GRUBHUB INC., 10-K filed on 2/26/2016
Annual Report
Document and Entity Information (USD $)
12 Months Ended
Dec. 31, 2015
Feb. 19, 2016
Jun. 30, 2015
Document And Entity Information [Abstract]
 
 
 
Document Type
10-K 
 
 
Amendment Flag
false 
 
 
Document Period End Date
Dec. 31, 2015 
 
 
Document Fiscal Year Focus
2015 
 
 
Document Fiscal Period Focus
FY 
 
 
Trading Symbol
GRUB 
 
 
Entity Registrant Name
GRUBHUB INC. 
 
 
Entity Central Index Key
0001594109 
 
 
Current Fiscal Year End Date
--12-31 
 
 
Entity Filer Category
Large Accelerated Filer 
 
 
Entity Common Stock, Shares Outstanding
 
84,576,652 
 
Entity Current Reporting Status
Yes 
 
 
Entity Voluntary Filers
No 
 
 
Entity Well-known Seasoned Issuer
Yes 
 
 
Entity Public Float
 
 
$ 2,186,085,162 
Consolidated Statements of Operations (USD $)
In Thousands, except Per Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2015
Dec. 31, 2014
Dec. 31, 2013
Income Statement [Abstract]
 
 
 
Revenues
$ 361,825 
$ 253,873 
$ 137,143 
Costs and expenses:
 
 
 
Sales and marketing
91,150 
66,201 
37,347 
Operations and support
107,424 
62,509 
34,173 
Technology (exclusive of amortization)
32,782 
25,185 
15,357 
General and administrative
40,506 
32,307 
21,907 
Depreciation and amortization
28,034 
22,687 
13,470 
Total costs and expenses
299,896 
208,889 
122,254 
Income before provision for income taxes
61,929 
44,984 
14,889 
Provision for income taxes
23,852 
20,721 
8,142 
Net income
38,077 
24,263 
6,747 
Preferred stock tax distributions
 
(320)
(1,073)
Net income attributable to common stockholders
$ 38,077 
$ 23,943 
$ 5,674 
Net income per share attributable to common stockholders:
 
 
 
Basic
$ 0.45 
$ 0.33 
$ 0.14 
Diluted
$ 0.44 
$ 0.30 
$ 0.12 
Weighted-average shares used to compute net income per share attributable to common stockholders:
 
 
 
Basic
84,076 
73,571 
40,681 
Diluted
85,706 
81,698 
56,645 
Consolidated Statements of Comprehensive Income (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2015
Dec. 31, 2014
Dec. 31, 2013
Statement Of Income And Comprehensive Income [Abstract]
 
 
 
Net income
$ 38,077 
$ 24,263 
$ 6,747 
OTHER COMPREHENSIVE INCOME (LOSS)
 
 
 
Foreign currency translation adjustments
(342)
(394)
159 
COMPREHENSIVE INCOME
$ 37,735 
$ 23,869 
$ 6,906 
Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Dec. 31, 2015
Dec. 31, 2014
CURRENT ASSETS:
 
 
Cash and cash equivalents
$ 169,293 
$ 201,796 
Short term investments
141,448 
111,341 
Accounts receivable, less allowances for doubtful accounts
42,051 
36,127 
Prepaid expenses
3,482 
2,940 
Total current assets
356,274 
352,204 
PROPERTY AND EQUIPMENT:
 
 
Property and equipment, net of depreciation and amortization
19,082 
16,003 
OTHER ASSETS:
 
 
Other assets
3,105 
3,543 
Goodwill
396,220 
352,788 
Acquired intangible assets, net of amortization
285,567 
254,339 
Total other assets
684,892 
610,670 
TOTAL ASSETS
1,060,248 
978,877 
CURRENT LIABILITIES:
 
 
Restaurant food liability
64,326 
91,575 
Accounts payable
8,189 
3,371 
Accrued payroll
4,841 
5,958 
Taxes payable
426 
1,660 
Other accruals
11,830 
8,441 
Total current liabilities
89,612 
111,005 
LONG TERM LIABILITIES:
 
 
Deferred taxes, non-current
87,584 
91,419 
Other accruals
5,456 
5,931 
Total long term liabilities
93,040 
97,350 
Commitments and contingencies
   
   
STOCKHOLDERS’ EQUITY:
 
 
Series A Convertible Preferred Stock, $0.0001 par value. Authorized: 25,000,000 shares as of December 31, 2015 and December 31, 2014; issued and outstanding: no shares as of December 31, 2015 and December 31, 2014.
   
   
Common stock, $0.0001 par value. Authorized: 500,000,000 shares at December 31, 2015 and December 31, 2014; issued and outstanding: 84,979,869 and 81,905,325 shares as of December 31, 2015 and December 31, 2014, respectively
Accumulated other comprehensive loss
(604)
(262)
Additional paid-in capital
759,292 
689,953 
Retained earnings
118,900 
80,823 
Total Stockholders’ Equity
877,596 
770,522 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$ 1,060,248 
$ 978,877 
Consolidated Balance Sheets (Parenthetical) (USD $)
Dec. 31, 2015
Dec. 31, 2014
Statement Of Financial Position [Abstract]
 
 
Series A Convertible Preferred Stock, par value
$ 0.0001 
$ 0.0001 
Series A Convertible Preferred Stock, shares authorized
25,000,000 
25,000,000 
Series A Convertible Preferred Stock, shares issued
Series A Convertible Preferred Stock, shares outstanding
Common stock, par value
$ 0.0001 
$ 0.0001 
Common stock, shares authorized
500,000,000 
500,000,000 
Common stock, shares issued
84,979,869 
81,905,325 
Common stock, shares outstanding
84,979,869 
81,905,325 
Statements of Cash Flows (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2015
Dec. 31, 2014
Dec. 31, 2013
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net income
$ 38,077 
$ 24,263 
$ 6,747 
Adjustments to reconcile net income to net cash from operating activities:
 
