GRUBHUB INC., S-1 filed on 8/25/2014
Securities Registration Statement
Document and Entity Information
6 Months Ended
Jun. 30, 2014
Document Information [Line Items]
 
Document Type
S-1 
Amendment Flag
false 
Document Period End Date
Jun. 30, 2014 
Trading Symbol
GRUB 
Entity Registrant Name
GRUBHUB INC. 
Entity Central Index Key
0001594109 
Entity Filer Category
Non-accelerated Filer 
Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Jun. 30, 2014
Dec. 31, 2013
Dec. 31, 2012
CURRENT ASSETS:
 
 
 
Cash and cash equivalents
$ 207,096 1
$ 86,542 
$ 41,161 
Accounts receivable, net
37,863 1
29,304 
19,371 
Deferred taxes, current
3,688 1
3,688 
26 
Prepaid expenses
2,505 1
2,625 
1,447 
Total current assets
251,152 1
122,159 
62,005 
PROPERTY AND EQUIPMENT:
 
 
 
Property and equipment, net of depreciation and amortization
16,529 1
17,096 
13,341 
OTHER ASSETS:
 
 
 
Other assets
4,039 1
2,328 
 
Goodwill
352,788 1
352,788 
113,442 
Intangible assets, net of amortization
261,390 1
268,441 
17,467 
Total other assets
618,217 1
623,557 
130,909 
TOTAL ASSETS
885,898 1
762,812 
206,255 
CURRENT LIABILITIES:
 
 
 
Restaurant food liability
84,486 1
78,245 
48,645 
Accounts payable
2,390 1
3,353 
781 
Accrued payroll
3,441 1
1,720 
1,980 
Taxes payable
1,377 1
1,768 
908 
Restructuring accrual
478 1
176 
 
Due to related party
 
 
244 
Other accruals
9,850 1
7,329 
5,610 
Total current liabilities
102,022 1
92,591 
58,168 
LONG TERM LIABILITIES:
 
 
 
Deferred taxes, non-current
98,633 1
90,495 
7,035 
Other accruals
3,939 1
3,936 
3,164 
Total long term liabilities
102,572 1
94,431 
10,199 
Redeemable common stock, $0.0001 par value, 1,344,236 shares outstanding as of December 31, 2013
 
18,415 
 
STOCKHOLDERS' EQUITY:
 
 
 
Series A Convertible Preferred Stock, $0.0001 par value. 11,185,683 shares authorized, issued and outstanding as of December 31, 2012; 25,000,000 shares authorized as of December 31, 2013 and June 30, 2014; 19,284,113 shares issued and outstanding as of December 31, 2013; no shares issued and outstanding as of June 30, 2014; aggregate liquidation preference of $50,000 and $86,200 in 2012 and 2013, respectively.
 
Common stock, $0.0001 par value, 31,349,777, 165,000,000 and 500,000,000 shares authorized at December 31, 2012 and 2013, and June 30, 2014, respectively; 31,349,777 shares issued, 31,218,164 shares outstanding; 53,757,437 shares issued and outstanding; and 78,831,161 shares issued and outstanding as of December 31, 2012, December 31, 2013 and June 30, 2014, respectively
1
Treasury shares common stock $0.0001 par value, 131,607 shares as of December 31, 2012
 
 
(858)
Accumulated other comprehensive income (loss)
316 1
132 
(27)
Additional paid-in capital
617,375 1
500,356 
86,743 
Retained earnings
63,605 1
56,880 
52,026 
Total Stockholders' Equity .
681,304 1
557,375 
137,888 
TOTAL LIABILITIES, REDEEMABLE COMMON STOCK AND STOCKHOLDERS' EQUITY
$ 885,898 1
$ 762,812 
$ 206,255 
Consolidated Balance Sheets (Parenthetical) (USD $)
In Thousands, except Share data, unless otherwise specified
Jun. 30, 2014
Dec. 31, 2013
Dec. 31, 2012
Redeemable common stock, par value
 
$ 0.0001 
 
Redeemable common stock, shares outstanding
 
1,344,236 
 
Series A Convertible Preferred Stock, par value
$ 0.0001 1
$ 0.0001 
$ 0.0001 
Series A Convertible Preferred Stock, shares authorized
25,000,000 1
25,000,000 
11,185,683 
Series A Convertible Preferred Stock, shares issued
 
19,284,113 
11,185,683 
Series A Convertible Preferred Stock, shares outstanding
 
19,284,113 
11,185,683 
Series A Convertible Preferred Stock, liquidation preference
 
$ 86,200 
$ 50,000 
Common stock, par value
$ 0.0001 1
$ 0.0001 
$ 0.0001 
Common stock, shares authorized
500,000,000 1
165,000,000 
31,349,777 
Common stock, shares issued
78,831,161 1
53,757,437 
31,349,777 
Common stock, shares outstanding
78,831,161 1
53,757,437 
31,218,164 
Treasury shares common stock, shares
 
 
131,607 
Consolidated Statements of Operations (USD $)
In Thousands, except Per Share data, unless otherwise specified
6 Months Ended 12 Months Ended
Jun. 30, 2014
Jun. 30, 2013
Dec. 31, 2013
Dec. 31, 2012
Dec. 31, 2011
Revenues
$ 118,619 1
$ 52,658 1
$ 137,143 
$ 82,299 
$ 60,611 
Costs and expenses:
 
 
 
 
 
Sales and marketing
32,285 1
16,164 1
37,347 
26,892 
17,198 
Operations and support
29,841 1
11,975 1
34,173 
18,165 
13,961 
Technology (exclusive of amortization)
11,413 1
5,344 1
15,357 
10,172 
5,651 
General and administrative
16,944 1
8,712 1
21,907 
12,249 
9,777 
Depreciation and amortization
11,130 1
3,673 1
13,470 
6,089 
4,033 
Total costs and expenses
101,613 1
45,868 1
122,254 
73,567 
50,620 
Income before income tax
17,006 1
6,790 1
14,889 
8,732 
9,991 
Provision (benefit) for income taxes
9,961 1
3,711 1
8,142 
813 
(5,220)
Net income
7,045 1
3,079 1
6,747 
7,919 
15,211 
Preferred stock tax distributions
(320)1
(648)1
(1,073)
(402)
(334)
Net income attributable to common stockholders
6,725 1
2,431 1
5,674 
7,517 
14,877 
Net income per share attributable to common stockholders:
 
 
 
 
 
Basic
$ 0.10 1
$ 0.08 1
$ 0.14 
$ 0.24 
$ 0.48 
Diluted
$ 0.09 1
$ 0.07 1
$ 0.12 
$ 0.19 
$ 0.36 
Weighted average shares used to compute net income per share attributable to common stockholders:
 
 
 
 
 
Basic
66,626 1
31,368 1
40,681 
31,320 
31,320 
Diluted
79,854 1
43,356 1
56,645 
42,666 
42,505 
Pro Forma
 
 
 
 
 
Costs and expenses:
 
 
 
 
 
Net income
 
2,431 
5,674 
 
 
Preferred stock tax distributions
 
648 
1,073 
 
 
Net income attributable to common stockholders
 
$ 3,079 
$ 6,747 
 
 
Net income per share attributable to common stockholders:
 
 
 
 
 
Basic
 
$ 0.06 1
$ 0.12 
 
 
Diluted
 
$ 0.07 1
$ 0.12 
 
 
Weighted average shares used to compute net income per share attributable to common stockholders:
 
 
 
 
 
Basic
 
42,554 1
55,071 
 
 
Diluted
 
43,356 1
56,645 
 
 
Consolidated Statements of Comprehensive Income (USD $)
In Thousands, unless otherwise specified
6 Months Ended 12 Months Ended
Jun. 30, 2014
Jun. 30, 2013
Dec. 31, 2013
Dec. 31, 2012
Dec. 31, 2011
Net income
$ 7,045 1
$ 3,079 1
$ 6,747 
$ 7,919 
$ 15,211 
OTHER COMPREHENSIVE INCOME (LOSS):
 
 
 
 
 
Foreign Currency Translation Adjustments
184 1
(225)1
159 
115 
(33)
COMPREHENSIVE INCOME
$ 7,229 1
$ 2,854 1
$ 6,906 
$ 8,034 
$ 15,178 
Consolidated Statements of Changes in Stockholders' Equity and Redeemable Common Stock (USD $)
In Thousands, except Share data
Total
Common stock
Preferred Stock
Treasury Stock [Member]
Additional Paid-in Capital [Member]
Accumulated Other Comprehensive Income (Loss) [Member]
Retained Earnings [Member]
Redeemable Common Stock
Balance, beginning at Dec. 31, 2010
$ 110,232 
$ 3 
$ 1 
 
$ 79,853 
$ (109)
$ 30,484 
 
Balance, beginning (in shares) at Dec. 31, 2010
 
31,319,911 
11,185,683 
 
 
 
 
 
Net income
15,211 
 
 
 
 
 
15,211 
 
Currency translation
(33)
 
 
 
 
(33)
 
 
Capital contribution from stockholders
5,758 
 
 
 
5,758 
 
 
 
Stock based compensation
803 
 
 
 
803 
 
 
 
Balance, ending at Dec. 31, 2011
131,971 
 
86,414 
(142)
45,695 
 
Balance, ending (in shares) at Dec. 31, 2011
 
31,319,911 
11,185,683 
 
 
 
 
 
Net income
7,919 
 
 
 
 
 
7,919 
 
Common stock repurchase
(858)
 
 
(858)
 
 
 
 
Common stock repurchase (Shares)
 
(131,607)
 
131,607 
 
 
 
 
Currency translation
115 
 
 
 
 
115 
 
 
Capital contribution from stockholders
6,000 
 
 
 
6,000 
 
 
 
Stock based compensation
2,364 
 
 
 
2,364 
 
 
 
Distributions to stockholders
(1,588)
 
 
 
 
 
(1,588)
 
Deferred tax effects attributable to merger of partnership interest or resulting from partnership status
(8,151)
 
 
 
(8,151)
 
 
 
Stock option exercises
116 
 
 
 
116 
 
 
 
Stock option exercises (in shares)
29,860 
29,860 
 
 
 
 
 
 
Balance, ending at Dec. 31, 2012
137,888 
(858)
86,743 
(27)
52,026 
 
Balance, ending (in shares) at Dec. 31, 2012
 
31,218,164 
11,185,683 
131,607 
 
 
 
 
Net income
6,747 
 
 
 
 
 
6,747 
 
Common stock repurchase
(1,367)
 
 
(1,367)
 
 
 
 
Common stock repurchase (Shares)
 
(176,082)
 
176,082 
 
 
 
 
Treasury share reissuance
 
 
 
2,225 
(2,225)
 
 
 
Treasury share reissuance (shares)
 
307,689 
 
(307,689)
 
 
 
 
Currency translation
159 
 
 
 
 
159 
 
 
Stock based compensation
4,933 
 
 
 
4,933 
 
 
 
Equity issued from merger with GrubHub Holdings Inc.
421,485 
 
421,482 
 
 
 
Equity issued from merger with GrubHub Holdings Inc. (shares)
 
23,318,580 
8,098,430 
 
 
 
 
 
Preferred stock tax distributions
(1,893)
 
 
 
 
 
(1,893)
 
Redeemable common stock
(18,415)
 
 
 
(18,415)
 
 
18,415 
Redeemable common stock (shares)
 
(1,344,236)
 
 
 
 
 
1,344,236 
Deferred tax effects attributable to merger of partnership interest or resulting from partnership status
6,420 
 
 
 
6,420 
 
 
 
Stock option exercises
1,418 
 
 
 
1,418 
 
 
 
Stock option exercises (in shares)
475,959 
433,322 
 
 
 
 
 
 
Balance, ending, redeemable stock at Dec. 31, 2013
18,415 
 
 
 
 
 
 
18,415 
Balance, ending at Dec. 31, 2013
557,375 
 
500,356 
132 
56,880 
 
Balance, ending, redeemable stock (in shares) at Dec. 31, 2013
1,344,236 
 
 
 
 
 
 
1,344,236 
Balance, ending (in shares) at Dec. 31, 2013
 
53,757,437 
19,284,113 
 
 
 
 
 
Net income1
7,045 
 
 
 
