GRUBHUB INC., 10-K filed on 3/5/2015
Annual Report
Document and Entity Information (USD $)
12 Months Ended
Dec. 31, 2014
Feb. 27, 2015
Jun. 30, 2014
Document And Entity Information [Abstract]
 
 
 
Document Type
10-K 
 
 
Amendment Flag
false 
 
 
Document Period End Date
Dec. 31, 2014 
 
 
Document Fiscal Year Focus
2014 
 
 
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
Non-accelerated Filer 
 
 
Entity Common Stock, Shares Outstanding
 
83,643,213 
 
Entity Current Reporting Status
Yes 
 
 
Entity Voluntary Filers
No 
 
 
Entity Well-known Seasoned Issuer
No 
 
 
Entity Public Float
 
 
$ 2,002,882,799 
Consolidated Statements of Operations (USD $)
In Thousands, except Per Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2014
Dec. 31, 2013
Dec. 31, 2012
Income Statement [Abstract]
 
 
 
Revenues
$ 253,873 
$ 137,143 
$ 82,299 
Costs and expenses:
 
 
 
Sales and marketing
66,201 
37,347 
26,892 
Operations and support
62,509 
34,173 
18,165 
Technology (exclusive of amortization)
25,185 
15,357 
10,172 
General and administrative
32,307 
21,907 
12,249 
Depreciation and amortization
22,687 
13,470 
6,089 
Total costs and expenses
208,889 
122,254 
73,567 
Income before provision for income taxes
44,984 
14,889 
8,732 
Provision for income taxes
20,721 
8,142 
813 
Net income
24,263 
6,747 
7,919 
Preferred stock tax distributions
(320)
(1,073)
(402)
Net income attributable to common stockholders
$ 23,943 
$ 5,674 
$ 7,517 
Net income per share attributable to common stockholders:
 
 
 
Basic
$ 0.33 
$ 0.14 
$ 0.24 
Diluted
$ 0.30 
$ 0.12 
$ 0.19 
Weighted-average shares used to compute net income per share attributable to common stockholders:
 
 
 
Basic
73,571 
40,681 
31,320 
Diluted
81,698 
56,645 
42,666 
Consolidated Statements of Comprehensive Income (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2014
Dec. 31, 2013
Dec. 31, 2012
Statement Of Income And Comprehensive Income [Abstract]
 
 
 
Net income
$ 24,263 
$ 6,747 
$ 7,919 
OTHER COMPREHENSIVE INCOME (LOSS)
 
 
 
Foreign currency translation adjustments
(394)
159 
115 
COMPREHENSIVE INCOME
$ 23,869 
$ 6,906 
$ 8,034 
Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Dec. 31, 2014
Dec. 31, 2013
CURRENT ASSETS:
 
 
Cash and cash equivalents
$ 201,796 
$ 86,542 
Short term investments
111,341 
 
Accounts receivable, less allowance for doubtful accounts
36,127 
29,304 
Deferred taxes, current
825 
3,688 
Prepaid expenses
2,940 
2,625 
Total current assets
353,029 
122,159 
PROPERTY AND EQUIPMENT:
 
 
Property and equipment, net of depreciation and amortization
16,003 
17,096 
OTHER ASSETS:
 
 
Other assets
3,543 
2,328 
Goodwill
352,788 
352,788 
Acquired intangible assets, net of amortization
254,339 
268,441 
Total other assets
610,670 
623,557 
TOTAL ASSETS
979,702 
762,812 
CURRENT LIABILITIES:
 
 
Restaurant food liability
91,575 
78,245 
Accounts payable
3,371 
3,353 
Accrued payroll
5,958 
1,720 
Taxes payable
1,660 
1,768 
Other accruals, current
8,441 
7,505 
Total current liabilities
111,005 
92,591 
LONG TERM LIABILITIES:
 
 
Deferred taxes, non-current
92,244 
90,495 
Other accruals, non-current
5,931 
3,936 
Total long term liabilities
98,175 
94,431 
Commitments and Contingencies
   