 
 
Depreciation
5,085 
5,032 
3,992 
Provision for doubtful accounts
850 
426 
473 
Loss on disposal of fixed assets
 
11 
 
Deferred taxes
(3,835)
4,612 
1,706 
Amortization of intangible assets
22,949 
17,655 
9,477 
Tenant allowance amortization
(159)
(159)
(159)
Stock-based compensation
13,450 
9,393 
4,933 
Deferred rent
32 
(17)
(135)
Investment premium amortization
688 
315 
 
Change in assets and liabilities, net of the effects of business acquisitions:
 
 
 
Accounts receivable
(4,343)
(7,394)
(8,298)
Prepaid expenses and other assets
242 
(1,669)
(2,388)
Restaurant food liability
(29,409)
13,414 
26,549 
Accounts payable
3,312 
(259)
2,065 
Accrued payroll
(2,104)
4,243 
(1,707)
Other accruals
(80)
3,038 
(2,192)
Due to related party
 
 
(244)
Net cash provided by operating activities
44,755 
72,904 
40,819 
CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
Purchases of investments
(220,667)
(113,156)
 
Proceeds from maturity of investments
189,872 
1,500 
 
Capitalized website and development costs
(7,137)
(3,431)
(2,592)
Purchases of property and equipment
(4,150)
(3,653)
(4,429)
Acquisitions of businesses, net of cash acquired
(73,907)
 
 
Cash acquired in merger of Grubhub Holdings Inc.
 
 
13,266 
Other cash flows from investing activities
(408)
 
 
Net cash provided by (used in) investing activities
(116,397)
(118,740)
6,245 
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Net proceeds from the issuance of common stock
 
142,541 
 
Repurchases of common stock
 
(116)
(1,367)
Proceeds from exercise of stock options
11,919 
8,322 
1,418 
Excess tax benefits related to stock-based compensation
27,830 
12,975 
 
Taxes paid related to net settlement of stock-based compensation awards
(345)
(2,070)
 
Preferred stock tax distributions
 
(320)
(1,893)
Net cash provided by (used in) financing activities
39,404 
161,332 
(1,842)
Net change in cash and cash equivalents
(32,238)
115,496 
45,222 
Effect of exchange rates on cash
(265)
(242)
159 
Cash and cash equivalents at beginning of year
201,796 
86,542 
41,161 
Cash and cash equivalents at end of the period
169,293 
201,796 
86,542 
SUPPLEMENTAL DISCLOSURE OF NON CASH ITEMS
 
 
 
Fair value of common stock issued for acquisitions
15,980 
 
421,485 
Cash paid for income taxes
 
1,326 
7,706 
Capitalized property, equipment and website and development costs in accounts payable at period end
927 
 
 
Cashless exercise of stock options
 
1,054 
 
Settlement of receivable through cashless acquisition of treasury shares in connection with the net settlement of stock-based awards
$ (345)
$ (3,123)
 
Consolidated Statements of Changes in Stockholders' Equity and Redeemable Common Stock (USD $)
In Thousands, except Share data
Total
Common stock
Preferred Stock
Treasury Stock
Additional Paid-in Capital
Accumulated Other Comprehensive Income (Loss)
Retained Earnings
Redeemable Common Stock
Balance, beginning at Dec. 31, 2012
$ 137,888 
$ 3 
$ 1 
$ (858)
$ 86,743 
$ (27)
$ 52,026 
 
Balance, beginning (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 
 
 
 
Issuance of common stock, acquisitions
421,485 
 
421,482 
 
 
 
Issuance of common stock, acquisitions (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
6,420 
 
 
 
6,420 
 
 
 
Stock option exercises, net of withholdings and other
1,418 
 
 
 
1,418 
 
 
 
Stock option exercises, net of withholdings and other (in shares)
 
433,322 
 
 
 
 
 
 
Balance, ending, redeemable stock at Dec. 31, 2013
 
 
 
 
 
 
 
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 
Balance, ending (in shares) at Dec. 31, 2013
 
53,757,437 
19,284,113 
 
 
 
 
 
Net income
24,263 
 
 
 
 
 
24,263 
 
Currency translation
(394)
 
 
 
 
(394)
 
 
Termination of put rights of redeemable common stock, in connection with the IPO
34,950 
 
 
 
34,950 
 
 
(34,950)
Termination of put rights of redeemable common stock in connection with the IPO (in shares)
 
1,344,236 
 
 
 
 
 
(1,344,236)
Conversion of preferred stock upon IPO
 
(2)
 
 
 
 
 
Conversion of preferred stock upon IPO (in shares)
 
19,284,113 
(19,284,113)
 
 
 
 
 
Issuance of common stock, net of issuance costs
142,541 
 
 
142,540 
 
 
 
Issuance of common stock, net of issuance costs (in shares)
 
5,250,000 
 
 
 
 
 
 
Change in fair value of redeemable common stock
(16,535)
 
 
 
(16,535)
 
 
16,535 
Stock-based compensation
9,530 
 
 
 
9,530 
 
 
 
Preferred stock tax distributions
(320)
 
 
 
 
 
(320)
 
Tax benefit related to stock-based compensation
12,975 
 
 
 
12,975 
 
 
 
Stock option exercises, net of withholdings and other
9,376 
 
 
 
9,376 
 
 
 
Stock option exercises, net of withholdings and other (in shares)
 
2,416,651 
 
 
 
 
 
 
Common stock repurchases and retirements
(3,239)
 
 
 
(3,239)
 
 
 
Common stock repurchases and retirements (in shares)
 
(147,112)
 
 
 
 
 
 
Balance, ending at Dec. 31, 2014
770,522 
 
 
689,953 
(262)
80,823 
 
Balance, ending (in shares) at Dec. 31, 2014
 
81,905,325 
 
 
 