 
 
7,045 
 
Common stock repurchase1
(3,225)
 
 
(3,225)
 
 
 
 
Common stock repurchase (Shares)1
 
(146,716)
 
146,716 
 
 
 
 
Treasury stock retirement1
 
 
 
3,225 
(3,225)
 
 
 
Treasury stock retirement (in shares)1
 
 
 
(146,716)
 
 
 
 
Currency translation1
184 
 
 
 
 
184 
 
 
Issuance of common stock in connection with the IPO, net of issuance costs1
94,927 
 
 
94,926 
 
 
 
Issuance of common stock in connection with the IPO, net of issuance costs1
 
4,000,000 
 
 
 
 
 
 
Stock based compensation1
4,709 
 
 
 
4,709 
 
 
 
Preferred stock tax distributions1
(320)
 
 
 
 
 
(320)
 
Stock option exercises1
2,194 
 
 
 
2,194 
 
 
 
Stock option exercises (in shares)
695,627 
592,091 1
 
 
 
 
 
 
Change in fair value of redeemable common stock1
(16,535)
 
 
 
(16,535)
 
 
16,535 
Termination of put rights of redeemable common stock in connection with the IPO1
34,950 
 
 
 
34,950 
 
 
(34,950)
Termination of put rights of redeemable common stock in connection with the IPO (in shares)1
 
1,344,236 
 
 
 
 
 
(1,344,236)
Conversion of Preferred Stock to common stock1
 
(2)
 
 
 
 
 
Conversion of Preferred Stock to common stock (in shares)1
 
19,284,113 
(19,284,113)
 
 
 
 
 
Balance, ending at Jun. 30, 20141
$ 681,304 
$ 8 
 
 
$ 617,375 
$ 316 
$ 63,605 
 
Balance, ending (in shares) at Jun. 30, 20141
 
78,831,161 
 
 
 
 
 
 
Statements of Cash Flows (USD $)
In Thousands, unless otherwise specified
6 Months Ended 12 Months Ended
Jun. 30, 2014
Jun. 30, 2013
Dec. 31, 2013
Dec. 31, 2012
Dec. 31, 2011
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
 
 
Net income
$ 7,045 1
$ 3,079 1
$ 6,747 
$ 7,919 
$ 15,211 
Adjustments to reconcile net income to net cash from operating activities:
 
 
 
 
 
Depreciation
2,390 1
1,278 1
3,992 
2,018 
855 
Provision for doubtful accounts
166 1
86 1
473 
74 
298 
Deferred taxes
8,138 1
(151)
1,706 
 
(8,051)
Intangible asset amortization
8,740 1
2,395 1
9,477 
4,071 
3,178 
Loss on disposal of equipment
 
 
 
 
66 
Proceeds received under tenant allowance
 
 
 
 
1,774 
Tenant allowance amortization
(79)1
(79)1
(159)
(160)
(106)
Stock based compensation
4,687 1
1,238 1
4,933 
2,364 
803 
Deferred rent
76 1
(64)1
(135)
797 
1,064 
Change in assets and liabilities, net of the effects of business acquisitions:
 
 
 
 
 
Accounts receivable
(8,725)1
(7,081)1
(8,298)
(526)
335 
Prepaid expenses and other assets
(1,592)1
452 1
(2,388)
(582)
(432)
Accounts payable
(962)1
1,510 1
2,065 
319 
261 
Restaurant food liability
6,241 1
11,184 1
26,549 
12,854 
8,538 
Accrued payroll
1,721 1
1,192 1
(1,707)
162 
932 
Other accruals
2,439 1
4,376 1
(2,192)
2,678 
2,128 
Due to related party
 
 
(244)
(2,410)
5,240 
Net cash provided by operating activities
30,285 1
19,415 1
40,819 
29,578 
32,094 
CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
 
 
Acquisition of business.
 
 
 
 
(12,171)
Cash acquired in merger of GrubHub Holdings Inc.
 
 
13,266 
 
 
Issuance of note receivable to related party
 
 
 
(26,400)
(16,000)
Payments on note receivable from related party
 
 
 
42,400 
 
Capitalized website and development costs
(1,112)1
(1,434)1
(2,592)
(2,280)
(2,398)
Purchases of property and equipment
(2,378)1
(3,170)1
(4,429)
(3,417)
(6,380)
Net cash provided by (used in) investing activities
(3,490)1
(4,604)1
6,245 
10,303 
(36,949)
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
 
 
Net proceeds from the issuance of common stock
94,927 1
 
 
 
 
Proceeds from exercise of stock options
1,145 1
104 1
1,418 
116 
 
Taxes paid related to net settlements of stock-based compensation awards
(2,061)1
 
 
 
 
Checks issued in excess of bank balance
 
 
 
(3,923)
1,563 
Payment of note payable
 
 
 
(1,965)
 
Contributions from members
 
 
 
6,000 
22,448 
Repurchases of common stock
(116)1
(1,259)1
(1,367)
(858)
 
Preferred stock tax distributions
(320)1
(651)1
(1,893)
(1,588)
(16,690)
Net cash provided by (used in) financing activities
93,575 1
(1,806)1
(1,842)
(2,218)
7,321 
Net change in cash and cash equivalents
120,370 1
13,005 1
45,222 
37,663 
2,466 
Effect of exchange rates on cash
184 1
(225)1
159 
115 
(33)
Cash and cash equivalents at beginning of year
86,542 
41,161 
41,161 
3,383 
950 
Cash and cash equivalents at end of year
207,096 1
53,941 1
86,542 
41,161 
3,383 
SUPPLEMENTAL DISCLOSURE OF NON CASH ITEMS
 
 
 
 
 
Note payable issued in connection with acquisition of business
 
 
 
 
1,965 
Cash paid for income taxes
1,321 1
2,243 1
7,706 
861 
2,265 
Cashless exercise of stock options
$ 1,049 1
 
 
 
 
Organization and Reorganization
Organization and Reorganization

1. Organization and Reorganization

Organization

GrubHub Inc., a Delaware corporation, and its wholly-owned subsidiaries (collectively referred to as the “Company”) provide an online and mobile platform for restaurant pick-up and delivery orders. Diners enter their location through an online interface and the Company displays the menus and other relevant information for restaurants in its network. Orders may be placed directly online 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 February 2014, the Company changed its name to GrubHub Inc. from GrubHub Seamless Inc. Reference to the “Company” throughout the financial statements relates to GrubHub Inc. and its wholly-owned subsidiaries.

Initial Public Offering

On April 4, 2014, the Company completed an initial public offering (the “IPO”) in which it issued and sold 4,000,000 shares of class A common stock at a public offering price of $26.00 per share. The Company received net proceeds of $94.9 million (unaudited) after deducting underwriting discounts and commissions of $6.5 million (unaudited) and other offering expenses of approximately $2.6 million (unaudited). These expenses were recorded against the proceeds received from the IPO.

Certain selling stockholders offered an additional 3,405,614 shares of common stock in the IPO and also granted the underwriters an option to purchase up to 1,110,842 additional shares of common stock. The Company did not receive any proceeds from the sale of the shares sold by the selling stockholders.

Upon the closing of the IPO, all shares of the Company’s then-outstanding convertible Series A Preferred Stock automatically converted into an aggregate of 19,284,113 shares of common stock. Additionally, the put rights for the Company’s redeemable common stock were terminated upon the closing of the IPO.

The Company has invested the funds received in non-interest bearing accounts, short-term and intermediate-term interest-bearing obligations, investment-grade investments, certificates of deposit or direct or guaranteed obligations of the U.S. government.

Reorganization and History

Overview of Reorganization

On August 8, 2013, GrubHub Inc. acquired, through a series of transactions, all of the equity interests of each of Seamless North America, LLC, Seamless Holdings Corporation (“Seamless Holdings”) and GrubHub Holdings Inc. pursuant to that certain Reorganization and Contribution Agreement, dated as of May 19, 2013, by and among GrubHub Inc., Seamless North America, LLC, Seamless Holdings, GrubHub Holdings Inc. and the other parties thereto (the “Reorganization Agreement”). Following this transaction, the Company concluded that Seamless Holdings was deemed the acquirer for financial reporting purposes (Note 3). Accordingly, the acquisition of GrubHub Holdings Inc. has been accounted for as a business combination. The results of operations of GrubHub Holdings Inc. have been included in the Company’s financial statements since August 9, 2013. In February 2014, GrubHub Seamless Inc. was renamed GrubHub Inc.

Prior to the Reorganization

Seamless North America, LLC was originally incorporated in Delaware in December 1999, and was converted to a Delaware limited liability company. Seamless North America was a single member LLC and wholly owned subsidiary of Aramark until June 6, 2011. In June 2011, Aramark sold an approximate 26% interest in Seamless North America, LLC in the form of convertible preferred stock to SLW Investors, LLC (“SLW Investors”), an entity controlled by a private equity firm.

On October 17, 2012, Aramark formed Seamless Holdings, as a wholly owned subsidiary for the purpose of completing a spin-off of its approximate 74% equity interest in Seamless North America, LLC. Prior to the spin-off, Aramark distributed all of the issued and outstanding shares of the common stock of Seamless Holdings to its parent company and sole shareholder, Aramark Intermediate Holdco Corporation (“Aramark Intermediate”). Thereafter, Aramark Intermediate distributed such shares to Aramark Holdings (the ultimate parent company of Aramark), which then distributed all of the shares of Seamless Holdings on a pro rata basis to the Aramark Holdings shareholders as of October 26, 2012, the record date. Each Aramark Holdings shareholder received one share of Seamless Holdings common stock for each share of Aramark Holdings common stock owned as of the record date.

 

The financial position and results of operations of Seamless Holdings and Seamless North America, LLC have been included in the consolidated financial statements for all periods presented.

Significant Accounting Policies
Significant Accounting Policies

2. Summary of Significant Accounting Policies

 

Basis of Presentation and Principles of Consolidation

 

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

 

The share and per share amounts for all periods presented reflect the completion of the Company’s 1-for-2 reverse stock split, which the Company effected on April 2, 2014.

 

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 development costs, goodwill, depreciable lives of property and equipment, recoverability of intangible assets with definite 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.

 

Pro Forma Presentation

 

Upon consummation of the initial public offering, all of the outstanding shares of convertible preferred stock automatically converted on a one-for-one basis into shares of common stock and all put rights for outstanding redeemable common stock were terminated. Unaudited pro forma net income per share attributable to common stockholders and pro forma weighted average number of shares outstanding for the year ended December 31, 2013 and the six months ended June 30, 2013 have been computed to give effect to the automatic conversion of the convertible preferred stock and redeemable common stock into common stock as though the conversion had occurred on the original dates of issuance, unless otherwise indicated.

 

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.

 

Accumulated Other Comprehensive Income (Loss)

 

Accumulated other comprehensive income consists of foreign currency translation adjustments. The financial statements of non-U.S. entities are translated from their functional currencies 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 income (loss) on the consolidated balance sheet.

 

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:

 

Computer equipment

   2-3 years

Furniture and fixtures

   5 years

Developed software

   1.5-3 years

Purchased software

   3-5 years

Leasehold improvements

   Shorter of expected useful life or lease term

 

The Company has reduced the estimated useful life on any computer equipment, furniture and fixtures, and leasehold improvements related to its Sandy, Utah location to coincide with the expected closure date of December 31, 2014. (See Note 7, “Commitments and Contingencies”).

 

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 differences 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. The allowance is recorded through a charge to bad debt expense which is recorded within general and administrative expenses in the consolidated statements of operations. The allowance is based on historical loss experience and any specific risks 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.