   
Redeemable common stock, $0.0001 par value, no shares and 1,344,236 shares outstanding as of December 31, 2014 and December 31, 2013, respectively
 
18,415 
STOCKHOLDERS’ EQUITY:
 
 
Series A Convertible Preferred Stock, $0.0001 par value. Authorized: 25,000,000 shares as of December 31, 2014 and December 31, 2013; issued and outstanding: no shares as of December 31, 2014 and 19,284,113 shares as of December 31, 2013; aggregate liquidation preference of $86,200 as of December 31, 2013
 
Common stock, $0.0001 par value. Authorized: 500,000,000 and 165,000,000 shares at December 31, 2014 and December 31, 2013, respectively; issued and outstanding: 81,905,325 and 53,757,437 shares as of December 31, 2014 and December 31, 2013, respectively
Accumulated other comprehensive income (loss)
(262)
132 
Additional paid-in capital
689,953 
500,356 
Retained earnings
80,823 
56,880 
Total Stockholders’ Equity
770,522 
557,375 
TOTAL LIABILITIES, REDEEMABLE COMMON STOCK AND STOCKHOLDERS’ EQUITY
$ 979,702 
$ 762,812 
Consolidated Balance Sheets (Parenthetical) (USD $)
In Thousands, except Share data, unless otherwise specified
Dec. 31, 2014
Dec. 31, 2013
Statement Of Financial Position [Abstract]
 
 
Redeemable common stock, par value
$ 0.0001 
$ 0.0001 
Redeemable common stock, shares outstanding
1,344,236 
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
19,284,113 
Series A Convertible Preferred Stock, shares outstanding
19,284,113 
Series A Convertible Preferred Stock, liquidation preference
 
$ 86,200 
Common stock, par value
$ 0.0001 
$ 0.0001 
Common stock, shares authorized
500,000,000 
165,000,000 
Common stock, shares issued
81,905,325 
53,757,437 
Common stock, shares outstanding
81,905,325 
53,757,437 
Condensed Consolidated Statements of Cash Flows (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2014
Dec. 31, 2013
Dec. 31, 2012
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net income
$ 24,263 
$ 6,747 
$ 7,919 
Adjustments to reconcile net income to net cash from operating activities:
 
 
 
Depreciation
5,032 
3,992 
2,018 
Provision for doubtful accounts
426 
473 
74 
Loss on disposal of fixed assets
11 
 
 
Deferred taxes
4,612 
1,706 
 
Intangible asset amortization
17,655 
9,477 
4,071 
Tenant allowance amortization
(159)
(159)
(160)
Stock-based compensation
9,393 
4,933 
2,364 
Deferred rent
(17)
(135)
797 
Investment premium amortization
315 
 
 
Change in assets and liabilities, net of the effects of business acquisitions:
 
 
 
Accounts receivable
(7,394)
(8,298)
(526)
Prepaid expenses and other assets
(1,669)
(2,388)
(582)
Restaurant food liability
13,414 
26,549 
12,854 
Accounts payable
(259)
2,065 
319 
Accrued payroll
4,243 
(1,707)
162 
Other accruals
3,038 
(2,192)
2,678 
Due to related party
 
(244)
(2,410)
Net cash provided by operating activities
72,904 
40,819 
29,578 
CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
Purchases of investments
(113,156)
 
 
Proceeds from maturity of investments
1,500 
 
 
Capitalized website and development costs
(3,431)
(2,592)
(2,280)
Purchases of property and equipment
(3,653)
(4,429)
(3,417)
Cash acquired in merger of GrubHub Holdings Inc.
 