 
 
 
Net income
38,077 
 
 
 
 
 
38,077 
 
Currency translation
(342)
 
 
 
 
(342)
 
 
Stock-based compensation
13,955 
 
 
 
13,955 
 
 
 
Issuance of common stock, acquisitions
15,980 
 
 
 
15,980 
 
 
 
Issuance of common stock, acquisitions (shares)
 
407,812 
 
 
 
 
 
 
Tax benefit related to stock-based compensation
27,830 
 
 
 
27,830 
 
 
 
Stock option exercises, net of withholdings and other
11,919 
 
 
 
11,919 
 
 
 
Stock option exercises, net of withholdings and other (in shares)
2,578,398 
2,578,398 
 
 
 
 
 
 
Issuance of restricted stock awards (shares)
 
101,616 
 
 
 
 
 
 
Shares repurchased and retired to satisfy tax withholding upon vesting
(345)
 
 
 
(345)
 
 
 
Shares repurchased and retired to satisfy tax withholding upon vesting (in share)
 
(13,282)
 
 
 
 
 
 
Balance, ending at Dec. 31, 2015
$ 877,596 
$ 8 
 
 
$ 759,292 
$ (604)
$ 118,900 
 
Balance, ending (in shares) at Dec. 31, 2015
 
84,979,869 
 
 
 
 
 
 
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 delivery address or use geo-location within the mobile applications and the Company displays the menus and other relevant information for restaurants in its network. Orders may be placed directly online, via mobile applications or over the phone at no cost to the diner. The Company charges the restaurant a per order commission that is largely fee based. In certain markets, the Company also provides delivery services to restaurants on its platform that do not have their own delivery operations.

Reorganization and History

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. See Note 3, “Acquisitions”, for additional details. Accordingly, the acquisition of Grubhub Holdings Inc. was 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.

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.

Summary of Significant Accounting Policies
Summary of Significant Accounting Policies

2. Summary of Significant Accounting Policies

Basis of Presentation and Principles of Consolidation

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

Use of Estimates

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

Cash and Cash Equivalents

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

Marketable Securities

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

Accumulated Other Comprehensive Loss

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

Property and Equipment, Net

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

 

Computer equipment

 

2-3 years

Delivery equipment

 

1.5 years

Furniture and fixtures

 

5 years

Developed software

 

1-3 years

Purchased software

 

3-5 years

Leasehold improvements

 

Shorter of expected useful life or lease term

 

The Company reduced the estimated useful life on certain developed and purchased software and computer equipment assets to coincide with the migration of nearly all of the Seamless consumer diner traffic to a new web and mobile platform during the second quarter of 2015 (see Note 7, “Property and Equipment”).

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

Accounts Receivable, Net

Accounts receivable primarily represent the net cash due from the Company’s payment processor for cleared transactions and amounts owed from corporate customers. The carrying amount of the Company’s receivables is reduced by an allowance for doubtful accounts that reflects management’s best estimate of amounts that will not be collected. These uncollected amounts are generally not recovered from the restaurants. The allowance is recorded through a charge to bad debt expense which is recorded within general and administrative expense 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.

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

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

 

 

 

Year Ended December 31,

 

 

 

2015

 

 

2014

 

Balance at beginning of period

 

$

723

 

 

$

510

 

Additions to expense

 

 

850

 

 

 

426

 

Writeoffs, net of recoveries and other adjustments

 

 

(614

)

 

 

(213

)

Balance at end of period

 

$

959

 

 

$

723

 

 

Advertising Costs

Advertising costs are generally expensed as incurred in connection with the requisite service period. Certain advertising production costs are capitalized and expensed when the advertisement first takes place. For the years ended December 31, 2015, 2014 and 2013, expenses attributable to advertising totaled approximately $64.4 million, $45.9 million and $25.0 million, respectively. Advertising costs are recorded in sales and marketing expense on the Company’s consolidated statements of operations.

Stock-Based Compensation

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

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

The Company has elected to use the with-and-without method in determining the order in which tax attributes are utilized. As a result, the Company will only recognize a tax benefit for stock-based awards in additional paid-in capital if an incremental tax benefit is realized after all other tax attributes available to the Company have been utilized. See Note 9, “Stock-Based Compensation” for further discussion.

Provision for Income Taxes

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

The Company utilizes a two-step approach to recognizing and measuring uncertain tax positions (“tax contingencies”). The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount which is more than 50% likely to be realized upon ultimate settlement. The Company considers many factors when evaluating and estimating its tax positions and tax benefits, which may require periodic adjustments and which may not accurately forecast actual outcomes. The Company includes interest and penalties related to tax contingencies in the provision for income taxes in the consolidated statements of operations. See Note 10, “Income Taxes.” Management of the Company does not expect the total amount of unrecognized tax benefits to significantly change in the next twelve months.

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 Holdings Corporation (“Aramark”) and SLW Investors, LLC from June of 2011 through October 29, 2012. Starting October 30, 2012, 74% of the partnership’s taxable income was 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 2013, the tax expense recorded in these consolidated statements of operations would have increased by $0.9 million.

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 the future undiscounted net cash flows expected to be generated by that asset group. 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, 2015, 2014 or 2013.

Website and Software Development Costs

The costs incurred in the preliminary stages of website and software development are expensed as incurred. Once an application has reached the development stage, internal and external costs, if direct and incremental and deemed by management to be significant, are capitalized and amortized on a straight-line basis over the estimated useful life of the application. Maintenance and enhancement costs, including those costs in the post-implementation stages, are typically expensed as incurred, unless such costs relate to substantial upgrades and enhancements to the website or software that result in added functionality, in which case the costs are capitalized and amortized on a straight-line basis over the estimated useful lives. Amortization expense related to capitalized website and software development costs is included in depreciation and amortization in the consolidated statements of operations. The Company capitalized $8.0 million, $3.6 million and $2.6 million of website development costs during the years ended December 31, 2015, 2014 and 2013, respectively.