 

Changes in the Company’s allowance for doubtful accounts are as follows:

 

     Year Ended
December 31,
    Six Months Ended
June 30,
 
     2012     2013         2013              2014      
                 (unaudited)  
     (in thousands)  

Allowance for doubtful accounts at beginning of period

   $ 248      $ 210      $ 210       $ 510   

Additions to expense

     74        473        86         166   

Less: writeoffs, net of recoveries and other adjustments

     (112     (173     16         3   
  

 

 

   

 

 

   

 

 

    

 

 

 

Balance at end of period

   $ 210      $ 510      $ 312       $ 679   
  

 

 

   

 

 

   

 

 

    

 

 

 

 

Advertising Costs

 

Advertising costs are generally expensed as incurred in connection with the requisite service period. Certain advertising production costs are capitalized and expensed over the requisite service period of the advertisements. For the years ended December 31, 2011, 2012 and 2013, expenses attributable to advertising totaled approximately $12.6 million, $20.4 million and $25.0 million, respectively. For the six months ended June 30, 2013 and 2014, expenses attributable to advertising totaled approximately $12.2 million (unaudited) and $22.4 million (unaudited), 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 at fair value on the date of grant and recognizes compensation expense over the service period on a straight-line basis for awards expected to vest.

 

The Company uses the Black-Scholes option-pricing model to determine the fair value for stock options. In valuing the Company’s options, the Company makes assumptions about risk-free interest rates, dividend yields, volatility and weighted-average expected lives, including estimated forfeiture rates. Risk-free interest rates are derived from U.S. Treasury securities as of the option grant date. Expected dividend yield is based on the Company’s historical dividend payments, which have been zero to date. As the Company did not have public trading history for its common shares until April of 2014, the expected volatility for the Company’s common stock is estimated using the published historical volatilities of industry peers representing the verticals in which the Company operates. The Company estimates the weighted-average expected life of the options as the average of the vesting option schedule and the term of the award, since the Company does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term due to the limited period of time stock-based awards have been exercisable. The term of the award is estimated using the simplified method. Forfeiture rates are estimated using historical actual forfeiture trends as well as the Company’s judgment of future forfeitures. These rates are evaluated quarterly and any change in compensation expense is recognized in the period of the change. The estimation of stock awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ from the Company’s current estimates, such amounts will be recorded as a cumulative adjustment in the period the estimates are revised. The Company considers many factors when estimating expected forfeitures, including the types of awards and employee class. Actual results, and future changes in estimates, may differ substantially from management’s current estimates.

 

Provision (Benefit) for Income Taxes

 

The provision (benefit) for income taxes is determined using the asset and liability method. Under this method, deferred tax assets and liabilities are calculated based upon the temporary differences between the financial statement and income tax bases of assets and liabilities using the enacted tax rates that are applicable in a given year.

 

The Company utilizes a two-step approach to recognizing and measuring uncertain tax positions (“tax contingencies”). The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount which is more than 50% likely to be realized upon ultimate settlement. The Company considers many factors when evaluating and estimating its tax positions and tax benefits, which may require periodic adjustments and which may not accurately forecast actual outcomes. The Company includes interest and penalties related to tax contingencies in the provision for income taxes in the consolidated statements of operations. See Note 9, “Income Taxes.” Management of the Company does not expect the total amount of unrecognized tax benefits to significantly change in the next twelve months.

 

Seamless North America, LLC became a partnership for tax purposes in June of 2011. The income tax consequences of a partnership are borne by its partners. The tax consequences of this partnership were borne by Aramark and SLW Investors from June of 2011 through October 29, 2012. Starting October 30, 2012, 74% of the partnership’s taxable income is reflected as taxable income at Seamless Holdings, a subsidiary of GrubHub Inc. Starting on August 9, 2013, 100% of the partnership’s taxable income was recognized as taxable income by the Company. If Seamless North America, LLC had been taxed as a C corporation for all of its earnings throughout 2011, 2012, and 2013 the tax expense recorded in these statements of operations would have increased by $1,493 million, $2,665 million, and $876 million, respectively.

 

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 and other long-lived assets for impairment whenever events or circumstances indicate that they may not be recoverable or at least annually. Recoverability is measured by comparing the carrying amount of an asset group to future undiscounted net cash flows expected to be generated. If this comparison indicates impairment, the amount of impairment to be recognized 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, 2011, 2012 and 2013 or the six months ended June 30, 2013 and 2014.

 

Website and Software Development Costs

 

The costs incurred in the preliminary stages of 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 their estimated useful lives. 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. The Company capitalized $2,398, $2,280 and $2,592 of website development costs during the years ended December 31, 2011, 2012 and 2013, respectively, and $1,434 (unaudited) and $1,112 (unaudited) of website development costs during the six months ended June 30, 2013 and 2014, respectively.

 

Goodwill

 

Goodwill represents the excess of the cost of an acquired business over the fair value of the assets acquired at the date of acquisition. Absent any special circumstances that could require an interim test, the Company has elected to test for goodwill impairment at September 30 of each year.

 

The Company tests for impairment using a two-step process. The first step of the goodwill impairment test identifies if there is potential goodwill impairment. If step one indicates that an impairment may exist, a second step is performed to measure the amount of the goodwill impairment, if any, by comparing the implied fair value of goodwill with the carrying amount. If the implied goodwill is less than the carrying amount, a write-down is recorded. The Company has determined that there was no goodwill impairment as of December 31, 2012 and 2013 and June 30, 2014.

 

Fair Value

 

Accounting standards define fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market in an orderly transaction between market participants on the measurement date. The standards also establish a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value:

 

The Company applied the following methods and assumptions in estimating its fair value measurements:

 

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: Cash equivalents are comprised of highly liquid investments, including money market funds and certificates of deposit with original maturities of less than three months. The fair value measurement of these assets is based on quoted market prices in active markets and, therefore, these assets are recorded at fair value on a recurring basis and classified as Level 1 in the fair value hierarchy. Redeemable common stock consisted of put rights the Company had granted to certain shareholders which required common shares to be repurchased at fair value (as defined in the stockholders agreement) determined by the redemption date. The fair value measurement of redeemable common stock (as defined in the stockholders agreement) was based on Level 3 inputs which are defined in the fair value hierarchy as noted above. Accounts receivable and accounts payable approximate fair value due to their generally short-term maturities.

 

The following tables present the balances of assets measured at fair value on a recurring basis as of the dates presented at December 31, 2012 and 2013 and June 30, 2014.

 

     December 31,      June 30,  2014
(unaudited)
 

Fair Value

     2012          2013       
     (in thousands)  

Cash equivalents

   $ —        $ 4,200       $ 4,203   

 

The Company did not have any assets or liabilities measured on a recurring basis using Level 2 or Level 3 inputs at December 31, 2012 and 2013 or June 30, 2014.

 

The fair value of the Company’s redeemable common stock, determined to be Level 3 under the fair value hierarchy, was measured based on the required redemption at the most recent fair value of the common stock. The put rights for the Company’s then outstanding redeemable common stock were terminated and the shares converted on a one-for-one basis into common stock upon the closing of the IPO on April 4, 2014. The redeemable common stock fair value was prepared based on the required redemption at the most recent fair value of the common stock. The following table presents the fair value, valuation techniques and related unobservable inputs for the Level 3 measurement as of December 31, 2013:

 

    Fair value
(in thousands)
    Valuation
technique
 

Unobservable

input

  Range

Redeemable common stock

  $ 18,415      Probability Weighted
Expected Return

Method

 

Discount rate of 15.3%

Lack of Marketability—
14.9% per common share

  Based on computed
estimated fair value

 

Concentration of Credit Risk

 

Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of accounts receivable. For the fiscal years ended December 31, 2011, 2012 and 2013 and the six months ended June 30, 2014, the Company had no customers which accounted for more than 10% of revenue or 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 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 to be persuasive evidence of an arrangement.

 

The Company generates revenues primarily when diners place an order on our platform through our websites, our mobile applications, third-party websites that incorporate our API or one of our listed phone numbers. Restaurants pay us a commission, typically a percentage of the transaction, on orders that are processed through our platform. Most of our restaurants can choose their level of commission rate, at or above our base rates, to affect their relative priority in our sorting algorithms, with restaurants paying higher commission rates generally appearing higher in the search order than restaurants paying lower commission rates. Some restaurants on our platform pay a monthly system fee for better branding and more robust placement. Because we are acting as an agent of the merchant in the transaction, we recognize as revenues only our 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 our platform. These promotions are generally cash credits to be applied against purchases. We record these incentive offers as reductions in revenues, generally on the date we record the corresponding revenue.

 

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 contractual arrangement with the related restaurant, and is adjusted for any cash credits, including incentive offers provided to restaurants and diners, related to the transaction. Although the Company will process the entire amount of the transaction with the diner, it will record its 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.

 

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. 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. Our reportable segment has been identified based on how our chief operating decision maker manages our business, makes operating decisions and evaluates operating performance.

 

Recently Issued Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (“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. ASU 2014-09 will be effective for the Company in the first quarter of 2017. Management is currently evaluating the impact the adoption of ASU 2014-09 will have on the Company’s condensed consolidated financial position, results of operations or cash flows and the method of retrospective application, either full or modified.

 

In July 2013, the FASB issued Accounting Standards Update No. 2013-11 “Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists” (“ASU 2013-11”), which requires that a liability related to an unrecognized tax benefit be presented as a reduction of a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward that the entity intends to use and is available for settlement at the reporting date. ASU 2013-11 was effective for and adopted by the Company in the first quarter of 2014 and applied prospectively to unrecognized tax benefits that existed at the effective date. The adoption of ASU 2013-11 impacted the Company’s financial statement presentation and disclosures, but otherwise did not impact the Company’s condensed consolidated financial position, results of operations or cash flows.

 

In February 2013, the FASB issued Accounting Standards Update No. 2013-02 “Comprehensive Income (Topic 220): Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income” (“ASU 2013-02”), which requires an entity to disaggregate the total change of each component of other comprehensive income either on the face of the income statement or as a separate disclosure in the notes. ASU 2013-02 was effective for and adopted by the Company in the first quarter of 2013. The adoption of ASU 2013-02 impacted the Company’s financial statement presentation and disclosures, but otherwise did not impact the Company’s condensed consolidated financial position, results of operations or cash flows.

 

In September 2011, the FASB issued ASU No. 2011-08, “Intangibles—Goodwill and Other (Topic 350)” “(ASU 2011-08”), which allows companies to assess qualitative factors to determine if it is more-likely-than-not that goodwill might be impaired and whether it is necessary to perform the two-step goodwill impairment test. ASU 2011-08 was effective for and adopted by the Company in the first quarter of 2012. The adoption of this ASU 2011-08 did not have any material impact on the Company’s results of operations or financial position.

 

In June 2011, the FASB issued ASU No. 2011-05, “Presentation of Comprehensive Income” (“ASU 2011-05”), which requires an entity to present total comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements and eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. The Company early adopted this guidance in the first quarter of 2012, retrospectively. The adoption of ASU 2011-05 impacted the Company’s financial statement presentation and disclosures, but otherwise did not impact the Company’s condensed consolidated financial position, results of operations or cash flows.

 

In May 2011, the FASB issued ASU No. 2011-04, “Fair Value Measurement (Topic 820),” (“ASU 2011-04”) which amended existing rules for fair value measurements and disclosures to clarify guidance and minimize differences between GAAP and International Financial Reporting Standards (“IFRS”). ASU 2011-04 requires entities to provide information about valuation techniques and unobservable inputs used in Level 3 fair value measurements and provide a narrative description of the sensitivity of Level 3 measurements to changes in unobservable inputs. ASU 2011-04 was for and adopted by the Company in the first quarter of 2012. The adoption of ASU 2011-04 did not have any impact on our financial position, results of operations or cash flows.

Acquisitions
Acquisitions

3. Acquisitions

 

GrubHub Holdings Inc.

 

On August 8, 2013, the Company acquired all of the equity interests of each of Seamless North America, LLC, Seamless Holdings and GrubHub Holdings Inc. pursuant to the Reorganization Agreement. In February 2014, GrubHub, Inc. changed its name to GrubHub Holdings Inc. The Company issued 23,318,580 shares of common stock and 8,098,430 shares of preferred stock to GrubHub Holdings Inc. in exchange for all of GrubHub Holdings Inc.’s equity interests (the “Merger”). The Company concluded that Seamless Holdings was deemed the acquirer for financial reporting purposes based on key deciding factors such as a majority ownership and majority of the board of director seats. Accordingly, the acquisition of GrubHub Holdings Inc. has been accounted for as a business combination. GrubHub Holdings Inc. provides online food ordering through its website grubhub.com, and also operates allmenus.com, a website that stores and displays approximately 275,000 menus.