13,266 
 
Issuance of note receivable to related party
 
 
(26,400)
Payments on note receivable from related party
 
 
42,400 
Net cash provided by (used in) investing activities
(118,740)
6,245 
10,303 
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Net proceeds from the issuance of common stock
142,541 
 
 
Repurchases of common stock
(116)
(1,367)
(858)
Proceeds from exercise of stock options
8,322 
1,418 
116 
Excess tax benefit related to stock-based compensation
12,975 
 
 
Taxes paid related to net settlements of stock-based compensation awards
(2,070)
 
 
Checks issued in excess of bank balance
 
 
(3,923)
Payment of note payable
 
 
(1,965)
Contributions from members
 
 
6,000 
Preferred stock tax distributions
(320)
(1,893)
(1,588)
Net cash provided by (used in) financing activities
161,332 
(1,842)
(2,218)
Net change in cash and cash equivalents
115,496 
45,222 
37,663 
Effect of exchange rates on cash
(242)
159 
115 
Cash and cash equivalents at beginning of year
86,542 
41,161 
3,383 
Cash and cash equivalents at end of year
201,796 
86,542 
41,161 
SUPPLEMENTAL DISCLOSURE OF NON CASH ITEMS
 
 
 
Fair value of common and preferred stock issued in acquisition of GrubHub Holdings Inc.
 
421,485 
 
Cash paid for income taxes
1,326 
7,706 
861 
Cashless exercise of stock options
1,054 
 
 
Settlement of receivable through cashless acquisition of treasury shares in connection with the cashless exercise of stock options
3,239 
 
 
Cashless Exercise
 
 
 
SUPPLEMENTAL DISCLOSURE OF NON CASH ITEMS
 
 
 
Settlement of receivable through cashless acquisition of treasury shares in connection with the cashless exercise of stock options
$ (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, 2011
$ 131,971 
$ 3 
$ 1 
 
$ 86,414 
$ (142)
$ 45,695 
 
Balance, beginning (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 
 
 
 
Preferred stock tax distributions
(1,588)
 
 
 
 
 
(1,588)
 
Stock option exercises, net of withholdings and other
116 
 
 
 
116 
 
 
 
Stock option exercises, net of withholdings and other (in shares)
 
29,860 
 
 
 
 
 
 
Deferred tax effects attributable to merger of partnership interest or resulting from partnership status
(8,151)
 
 
 
(8,151)
 
 
 
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 
Stock option exercises, net of withholdings and other
1,418 
 
 
 
1,418 
 
 
 
Stock option exercises, net of withholdings and other (in shares)
 
433,322 
 
 
 
 
 
 
Deferred tax effects attributable to merger of partnership interest or resulting from partnership status
6,420 
 
 
 
6,420 
 
 
 
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 income
24,263 
 
 
 
 
 
24,263 
 
Currency translation
(394)
 
 
 
 
(394)
 
 
Termination of put rights of redeemable common stock, in connection with the IPO
34,950 
 
 
 
34,950 
 
 
(34,950)
Termination of put rights of redeemable common stock in connection with the IPO (in shares)
 
1,344,236 
 
 
 
 
 
(1,344,236)
Conversion of preferred stock upon IPO
 
(2)
 
 
 
 
 
Conversion of preferred stock upon IPO (in shares)
 
19,284,113 
(19,284,113)
 
 
 
 
 
Issuance of common stock, net of issuance costs
142,541 
 
 
142,540 
 
 
 
Issuance of common stock, net of issuance costs (in shares)
 
5,250,000 
 
 
 
 
 
 
Change in fair value of redeemable common stock
(16,535)
 
 
 
(16,535)
 
 
16,535 
Stock-based compensation
9,530 
 
 
 
9,530 
 
 
 
Tax benefit related to stock-based compensation
12,975 
 
 
 
12,975 
 
 
 
Preferred stock tax distributions
(320)
 
 
 
 
 
(320)
 
Stock option exercises, net of withholdings and other
9,376 
 
 
 
9,376 
 
 
 
Stock option exercises, net of withholdings and other (in shares)
2,554,699 1
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 
$ 8 
 
 
$ 689,953 
$ (262)
$ 80,823 
 
Balance, ending, redeemable stock (in shares) at Dec. 31, 2014
 
 
 
 
 
 
 
Balance, ending (in shares) at Dec. 31, 2014
 
81,905,325 
 
 
 
 
 
 
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.