Goodwill

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

The Company tests for impairment using a two-step process. The first step of the goodwill impairment test identifies if there is potential goodwill impairment. If step one indicates that an impairment may exist, a second step is performed to measure the amount of the goodwill impairment, if any, by comparing the implied fair value of goodwill with the carrying amount. If the implied fair value of goodwill is less than the carrying amount, a write-down is recorded. The Company determined there was no goodwill impairment during the years ended December 31, 2015, 2014 or 2013.

Fair Value

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

Concentration of Credit Risk

Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of accounts receivable. For the years ended December 31, 2015, 2014 and 2013, the Company had no customers which accounted for more than 1% of revenue or 10% of accounts receivable.

Revenue Recognition

In general, the Company recognizes revenue when (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered to the customer, (iii) the fee is fixed or determinable and (iv) collectability is reasonably assured. The Company considers 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 the platform through its mobile applications, its websites, third-party websites that incorporate API or one of the Company’s listed phone numbers. Restaurants pay a commission, typically a percentage of the transaction, on orders that are processed through the platform. Most of the restaurants on the platform can choose their level of commission rate, at or above a base rate, to affect their relative priority in the sorting algorithms, with restaurants paying higher commission rates generally appearing higher in the search order than restaurants paying lower commission rates. Additionally, restaurants that use the Company’s delivery services pay an additional commission for the use of those services. As an agent of the merchant in the transaction, the Company recognizes as revenues only the commissions from the transaction, which are a percentage of the total Gross Food Sales for such transaction.

The Company periodically provides incentive offers to restaurants and diners to use the platform. These promotions are generally cash credits to be applied against purchases. These incentive offers are recorded as reductions in revenues, generally on the date the corresponding revenue is recorded.

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. The Company also recognizes as revenue any fees charged to the diner for delivery services provided by the Company. Although the Company will process the entire amount of the transaction with the diner, it will record revenue on a net basis because the Company is acting as an agent of the merchant in the transaction. The Company will record an amount representing the restaurant food liability for the net balance due the restaurant. Costs incurred for processing the transactions and providing delivery services are included in operations and support in the consolidated statements of operations.

Deferred Rent

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

Segments

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

Recently Issued Accounting Pronouncements

In November 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2015-17, “Income Taxes – Balance Sheet Classification of Deferred Taxes” (“ASU 2015-17”). The purpose of the standard is to simplify the presentation of deferred taxes on a classified balance sheet. Under current GAAP, deferred income tax assets and liabilities are separated into current and noncurrent amounts in the balance sheet. The amendments in ASU 2015-17 require that all deferred tax assets and liabilities be classified as noncurrent in the balance sheet. The ASU is effective beginning in the first quarter of 2017, but with early adoption permitted and may be applied either prospectively or retrospectively. The Company has elected to early adopt ASU 2015-17 on a retrospective basis effective in the fourth quarter of 2015. The adoption of ASU 2015-17 impacted the presentation of the Company’s deferred tax assets and liabilities in the consolidated balance sheets and certain disclosures, but did not have an impact on results of operations or cash flows. See Note 10, “Income Taxes” for further details.

In September 2015, the FASB issued Accounting Standards Update No. 2015-16, “Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments” (“ASU 2015-16”), which eliminates the requirement to account for adjustments identified during the measurement-period in a business combination retrospectively. Instead, the acquirer must recognize measurement-period adjustments during the period in which they are identified, including the effect on earnings of any amounts that would have been recorded in previous periods had the purchase accounting been completed at the acquisition date. ASU 2015-16 will be effective for the Company in the first quarter of 2016 with early adoption permitted. The adoption of ASU 2015-16 is expected to eliminate costs related to retrospective application of any measurement-period adjustments that may be identified, but otherwise is not expected to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.     

In April 2015, the FASB issued Accounting Standards Update 2015-05, “Intangibles -Goodwill and Other – Internal Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement” (“ASU 2015-05”), which provides guidance on accounting for fees paid in a cloud computing arrangement. Under ASU 2015-05, if a cloud computing arrangement includes a software license, the software license element should be accounted for consistent with the purchase of other software licenses. If the cloud computing arrangement does not include a software license, it should be accounted for as a service contract. ASU 2015-05 will be effective for the Company in the first quarter of 2016 and may be applied either prospectively or retrospectively. The Company has elected to apply ASU 2015-05 prospectively; however, its adoption is not expected to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

In May 2014, the FASB issued Accounting Standards Update No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”), which supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, including most industry-specific requirements. ASU 2014-09 establishes a five-step revenue recognition process in which an entity will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. ASU 2014-09 also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenues and cash flows from contracts with customers. In August 2015, the FASB issued Accounting Standards Update 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date”, which defers the effective date of ASU 2014-09 by one year. ASU 2014-09 will be effective for the Company in the first quarter of 2018. Management is currently evaluating the impact the adoption of ASU 2014-09 will have on the Company’s consolidated financial position, results of operations or cash flows. The Company currently anticipates applying the modified retrospective approach when adopting the standard.

 

Acquisitions
Acquisitions

3. Acquisitions

2015 Acquisitions

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

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

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

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

 

 

 

 

(in thousands)

 

Cash and cash equivalents

 

 

$

698

 

Accounts receivable

 

 

 

2,331

 

Prepaid expenses and other assets

 

 

 

325

 

Customer and vendor relationships

 

 

 

44,259

 

Property and equipment

 

 

 

161

 

Developed technology

 

 

 

4,676

 

Goodwill

 

 

 

43,432

 

Trademarks

 

 

 

529

 

Accounts payable and accrued expenses

 

 

 

(5,826

)

Total purchase price plus cash acquired

 

 

 

90,585

 

Cash acquired

 

 

 

(698

)

Fair value of common stock issued

 

 

 

(15,980

)

Net cash paid

 

 

$

73,907

 

 

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

The results of operations of DiningIn, Restaurants on the Run and Delivered Dish have been included in the Company’s financial statements since February 4, 2015, February 27, 2015 and December 4, 2015, respectively. The total amount of revenues and net loss from the acquisitions included in the Company’s operating results since the respective acquisition dates through December 31, 2015 were $23.0 million and $1.5 million, respectively.