 

The fair value of the equity issued to GrubHub Holdings Inc. in connection with the Merger was approximately $421.5 million. The value of the equity was determined using the estimated fair value of GrubHub Holdings Inc.’s stock at the merger date based on a valuation of GrubHub Holdings Inc. conducted by management. The assets acquired and liabilities assumed were recorded at their estimated fair values as of August 8, 2013. Included as part of the $421.5 million value is approximately $11.0 million which represents the fair value of the replacement awards using the Black-Scholes option-pricing model that were attributed to the pre-combination service period for GrubHub Holdings Inc. option holders. Post combination expense of $12.5 million is expected to be recognized post-Merger, which represents for the unrecognized compensation expense related to GrubHub Holdings Inc. stock options. See Note 8, Stock-Based Compensation, for further details.

 

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 existing markets and access new customers and to create revenue and cost synergies that management believes will contribute to future profits. The goodwill is not deductible for income tax purposes.

 

The Company incurred certain expenses directly and indirectly related to the Merger of $4.7 million during the year ended December 31, 2013 and $3.3 million (unaudited) during the six months ended June 30, 2013, which were recognized in in general and administrative expenses within the consolidated statement of operations.

 

The following table summarizes the August 8, 2013 acquisition-date fair value of the assets and liabilities acquired in connection with the GrubHub Holdings Inc. business combination:

 

     (in thousands)  

Cash and cash equivalents

   $ 13,266   

Accounts receivable

     2,108   

Other identifiable assets

     4,422   

Customer and vendor relationships

     167,450   

Deferred tax asset

     4,013   

Deferred tax liability

     (88,937

Developed technology

     5,143   

Goodwill

     239,346   

Liabilities assumed

     (10,602

Trademarks

     85,276   
  

 

 

 

Total net assets acquired

   $ 421,485   
  

 

 

 

 

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

 

The results of operations related to GrubHub Holdings Inc. have been included in the Company’s financial statements since August 9, 2013. The amount of revenues and net loss included in the Company’s operating results since the acquisition date through December 31, 2013 were $26.3 million and $3.6 million, respectively.

 

The following unaudited pro forma information presents a summary of the operating results of the Company for the year ended December 31, 2012 and 2013, and the six months ended June 30, 2013 as if GrubHub Inc. had acquired GrubHub Holdings Inc. as of January 1, 2012 and January 1, 2013, respectively:

 

     December 31, 2012
Pro forma combined
    December 31, 2013
Pro forma combined
     Six Months Ended
June 30, 2013
Pro forma combined
 
    

(unaudited)

(in thousands)

 

Revenues

   $ 118,854      $ 170,086       $ 80,027   

Net income (loss)

   $ (17,028   $ 4,160       $ 773   

 

The pro forma adjustments reflect the additional amortization that would have been recognized for the intangible assets, replacement stock option awards compensation cost for services performed after the Merger, elimination of transaction costs incurred and pro forma tax adjustments for the years ended December 31, 2012 and 2013 and the six months ended June 30, 2013 as follows:

 

     Year Ended
December 31, 2012
     Year Ended
December 31, 2012
    Six Months  Ended
June 30, 2013
 
     (in thousands)  
     (unaudited)  

Amortization of intangible assets

   $ 9,761       $ 6,475      $ 5,334   

Stock-based compensation

     4,979         2,997        2,424   

Transaction costs

     —          (9,131     (7,430

Income tax benefit

     —          (3,050     (2,767

Related Party Transactions
Related Party Transactions

4. Related Party Transactions

Note Receivable

On December 31, 2011, the Company loaned Aramark $16.0 million and entered into a note receivable with an interest rate of 3.4% per annum. The note was paid in full along with the accumulated accrued interest in January 2012. Additionally during 2012, the Company made short-term advances to Aramark, which were also repaid in 2012.

Due to Related Party

During 2012 and 2013, the Company had a cash management program with Aramark whereby all payroll and related costs were funded by Aramark and all cumulative excess cash balances were deposited with Aramark. At December 31, 2012 the balance due to Aramark was $0.2 million. The program was terminated during 2013 and no balance was due as of December 31, 2013.

Corporate Service Agreement

The Company had an arrangement with Aramark pursuant to which the latter would provide support for certain corporate, accounting, information technology and other administrative services. Total expenses under this arrangement for the years ended December 31, 2011, 2012, and 2013 were $0.6 million, $0.4 million, and $0.1 million, respectively. The arrangement was terminated in 2013.

Goodwill and Acquired Intangible Assets
Goodwill and Acquired Intangible Assets

5. Goodwill and Acquired Intangible Assets

The components of acquired intangible assets as of December 31, 2012, December 31, 2013 and June 30, 2014 were as follows:

 

     Useful Lives    Amounts      Accumulated
Amortization
    Carrying
Value
 
     (in thousands)  

December 31, 2012

          

Customer and vendor relationships, databases

   1 to 15 years    $ 24,529       $ (11,462   $ 13,067   
     

 

 

    

 

 

   

 

 

 

Total amortizable intangible assets

        24,529         (11,462     13,067   

Trademarks

   Indefinite      4,400         —          4,400   
     

 

 

    

 

 

   

 

 

 

Total acquired intangible assets

      $ 28,929       $ (11,462   $ 17,467   
     

 

 

    

 

 

   

 

 

 
     Useful Lives    Amounts      Accumulated
Amortization
    Carrying
Value
 
     (in thousands)  

December 31, 2013

          

Developed technology

   3 years    $ 5,143       $ (677   $ 4,466   

Customer and vendor relationships, databases

   1 to 16.4 years      191,979         (17,680     174,299   
     

 

 

    

 

 

   

 

 

 

Total amortizable intangible assets

        197,122         (18,357     178,765   

Trademarks

   Indefinite      89,676         —          89,676   
     

 

 

    

 

 

   

 

 

 

Total acquired intangible assets

      $ 286,798       $ (18,357   $ 268,441   
     

 

 

    

 

 

   

 

 

 
     Useful Lives    Amounts      Accumulated
Amortization
    Carrying
Value
 
     (in thousands)  

June 30, 2014 (unaudited)

          

Developed technology

   3 years    $ 5,143       $ (1,534   $ 3,609   

Customer and vendor relationships, databases

   1 to 16.4 years      191,979         (23,874     168,105   
     

 

 

    

 

 

   

 

 

 

Total amortizable intangible assets

        197,122         (25,408     171,714   

Trademarks

   Indefinite      89,676         —          89,676   
     

 

 

    

 

 

   

 

 

 

Total acquired intangible assets

      $ 286,798       $ (25,408   $ 261,390   
     

 

 

    

 

 

   

 

 

 

Amortization expense recorded for acquired intangible assets for the years ended December 31, 2011, 2012 and 2013 was $2.0 million, $2.5 million and $6.9 million, respectively, and $1.1 million (unaudited) and $7.0 million (unaudited) for the six months ended June 30, 2013 and 2014, respectively. These amounts are included in depreciation and amortization in the consolidated statements of operations.

 

The Company recorded additions of $257.9 million for intangible assets acquired with the Merger during the year ended December 31, 2013.

The components of acquired intangible assets added during 2013 were as follows:

 

     December 31, 2013  
     Weighted Average
Useful Life
   Amounts  
     (in thousands)  

Developed technology

   3 years    $ 5,143   

Customer and vendor relationships, databases

   16.4 years      167,450   

Trademarks

   Indefinite      85,276   
     

 

 

 

Total acquired intangible assets

      $ 257,869   
     

 

 

 

The remaining weighted average amortization period for acquired intangible assets was 14.6 years as of June 30, 2014. Estimated future amortization expense for intangible asset as of June 30, 2014 is as follows:

 

    

(unaudited)

(in thousands)

 

The remainder of 2014

   $ 7,051   

2015

     14,102   

2016

     13,344   

2017

     12,068   

2018

     12,068   

Beyond

     113,081   
  

 

 

 

Total

   $ 171,714   
  

 

 

 

The changes in the carrying amount of goodwill during the periods presented were as follows:

 

     (in thousands)  

December 31, 2011

   $ 113,442   

Additions

     —     
  

 

 

 

December 31, 2012

     113,442   

Acquisition of GrubHub Holdings Inc.

     239,346   
  

 

 

 

December 31, 2013

     352,788   
  

 

 

 

Additions*

     —     

June 30, 2014*

   $ 352,788   
  

 

 

 

 

* Unaudited
Property and Equipment
Property and Equipment

6. Property and Equipment, Net

 

The components of the Company’s property and equipment as of December 31, 2012, December 31, 2013 and June 30, 2014 were as follows:

 

     As of December 31,     June 30, 2014  
     2012     2013    
                 (unaudited)  
     (in thousands)  

Computer equipment

   $ 5,612      $ 9,739      $ 11,495   

Furniture and fixtures

     1,645        2,176        2,440   

Developed software

     11,470        13,930        15,064   

Purchased software

     —         2,124        2,129   

Leasehold improvement

     5,194        6,120        6,473   
  

 

 

   

 

 

   

 

 

 

Property and equipment

     23,921        34,089        37,601   

Accumulated amortization and depreciation

     (10,580     (16,993     (21,072
  

 

 

   

 

 

   

 

 

 

Property and equipment, net

   $ 13,341      $ 17,096      $ 16,529   
  

 

 

   

 

 

   

 

 

 

 

The Company recorded amortization and depreciation expense related to property and equipment other than developed software of $0.9 million, $2.0 million, and $4.0 million for the years ended December 31, 2011, 2012 and 2013, respectively, and $1.6 million (unaudited) and $2.7 million (unaudited) for the six months ended June 30, 2013 and 2014, respectively.

 

The Company capitalized $2.3 million and $2.6 million in developed software for the years ended December 31, 2012 and 2013, respectively, and $1.4 million (unaudited) and $1.1 million (unaudited) for the six months ended June 30, 2013 and 2014, respectively. Amortization expense for developed software costs recognized in depreciation and amortization in the consolidated statements of operations was $1.1 million, $1.6 million and $2.6 million, for the years ended December 31, 2011, 2012 and 2013, respectively, and $1.0 million (unaudited) and $1.4 million (unaudited) for the six months ended June 30, 2013 and 2014, respectively.

Commitments and Contingencies
Commitments and Contingencies

7. Commitments and Contingencies

Office Facility Leases

The Company has various operating lease agreements which expire at various dates through June 2022. The terms of the lease agreements provide for rental payments on a graduated basis. The Company recognizes rent expense on a straight-line basis over the lease period.

Rental expense, principally for leased office space under operating lease commitments, was $1.9 million, $2.2 million and $2.5 million for the years ended December 31, 2011, 2012 and 2013, respectively, and $0.9 million (unaudited) and $1.9 million (unaudited) for the six months ended June 30, 2013 and 2014, respectively.

Future minimum lease payments under these leases as of June 30, 2014 were as follows:

 

     (in thousands)  

The remainder of 2014

   $ 2,346   

2015

     3,646   

2016

     3,482   

2017

     2,939   

2018

     1,750   

Thereafter

     6,123   
  

 

 

 

Total minimum lease payments

   $ 20,286   
  

 

 

 

Legal

In August 2011, Ameranth filed a patent infringement action against a number of defendants, including GrubHub Holdings Inc., in the U.S. District Court for the Southern District of California (the “Court”), Case No. 3:11-cv-1810 (“’1810 action”). In September 2011, Ameranth amended its complaint in the ’1810 action to also accuse Seamless North America, LLC of infringement. Ameranth alleged that the GrubHub Holdings Inc. and Seamless North America, LLC ordering systems, products and services infringe claims 12 and 15 of U.S. Patent No. 6,384,850 (“’850 patent”) and claims 11 and 15 of U.S. Patent No. 6,871,325 (“’325 patent”).

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

On November 26, 2013, the consolidated case was stayed pending the disposition of petitions for post-grant review of all the patents in the suit. These petitions were filed in the United States Patent and Trademark Office (the “PTO”) under the new Transitional Program for Covered Business Method Patents (the “CBM proceedings”). The CBM proceedings resulted in a March 26, 2014 ruling denying defendants’ petitions on the claims most relevant to GrubHub Holdings Inc. and Seamless North America LLC. The consolidated case remains stayed.