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 common stock at a public offering price of $26.00 per share. The Company received net proceeds of $94.9 million after deducting underwriting discounts and commissions of $6.5 million and other offering expenses of approximately $2.6 million. 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.

Follow-on Offering

On September 3, 2014, the Company completed a follow-on offering in which it issued and sold 1,250,000 shares of common stock at a public offering price of $40.25 per share. The Company received net proceeds of $47.6 million after deducting underwriting discounts and commissions of $1.9 million and other offering expenses of approximately $0.8 million. These expenses were recorded against the proceeds received from the follow-on offering.

Certain selling stockholders offered an additional 9,218,198 shares of common stock. These selling stockholders also granted the underwriters an option to purchase up to 1,570,229 additional shares of common stock, which was not exercised. The Company did not receive any proceeds from the sale of the shares sold by the selling stockholders.

The Company invested the funds received from the IPO and the follow-on offering in non-interest bearing accounts, short-term interest-bearing obligations and investment-grade investments.

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. 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.

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.

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 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 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 Income (Loss)

Accumulated other comprehensive income (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 income (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

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 any computer equipment, furniture and fixtures, and leasehold improvements related to its Sandy, Utah location to coincide with the expected closure date of the facility. (See Note 8, “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 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. 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.

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

 

 

 

Year Ended December 31,

 

 

 

2014

 

 

2013

 

Balance at beginning of year

 

$

510

 

 

$

210

 

Additions to expense

 

 

426

 

 

 

473

 

Writeoffs, net of recoveries and other adjustments

 

 

(213

)

 

 

(173

)

Balance at end of year

 

$

723

 

 

$

510

 

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, 2014, 2013 and 2012, expenses attributable to advertising totaled approximately $45.9 million, $25.0 million and $20.4 million, respectively. Advertising costs are recorded in sales and marketing expense on the Company’s consolidated statements of operations.

Stock-Based Compensation

The Company measures compensation expense for all stock-based awards 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.

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.

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 and SLW Investors 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 and 2012, the tax expense recorded in these consolidated statements of operations would have increased by $0.9 million and $2.7 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 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, 2014, 2013 and 2012.

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 $3.6 million, $2.6 million and $2.3 million of website development costs during the years ended December 31, 2014, 2013 and 2012, 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 has determined that there was no goodwill impairment as of December 31, 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, 2014, 2013 and 2012, 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 websites, its mobile applications, 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. Some restaurants on the platform pay a monthly system fee for better branding and more robust placement. 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 restaurant or diner for delivery services provided by the Company. Although the Company will process the entire amount of the transaction with the diner, it will record revenue on a net basis because the Company is acting as an agent of the merchant in the transaction. The Company will record an amount representing the restaurant food liability for the net balance due the restaurant. Costs incurred for processing the transactions and providing delivery services are included in operations and support in the consolidated statements of operations.

Deferred Rent

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

Segments

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

Recently Issued Accounting Pronouncements

In May 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 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 consolidated financial position, results of operations or cash flows.

 

Acquisitions
Acquisitions

3. Acquisitions

GrubHub Holdings Inc.

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.

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

 

 

 

Year Ended

December 31, 2013

 

 

 

(in thousands)

 

Revenues

 

$

170,086

 

Net income

 

 

4,160

 

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 year ended December 31, 2013 as follows:

 

 

 

Year Ended

December 31, 2013

 

 

 

(in thousands)

 

Amortization of intangible assets

 

$

6,475

 

Stock-based compensation

 

 

2,997

 

Transaction costs

 

 

(9,131

)

Income tax benefit

 

 

(3,050

)

The unaudited pro forma revenues 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 Merger been completed as of the beginning of the period presented and should not be taken as indicative of the Company’s future consolidated results of operations or financial condition.

Marketable Securities
Marketable Securities

4. Marketable Securities

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

 

 

 

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, 2014.

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, 2014 were as follows:

 

 

 

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 year ended December 31, 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

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 of 2012. Additionally, during 2012, the Company made short-term advances to Aramark, which were also repaid in 2012.