The following unaudited pro forma information presents a summary of the operating results of the Company for the years ended December, 2015 and 2014 as if the acquisitions had occurred on January 1, 2014:

 

 

 

Year Ended December 31,

 

 

 

2015

 

 

2014

 

 

(in thousands)

 

Revenues

 

$

371,021

 

 

$

283,522

 

Net income

 

 

39,431

 

 

 

23,103

 

 

The pro forma adjustments reflect the amortization that would have been recognized for intangible assets, elimination of transaction costs incurred and pro forma tax adjustments for the years ended December 31, 2015 and 2014 as follows:

 

 

 

Year Ended December 31,

 

 

 

2015

 

 

2014

 

 

(in thousands)

 

Depreciation and amortization

 

$

3

 

 

$

5,483

 

Transaction costs

 

 

(1,055

)

 

 

(646

)

Income tax benefit

 

 

(109

)

 

 

(1,066

)

 

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

2014 Acquisitions

There were no acquisitions during the year ended December 31, 2014.

2013 Acquisitions

On August 8, 2013 (the “Merger Date”), 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. The results of operations of Grubhub Holdings Inc. have been included in the Company’s financial statements since August 9, 2013. Grubhub Holdings Inc. provides online food ordering through its website grubhub.com, and also operates allmenus.com, a website that stored and displayed approximately 275,000 menus at the time of acquisition. The Merger has expanded the Company’s existing markets and access to new customers and created revenue and cost synergies which management believes will contribute to future profits.

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 the stock of Grubhub Holdings Inc. at the Merger Date based on a valuation of Grubhub Holdings Inc. performed by management. The assets acquired and liabilities assumed were recorded at their estimated fair values as of August 8, 2013. The fair value of the equity of $421.5 million included approximately $11.0 million related to the fair value of the replacement awards that were attributed to the pre-combination service period for Grubhub Holdings Inc. option holders. The fair value of the replacement awards was determined using the Black-Scholes option pricing model. Post combination expense of $12.5 million is recognized post-Merger for the unrecognized compensation expense related to Grubhub Holdings Inc. stock options. See Note 9, “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, which were recognized in general and administrative expense within the consolidated statements 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) and vendor 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) and vendor relationships. These fair value measurements were based on significant inputs not observable in the market and thus represent Level 3 measurements within the fair value hierarchy.

Marketable Securities
Marketable Securities

4. Marketable Securities

The amortized cost, unrealized gains and losses and estimated fair value of the Company’s held-to-maturity marketable securities as of December 31, 2015 and 2014 were as follows:

 

 

 

December 31, 2015

 

 

 

Amortized Cost

 

 

Unrealized Gains

 

 

Unrealized Losses

 

 

Estimated

Fair Value

 

 

 

(in thousands)

 

Cash and cash equivalents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

$

22,744

 

 

$

 

 

$

(5

)

 

$

22,739

 

Short term investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

 

90,949

 

 

 

 

 

 

(102

)

 

 

90,847

 

Corporate bonds

 

 

41,503

 

 

 

9

 

 

 

(39

)

 

 

41,473

 

U.S. government agency bonds

 

 

8,996

 

 

 

8

 

 

 

 

 

 

9,004

 

Total

 

$

164,192

 

 

$

17

 

 

$

(146

)

 

$

164,063

 

 

 

 

December 31, 2014

 

 

 

Amortized Cost

 

 

Unrealized Gains

 

 

Unrealized Losses

 

 

Estimated

Fair Value

 

 

 

(in thousands)

 

Cash and cash equivalents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

 

$

1,882

 

 

$

1

 

 

$

(1

)

 

$

1,882

 

Short term investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

 

38,081

 

 

 

 

 

 

(26

)

 

 

38,055

 

Corporate bonds

 

 

73,260

 

 

 

2

 

 

 

(64

)

 

 

73,198

 

Total

 

$

113,223

 

 

$

3

 

 

$

(91

)

 

$

113,135

 

 

All of the Company’s marketable securities were classified as held-to-maturity investments and have maturities within one year of December 31, 2015.

The gross unrealized losses, estimated fair value and length of time the individual marketable securities were in a continuous loss position for those marketable securities in an unrealized loss position as of December 31, 2015 and 2014 were as follows:

 

 

 

December 31, 2015

 

 

 

Less Than 12 Months

 

 

12 Months or Greater

 

 

Total

 

 

 

Estimated

Fair Value

 

 

Unrealized Loss

 

 

Estimated

Fair Value

 

 

Unrealized Loss

 

 

Estimated

Fair Value

 

 

Unrealized Loss

 

 

 

(in thousands)

 

Commercial paper

 

$

113,586

 

 

$

(107

)

 

$

 

 

$

 

 

$

113,586

 

 

$

(107

)

Corporate bonds

 

 

31,952

 

 

 

(39

)

 

 

 

 

 

 

 

 

31,952

 

 

 

(39

)

Total

 

$

145,538

 

 

$

(146

)

 

$

 

 

$

 

 

$

145,538

 

 

$

(146

)

 

 

 

 

December 31, 2014

 

 

 

Less Than 12 Months

 

 

12 Months or Greater

 

 

Total

 

 

 

Estimated

Fair Value

 

 

Unrealized Loss

 

 

Estimated

Fair Value

 

 

Unrealized Loss

 

 

Estimated

Fair Value

 

 

Unrealized Loss

 

 

 

(in thousands)

 

Commercial paper

 

$

38,055

 

 

$

(26

)

 

$

 

 

$

 

 

$

38,055

 

 

$

(26

)

Corporate bonds

 

 

64,557

 

 

 

(65

)

 

 

 

 

 

 

 

 

64,557

 

 

 

(65

)

Total

 

$

102,612

 

 

$

(91

)

 

$

 

 

$

 

 

$

102,612

 

 

$

(91

)

 

During the years ended December 31, 2015 and 2014, the Company did not recognize any other-than-temporary impairment losses related to its marketable securities. The Company did not have any marketable securities prior to July 1, 2014.

