the years ended December 31, 2017, 2016 and 2015:
|
|
Year Ended December 31, 2017
|
|
|
|
Income
(Numerator)
|
|
|
Shares
(Denominator)
|
|
|
Per Share
Amount
|
|
|
(in thousands, except per share data)
|
|
Basic EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common stockholders
|
|
$
|
98,983
|
|
|
|
86,297
|
|
|
$
|
1.15
|
|
Effect of Dilutive Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
—
|
|
|
|
1,059
|
|
|
|
|
|
Restricted stock units
|
|
|
—
|
|
|
|
826
|
|
|
|
|
|
Diluted EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common stockholders
|
|
$
|
98,983
|
|
|
|
88,182
|
|
|
$
|
1.12
|
|
|
|
Year Ended December 31, 2016
|
|
|
|
Income
(Numerator)
|
|
|
Shares
(Denominator)
|
|
|
Per Share
Amount
|
|
|
(in thousands, except per share data)
|
|
Basic EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common stockholders
|
|
$
|
49,557
|
|
|
|
85,069
|
|
|
$
|
0.58
|
|
Effect of Dilutive Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
—
|
|
|
|
792
|
|
|
|
|
|
Restricted stock units and restricted stock awards
|
|
|
—
|
|
|
|
274
|
|
|
|
|
|
Diluted EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common stockholders
|
|
$
|
49,557
|
|
|
|
86,135
|
|
|
$
|
0.58
|
|
68
GRUBHUB INC.
Notes to Consolidated Financial Statements (Continued)
|
|
Year Ended December 31, 2015
|
|
|
|
Income
(Numerator)
|
|
|
Shares
(Denominator)
|
|
|
Per Share
Amount
|
|
|
(in thousands, except per share data)
|
|
Basic EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common stockholders
|
|
$
|
38,077
|
|
|
|
84,076
|
|
|
$
|
0.45
|
|
Effect of Dilutive Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
—
|
|
|
|
1,594
|
|
|
|
|
|
Restricted stock units and restricted stock awards
|
|
|
—
|
|
|
|
36
|
|
|
|
|
|
Diluted EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common stockholders
|
|
$
|
38,077
|
|
|
|
85,706
|
|
|
$
|
0.44
|
|
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. The repurchases resulted in a reduction of the outstanding shares used to calculate the weighted-average common shares outstanding for basic and diluted net earnings per share from the dates of the repurchases. See Note 11,
Stockholders’ Equity,
for additional details.
The number of
shares of common stock underlying stock-based awards excluded from the calculation of diluted net income per share attributable to common stockholders because their effect would have been antidilutive for the years ended December 31,
2017, 2016 and 2015
were as follows:
|
|
Year Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Anti-dilutive shares underlying stock-based awards:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
—
|
|
|
|
552,108
|
|
|
|
2,380,813
|
|
Restricted stock units
|
|
|
35,646
|
|
|
|
212,170
|
|
|
|
464,930
|
|
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, restaurant food liability and accounts payable approximate fair value due to their generally short-term maturities. See Note 8,
Debt
, for details of the fair value of the Company’s outstanding borrowings under the Credit Agreement.
69
GRUBHUB INC.
Notes to Consolidated Financial Statements (Continued)
The following table presents th
e balances of assets measured at fair value on a recurring basis as of December 31, 2017 and 2016:
|
|
December 31, 2017
|
|
|
December 31, 2016
|
|
|
Level 2
|
|
|
Level 2
|
|
|
|
|
(in thousands)
|
Money market funds
|
|
$
|
93
|
|
|
$
|
1,723
|
|
|
Commercial paper
|
|
|
61,317
|
|
|
|
131,937
|
|
|
Corporate bonds
|
|
|
3,374
|
|
|
|
16,089
|
|
|
U.S. government agency bonds
|
|
|
—
|
|
|
|
5,500
|
|
|
Total
|
|
$
|
64,784
|
|
|
$
|
155,249
|
|
|
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.
15. Subsequent Events
On February 8, 2018, the Company entered into an Investment Agreement (the “Investment Agreement”) by and among the Company and Yum Restaurant Services Group, LLC (the “Investor”), a wholly owned subsidiary of Yum! Brands, Inc. Pursuant to the Investment Agreement, the Company agreed to issue and sell to the Investor 2,820,464 shares of common stock of the Company (the “Acquired Shares”), for a purchase price of $70.9103 per Acquired Share and an aggregate purchase price of $200.0 million (the “Investment”), subject to certain closing conditions. The Acquired Shares will result in an immediate increase in 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. The Company expects the closing of the Investment to occur prior to the end of the first quarter of 2018, pending regulatory approval.
The Investment Agreement may be terminated by the Company or the Investor under certain circumstances specified therein, including if the closing of the Investment has not occurred on or prior to July 31, 2018. The Company expects to use proceeds from the Investment for general corporate purposes which may include accelerating the expansion of delivery services, investing in the platform and pursuing growth opportunities.
70