Due to Related Party

 During the years ended December 31, 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. 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 and $0.4 million during the years ended December 31, 2013 and 2012, respectively. 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, 2014 and 2013 were as follows:

 

 

 

December 31, 2014

 

 

December 31, 2013

 

 

 

Gross Carrying

Amount

 

 

Accumulated

Amortization

 

 

Net Carrying

Value

 

 

Gross Carrying

Amount

 

 

Accumulated

Amortization

 

 

Net Carrying

Value

 

 

 

(in thousands)

 

Developed technology

 

$

5,143

 

 

$

(2,392

)

 

$

2,751

 

 

$

5,143

 

 

$

(677

)

 

$

4,466

 

Customer and vendor relationships, databases

 

 

191,979

 

 

 

(30,067

)

 

 

161,912

 

 

 

191,979

 

 

 

(17,680

)

 

 

174,299

 

Total amortizable intangible assets

 

 

197,122

 

 

 

(32,459

)

 

 

164,663

 

 

 

197,122

 

 

 

(18,357

)

 

 

178,765

 

Indefinite-lived trademarks

 

 

89,676

 

 

 

 

 

 

89,676

 

 

 

89,676

 

 

 

 

 

 

89,676

 

Total acquired intangible assets

 

$

286,798

 

 

$

(32,459

)

 

$

254,339

 

 

$

286,798

 

 

$

(18,357

)

 

$

268,441

 

Amortization expense for acquired intangible assets was $14.1 million, $6.9 million and $2.5 million for the years ended December 31, 2014, 2013 and 2012, respectively.

The changes in the carrying amount of goodwill for the years ended December 31, 2014 and 2013 were as follows.

 

 

 

Goodwill

 

 

Accumulated Impairment Losses

 

 

Net Book Value

 

 

 

(in thousands)

 

Balance as of December 31, 2012

 

$

113,442

 

 

$

 

 

$

113,442

 

Acquisition of GrubHub Holdings Inc.

 

 

239,346

 

 

 

 

 

 

239,346

 

Balance as of December 31, 2013

 

 

352,788

 

 

 

 

 

 

352,788

 

Balance as of December 31, 2014

 

$

352,788

 

 

$

 

 

$

352,788

 

During the year ended December 31, 2013, the Company recorded additions to other intangible assets of $257.9 million as a result of the Merger. The components of the acquired intangibles added during the year ended December 31, 2013 were as follows:

 

 

 

December 31, 2013

 

 

 

Amount

 

 

Weighted-Average Amortization

Period

(years)

 

Developed technology

 

$

5,143

 

 

 

3

 

Customer and vendor relationships, databases

 

 

167,450

 

 

 

16.4

 

Indefinite-lived trademarks

 

 

85,276

 

 

Indefinite

 

 

 

$

257,869

 

 

 

 

 

Estimated future amortization expense of acquired intangible assets as of December 31, 2014 was as follows:

 

 

 

(in thousands)

 

2015

 

$

14,102

 

2016

 

 

13,344

 

2017

 

 

12,068

 

2018

 

 

12,068

 

2019

 

 

10,656

 

Thereafter

 

 

102,425

 

Total

 

$

164,663

 

As of December 31, 2014, the estimated remaining weighted-average useful lives of the Company’s acquired intangibles was 14.2 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, 2014 and 2013 were as follows:

 

 

 

December 31, 2014

 

 

December 31, 2013

 

 

 

(in thousands)

 

Computer equipment

 

$

12,114

 

 

$

9,739

 

Furniture and fixtures

 

 

1,876

 

 

 

2,176

 

Developed software

 

 

12,378

 

 

 

13,930

 

Purchased software

 

 

2,149

 

 

 

2,124

 

Leasehold improvements

 

 

5,900

 

 

 

6,120

 

Property and equipment

 

 

34,417

 

 

 

34,089

 

Accumulated amortization and depreciation

 

 

(18,414

)

 

 

(16,993

)

Property and equipment, net

 

$

16,003

 

 

$

17,096

 

The Company recorded depreciation and amortization expense for property and equipment other than developed software for the years ended December 31, 2014, 2013 and 2012 of $5.7 million, $4.0 million and $2.0 million, respectively. The gross carrying amount and accumulated amortization and depreciation of the Company’s property and equipment as of December 31, 2014 have been adjusted for certain fully depreciated assets that were disposed of with the closure of the Utah facility in the fourth quarter of 2014 (see Note 8, “Commitments and Contingencies”, for further details).