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

Related Party Transactions
Related Party Transactions

5. Related Party Transactions

Due to Related Party

During the year ended December 31, 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. The program was terminated in 2013 and no balance was due as of December 31, 2013.

Corporate Services Agreement

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

Goodwill and Acquired Intangible Assets
Goodwill and Acquired Intangible Assets

6. Goodwill and Acquired Intangible Assets

The components of acquired intangible assets as of December 31, 2015 and 2014 were as follows:

 

 

 

December 31, 2015

 

 

December 31, 2014

 

 

 

Gross Carrying

Amount

 

 

Accumulated

Amortization

 

 

Net Carrying

Value

 

 

Gross Carrying

Amount

 

 

Accumulated

Amortization

 

 

Net Carrying

Value

 

 

 

(in thousands)

 

Developed technology

 

$

9,819

 

 

$

(6,288

)

 

$

3,531

 

 

$

5,143

 

 

$

(2,392

)

 

$

2,751

 

Customer and vendor relationships, databases

 

 

236,238

 

 

 

(44,192

)

 

 

192,046

 

 

 

191,979

 

 

 

(30,067

)

 

 

161,912

 

Trademarks

 

 

529

 

 

 

(215

)

 

 

314

 

 

 

 

 

 

 

 

 

 

Total amortizable intangible assets

 

 

246,586

 

 

 

(50,695

)

 

 

195,891

 

 

 

197,122

 

 

 

(32,459

)

 

 

164,663

 

Indefinite-lived trademarks

 

 

89,676

 

 

 

 

 

 

89,676

 

 

 

89,676

 

 

 

 

 

 

89,676

 

Total acquired intangible assets

 

$

336,262

 

 

$

(50,695

)

 

$

285,567

 

 

$

286,798

 

 

$

(32,459

)

 

$

254,339

 

 

Amortization expense for acquired intangible assets was $18.2 million, $14.1 million and $6.9 million for the years ended December 31, 2015, 2014 and 2013, respectively.

The changes in the carrying amount of goodwill for the years ended December 31, 2015 and 2014 were as follows.

 

 

 

Goodwill

 

 

Accumulated Impairment Losses

 

 

Net Book Value

 

 

 

(in thousands)

 

Balance as of December 31, 2013

 

$

352,788

 

 

$

 

 

$

352,788

 

Balance as of December 31, 2014

 

 

352,788

 

 

 

 

 

 

352,788

 

Acquisitions

 

 

43,432

 

 

 

 

 

 

43,432

 

Balance as of December 31, 2015

 

$

396,220

 

 

$

 

 

$

396,220

 

 

During the year ended December 31, 2015, the Company recorded additions to acquired intangible assets of $49.5 million as a result of the acquisitions of DiningIn, Restaurants on the Run and Delivered Dish. The components of the acquired intangibles assets added during the year ended December 31, 2015 were as follows:

 

 

 

Year Ended

December 31, 2015

 

 

Weighted-Average

Amortization

Period

 

 

 

(in thousands)

 

 

(years)

 

Customer and vendor relationships

 

$

44,259

 

 

 

18.7

 

Developed technology

 

 

4,676

 

 

 

1.7

 

Trademarks

 

 

529

 

 

 

1.8

 

Total

 

$

49,464

 

 

 

 

 

 

Estimated future amortization expense of acquired intangible assets as of December 31, 2015 was as follows:

 

 

 

(in thousands)

 

2016

 

$

17,664

 

2017

 

 

15,331

 

2018

 

 

14,455

 

2019

 

 

14,455

 

2020

 

 

11,249

 

Thereafter

 

 

122,737

 

Total

 

$

195,891

 

 

As of December 31, 2015, the estimated remaining weighted-average useful life of the Company’s acquired intangibles was 14.3 years. The Company recognizes amortization expense for acquired intangibles on a straight-line basis.

Property and Equipment
Property and Equipment

7. Property and Equipment

The components of the Company’s property and equipment as of December 31, 2015 and 2014 were as follows:

 

 

 

December 31, 2015

 

 

December 31, 2014

 

 

 

(in thousands)

 

Computer equipment

 

$

10,080

 

 

$

12,114

 

Delivery equipment

 

 

555

 

 

 

 

Furniture and fixtures

 

 

2,092

 

 

 

1,876

 

Developed software

 

 

11,129

 

 

 

12,378

 

Purchased software

 

 

361

 

 

 

2,149

 

Leasehold improvements

 

 

6,050

 

 

 

5,900

 

Property and equipment

 

 

30,267

 

 

 

34,417

 

Accumulated amortization and depreciation

 

 

(11,185

)

 

 

(18,414

)

Property and equipment, net

 

$

19,082

 

 

$

16,003

 

 

The gross carrying amount and accumulated amortization and depreciation of the Company’s property and equipment as of December 31, 2015 have been adjusted for certain fully depreciated developed and purchased software and computer equipment assets that were disposed of with the migration of nearly all of the Seamless consumer diner traffic to a new web and mobile platform during the second quarter of 2015 and certain other computer equipment that were fully depreciated and disposed of during the fourth quarter of 2015. During the year ended December 31, 2015, the Company recorded approximately $1.9 million of accelerated depreciation and amortization expense related to these retired assets.