 

No trial date has been set for this case. 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 June 30, 2014, 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 early stage of the dispute 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 matters described above, from time to time, the Company is involved in various other legal proceedings arising from the normal course of business activities. As of June 30, 2014, the Company had reserved $0.6 million (unaudited) for such litigation.

Indemnification

In connection with the Merger, the Company agreed to indemnify Aramark Holdings for negative income tax consequences associated with the October 2012 spin-off of Seamless Holdings that are the result of certain actions taken by us, including our solicitation of acquirers to purchase us prior to October 29, 2014, and in certain other instances subject to a $15 million limitation. Management is not aware of any actions that would impact the indemnification obligation.

Restructuring

On November 20, 2013 the Company announced plans to close its Sandy, Utah office location in 2014. The Company recorded a restructuring accrual in the condensed consolidated balance sheets for severance and payroll related benefits as a result of the restructuring announcement. This amount represents the service vesting requirements for identified employees required to work through the expected closure date of the facility of December 31, 2014. The Company estimates total restructuring costs to be incurred will be approximately $1.2 million, including expense of $0.5 million (unaudited) to be recognized in the second half of 2014 related to the termination of the Sandy, Utah office lease agreement. Restructuring expense of $0.2 million and $0.5 million (unaudited) was recognized in general and administrative expenses in the condensed consolidated statements of operations for the year ended December 31, 2013 and the six months ended June 30, 2014, respectively.

The following tables summarize the Company’s restructuring activity during the year ended December 31, 2013 and the six months ended June 30, 2014:

 

     (in thousands)  

Restructuring reserve balance at December 31, 2012

   $  —     

Restructuring expense

     176   

Cash payments

     —     
  

 

 

 

Restructuring reserve balance at December 31, 2013

   $ 176   

Restructuring expense*

     492   

Cash payments*

     (190 )
  

 

 

 

Restructuring reserve balance at June 30, 2014*

   $ 478   
  

 

 

 

 

* Unaudited
Stock-Based Compensation
Stock-Based Compensation

8. Stock-Based Compensation

 

During 2011, the Company established a stock incentive plan (the “Plan”). The Plan allows the Company to grant stock options to individuals or groups of individuals as specified in the Plan. The exercise price of stock options cannot be less than the fair value of the common stock at the time of the grant, and the stock options generally expire ten years after the date of issuance.

 

As part of the Reorganization Agreement, the Company was required to replace GrubHub Holdings Inc.’s share based payment awards. The Company determined the fair value of the replacement awards at the time of the Merger. The fair value based measure of the replacement awards that was attributable to pre-combination services was approximately $11.0 million, and was included as part of the purchase price of $421.5 million, as additional consideration transferred in the business combination. The Company also determined that the fair value based measure of the replacement options attributable to post combination services was approximately $12.5 million. The fair value of the post combination services replacement awards is recognized as compensation cost in the Company’s post-Merger consolidated financial statements over the remaining vesting period.

 

The Company granted 3,992,500, 1,619,167, 3,698,708 and 1,739,273 (unaudited) stock options during the year ended December 31, 2011, 2012 and 2013 and the six months ended June 30, 2014, respectively. The fair market 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 historical volatilities of comparable publicly traded companies. The Company uses historical data to estimate option exercises and employee terminations within the valuation model. Separate groups of employees that have similar historical exercise behavior are considered separately for valuation purposes. The expected term of the award is estimated using a simplified method. The fair value at grant date was determined considering the performance of the Company at the grant date as well as future growth and profitability expectations by applying market and income approaches. The risk-free rate for the period within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The following assumptions were utilized for the years ended December 31, 2011, 2012, and 2013 and the six months ended June 30, 2014:

 

     December 31,     June 30, 2014  
     2011     2012     2013    
                       (unaudited)  

Weighted average fair value options granted

   $ 1.09      $ 1.46      $ 3.97      $ 13.12   

Average risk-free interest rate

     1.21     0.87     1.41     2.00

Expected stock price volatilities(a)

     60.40     54.80     50.7     50.5

Dividend yield

     None        None        None        None   

Expected stock option life (years)

     6.08        6.11        5.20        6.29   

 

a)   There was no active external or internal market for the Company’s shares until April of 2014. Thus, it was not possible to estimate the expected volatility of the Company’s share price in estimating fair value of options granted. As a substitute for such volatility, the Company used the historical volatility of comparable companies.

 

The stock options vest over different lengths of time depending upon the grantee. Compensation expense is recorded over the vesting period. The Company recorded compensation expense of $0.8 million, $2.6 million and $4.9 million for the years ended December 31, 2011, 2012 and 2013, respectively, and $1.2 million (unaudited) and $4.7 million (unaudited) during the six months ended June 30, 2013 and 2014, respectively.

 

A summary of the Company’s stock option activity is as follows:

 

     Fiscal Year Ended December 31, 2011  
     Options     Weighted
Average
Exercise Price
     Average
Intrinsic
Value

(in  thousands)
     Weighted
Average
Exercise  Term

(years)
 

Outstanding at beginning of period

     —         N/A         

Granted

     3,992,500      $ 3.80         

Forfeited

     (135,000     3.80         
  

 

 

         

Outstanding at end of period

     3,875,500      $ 3.80       $ 2,003         9.79   
  

 

 

         

Vested and expected to vest at end of period

     3,310,894        3.80         1,722         9.73   

Exercisable at end of period

     2,344        3.80       $ 1         9.70   

 

     Fiscal Year Ended December 31, 2012  
     Options     Weighted
Average
Exercise Price
     Average
Intrinsic
Value

(in  thousands)
     Weighted
Average
Exercise  Term

(years)
 

Outstanding at beginning of period

     3,857,500      $ 3.80       $ 2,003         9.79   

Granted

     1,619,167        5.16         

Forfeited

     (541,799     3.88         

Exercised

     (29,860     3.80         
  

 

 

         

Outstanding at end of period

     4,905,008      $ 4.24         8,632         9.37   
  

 

 

         

Vested and expected to vest at end of period

     4,323,108        4.22         7,687         9.41   

Exercisable at end of period

     1,222,222        3.80       $ 2,689         9.41   

 

     Fiscal Year Ended December 31, 2013  
     Options     Weighted
Average
Exercise Price
     Average
Intrinsic
Value

(in  thousands)
     Weighted
Average
Exercise  Term

(years)
 

Outstanding at beginning of period

     4,905,008      $ 4.24       $ 8,632         9.37   

Granted

     3,698,708        3.78         

Forfeited

     (458,204     4.40         

Exercised

     (475,959     3.04         
  

 

 

         

Outstanding at end of period

     7,669,553      $ 4.08         56,844         8.29   
  

 

 

         

Vested and expected to vest at end of period

     7,193,713        4.02         53,870         8.27   

Exercisable at end of period

     3,081,017        3.64       $ 24,197         8.18   

 

     Six Months Ended June 30, 2014  
     Options     Weighted
Average
Exercise Price
     Average
Intrinsic
Value

(in  thousands)
     Weighted
Average
Exercise  Term

(years)
 
     (unaudited)  

Outstanding at beginning of period

     7,669,553      $ 4.08       $ 56,844         8.29   

Granted

     1,739,273        15.13         

Forfeited

     (558,820     4.27         

Exercised

     (695,627     3.31         
  

 

 

         

Outstanding at end of period

     8,154,379        6.44         236,210         8.20   
  

 

 

         

Vested and expected to vest at end of period

     6,587,727        5.60         196,389         8.06   

Exercisable at end of period

     3,493,142      $ 3.88       $ 110,146         7.76   

 

The aggregate intrinsic value in the tables above represents the total pre-tax intrinsic value (the difference between the fair value of the common stock on December 31, 2011, 2012 and 2013 and June 30, 2014, respectively, 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 market 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, 2012, and 2013 was $0.07 million and $3.4 million, respectively, and $11.6 million (unaudited) during the six months ended June 30, 2014. There were no awards exercised during the year ended December 31, 2011.

 

The options outstanding and exercisable as of June 30, 2014 have been segregated into ranges for additional disclosure as follows:

 

Exercise Price

   Outstanding
on
June 30, 2014(1)
     Weighted
Average
Remaining
Term

(years)
     Vested and
Expected to
Vest on
June 30, 2014
     Weighted
Average
Exercise Term

(years)
     Exercisable
on
June 30, 2014
     Weighted
Average
Exercise Term

(years)
 
     (unaudited)  

$0.06

     8,554         4.47         8,544         4.47         8,554         4.47   

  0.08

     87,654         4.98         87,654         4.98         87,654         4.98   

  0.44

     74,823         6.03         74,212         6.03         69,067         6.01   

  0.78

     77,867         6.45         73,971         6.45         32,632         6.52   

  0.90

     255,793         6.86         239,093         6.86         138,714         6.88   

  2.00

     1,098,402         7.59         889,702         7.56         439,976         7.47   

  2.62

     50,000         7.31         50,000         7.31         50,000         7.31   

  3.80

     2,546,905         7.98         2,397,213         7.99         1,768,388         8.00   

  4.62

     50,599         7.97         40,930         7.97         25,298         7.97   

  5.06

     59,725         8.07         49,386         8.07         3,582         8.08   

  5.08

     155,797         8.14         90,184         8.14         50,352         8.14   

  5.20

     338,952         7.42         288,053         7.39         161,020         7.41   

  5.60

     1,070,535         8.00         916,871         8.04         446,447         8.06   

  6.20

     125,058         8.35         98,269         8.35         28,617         8.32   

  6.22

     125         8.38         104         8.38         —           n/a   

  8.40

     164,888         8.63         153,399         8.62         106,173         8.59   

  8.42

     93,739         8.60         66,633         8.60         31,072         8.59   

  10.82

     199,000         8.80         123,791         8.80         42,177         8.81   

  11.50

     28,750         9.44         13,422         9.42         389         8.69   

  13.70

     1,566,930         9.60         820,956         9.60         —           n/a   

  30.91

     122,100         9.89         57,147         9.89         —           n/a   

  35.31

     18,183         9.78         18,183         9.78         3,030         9.78   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     8,154,379         8.20         6,587,727         8.06         3,493,142         7.76   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)   Includes 34,512 shares of restricted common stock owned by officers of the Company that contain forfeiture provisions.

 

As of June 30, 2014, total unrecognized compensation cost, adjusted for estimated forfeitures, related to non-vested stock options was $21.1 million (unaudited) and is expected to be recognized over a weighted average period of 3.05 years.

Income Taxes
Income Taxes

9. Income Taxes

The Company files income tax returns in the U.S. federal, the United Kingdom and various state jurisdictions. The Company’s primary operating unit is Seamless North America, LLC, which was incorporated in 1999 as a taxable C-Corporation, and acquired by Aramark in April of 2006. The Company was converted to a single member limited liability company (“LLC”) in April of 2007. In June of 2011, the entity was converted into a partnership for tax purposes upon the sale of a 26% interest to SLW Investors. In October of 2012, Aramark spun off its interest in Seamless North America, LLC by contributing the partnership interest to a newly formed C-Corporation, Seamless Holdings, and distributing those shares to the shareholders of Aramark. The income taxes paid on behalf of Seamless North America, LLC by Aramark, while it was a single member LLC, have been reflected as income tax expense and as contributed capital for the period prior to the sale to SLW Investors in June of 2011. On that date, the Company recorded tax benefits of approximately $8.1 million relating to the reversal of existing deferred tax liabilities relating to the C-Corporation and recognition of a deferred tax asset at the partnership level relating to tax status of the underlying LLC. A deferred tax liability of approximately $8.2 million was assumed by Seamless Holdings at the time it was spun off from Aramark in October of 2012. This liability was reflected as an offset to equity, as part of the spin off.