The Company capitalized developed software costs of $3.6 million, $2.6 million and $2.3 million for the years ended December 31, 2014, 2013 and 2012, respectively. Amortization expense for developed software costs, recognized in depreciation and amortization in the consolidated statements of operations, for the years ended December 31, 2014, 2013 and 2012 was $2.9 million, $2.6 million and $1.6 million, respectively. The gross carrying amount and accumulated amortization of the Company’s developed software as of December 31, 2014 have also been adjusted for certain fully depreciated assets that were no longer in use due to the continued development of the Company’s platform.

 

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 June 2022. 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 5 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 $3.6 million, $2.5 million and $2.2 million for the years ended December 31, 2014, 2013 and 2012, 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, 2014 were as follows:

 

 

 

(in thousands)

 

2015

 

$

3,646

 

2016

 

 

3,482

 

2017

 

 

2,939

 

2018

 

 

1,750

 

2019

 

 

1,749

 

Thereafter

 

 

4,374

 

Total

 

$

17,940

 

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 patent infringement. 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.

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 December 31, 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 December 31, 2014, the Company had accrued $0.1 million for such litigation, which included an aggregate reserve of $0.7 million included in current liabilities less an expected insurance recovery of $0.6 million included in current assets in the consolidated balance sheets.

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 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. Remaining severance and payroll-related benefits due to terminated employees as of December 31, 2014 are expected to be paid in the first quarter of 2015. The Company does not expect to incur any additional restructuring expense related to the Sandy, Utah facility closure.

The following table summarizes the Company’s restructuring activity during the year ended December 31, 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

 

 

Stock-Based Compensation
Stock-Based Compensation

9. Stock-Based Compensation

Under the GrubHub Inc. 2013 Omnibus Incentive Plan (the “2013 Plan”), the Company has granted certain employees and directors non-qualified stock options and restricted stock units. The 2013 Plan authorizes the issuance of up to 10,351,283 shares of common stock. 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 recognizes compensation expense based on estimated grant date fair values for all stock-based awards issued to employees and directors, including stock options and restricted stock units. For all stock options outstanding as of December 31, 2014, 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 2013 Plan is 10 years, and they expire 10 years from the date of grant. Compensation expense for stock options and restricted stock units is recognized ratably over the vesting period.

The rights granted to the recipient of a restricted stock unit award 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.

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 2,019,413, 3,698,708 and 1,619,167 stock options during the years ended December 31, 2014, 2013 and 2012, 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 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, prior to the IPO, was determined considering the performance of the Company at the grant date as well as future growth and profitability expectations by applying market and income approaches. The risk-free rate for the period within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The assumptions used to determine the fair value of the stock options granted during the years ended December 31, 2014, 2013 and 2012 were as follows:

 

 

 

2014

 

 

2013

 

 

2012

 

Weighted-average fair value options granted

 

$

13.87

 

 

$

3.97

 

 

$

1.46

 

Average risk-free interest rate

 

 

1.97

%

 

 

1.41

%

 

 

0.87

%

Expected stock price volatilities(a)

 

 

50.3

%

 

 

50.7

%

 

 

54.8

%

Dividend yield

 

None

 

 

None

 

 

None

 

Expected stock option life (years)

 

 

6.26

 

 

 

5.20

 

 

 

6.11

 

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.