The Company recorded depreciation and amortization expense for property and equipment other than developed software for the years ended December 31, 2015, 2014 and 2013 of $5.7 million, $5.7 million and $4.0 million, respectively.

The Company capitalized developed software costs of $8.0 million, $3.6 million and $2.6 million for the years ended December 31, 2015, 2014 and 2013, respectively. Amortization expense for developed software costs, recognized in depreciation and amortization in the consolidated statements of operations, for the years ended December 31, 2015, 2014 and 2013 was $4.1 million, $2.9 million and $2.6 million, respectively.

Commitments and Contingencies
Commitments and Contingencies

 8. Commitments and Contingencies

Office Facility Leases

The Company has various operating lease agreements for its office facilities which expire at various dates through March 2026. The terms of the lease agreements provide for rental payments on a graduated basis. The Company can, after the initial lease term, renew its leases under right of first offer terms at fair value at the time of renewal for a period of five years. The Company recognizes rent expense on a straight-line basis over the lease term.

Rental expense, primarily for leased office space under the operating lease commitments, was $4.1 million, $3.6 million and $2.5 million for the years ended December 31, 2015, 2014 and 2013, respectively.

Future minimum lease payments under the Company’s operating lease agreements that have initial or remaining non-cancelable lease terms in excess of one year as of December 31, 2015 were as follows:

 

 

 

(in thousands)

 

2016

 

$

3,618

 

2017

 

 

3,938

 

2018

 

 

4,499

 

2019

 

 

4,698

 

2020

 

 

4,762

 

Thereafter

 

 

19,567

 

Total

 

$

41,082

 

 

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

Legal

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

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

No trial date has been set for this case and the consolidated district court case remains stayed. The Company believes this case lacks merit and that it has strong defenses to all of the infringement claims. The Company intends to defend the suit vigorously. However, the Company is unable to predict the likelihood of success of Ameranth’s infringement claims and is unable to predict the likelihood of success of its counterclaims. The Company has not recorded an accrual related to this lawsuit as of December 31, 2015, 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.

Indemnification

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

Restructuring

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 consolidated balance sheets for severance and payroll related benefits and other facility closure costs as a result of the restructuring announcement. The amounts recorded represented the service vesting requirements for identified employees who worked for various periods beyond the communication date and related lease termination costs. The facility was closed on November 30, 2014; however, certain employees worked until January 2, 2015. During the year ended December 31, 2014, total restructuring costs incurred were approximately $1.3 million, including expense of $0.5 million related to the termination of the Sandy, Utah office lease agreement. During the year ended December 31, 2013, total restructuring costs incurred were $0.2 million. Restructuring expense was recognized in general and administrative expense in the consolidated statements of operations. The Company did not incur any restructuring expense related to the Sandy, Utah facility closure during the year ended December 31, 2015.

The following table summarizes the Company’s restructuring activity during the years ended December 31, 2015 and 2014:

 

 

 

(in thousands)

 

Restructuring accrual balance at December 31, 2013

 

$

176

 

Restructuring expense

 

 

1,313

 

Cash payments

 

 

(741

)

Restructuring accrual balance at December 31, 2014

 

 

748

 

Restructuring expense

 

 

 

Cash payments

 

 

(748

)

Restructuring accrual balance at December 31, 2015

 

$

 

 

Stock-Based Compensation
Stock-Based Compensation

9. Stock-Based Compensation

In May 2015, the Company’s stockholders approved the Grubhub Inc. 2015 Long-Term Incentive Plan (the “2015 Plan”), pursuant to which the Compensation Committee of the Board of Directors may grant stock options, stock appreciation rights, restricted stock awards, restricted stock units, performance awards and other stock-based and cash-based awards. On May 20, 2015, the Company filed a registration statement on Form S-8 to register up to 14,256,901 shares of common stock reserved for issuance pursuant to awards granted under the 2015 Plan. Effective May 20, 2015, no further grants will be made under the Company’s 2013 Omnibus Incentive Plan (the “2013 Plan”). As of December 31, 2015, there were 8,637,093 shares of common stock authorized and available for issuance pursuant to awards granted under the 2015 Plan. The Board of Directors of the Company and committee or subcommittee of the Board of Directors has discretion to establish the terms and conditions for grants, including, but not limited to, the number shares and vesting and forfeiture provisions.

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

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

The recipient of a restricted stock award shall have all of the rights of a holder of shares of the Company’s common stock, including the right to receive dividends, the right to vote such shares and, upon the full vesting of the restricted stock awards, the right to tender such shares. The payment of any dividends will be deferred until the restricted stock awards have fully vested. The restricted stock awards outstanding as of December 31, 2015, generally vest over 2 years and are subject to forfeiture upon termination of employment prior to vesting unless otherwise provided in the terms of the award agreement.

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

Stock Options

The Company granted 2,542,523, 2,019,413 and 3,698,708 stock options during the years ended December 31, 2015, 2014 and 2013, respectively. The fair value of each stock option award was estimated based on the assumptions below as of the grant date using the Black-Scholes-Merton option pricing model. Expected volatilities are based on a combination of the historical and implied volatilities of comparable publicly-traded companies and the historical volatility of the Company’s own common stock due to its limited trading history. The Company uses historical data to estimate option exercises and employee terminations within the valuation model. Separate groups of employees that have similar historical exercise behavior are considered separately for valuation purposes. The expected term of the award is estimated using a simplified method. The fair value at grant date, prior to the Company’s initial public offering in April 2014 (the “IPO”), was determined considering the performance of the Company at the grant date as well as future growth and profitability expectations by applying market and income approaches. The risk-free rate for the period within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The assumptions used to determine the fair value of the stock options granted during the years ended December 31, 2015, 2014 and 2013 were as follows:

 

 

 

2015

 

 

2014

 

 

2013

 

Weighted-average fair value options granted

 

$

14.66

 

 

$

13.87

 

 

$

3.97

 

Average risk-free interest rate

 

 

1.65

%

 

 

1.97

%

 

 

1.41

%

Expected stock price volatilities(a)

 

 

48.4

%

 

 

50.3

%

 

 

50.7

%

Dividend yield

 

None

 

 

None

 

 

None

 

Expected stock option life (years)

 

 

6.07

 

 

 

6.26

 

 

 

5.20

 

 

(a)

There was no active external or internal market for the Company’s common stock prior to the IPO. Due to the Company’s limited trading history, the Company estimated expected volatility for the years ended December 31, 2015 and 2014 based on a combination of the historical and implied volatilities of comparable publicly-traded companies and the historical volatility of the Company’s own common stock. During the year ended December 31, 2013, the expected volatility was based on the historical and implied volatilities of comparable publicly-traded companies as there was no trading history for the Company’s own common stock.