 

The income tax provision (benefit) was comprised of the following:

 

     Year Ended December 31,  
     2011     2012      2013  
     (in thousands)  

Current:

       

Federal

   $ 1,514      $ 316       $ 2,912   

State

     893        132         3,056   

Foreign

     424        365         468   
  

 

 

   

 

 

    

 

 

 

Total current

     2,831        813         6,436   

Deferred:

       

Federal

     (4,493     —           1,300   

State

     (3,558     —           406   
  

 

 

   

 

 

    

 

 

 

Total deferred

     (8,051     —           1,706   
  

 

 

   

 

 

    

 

 

 

Total income tax expense

   $ (5,220   $ 813       $ 8,142   
  

 

 

   

 

 

    

 

 

 

Income before income taxes was as follows:

 

     Year Ended December 31,  
     2011      2012      2013  
     (in thousands)  

Domestic source

   $ 8,506       $ 7,153       $ 12,986   

Foreign source

     1,485         1,579         1,903   
  

 

 

    

 

 

    

 

 

 

Income before income tax

   $ 9,991       $ 8,732       $ 14,889   
  

 

 

    

 

 

    

 

 

 

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:

 

     Year Ended December 31,  
     2011     2012     2013  
     (in thousands)  

Tax at statutory rate

   $ 3,497      $ 3,056      $ 5,211   

State income taxes

     622        251        2,522   

Nondeductible transaction costs

     —          —          1,148   

Tax benefit of partnership status

     (1,239     (2,211     (726

Tax impact of change in tax status of LLC

     (7,956     —          —     

Valuation allowance reversal

     —          —          (502

Foreign rate differential

     (96     (188     (220

All other

     (48     (95     709   
  

 

 

   

 

 

   

 

 

 

Total provision (benefit) for income taxes

   $ (5,220   $ 813      $ 8,142   
  

 

 

   

 

 

   

 

 

 

 

The tax effects of temporary differences giving rise to deferred income tax assets and liabilities were as follows:

 

     As of December 31,  
     2012     2013  
     (in thousands)  

Deferred tax assets:

    

Loss and credit carryforwards

   $ 1,157      $ 16,606   

Accrued expenses

     26        620   

Intangible assets

     592        —     

Share-based compensation

     111        5,200   
  

 

 

   

 

 

 

Total deferred tax assets

     1,886        22,426   

Deferred tax (liabilities):

    

Fixed assets

   $ (241   $ (1,145

Intangible assets

     —          (105,435

Investment in partnership

     (8,150     (1,751
  

 

 

   

 

 

 

Total deferred tax (liabilities)

     (8,391     (108,331

(Less) valuation allowance

     (504     (902
  

 

 

   

 

 

 

Net deferred tax asset (liability)

   $ (7,009   $ (86,807
  

 

 

   

 

 

 

Classification of net deferred tax assets (liabilities) on the consolidated balance sheet was as follows:

 

     As of December 31,  
     2012     2013  
     (in thousands)  

Current assets

   $ 26      $ 3,688   

Non-current assets

     —          —     

Non-current (liabilities)

     (7,035     (90,495
  

 

 

   

 

 

 

Total deferred tax asset (liabilities)

   $ (7,009   $ (86,807
  

 

 

   

 

 

 

During 2013, the Company reversed the $0.5 million valuation allowance it previously established against the net deferred tax assets of its subsidiary, Slick City Media, Inc., as the Company now believes that it is more likely than not that these assets will be utilized, based on projected future income levels. The NOL carryover of this subsidiary, which was acquired in October of 2011, as well as the NOL and credit carryovers of GrubHub Holdings Inc., which was acquired on August 8, 2013, are subject to Section 382 and 383 of the Internal Revenue Code, which places limits on the utilization of acquired NOL and credit carryovers. Based on preliminary analysis performed by the Company, it does not believe that Sections 382 and 383 will significantly delay the utilization of these subsidiaries’ NOL and credit carryovers. A partial valuation reserve of $0.9 million is recorded at December 31, 2013 against certain state only credits as those credits have a short carryover period and the Company believes that this portion of the credit carryovers will more likely than not expire before they are utilized.

The Company has not provided U.S. income tax on the accumulated earnings of approximately $5.1 million of its UK subsidiary, Seamless Europe, Ltd., as it intends to permanently reinvest those undistributed earnings into future operations in that country. We estimate the potential additional U.S. tax liabilities that would result from the complete repatriation of those accumulated earnings to be approximately $0.8 million.

The Company had the following tax loss and credit carryforwards as of December 31, 2012 and 2013:

 

     2012      2013      Years of
Expiration:
Beginning
 
     (in thousands)  

U.S. federal loss carryforwards

   $ 3,380       $ 34,297         2027   

U.S. state and local loss carryforwards

     3,380         36,201         2027   

U.S. contribution carryforwards

     —           85         2015   

Illinois Edge Credits

     —           1,075         2017   

U.S. R&D Credits

     —           53         2031   

U.S. Alternative Minimum Tax Credit carryover

     8         240         No expiration   

 

 

In addition to the federal and state NOL carryforwards shown above, the Company has $3.7 million in additional loss carryovers attributable to excess tax benefits on stock option exercises that will be recorded to additional paid-in capital when those losses are deemed utilized applying the “with and without” method of accounting for excess tax benefits.

The Company is not currently under examination in any taxing jurisdiction, and its tax returns are subject to the normal statute of limitations, three years form 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 NOLs of Slick City Media, Inc. are still subject to audit by the IRS and state and local jurisdictions. Also, the 1999 and later year NOLs of GrubHub Holdings Inc. and its acquired businesses are still subject to audit by the IRS and state and local jurisdictions. The September 30, 2010 and later UK returns of Seamless Europe Ltd. are subject to exam by the UK tax authorities.

The Company is subject to taxation in the U.S. federal and various state jurisdictions. Significant judgment is required in determining the provision for income taxes and recording the related income tax assets and liabilities. The Company’s practice for accounting for uncertainty in income taxes is to recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not criteria, the amount recognized in the financial statements is the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority.

The following table summarizes the Company’s unrecognized tax benefit activity, excluding the related accrual for interest:

 

     December 31,  
     2013      2012  
     (in thousands)  

Balance at beginning of year

   $ —         $ —     

Increase in positions relating to prior periods

     166         —     

Increases in positions taken in the current period

     931         —     
  

 

 

    

 

 

 

Balance at end of year

   $ 1,097       $ —     
  

 

 

    

 

 

 

The Company records interest and penalties, if any, as a component of its income tax expenses. The non-current income tax liabilities are recorded in other long-term liabilities in the consolidated balance sheet. At December 31, 2013, the Company did not anticipate any significant adjustments to its unrecognized tax benefits caused by the settlement of tax examinations or other factors, within the next twelve months. Included in the balance sheet at December 31, 2013 were deferred tax assets that relate to the potential settlement of these unrecognized tax benefits. After consideration of these amounts, $0.5 million and $0 of the amount accrued at December 31, 2013 and 2012, respectively, would impact the effective tax rate, if reversed.

Stockholders' Equity
Stockholders' Equity

10. Stockholders’ Equity

The Company is authorized to issue two classes of stock: common stock and Series A Preferred Stock. Each share of Series A Preferred Stock was convertible, at the option of the holder thereof, into common stock on a one-for-one basis, subject to adjustment as defined in the Company’s amended and restated certificate of incorporation. The Company entered into a stockholders agreement in 2013 with certain stockholders. The agreement prevented those stockholders from transferring their shares without the consent of a majority of the stockholders.

On April 4, 2014, the Company completed the IPO in which the Company issued and sold 4,000,000 shares of common stock at a public offering price of $26.00 per share. The Company received net proceeds of $94.9 million (unaudited) after deducting underwriting discounts and commissions of $6.5 million (unaudited) and other offering expenses of approximately $2.6 million (unaudited). Upon the closing of the IPO, the stockholder’s agreement ceased to be in effect.

Common Stock

Each holder of common stock will have one vote per share of common stock held on all matters that are submitted for stockholder vote. Upon liquidation, the common stock was junior to the rights and preferences of the Series A preferred stock as of December 31, 2013. At December 31, 2012 and 2013, and June 30, 2014 there were 31,349,777, 165,000,000 and 500,000,000 shares (unaudited) of common stock authorized, respectively. The Company increased the number of authorized shares at the time of the Merger. At December 31, 2012, there were 31,349,777 shares issued and 31,218,164 shares of common stock outstanding. At December 31, 2013, there were 53,757,437 shares of common stock issued and outstanding. At June 30, 2014 there were 78,831,161 shares (unaudited) of common stock issued and outstanding. The Company held 131,607 shares as treasury shares for the year ended December 31, 2012.

 

Series A Preferred Stock

Upon the closing of the IPO on April 4, 2014, all shares of the Company’s then-outstanding convertible Series A Preferred Stock automatically converted on a one-for-one basis into an aggregate of 19,284,113 shares of common stock. There were no issued or outstanding shares of preferred stock as of June 30, 2014.

In the event of a liquidation event, the holders of Series A preferred stock were entitled to receive pari passu to each other, and prior in preference to any distribution of any assets of the Company to the holders of common stock. The Series A preferred stock had a liquidation preference of an amount per share equal to the original Series A preferred stock issue price. The aggregate liquidation preference of the Series A Preferred Stock as of December 31, 2012 and 2013 was approximately $50.0 million and $86.2 million, respectively.

Redeemable Common Stock

The put rights that would have required the Company to repurchase the Company’s then outstanding redeemable common stock at fair value (as defined in the stockholders agreement) determined at the redemption date were terminated and the shares converted on a one-for-one basis into an aggregate of 1,344,236 shares common stock upon the closing of the IPO on April 4, 2014.

There were 1,344,236 shares of common stock with put rights that would have required the Company to repurchase these shares at fair value determined at the redemption date. As the redemption price is equivalent to the fair value of the instrument, the Company adjusted the carrying value of the redeemable common stock to its fair value with an adjustment to equity. The fair value of the redeemable common stock was $18.4 million at December 31, 2013. The Company had an annual redemption limit of $4.0 million.

Retirement Plan
Retirement Plan

11. Retirement Plan

Beginning February 1, 2012, the Company maintained a defined contribution plan for employees. The plan is qualified under section 401(k) of the Internal Revenue Code. From February 1, 2012 to September 30, 2012, the Company matched 67% of the first 6% of eligible contributions. From October 1, 2012 to December 31, 2013, and during the six months ended June 30, 2014, the Company matched 100% of the first 3% of employees’ contributions and 50% of the next 2% of employees’ contributions that were made. The Company may also make discretionary profit sharing contributions as determined by the Company’s Board of Directors. The Company’s matching contributions to the plan were $0.3 million and $0.7 million during the years ended December 31, 2012 and 2013, respectively, and $0.5 million (unaudited) during the six months ended June 30, 2014. The Company did not make matching contributions during the year ended December 31, 2011.

Net Income Per Share Attributable to Common Stockholders
Net Income Per Share Attributable to Common Stockholders

12. Net Income 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, 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 using the treasury stock method and common stock issuable upon conversion of the Series A Preferred Stock. Upon the closing of the IPO, all shares of the Company’s then-outstanding convertible Series A Preferred Stock automatically converted into an aggregate of 19,284,113 shares of common stock.

 

The following tables present the calculation of basic and diluted net income per share attributable to common stockholders for the periods presented:

 

     For the Year Ended December 31, 2011  
     Income
(Numerator)
    Shares
(Denominator)
     Per Share
Amount
 
     (in thousands, except per share data)  

Net income

   $ 15,211        

Preferred stock tax distributions

     (334     
  

 

 

      

Basic EPS

       

Net income attributable to common stockholders

     14,877        31,320       $ 0.48   
       

 

 

 

Effect of Dilutive Securities

       

Preferred Stock

     334        11,185      

Stock options

     —         —       
  

 

 

   

 

 

    

Diluted EPS

       

Net income attributable to common stockholders

   $ 15,211        42,505       $ 0.36   
  

 

 

   

 

 

    

 

 

 

 

     For the Year Ended December 31, 2012  
     Income
(Numerator)
    Shares
(Denominator)
     Per Share
Amount
 
     (in thousands, except per share data)  

Net income

   $ 7,919        

Preferred stock tax distributions

     (402     
  

 

 

      

Basic EPS

       

Net income attributable to common stockholders

     7,517        31,320       $ 0.24   
       

 

 

 

Effect of Dilutive Securities

       

Preferred Stock

     402        11,185      

Stock options

     —         161      
  

 

 

   

 

 

    

Diluted EPS

       

Net income attributable to common stockholders

   $ 7,919        42,666       $ 0.19   
  

 

 

   

 

 

    

 

 

 

 

     For the Year Ended December 31, 2013  
     Income
(Numerator)
    Shares
(Denominator)
     Per Share
Amount
 
     (in thousands, except per share data)  

Net income

   $ 6,747        

Preferred stock tax distributions

     (1,073     
  

 

 

      

Basic EPS

       

Net income attributable to common stockholders

     5,674        40,681       $ 0.14   
       

 

 

 

Effect of Dilutive Securities

       

Preferred Stock

     1,073        14,390      

Stock options

     —         1,574      
  

 

 

   

 

 

    

Diluted EPS

       

Net income attributable to common stockholders

   $ 6,747        56,645       $ 0.12   
  

 

 

   

 

 

    

 

 

 

 

     For the Six Months Ended June 30, 2013      For the Six Months Ended June 30, 2014  
     Income
(Numerator)
    Shares
(Denominator)
     Per Share
Amount
     Income
(Numerator)
    Shares
(Denominator)
     Per Share
Amount
 
     (in thousands, except per share data)  
     (unaudited)  

Net income

   $ 3,079            $ 7,045        

Preferred stock tax distributions

     (648           (320     
  

 

 

   

 

 

    

 

 

    

 

 

      

Basic EPS

               

Net income attributable to common stockholders

     2,431        31,368       $ 0.08         6,725        66,626       $ 0.10   
               

 

 

 

Effect of Dilutive Securities

               

Preferred Stock

     648        11,186            320        9,960      

Stock options

     —         802            —         3,268      
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

Diluted EPS

               

Net income attributable to common stockholders

   $ 3,079        43,356       $ 0.07       $ 7,045        79,854       $ 0.09   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

 

For the years ended December 31, 2011, 2012, and 2013, 3,857,500, 1,330,521, and 477,452 shares of common stock underlying stock options, respectively, were excluded from the calculation of diluted net income per share attributable to common stockholders because their effect would have been antidilutive. For the six months ended June 30, 2013 and 2014, 328,750 shares (unaudited) and 140,283 shares (unaudited) of common stock underlying stock options, respectively, were excluded because their effect would have been antidilutive.

 

Pro Forma Net Income per Share Attributable to Common Stockholders

 

Pro forma basic and diluted net income per share were computed to give effect to the conversion of the convertible preferred stock (using the if-converted method) into common stock as though the conversion had occurred on the dates of issuance and to give effect to the provision for income taxes during the period when the Company was a pass through entity for tax purposes.

 

The following table presents the calculation of pro forma basic and diluted net income per share attributable to common stockholders.

 

     Six Months Ended
June 30, 2013
     Year Ended
December 31, 2013
 
     (in thousands, except per share data)  
     (unaudited)  

Net income attributable to common stockholders

   $ 2,431       $ 5,674   

Dividends on preferred stock

     648         1,073   
  

 

 

    

 

 

 

Pro forma net income

   $ 3,079       $ 6,747   

Weighted average shares used to compute basic net income per share attributable to common stockholders

     31,368         40,681   

Adjustment for assumed conversion of preferred stock to common stock

     11,186         14,390   
  

 

 

    

 

 

 

Weighted average shares used to compute diluted net income per share

     42,554         55,071   

Dilutive effect of stock options

     802         1,574   
  

 

 

    

 

 

 

Weighted average shares used to compute diluted pro forma net income per share

     43,356         56,645   
  

 

 

    

 

 

 

Pro forma net income per share attributable to common stockholders:

     

Basic

   $ 0.06       $ 0.12   

Diluted

   $ 0.07       $ 0.12   

Significant Accounting Policies (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.

The share and per share amounts for all periods presented reflect the completion of the Company’s 1-for-2 reverse stock split, which the Company effected on April 2, 2014.

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 development costs, goodwill, depreciable lives of property and equipment, recoverability of intangible assets with definite 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.

Pro Forma Presentation

Upon consummation of the initial public offering, all of the outstanding shares of convertible preferred stock automatically converted on a one-for-one basis into shares of common stock and all put rights for outstanding redeemable common stock were terminated. Unaudited pro forma net income per share attributable to common stockholders and pro forma weighted average number of shares outstanding for the year ended December 31, 2013 and the six months ended June 30, 2013 have been computed to give effect to the automatic conversion of the convertible preferred stock and redeemable common stock into common stock as though the conversion had occurred on the original dates of issuance, unless otherwise indicated.

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.

Accumulated Other Comprehensive Income (Loss)

Accumulated other comprehensive income consists of foreign currency translation adjustments. The financial statements of non-U.S. entities are translated from their functional currencies 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 income (loss) on the consolidated balance sheet.

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:

 

Computer equipment

   2-3 years

Furniture and fixtures

   5 years

Developed software

   1.5-3 years

Purchased software

   3-5 years

Leasehold improvements

   Shorter of expected useful life or lease term

 

The Company has reduced the estimated useful life on any computer equipment, furniture and fixtures, and leasehold improvements related to its Sandy, Utah location to coincide with the expected closure date of December 31, 2014. (See Note 7, “Commitments and Contingencies”).

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 differences 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. The allowance is recorded through a charge to bad debt expense which is recorded within general and administrative expenses in the consolidated statements of operations. The allowance is based on historical loss experience and any specific risks 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.

 

Changes in the Company’s allowance for doubtful accounts are as follows:

 

     Year Ended
December 31,
    Six Months Ended
June 30,
 
     2012     2013         2013              2014      
                 (unaudited)  
     (in thousands)  

Allowance for doubtful accounts at beginning of period

   $ 248      $ 210      $ 210       $ 510   

Additions to expense

     74        473        86         166   

Less: writeoffs, net of recoveries and other adjustments

     (112     (173     16         3   
  

 

 

   

 

 

   

 

 

    

 

 

 

Balance at end of period

   $ 210      $ 510      $ 312       $ 679   
  

 

 

   

 

 

   

 

 

    

 

 

 

 

Advertising Costs

Advertising costs are generally expensed as incurred in connection with the requisite service period. Certain advertising production costs are capitalized and expensed over the requisite service period of the advertisements. For the years ended December 31, 2011, 2012 and 2013, expenses attributable to advertising totaled approximately $12.6 million, $20.4 million and $25.0 million, respectively. For the six months ended June 30, 2013 and 2014, expenses attributable to advertising totaled approximately $12.2 million (unaudited) and $22.4 million (unaudited), 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 at fair value on the date of grant and recognizes compensation expense over the service period on a straight-line basis for awards expected to vest.

The Company uses the Black-Scholes option-pricing model to determine the fair value for stock options. In valuing the Company’s options, the Company makes assumptions about risk-free interest rates, dividend yields, volatility and weighted-average expected lives, including estimated forfeiture rates. Risk-free interest rates are derived from U.S. Treasury securities as of the option grant date. Expected dividend yield is based on the Company’s historical dividend payments, which have been zero to date. As the Company did not have public trading history for its common shares until April of 2014, the expected volatility for the Company’s common stock is estimated using the published historical volatilities of industry peers representing the verticals in which the Company operates. The Company estimates the weighted-average expected life of the options as the average of the vesting option schedule and the term of the award, since the Company does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term due to the limited period of time stock-based awards have been exercisable. The term of the award is estimated using the simplified method. Forfeiture rates are estimated using historical actual forfeiture trends as well as the Company’s judgment of future forfeitures. These rates are evaluated quarterly and any change in compensation expense is recognized in the period of the change. The estimation of stock awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ from the Company’s current estimates, such amounts will be recorded as a cumulative adjustment in the period the estimates are revised. The Company considers many factors when estimating expected forfeitures, including the types of awards and employee class. Actual results, and future changes in estimates, may differ substantially from management’s current estimates.

Provision (Benefit) for Income Taxes

The provision (benefit) for income taxes is determined using the asset and liability method. Under this method, deferred tax assets and liabilities are calculated based upon the temporary differences between the financial statement and income tax bases of assets and liabilities using the enacted tax rates that are applicable in a given year.

The Company utilizes a two-step approach to recognizing and measuring uncertain tax positions (“tax contingencies”). The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount which is more than 50% likely to be realized upon ultimate settlement. The Company considers many factors when evaluating and estimating its tax positions and tax benefits, which may require periodic adjustments and which may not accurately forecast actual outcomes. The Company includes interest and penalties related to tax contingencies in the provision for income taxes in the consolidated statements of operations. See Note 9, “Income Taxes.” Management of the Company does not expect the total amount of unrecognized tax benefits to significantly change in the next twelve months.

Seamless North America, LLC became a partnership for tax purposes in June of 2011. The income tax consequences of a partnership are borne by its partners. The tax consequences of this partnership were borne by Aramark and SLW Investors from June of 2011 through October 29, 2012. Starting October 30, 2012, 74% of the partnership’s taxable income is reflected as taxable income at Seamless Holdings, a subsidiary of GrubHub Inc. Starting on August 9, 2013, 100% of the partnership’s taxable income was recognized as taxable income by the Company. If Seamless North America, LLC had been taxed as a C corporation for all of its earnings throughout 2011, 2012, and 2013 the tax expense recorded in these statements of operations would have increased by $1,493 million, $2,665 million, and $876 million, respectively.

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 and other long-lived assets for impairment whenever events or circumstances indicate that they may not be recoverable or at least annually. Recoverability is measured by comparing the carrying amount of an asset group to future undiscounted net cash flows expected to be generated. If this comparison indicates impairment, the amount of impairment to be recognized 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, 2011, 2012 and 2013 or the six months ended June 30, 2013 and 2014.

     Website and Software Development Costs

 

The costs incurred in the preliminary stages of 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 their estimated useful lives. 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. The Company capitalized $2,398, $2,280 and $2,592 of website development costs during the years ended December 31, 2011, 2012 and 2013, respectively, and $1,434 (unaudited) and $1,112 (unaudited) of website development costs during the six months ended June 30, 2013 and 2014, respectively.

Goodwill

Goodwill represents the excess of the cost of an acquired business over the fair value of the assets acquired at the date of acquisition. Absent any special circumstances that could require an interim test, the Company has elected to test for goodwill impairment at September 30 of each year.

The Company tests for impairment using a two-step process. The first step of the goodwill impairment test identifies if there is potential goodwill impairment. If step one indicates that an impairment may exist, a second step is performed to measure the amount of the goodwill impairment, if any, by comparing the implied fair value of goodwill with the carrying amount. If the implied goodwill is less than the carrying amount, a write-down is recorded. The Company has determined that there was no goodwill impairment as of December 31, 2012 and 2013 and June 30, 2014.

Fair Value

Accounting standards define fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market in an orderly transaction between market participants on the measurement date. The standards also establish a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value:

The Company applied the following methods and assumptions in estimating its fair value measurements:

 

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: Cash equivalents are comprised of highly liquid investments, including money market funds and certificates of deposit with original maturities of less than three months. The fair value measurement of these assets is based on quoted market prices in active markets and, therefore, these assets are recorded at fair value on a recurring basis and classified as Level 1 in the fair value hierarchy. Redeemable common stock consisted of put rights the Company had granted to certain shareholders which required common shares to be repurchased at fair value (as defined in the stockholders agreement) determined by the redemption date. The fair value measurement of redeemable common stock (as defined in the stockholders agreement) was based on Level 3 inputs which are defined in the fair value hierarchy as noted above. Accounts receivable and accounts payable approximate fair value due to their generally short-term maturities.

The following tables present the balances of assets measured at fair value on a recurring basis as of the dates presented at December 31, 2012 and 2013 and June 30, 2014.

 

     December 31,      June 30, 2014
(unaudited)
 
Fair Value    2012      2013     
     (in thousands)  

Cash equivalents

   $ —        $ 4,200       $ 4,203   

The Company did not have any assets or liabilities measured on a recurring basis using Level 2 or Level 3 inputs at December 31, 2012 and 2013 or June 30, 2014.

The fair value of the Company’s redeemable common stock, determined to be Level 3 under the fair value hierarchy, was measured based on the required redemption at the most recent fair value of the common stock. The put rights for the Company’s then outstanding redeemable common stock were terminated and the shares converted on a one-for-one basis into common stock upon the closing of the IPO on April 4, 2014. The redeemable common stock fair value was prepared based on the required redemption at the most recent fair value of the common stock. The following table presents the fair value, valuation techniques and related unobservable inputs for the Level 3 measurement as of December 31, 2013:

 

     Fair value
(in thousands)
     Valuation
technique
   Unobservable
input
  Range

Redeemable common stock

   $ 18,415       Probability Weighted
Expected Return

Method

   Discount rate of
15.3% Lack of
Marketability–14.9%
per common share
  Based on computed
estimated fair value

Concentration of Credit Risk

Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of accounts receivable. For the fiscal years ended December 31, 2011, 2012 and 2013 and the six months ended June 30, 2014, the Company had no customers which accounted for more than 10% of revenue or 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 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 to be persuasive evidence of an arrangement.

The Company generates revenues primarily when diners place an order on our platform through our websites, our mobile applications, third-party websites that incorporate our API or one of our listed phone numbers. Restaurants pay us a commission, typically a percentage of the transaction, on orders that are processed through our platform. Most of our restaurants can choose their level of commission rate, at or above our base rates, to affect their relative priority in our sorting algorithms, with restaurants paying higher commission rates generally appearing higher in the search order than restaurants paying lower commission rates. Some restaurants on our platform pay a monthly system fee for better branding and more robust placement. Because we are acting as an agent of the merchant in the transaction, we recognize as revenues only our 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 our platform. These promotions are generally cash credits to be applied against purchases. We record these incentive offers as reductions in revenues, generally on the date we record the corresponding revenue.

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 contractual arrangement with the related restaurant, and is adjusted for any cash credits, including incentive offers provided to restaurants and diners, related to the transaction. Although the Company will process the entire amount of the transaction with the diner, it will record its 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.

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. 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. Our reportable segment has been identified based on how our chief operating decision maker manages our business, makes operating decisions and evaluates operating performance.

Recently Issued Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (“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. ASU 2014-09 will be effective for the Company in the first quarter of 2017. Management is currently evaluating the impact the adoption of ASU 2014-09 will have on the Company’s condensed consolidated financial position, results of operations or cash flows and the method of retrospective application, either full or modified.

 

In July 2013, the FASB issued Accounting Standards Update No. 2013-11 “Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists” (“ASU 2013-11”), which requires that a liability related to an unrecognized tax benefit be presented as a reduction of a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward that the entity intends to use and is available for settlement at the reporting date. ASU 2013-11 was effective for and adopted by the Company in the first quarter of 2014 and applied prospectively to unrecognized tax benefits that existed at the effective date. The adoption of ASU 2013-11 impacted the Company’s financial statement presentation and disclosures, but otherwise did not impact the Company’s condensed consolidated financial position, results of operations or cash flows.

 

In February 2013, the FASB issued Accounting Standards Update No. 2013-02 “Comprehensive Income (Topic 220): Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income” (“ASU 2013-02”), which requires an entity to disaggregate the total change of each component of other comprehensive income either on the face of the income statement or as a separate disclosure in the notes. ASU 2013-02 was effective for and adopted by the Company in the first quarter of 2013. The adoption of ASU 2013-02 impacted the Company’s financial statement presentation and disclosures, but otherwise did not impact the Company’s condensed consolidated financial position, results of operations or cash flows.

 

In September 2011, the FASB issued ASU No. 2011-08, “Intangibles—Goodwill and Other (Topic 350)” “(ASU 2011-08”), which allows companies to assess qualitative factors to determine if it is more-likely-than-not that goodwill might be impaired and whether it is necessary to perform the two-step goodwill impairment test. ASU 2011-08 was effective for and adopted by the Company in the first quarter of 2012. The adoption of this ASU 2011-08 did not have any material impact on the Company’s results of operations or financial position.

 

In June 2011, the FASB issued ASU No. 2011-05, “Presentation of Comprehensive Income” (“ASU 2011-05”), which requires an entity to present total comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements and eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. The Company early adopted this guidance in the first quarter of 2012, retrospectively. The adoption of ASU 2011-05 impacted the Company’s financial statement presentation and disclosures, but otherwise did not impact the Company’s condensed consolidated financial position, results of operations or cash flows.

 

In May 2011, the FASB issued ASU No. 2011-04, “Fair Value Measurement (Topic 820),” (“ASU 2011-04”) which amended existing rules for fair value measurements and disclosures to clarify guidance and minimize differences between GAAP and International Financial Reporting Standards (“IFRS”). ASU 2011-04 requires entities to provide information about valuation techniques and unobservable inputs used in Level 3 fair value measurements and provide a narrative description of the sensitivity of Level 3 measurements to changes in unobservable inputs. ASU 2011-04 was for and adopted by the Company in the first quarter of 2012. The adoption of ASU 2011-04 did not have any impact on our financial position, results of operations or cash flows.

Significant Accounting Policies (Tables)

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:

 

Computer equipment

   2-3 years

Furniture and fixtures

   5 years

Developed software

   1.5-3 years

Purchased software

   3-5 years

Leasehold improvements

   Shorter of expected useful life or lease term

Changes in the Company’s allowance for doubtful accounts are as follows:

 

     Year Ended
December 31,
    Six Months Ended
June 30,
 
     2012     2013         2013              2014      
                 (unaudited)  
     (in thousands)  

Allowance for doubtful accounts at beginning of period

   $ 248      $ 210      $ 210       $ 510   

Additions to expense

     74        473        86         166   

Less: writeoffs, net of recoveries and other adjustments

     (112     (173     16         3   
  

 

 

   

 

 

   

 

 

    

 

 

 

Balance at end of period

   $ 210      $ 510      $ 312       $ 679   
  

 

 

   

 

 

   

 

 

    

 

 

 

The following tables present the balances of assets measured at fair value on a recurring basis as of the dates presented at December 31, 2012 and 2013 and June 30, 2014.

 

     December 31,      June 30, 2014
(unaudited)
 
Fair Value    2012      2013     
     (in thousands)  

Cash equivalents

   $ —        $ 4,200       $ 4,203   

The following table presents the fair value, valuation techniques and related unobservable inputs for the Level 3 measurement as of December 31, 2013:

 

     Fair value
(in thousands)
     Valuation
technique
   Unobservable
input
  Range

Redeemable common stock

   $ 18,415       Probability Weighted
Expected Return

Method

   Discount rate of
15.3% Lack of
Marketability–14.9%
per common share
  Based on computed
estimated fair value
Acquisitions (Tables)

The following table summarizes the August 8, 2013 acquisition-date fair value of the assets and liabilities acquired in connection with the GrubHub Holdings Inc. business combination:

 

     (in thousands)  

Cash and cash equivalents

   $ 13,266   

Accounts receivable

     2,108   

Other identifiable assets

     4,422   

Customer and vendor relationships

     167,450   

Deferred tax asset

     4,013   

Deferred tax liability

     (88,937

Developed technology

     5,143   

Goodwill

     239,346   

Liabilities assumed

     (10,602

Trademarks

     85,276   
  

 

 

 

Total net assets acquired

   $ 421,485   
  

 

 

 

The following unaudited pro forma information presents a summary of the operating results of the Company for the year ended December 31, 2012 and 2013, and the six months ended June 30, 2013 as if GrubHub Inc. had acquired GrubHub Holdings Inc. as of January 1, 2012 and January 1, 2013, respectively:

 

     December 31, 2012
Pro forma combined
    December 31, 2013
Pro forma combined
     Six Months Ended
June 30, 2013
Pro forma combined
 
    

(unaudited)

(in thousands)

 

Revenues

   $ 118,854      $ 170,086       $ 80,027   

Net income (loss)

   $ (17,028   $ 4,160       $ 773   

The pro forma adjustments reflect the additional amortization that would have been recognized for the intangible assets, replacement stock option awards compensation cost for services performed after the Merger, elimination of transaction costs incurred and pro forma tax adjustments for the years ended December 31, 2012 and 2013 and the six months ended June 30, 2013 as follows:

 

     Year Ended
December 31, 2012
     Year Ended
December 31, 2012
    Six Months Ended
June 30, 2013
 
     (in thousands)  
     (unaudited)  

Amortization of intangible assets

   $ 9,761       $ 6,475      $ 5,334   

Stock-based compensation

     4,979         2,997        2,424   

Transaction costs

     —           (9,131     (7,430

Income tax benefit

     —           (3,050     (2,767
Goodwill and Acquired Intangible Assets (Tables)

The components of acquired intangible assets as of December 31, 2012, December 31, 2013 and June 30, 2014 were as follows:

 

     Useful Lives    Amounts      Accumulated
Amortization
    Carrying
Value
 
     (in thousands)  

December 31, 2012

          

Customer and vendor relationships, databases

   1 to 15 years    $ 24,529       $ (11,462   $ 13,067   
     

 

 

    

 

 

   

 

 

 

Total amortizable intangible assets

        24,529         (11,462     13,067   

Trademarks

   Indefinite      4,400         —          4,400   
     

 

 

    

 

 

   

 

 

 

Total acquired intangible assets

      $ 28,929       $ (11,462   $ 17,467   
     

 

 

    

 

 

   

 

 

 
     Useful Lives    Amounts      Accumulated
Amortization
    Carrying
Value
 
     (in thousands)  

December 31, 2013

          

Developed technology

   3 years    $ 5,143       $ (677   $ 4,466   

Customer and vendor relationships, databases

   1 to 16.4 years      191,979         (17,680     174,299   
     

 

 

    

 

 

   

 

 

 

Total amortizable intangible assets

        197,122         (18,357     178,765   

Trademarks

   Indefinite      89,676         —          89,676   
     

 

 

    

 

 

   

 

 

 

Total acquired intangible assets

      $ 286,798       $ (18,357   $ 268,441   
     

 

 

    

 

 

   

 

 

 
     Useful Lives    Amounts      Accumulated
Amortization
    Carrying
Value
 
     (in thousands)  

June 30, 2014 (unaudited)

          

Developed technology

   3 years    $ 5,143       $ (1,534   $ 3,609   

Customer and vendor relationships, databases

   1 to 16.4 years      191,979         (23,874     168,105   
     

 

 

    

 

 

   

 

 

 

Total amortizable intangible assets

        197,122         (25,408     171,714   

Trademarks

   Indefinite      89,676         —          89,676   
     

 

 

    

 

 

   

 

 

 

Total acquired intangible assets

      $ 286,798       $ (25,408   $ 261,390   
     

 

 

    

 

 

   

 

 

 

 

The components of acquired intangible assets added during 2013 were as follows:

 

     December 31, 2013  
     Weighted Average
Useful Life
   Amounts  
     (in thousands)  

Developed technology

   3 years    $ 5,143   

Customer and vendor relationships, databases

   16.4 years      167,450   

Trademarks

   Indefinite      85,276   
     

 

 

 

Total acquired intangible assets

      $ 257,869   
     

 

 

 

Estimated future amortization expense for intangible asset as of June 30, 2014 is as follows:

 

    

(unaudited)

(in thousands)

 

The remainder of 2014

   $ 7,051   

2015

     14,102   

2016

     13,344   

2017

     12,068   

2018

     12,068   

Beyond

     113,081   
  

 

 

 

Total

   $ 171,714   
  

 

 

 

The changes in the carrying amount of goodwill during the periods presented were as follows:

 

     (in thousands)  

December 31, 2011

   $ 113,442   

Additions

     —     
  

 

 

 

December 31, 2012

     113,442   

Acquisition of GrubHub Holdings Inc.

     239,346   
  

 

 

 

December 31, 2013

     352,788   
  

 

 

 

Additions*

     —     

June 30, 2014*

   $ 352,788   
  

 

 

 

 

* Unaudited
Property and Equipment (Tables)
Components of Property and Equipment

The components of the Company’s property and equipment as of December 31, 2012, December 31, 2013 and June 30, 2014 were as follows:

 

     As of December 31,     June 30, 2014  
     2012     2013    
                 (unaudited)  
     (in thousands)  

Computer equipment

   $ 5,612      $ 9,739      $ 11,495   

Furniture and fixtures

     1,645        2,176        2,440   

Developed software

     11,470        13,930        15,064   

Purchased software

     —         2,124        2,129   

Leasehold improvement

     5,194        6,120        6,473   
  

 

 

   

 

 

   

 

 

 

Property and equipment