 

Stock option awards as of December 31, 2014 and 2013, and changes during the year ended December 31, 2014, were as follows:

 

 

 

Options

 

 

Weighted-Average

Exercise Price

 

 

Average Intrinsic

Value

(thousands)

 

 

Weighted-Average

Exercise Term

(years)

 

Outstanding at December 31, 2013

 

 

7,669,553

 

 

$

4.08

 

 

$

56,844

 

 

 

8.29

 

Granted

 

 

2,019,413

 

 

 

18.35

 

 

 

 

 

 

 

 

 

Forfeited

 

 

(953,472

)

 

 

6.68

 

 

 

 

 

 

 

 

 

Exercised(a)

 

 

(2,554,699

)

 

 

3.73

 

 

 

 

 

 

 

 

 

Outstanding at December 31, 2014

 

 

6,180,795

 

 

 

8.49

 

 

 

172,661

 

 

 

7.87

 

Vested and expected to vest at December 31, 2014

 

 

4,738,666

 

 

 

7.56

 

 

 

138,012

 

 

 

7.73

 

Exercisable at December 31, 2014

 

 

2,506,615

 

 

$

4.02

 

 

$

80,962

 

 

 

7.22

 

(a)Included 138,048 shares of restricted common stock owned by officers of the Company that contained forfeiture provisions.

___________________________________________

 

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, 2014, 2013 and 2012 was $74.0 million, $3.4 million and $0.1 million, respectively.

The Company recorded compensation expense for stock options of $9.4 million, $4.9 million and $2.4 million for the years ended December 31, 2014, 2013 and 2012, respectively. During the year ended December 31, 2014, the Company capitalized $0.1 million of stock-based compensation expense as website and software development costs. As of December, 2014, total unrecognized compensation cost, adjusted for estimated forfeitures, related to non-vested stock options was $19.2 million and is expected to be recognized over a weighted-average period of 2.95 years.

During the year ended December 31, 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 $13.0 million. Excess tax benefits were suspended during the years ended December 31, 2013 and 2012 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

Non-vested restricted stock unit awards as of December 31, 2014 and 2013, and changes during the year ended December 31, 2014 were as follows:

 

 

 

Shares

 

 

Weighted-Average

Grant Date Fair

Value

 

Outstanding at December 31, 2013

 

 

 

 

$

 

Granted

 

 

2,899

 

 

 

31.90

 

Forfeited

 

 

 

 

 

 

Vested

 

 

 

 

 

 

Outstanding at December 31, 2014

 

 

2,899

 

 

$

31.90

 

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 and 2012. As of December, 2014, $0.1 million of total unrecognized compensation cost, adjusted for estimated forfeitures, related to 2,899 non-vested restricted stock units with a weighted-average grant date fair value of $31.90 is expected to be recognized over a weighted-average period of 4.0 years. The fair value of these awards was determined based on the Company’s stock price at the grant date and assumes no expected dividend payments through the vesting period.

There were no excess tax benefits related to restricted stock units during the years ended December 31, 2014, 2013 and 2012.

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. 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.

For the years ended December 31, 2014, 2013 and 2012, the income tax provision was comprised of the following:

 

 

Year Ended December 31,

 

 

 

2014

 

 

2013

 

 

2012

 

 

 

(in thousands)

 

Current:

 

 

 

 

 

 

 

 

 

 

 

 

Federal

 

$

8,073

 

 

$

2,912

 

 

$

316

 

State

 

 

7,610

 

 

 

3,056

 

 

 

132

 

Foreign

 

 

426

 

 

 

468

 

 

 

365

 

Total current

 

 

16,109

 

 

 

6,436

 

 

 

813

 

Deferred:

 

 

 

 

 

 

 

 

 

 

 

 

Federal

 

 

1,056

 

 

 

1,300

 

 

 

 

State

 

 

3,556

 

 

 

406

 

 

 

 

Total deferred

 

 

4,612

 

 

 

1,706

 

 

 

 

Total income tax expense

 

$

20,721

 

 

$

8,142

 

 

$

813

 

Income before provision for income taxes for the years ended December 31, 2014, 2013 and 2012, was as follows:

 

 

Year Ended December 31,

 

 

 

2014

 

 

2013

 

 

2012

 

 

 

(in thousands)

 

Domestic source

 

$

43,069

 

 

$

12,986

 

 

$

7,153

 

Foreign source

 

 

1,915

 

 

 

1,903

 

 

 

1,579

 

Income before provision for income taxes

 

$

44,984

 

 

$

14,889

 

 

$

8,732

 

The following is a reconciliation of income taxes computed at the U.S. federal statutory rate to the income taxes reported in the consolidated statements of operations for the years ended December 31, 2014, 2013 and 2012:

 

 

 

Year Ended December 31,

 

 

 

2014

 

 

2013

 

 

2012

 

 

 

(in thousands)

 

Income tax expense at statutory rate

 

$

15,747

 

 

$

5,211

 

 

$

3,056

 

State income taxes

 

 

8,038

 

 

 

2,522

 

 

 

251

 

Deferred tax impact of reorganization

 

 

(2,382

)

 

 

 

 

 

 

Nondeductible transaction costs

 

 

 

 

 

1,148

 

 

 

 

Tax benefit of partnership status

 

 

 

 

 

(726

)

 

 

(2,211

)

Valuation allowance reversal

 

 

 

 

 

(502

)

 

 

 

Foreign rate differential

 

 

(253

)

 

 

(220

)

 

 

(188

)

All other

 

 

(429

)

 

 

709

 

 

 

(95

)

Total income tax expense

 

$

20,721

 

 

$

8,142

 

 

$

813

 

On December 31, 2014, the Company undertook a series of transactions intended to simplify its legal and tax structure in the U.S. The result of the reorganization was a combination of GrubHub Holdings Inc. and Seamless North America, which resulted in the deemed liquidation of the Seamless North America, LLC partnership status for tax purposes. The reorganization resulted in a net income tax benefit of $0.4 million for the year ended December 31, 2014. The income tax benefit consisted of a deferred tax benefit of $2.2 million as a result of converting the Seamless North America, LLC partnership into a division of GrubHub Holdings Inc., partially offset by an increase in deferred tax expense of $1.8 million as a result of the adjusted deferred state tax rate applicable to the Company’s U.S. operations.

The Company recorded a $2.0 million increase in deferred tax expense during the second quarter of 2014 as a result of a change in state tax law.

The tax effects of temporary differences giving rise to deferred income tax assets and liabilities as of December 31, 2014 and 2013 were as follows:

 

 

 

As of December 31,

 

 

 

2014

 

 

2013

 

 

 

(in thousands)

 

Deferred tax assets:

 

 

 

 

 

 

 

 

Loss and credit carryforwards

 

$

7,212

 

 

$

16,606

 

Accrued expenses

 

 

2,221

 

 

 

620

 

Stock-based compensation

 

 

7,752

 

 

 

5,200

 

Total deferred tax assets

 

 

17,185

 

 

 

22,426

 

Valuation allowance

 

 

(910

)

 

 

(902

)

Net deferred tax assets

 

 

16,275

 

 

 

21,524

 

Deferred tax liabilities:

 

 

 

 

 

 

 

 

Fixed assets

 

 

(2,721

)

 

 

(1,145

)

Intangible assets

 

 

(104,973

)

 

 

(105,435

)

Investment in partnership

 

 

 

 

 

(1,751

)

Total deferred tax liabilities

 

 

(107,694

)

 

 

(108,331

)

Net deferred tax liability

 

$

(91,419

)

 

$

(86,807

)

Classification of net deferred tax assets (liabilities) on the consolidated balance sheets as of December 31, 2014 and 2013 was as follows:

 

 

 

As of December 31,

 

 

 

2014

 

 

2013

 

 

 

(in thousands)

 

Current assets

 

$

825

 

 

$

3,688

 

Non-current liabilities

 

 

(92,244

)

 

 

(90,495

)

Total deferred tax liability

 

$

(91,419

)

 

$

(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 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 li