 

 

Stock option awards as of December 31, 2015 and 2014, and changes during the year ended December 31, 2015, were as follows:

 

 

 

Options

 

 

Weighted-Average

Exercise Price

 

 

Aggregate Intrinsic

Value

(thousands)

 

 

Weighted-Average

Exercise Term

(years)

 

Outstanding at December 31, 2014

 

 

6,180,795

 

 

$

8.49

 

 

$

172,661

 

 

 

7.87

 

Granted

 

 

2,542,523

 

 

 

30.99

 

 

 

 

 

 

 

 

 

Forfeited

 

 

(1,066,623

)

 

 

18.31

 

 

 

 

 

 

 

 

 

Exercised

 

 

(2,578,398

)

 

 

4.63

 

 

 

 

 

 

 

 

 

Outstanding at December 31, 2015

 

 

5,078,297

 

 

 

19.66

 

 

 

41,107

 

 

 

8.21

 

Vested and expected to vest at December 31, 2015

 

 

3,522,623

 

 

 

17.77

 

 

 

32,195

 

 

 

8.08

 

Exercisable at December 31, 2015

 

 

1,349,375

 

 

$

8.23

 

 

$

23,208

 

 

 

6.62

 

 

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the fair value of the common stock and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their in-the-money options on each date. This amount will change in future periods based on the fair value of the Company’s stock and the number of options outstanding. The aggregate intrinsic value of awards exercised during the years ended December 31, 2015, 2014 and 2013 was $87.6 million, $74.0 million and $3.4 million, respectively.

The Company recorded compensation expense for stock options of $9.9 million, $9.4 million and $4.9 million for the years ended December 31, 2015, 2014 and 2013, respectively. During the years ended December 31, 2015 and 2014, the Company capitalized $0.5 million and $0.1 million of stock-based compensation expense as website and software development costs, respectively. As of December, 2015, total unrecognized compensation cost, adjusted for estimated forfeitures, related to non-vested stock options was $25.7 million and is expected to be recognized over a weighted-average period of 3.2 years.

During the years ended December 31, 2015 and 2014, the Company reported excess tax benefits as a decrease in cash flows from operations and an increase in cash flows from financing activities of $27.8 million and $13.0 million, respectively. Excess tax benefits were suspended during the year ended December 31, 2013 due to net operating losses. Excess tax benefits reflect the total of the individual stock option exercise transactions in which the reduction to the Company’s income tax liability is greater than the deferred tax assets that were previously recorded.

Restricted Stock Units and Restricted Stock Awards

Non-vested restricted stock unit awards as of December 31, 2015 and 2014, and changes during the year ended December 31, 2015 were as follows:

 

 

 

Restricted Stock Units

 

 

Restricted Stock Awards

 

 

 

Shares

 

 

Weighted-Average

Grant Date Fair

Value

 

 

Shares

 

 

Weighted-Average

Grant Date Fair

Value

 

Outstanding at December 31, 2014

 

 

2,899

 

 

$

31.90

 

 

 

 

 

$

 

Granted

 

 

896,906

 

 

 

27.85

 

 

 

101,616

 

 

 

42.01

 

Forfeited

 

 

(11,322

)

 

 

28.98

 

 

 

 

 

 

 

Vested

 

 

 

 

 

 

 

 

(33,872

)

 

 

42.01

 

Outstanding at December 31, 2015

 

 

888,483

 

 

$

27.85

 

 

 

67,744

 

 

$

42.01

 

 

During the year ended December 31, 2015, compensation expense recognized related to restricted stock awards and restricted stock units was $1.9 million and $1.7 million, respectively. During the year ended December 31, 2014, compensation expense recognized related to restricted stock units was nominal. There were no non-vested restricted stock units or related expense during the years ended December 31, 2013. There were no non-vested restricted stock awards or related expense during the years ended December 31, 2014 and 2013. The aggregate fair value of restricted stock awards that vested during the year ended December 31, 2015 was $1.4 million. As of December, 2015, $13.8 million of total unrecognized compensation cost, adjusted for estimated forfeitures, related to 888,483 non-vested restricted stock units with a weighted-average grant date fair value of $27.85 is expected to be recognized over a weighted-average period of 3.7 years. As of December 31, 2015, $1.7 million of total unrecognized compensation cost related to 67,744 non-vested restricted stock awards with weighted-average grant date fair values of $42.01 is expected to be recognized over a weighted-average period of 1.2 years. The fair value of these awards was determined based on the Company’s stock price at the grant date and assumes no expected dividend payments through the vesting period.

There were no excess tax benefits related to restricted stock units or restricted stock awards during the years ended December 31, 2015, 2014 and 2013.

Income Taxes
Income Taxes

10. Income Taxes

The Company files income tax returns in the U.S. federal, the United Kingdom and various state jurisdictions.

For the years ended December 31, 2015, 2014 and 2013, the income tax provision was comprised of the following:

 

 

 

Year Ended December 31,

 

 

 

2015

 

 

2014

 

 

2013

 

 

 

(in thousands)

 

Current: