Notes to Consolidated Financial Statements
1. Organization
Grubhub Inc., a Delaware corporation, and its wholly-owned subsidiaries (collectively referred to as the “Company”) provide an online and mobile takeout marketplace for restaurant pick-up and delivery orders. The Company connects diners and restaurants through restaurant technology and easy-to-use platforms. 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. The Company primarily charges restaurant partners a per order commission that is percentage-based. In many markets, the Company also provides delivery services to restaurants on its platform that do not have their own delivery operations. The Company’s takeout marketplace, and related platforms where the Company provides marketing services to generate orders, are collectively referred to as the “Platform”.
2. Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The Company’s consolidated financial statements were prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The accompanying consolidated financial statements include all wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. The consolidated statements of operations include the results of entities acquired from the dates of the acquisitions for accounting purposes.
Changes in Accounting Principle
See “Recently Issued Accounting Pronouncements” below for a description of accounting principle changes adopted during the year ended December 31, 2020 related to credit losses.
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. These estimates, judgments and assumptions take into account historical and forward-looking factors that the Company believes are reasonable including, but not limited to, the potential impact arising from the COVID-19 pandemic and measures implemented to prevent its spread. As the extent and duration of the impact from the COVID-19 pandemic remain unclear, the Company’s estimates and assumptions may evolve as conditions change. Significant items subject to such estimates, judgments and assumptions include revenue recognition, website and internal-use software development costs, goodwill, valuation and recoverability of intangible assets with finite lives and other long-lived assets, stock-based compensation, and income taxes. 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. Cash and cash equivalents exclude the Company’s restricted cash balances of $2.7 million and $3.7 million as of December 31, 2020 and 2019, respectively, which are included within prepaid expenses and other current assets and other long-term assets on the consolidated balance sheets.
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. 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 net interest expense in the consolidated statements of operations. Interest income is recognized when earned.
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GRUBHUB INC.
Notes to Consolidated Financial Statements (Continued)
The Company adopted Accounting Standards Update No. 2016-13, “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”) on January 1, 2020 using the modified-retrospective approach. Under ASU 2016-13, the Company estimates the allowance for expected credit losses, if any, on its held-to-maturity investments based on our investment loss history as well as external market data of similar securities and other factors, including those related to current market conditions and events. See Note 6, Marketable Securities, for additional details.
Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss consists of foreign currency translation adjustments. The financial statements of the Company’s foreign subsidiaries 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:
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Estimated Useful Life
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Computer equipment
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2-3 years
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Furniture and fixtures
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5 years
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Developed software
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1-3 years
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Purchased software and digital assets
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3-5 years
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Leasehold improvements
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Shorter of expected useful life or lease term
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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
See Note 4, Revenue, below for a description of the Company’s accounts receivable accounting policy.
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, 2020, 2019 and 2018, expenses attributable to advertising totaled approximately $307.3 million, $237.1 million and $170.3 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 and restricted stock units, at fair value on the date of grant and recognizes compensation expense over the service period on a straight-line basis for awards expected to vest.
The Company uses the Black-Scholes option-pricing model to determine the fair value for stock options. Management has determined the Black-Scholes fair value of stock option awards and related stock-based compensation expense with the assistance of third-party valuations. Determining the fair value of stock-based awards at the grant date requires judgment. The determination of the grant date fair value of options using an option-pricing model is affected by the Company’s common stock fair value as well as assumptions regarding a number of other complex and subjective variables. If any of the assumptions used in the Black-Scholes model changes significantly, stock-based compensation for future awards may differ materially compared with the awards granted previously.
The Black-Scholes option-pricing model requires the use of highly subjective and complex assumptions, including the expected term and the price volatility of the underlying stock, which determine the fair value of stock-based awards. These assumptions include:
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•
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Risk-free rate. Risk-free interest rates are derived from U.S. Treasury securities as of the option grant date.
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•
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Expected dividend yields. Expected dividend yields are based on our historical dividend payments, which have been zero to date (excluding the preferred stock tax distributions made by Seamless Holdings prior to 2015).
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•
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Volatility. Expected volatility is based on the historical and implied volatilities of the Company’s own common stock.
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46
GRUBHUB INC.
Notes to Consolidated Financial Statements (Continued)
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•
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Expected term. The expected term calculation for option awards considers a combination of the Company’s historical and estimated future exercise behavior.
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•
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Forfeiture rate. Forfeiture rates are estimated using historical actual forfeiture trends as well as our judgment of future forfeitures. These rates are evaluated at least annually and any change in compensation expense is recognized in the period of the change. The estimation of stock awards that will ultimately vest requires judgment and, to the extent actual results or updated estimates differ from our current estimates, such amounts will be recorded as a cumulative adjustment in the period in which the estimates are revised. The Company considers many factors when estimating expected forfeitures, including the types of awards and employee class. Actual results, and future changes in estimates, may differ substantially from management’s current estimates.
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See Note 12, Stock-Based Compensation, for the weighted-average assumptions used to estimate the fair value of options granted during the years ended December 31, 2020, 2019 and 2018.
Income Tax (Benefit) Expense
Income tax (benefit) expense is determined using the asset and liability method. Under this method, deferred tax assets and liabilities are calculated based upon the temporary differences between the financial statement and income tax bases of assets and liabilities using the enacted tax rates that are applicable in a given year. The utilization of deferred tax assets is limited by the amount of taxable income expected to be generated within the allowable carryforward period and other factors. Management also considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. The Company records a valuation allowance to reduce deferred tax assets to the amount management believes is more likely than not to be realized.
The Company generated a significant U.S. deferred tax asset in 2020 as a result of the sale of intellectual property intangibles by Tapingo Ltd, the Company’s Israeli subsidiary, to Grubhub Holdings Inc. In performing its analysis of whether a valuation allowance to reduce the deferred income tax asset was necessary as of December 31, 2020, the Company evaluated the data and believes that it is more likely than not that the deferred tax assets in the U.S. will be not realized. In the fourth quarter of 2020, the Company entered a three-year cumulative loss position and due to the uncertainty caused in part by COVID-19, the Company is no longer relying on forecasted earnings as a source of positive evidence that the Company will be able to utilize its deferred tax assets. As such, management determined that a full valuation allowance was required as of December 31, 2020. As of December 31, 2020 and 2019, a valuation allowance of $61.7 million and $15.7 million, respectively, was recorded on the Company’s consolidated balance sheets. See Note 13, Income Taxes, for additional information. Adjustments to the valuation allowance are recognized as expense in the period in which such determination is made. The calculation of income tax liabilities involves significant judgment in estimating the impact of uncertainties and complex tax laws. In addition, the Company’s tax returns are subject to audit by various U.S. and foreign tax authorities. Resolution of these uncertainties in a manner inconsistent with our expectations could have a material impact on the Company’s financial position and results of operations.
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.
Due to the reduced cost of repatriating unremitted earnings as a result of U.S. tax legislation signed into law in December of 2017, the Tax Cuts and Jobs Act (the “Tax Act”), the Company plans to repatriate cash from the U.K. to the U.S. The Company estimated no additional tax liability as of December 31, 2020 and 2019 as there are no applicable withholding taxes for the transaction. Management regularly evaluates whether foreign earnings are expected to be permanently reinvested. This evaluation requires judgment about the future operating and liquidity needs of the Company’s foreign subsidiary. Changes in economic and business conditions, foreign or U.S. tax laws, or the Company’s financial situation could result in changes in these judgments and the need to record additional tax liabilities.
The Company includes interest and penalties related to tax contingencies in the provision for income taxes in the consolidated statements of operations. Management does not expect the total amount of unrecognized tax benefits to significantly change in the next twelve months.
47
GRUBHUB INC.
Notes to Consolidated Financial Statements (Continued)
Intangible Assets
The estimated fair values of acquired intangible assets are determined as of the acquisition date based on significant management estimates included in established valuation techniques with the assistance of third-party valuations. See Note 5, Acquisitions, for the estimated acquisition date fair values and valuation methodologies of assets acquired in the periods presented. Intangible assets with finite useful lives are amortized using the straight-line method over their estimated useful lives and are reviewed for impairment. The Company evaluates intangible assets with finite and indefinite useful lives and other long-lived assets for impairment whenever events or circumstances indicate that they may not be recoverable, or at least annually. If management determines in its qualitative assessment that it is more likely than not that the assets may not be recoverable, the recoverability of finite and other long-lived assets is measured by comparing the carrying amount of an asset group to the future undiscounted net cash flows expected to be generated by that asset group. The Company groups assets for purposes of such review at the lowest level for which identifiable cash flows of the asset group are largely independent of the cash flows of the other groups of assets and liabilities. The amount of impairment to be recognized for finite and indefinite-lived intangible assets and other long-lived assets is calculated as the difference between the carrying value and the fair value of the asset group, generally measured by discounting estimated future cash flows. There were no impairment indicators present during the years ended December 31, 2020, 2019 or 2018.
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 $76.0 million, $64.5 million and $41.1 million of website development costs during the years ended December 31, 2020, 2019 and 2018, respectively.
Goodwill
Goodwill represents the excess of the cost of an acquired business over the fair value of the assets acquired at the date of acquisition. The Company’s methodology for allocating the purchase price of acquisitions is based on established valuation techniques that consider a number of factors, including valuations performed by third-party appraisers. As of December 31, 2020, the Company had $1,008.0 million in goodwill on its consolidated balance sheets. The Company assesses the impairment of goodwill at least annually and whenever events or changes in circumstances indicate that goodwill may be impaired. Absent any special circumstances that could require an interim test, the Company has elected to test for goodwill impairment at September 30 of each year. The Company has one reporting unit in testing goodwill for impairment.
In testing goodwill for impairment, the Company may elect to utilize a qualitative assessment to evaluate whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the qualitative assessment indicates that goodwill impairment is more likely than not, the Company performs a quantitative impairment test. The Company would recognize an impairment charge for the amount by which the reporting unit’s carrying amount exceeds its fair value, if any, not to exceed the carrying amount of goodwill.
Management determined the fair value of the Company as of September 30, 2020 by using a market-based approach that utilized our market capitalization, as adjusted for factors such as a control premium. After consideration of the Company’s market capitalization, business growth and other factors, management determined that it was more likely than not that the fair value of the Company exceeded its carrying amount at September 30, 2020 and that further analysis was not required.
Additionally, as part of the interim review for indicators of impairment, management analyzed potential changes in value based on operating results for the three months ended December 31, 2020 compared to expected results. Management also considered how the Company’s market capitalization, business growth and other factors used in the September 30, 2020 impairment analysis, could be impacted by changes in market conditions and economic events. For example, as a result of the proposed Transaction, a component of the Company’s implied enterprise value contemplates the share price of JET as attributed to the Company. If JET’s share price were to decline, the overall consideration associated with the Transaction could be reduced which could result in a future goodwill impairment triggering event. Additionally, COVID-19 has impacted our restaurant partners and has affected the Company’s business as described in Part II, Item 7, Management's Discussion and Analysis, of this Annual Report on Form 10-K. Management considered these trends in performing its assessment of whether an interim impairment review was required. Based on this interim assessment, management concluded that as of December 31, 2020, there were no events or changes in circumstances that indicated it was more likely than not that the Company’s fair value was below its carrying value.
48
GRUBHUB INC.
Notes to Consolidated Financial Statements (Continued)
The Company determined there was no goodwill impairment during the years ended December 31, 2020, 2019 and 2018. Nevertheless, significant changes in global economic and market conditions could result in changes to expectations of future financial results and key valuation assumptions. Such changes could result in revisions of management’s estimates of the Company’s fair value and could result in a material impairment of goodwill.
Debt Issuance Costs
The Company has incurred debt issuance costs in connection with its debt facilities and related amendments. Amounts paid directly to lenders are classified as issuance costs. Commitment fees and other costs directly associated with obtaining credit facilities are deferred financing costs which are recorded in the consolidated balance sheets and amortized over the term of the facility. The Company allocated deferred debt issuance costs incurred for its credit facility between the revolver and term loan based on their relative borrowing capacity. Deferred debt issuance costs associated with the revolving credit facility are recorded within other assets and those associated with the term loan and senior notes are recorded as a reduction of the carrying value of the debt on the consolidated balance sheets. All deferred debt issuance costs are amortized using the effective interest rate method to interest expense within net interest expense on the Company’s consolidated statements of operations. The Company records the write-off of unamortized debt issuance costs upon the extinguishment or modification of the related debt facility within interest expense in the consolidated statements of operations. See Note 11, Debt, for additional details.
Fair Value
Accounting standards define fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market in an orderly transaction between market participants on the measurement date. The standards also establish a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. See Note 17, 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, 2020, 2019 and 2018, the Company had no customers which accounted for more than 10% of revenue or accounts receivable.
Revenue Recognition
See Note 4, Revenue, below for a description of the Company’s revenue recognition policy.
Lease Obligations
On January 1, 2019, the Company adopted Accounting Standards Codification Topic 842, Leases (“ASC Topic 842”) using the modified retrospective transition approach by applying the new standard to all leases existing at the date of initial application. The Company elected the optional practical expedient package which, among other things, includes retaining the historical classification of leases.
Under ASC Topic 842, the Company determines if an arrangement is a lease at inception of a contract. Leases with an initial term of 12 months or less are not recorded on the balance sheet. Non-lease components associated with lease components in the Company’s lease contracts are treated as a single lease component. Operating lease right-of-use assets and liabilities commencing after January 1, 2019 are recognized at commencement date based on the present value of lease payments over the lease term. The right-of-use asset also includes any lease payments made prior to commencement and is recorded net of any lease incentives received. Because the rate implicit in each lease is not readily determinable, the Company uses its incremental borrowing rate to determine the present value of the lease payments. To determine the incremental borrowing rate, the Company uses information including the risk-free interest rate for the remaining lease term, the Company’s implied credit rating and interest rates of similar debt instruments of entities with comparable credit ratings. The Company recognizes rent expense on a straight-line basis over the lease term, which is allocated on a headcount basis to operations and support, sales and marketing, technology and general and administrative costs and expenses in the consolidated statements of operations.
Prior period amounts have not been adjusted and continue to be reported under ASC Topic 840 with the difference between cash rent payments and straight-lined rent expenses recorded as a deferred rent liability presented within other accruals in the consolidated balance sheets. The Company also has landlord-funded leasehold improvements that were recorded as tenant allowances, which were 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.
49
GRUBHUB INC.
Notes to Consolidated Financial Statements (Continued)
Recently Issued Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board (the “FASB”) issued ASU 2016-13, which introduces a new forward-looking approach, based on expected losses, to estimate credit losses on certain types of financial instruments, including trade receivables and held-to-maturity debt securities that requires entities to incorporate considerations of historical information, current information and reasonable and supportable forecasts. This ASU also expands disclosure requirements. ASU 2016-13 was effective for and adopted by the Company in the first quarter of 2020. The guidance was applied using the modified-retrospective approach. The adoption of ASU 2016-13 did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows as credit losses were not expected to be significant. The Company will continue to monitor the impact of the COVID-19 pandemic on expected credit losses.
3. Merger Agreement
On June 10, 2020, the Company entered into an Agreement and Plan of Merger (as amended on September 4, 2020, the “Merger Agreement”) with Just Eat Takeaway.com N.V. (“JET”), Checkers Merger Sub I, Inc., a Delaware corporation and wholly owned subsidiary of JET (“Merger Sub I”), and Checkers Merger Sub II, Inc., a Delaware corporation and wholly owned subsidiary of JET (“Merger Sub II”). Pursuant to the Merger Agreement, Merger Sub I will be merged with and into the Company (the “Initial Merger”), with the Company continuing as the surviving company in the Initial Merger (the “Initial Surviving Company”). Immediately thereafter, the Initial Surviving Company will merge with and into Merger Sub II (the “Subsequent Merger” and, together with the Initial Merger, the “Transaction”), with Merger Sub II continuing as the surviving company.
On and subject to the terms and conditions set forth in the Merger Agreement, at the effective time of the Initial Merger, each issued and outstanding share of our common stock (other than any shares of our common stock owned by the Company, JET, Merger Sub I, Merger Sub II or any other direct or indirect wholly owned subsidiary of JET), will be converted into one share of common stock, par value $0.0001 per share, of the Initial Surviving Company (the “Initial Surviving Company Stock”). Each such share of Initial Surviving Company Stock will immediately thereafter be automatically exchanged for 0.6710 American depositary shares of JET (“JET ADS”), with each JET ADS representing one share in the share capital of JET with a nominal value of €0.04 per share (“JET Shares”) (the “Merger Consideration”). The Transaction is expected to close in the first half of 2021.
4. Revenue
Revenues are recognized when control of the promised goods or services is transferred to the customer, in the amount that reflects the consideration the Company expects to receive in exchange for those good or services.
The Company generates revenues primarily when diners place an order on the Platform through its mobile applications, its websites, or through third-party websites that incorporate the Company’s API or one of the Company’s listed phone numbers. Restaurant partners generally pay a commission, typically a percentage of the transaction, on orders that are processed through the Platform. Most of the restaurant partners on the Company’s Platform can choose their level of commission rate, at or above a base rate. A restaurant partner can choose to pay a higher rate that affects its prominence and exposure to diners on the Platform. Additionally, restaurant partners on the Platform that use the Company’s delivery services pay an additional commission for the use of those services. The Company may also charge fees directly to the diner.
Revenues from online and phone pick-up and delivery orders are recognized when the orders are transmitted to the restaurants, including revenues for managed delivery services due to the simultaneous nature of the Company’s delivery operations. The amount of revenue recognized by the Company is based on the arrangement with the related restaurant and is adjusted for any expected refunds or adjustments, which are estimated using an expected value approach based on historical experience and any cash credits related to the transaction, including incentive offers provided to restaurants and diners. The Company also recognizes as revenue any fees charged directly to the diner.
Judgement is required in determining whether the Company is the principal or the agent in transactions with restaurants, diners and its delivery network. Although the Company processes and collects the entire amount of the transaction with the diner, it records revenue for transmitting orders to restaurants on a net basis because the Company is acting as an agent for takeout orders, which are prepared by the restaurants. We do not pre-purchase or otherwise control the food prepared by restaurants prior to the takeout order being transferred to the diner. The Company is the principal in the transaction with respect to credit card processing and managed delivery services because it controls the respective services. The Company’s conclusion that it is the principal for credit card processing and managed delivery services is based on the totality of the facts and circumstances that affect the substance of the arrangement for credit card processing and delivery services, including the Company’s stated terms and conditions, contractual agreements, and its customary business practices. The Company controls managed delivery services as it is contractually responsible to its restaurant partners to provide delivery services, directs its network of delivery partners to render food delivery services, bears all of the cost of delivery service problems and inefficiencies, and has full discretion in establishing restaurant delivery commissions, diner delivery fees and amounts paid to its delivery network. As a result, costs incurred for processing the credit card transactions and providing delivery services are included in operations and support expense in the consolidated statements of operations.
50
GRUBHUB INC.
Notes to Consolidated Financial Statements (Continued)
The Company periodically provides incentive offers to restaurants and diners to use our platform. These promotions are generally cash credits to be applied against purchases. These incentive offers are recorded as a reduction in revenues, generally on the date the corresponding order revenue is recognized. For those incentives that create an obligation to discount current or future orders, management applies judgment in allocating the incentives that are expected to be redeemed proportionally to current and future orders based on their relative expected transaction prices.
The Company also generates revenue from fees paid by diners for GH+, our subscription product. GH+ subscribers receive unlimited deliveries with $0 delivery fee on qualifying orders from GH+ restaurants. Revenue generated from the Company’s GH+ subscriptions is recognized on a ratable basis over the contractual period, which is generally one month.
The Company derives some revenues from mobile application development professional services and access to the respective order ahead platforms and related services. Revenues for professional services and related platform access fees are generally recognized ratably over the subscription period beginning on the date the platform access becomes available to the customer. Revenues for certain professional services may be recognized in full once the services are performed if they are distinct. The Company also generates a small amount of revenues directly from companies that participate in our corporate ordering program and by selling advertising to third parties on our allmenus.com website. The Company does not anticipate that the foregoing will generate a material portion of our revenues in the foreseeable future.
For most orders, diners use a credit card to pay for their meal when the order is placed. For these transactions, the Company collects the total amount of the diner’s order net of payment processing fees from the payment processor and remits the net proceeds to the restaurant less commission and other fees. The Company generally accumulates funds and remits the net proceeds to the restaurant partners on at least a monthly basis, depending on the payment terms with the restaurant. Non-partnered restaurants are paid at the time of the order. The Company also accepts payment for orders via gift cards offered on its platform. For gift cards that are not subject to unclaimed property laws, the Company recognizes revenue from estimated unredeemed gift cards, based on its historical breakage experience, over the expected customer redemption period.
Certain governmental taxes are imposed on the products and services provided through the Company’s platform and are included in the order fees charged to the diner and collected by the Company. Sales taxes are either remitted to the restaurant for payment or are paid directly to certain states. These fees are recorded on a net basis, and, as a result, are excluded from revenues.
Accounts Receivable, Net
Accounts receivable primarily represent the net cash due from the Company’s payment processors for cleared transactions and amounts owed from corporate and other institutional customers and Enterprise restaurants, which are generally invoiced on a monthly basis. The carrying amount of the Company’s receivables is reduced by an allowance for doubtful accounts that reflects management’s best estimate of amounts that will not be collected. These uncollected amounts are generally not recovered from the restaurants. The allowance is recorded through a charge to bad debt expense which is recognized within general and administrative expense in the consolidated statements of operations. The allowance is based on expected credit losses which incorporate historical loss experience and any specific risks, current or forecasted, identified in collection matters.
Management provides for probable uncollectible amounts through a charge against bad debt expense and a credit to an allowance based on its assessment of the current status of individual accounts. Balances still outstanding after management has used reasonable collection efforts are written off against the allowance. The Company does not charge interest on trade receivables.
The Company incurs expenses for uncollected credit card receivables (or “chargebacks”), including fraudulent orders, when a diner’s card is authorized but fails to process, and for other unpaid credit card receivables. The majority of the Company’s chargeback expense is recorded directly to general and administrative expense in the consolidated statements of operations as the charges are incurred; however, a portion of the allowance for doubtful accounts includes a reserve for estimated chargebacks on the net cash due from the Company’s payment processors as of the end of the period.
Changes in the Company’s allowance for doubtful accounts for the periods presented were as follows:
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|
|
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|
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|
December 31, 2020
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December 31, 2019
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Balance at beginning of period
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$
|
2,812
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|
|
$
|
1,460
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|
Additions to expense
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|
102
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|
|
|
1,497
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|
Write-offs, net of recoveries and other adjustments
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(438
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)
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|
|
(145
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)
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Balance at end of period
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|
$
|
2,476
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|
|
$
|
2,812
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51
GRUBHUB INC.
Notes to Consolidated Financial Statements (Continued)
Deferred Revenues
The Company’s deferred revenues consist primarily of gift card liabilities, certain incentive liabilities as well as customer billings for professional services recognized ratably over the subscription period. These amounts are included within other accruals on the consolidated balance sheets. See Note 9, Other Accruals, for the Company’s gift card liabilities as of December 31, 2020 and 2019. Other deferred revenues are not material to the Company’s consolidated financial position. The majority of gift cards and incentives issued by the Company are redeemed within a year.
Contract Acquisition Costs
The Company defers the incremental costs of obtaining and renewing restaurant and corporate and campus program customer contracts, primarily consisting of commissions and bonuses and related payroll taxes, as contract acquisition assets within other assets on the consolidated balance sheets. Contract acquisition assets are amortized on a straight-line basis to sales and marketing expense in the consolidated statements of operations over the useful life of the contract, which is estimated to be approximately 4 years based on anticipated customer renewals. During the years ended December 31, 2020 and 2019, the Company deferred $32.3 million and $16.5 million of contract acquisitions costs, respectively, and amortized $10.4 million and $4.5 million of related expense, respectively.
5. Acquisitions
There were no acquisitions during the years ended December 31, 2020 and 2019.
2018 Acquisitions
On November 7, 2018, the Company acquired all of the issued and outstanding shares of Tapingo Ltd. (“Tapingo”) for approximately $152.1 million, including $151.7 million of cash paid (net of cash acquired of $1.5 million) and $0.4 million of other non-cash consideration. Tapingo is a leading platform for campus food ordering with direct integration into college meal plans and point of sale systems. The acquisition of Tapingo has enhanced the Company’s diner network on college campuses.
On September 13, 2018, the Company acquired SCVNGR, Inc. d/b/a LevelUp (“LevelUp”) for approximately $369.4 million, including $366.8 million of cash paid (net of cash acquired of $6.0 million) and $2.6 million of other non-cash consideration. LevelUp is a leading provider of mobile diner engagement and payment solutions for national and regional restaurant brands. The acquisition of LevelUp has simplified the Company’s integrations with restaurants’ systems, increased diner engagement and accelerated product development.
The Company assumed Tapingo and LevelUp employees’ unvested incentive stock option (“ISO”) awards as of the respective closing dates. Approximately $0.4 million and $2.6 million of the fair value of the assumed ISO awards granted to acquired Tapingo and LevelUp employees, respectively, was attributable to the pre-combination services of the awardees and was included in the respective purchase prices. These amounts are reflected within goodwill in the respective purchase price allocations. As of the respective acquisition dates, aggregate post-combination expense of approximately $21.4 million was expected to be recognized related to the combined assumed ISO awards over the remaining post-combination service periods.
The results of operations of Tapingo and LevelUp have been included in the Company’s financial statements since November 7, 2018 and September 13, 2018, respectively.
The excess of the consideration transferred in the acquisitions over the amounts assigned to the fair value of the net assets acquired was recorded as goodwill, which represents the value of LevelUp’s technology team, the ability to simplify integrations with restaurants on the Company’s platform and the expanded breadth and depth of the Company’s network of diners and campus relationships. The total goodwill related to the acquisitions of Tapingo and LevelUp of $418.1 million is not deductible for income tax purposes.
The assets acquired and liabilities assumed of Tapingo and LevelUp were recorded at their estimated fair values as of the closing dates of November 7, 2018 and September 13, 2018, respectively. See Note 6, Goodwill and Acquired Intangible Assets, for a description of changes to the purchase price allocations for Tapingo and LevelUp during the year ended December 31, 2019.
52
GRUBHUB INC.
Notes to Consolidated Financial Statements (Continued)
The following table summarizes the final purchase price allocation acquisition-date fair values of the assets and liabilities acquired in connection with the Tapingo and LevelUp acquisitions:
|
Tapingo
|
|
|
LevelUp
|
|
|
Total
|
|
|
(in thousands)
|
|
Accounts receivable
|
$
|
3,101
|
|
|
$
|
6,201
|
|
|
$
|
9,302
|
|
Prepaid expenses and other current assets
|
|
843
|
|
|
|
1,396
|
|
|
|
2,239
|
|
Property and equipment
|
|
—
|
|
|
|
895
|
|
|
|
895
|
|
Other assets
|
|
163
|
|
|
|
—
|
|
|
|
163
|
|
Restaurant relationships
|
|
11,279
|
|
|
|
10,217
|
|
|
|
21,496
|
|
Diner acquisition
|
|
—
|
|
|
|
3,912
|
|
|
|
3,912
|
|
Below-market lease intangible
|
|
—
|
|
|
|
2,205
|
|
|
|
2,205
|
|
Developed technology
|
|
9,755
|
|
|
|
20,107
|
|
|
|
29,862
|
|
Goodwill
|
|
121,908
|
|
|
|
296,198
|
|
|
|
418,106
|
|
Net deferred tax asset
|
|
9,582
|
|
|
|
31,545
|
|
|
|
41,127
|
|
Accounts payable and accrued expenses
|
|
(4,573
|
)
|
|
|
(3,249
|
)
|
|
|
(7,822
|
)
|
Total purchase price net of cash acquired
|
$
|
152,058
|
|
|
$
|
369,427
|
|
|
$
|
521,485
|
|
Fair value of assumed ISOs attributable to pre-combination service
|
|
(372
|
)
|
|
|
(2,594
|
)
|
|
|
(2,966
|
)
|
Net cash paid
|
$
|
151,686
|
|
|
$
|
366,833
|
|
|
$
|
518,519
|
|
Additional Information
The estimated fair values of the intangible assets acquired were determined based on a combination of the income, cost, and market approaches to measure the fair value of the restaurant relationships, diner acquisition and developed technology as follows:
|
Valuation Method
|
|
Tapingo
|
|
LevelUp
|
Restaurant relationships
|
Multi-period excess earnings
|
|
With or without comparative business valuation
|
Diner acquisition
|
n/a
|
|
Cost to recreate
|
Developed technology
|
Cost to recreate
|
|
Multi-period excess earnings
|
The fair value of the LevelUp below-market lease was measured based on the present value of the difference between the contractual amounts to be paid pursuant to the lease and an estimate of current fair market lease rates measured over the non-cancelable remaining term of the lease.
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. Unobservable inputs were reflective of the types of assumptions that market participants would use in measuring the fair values of similar assets and liabilities such as, among others, discount rates, estimated future cash flows, initial developer costs, expected profits, royalty rates, rates of attrition and expected rates of return.
The Company incurred certain expenses directly and indirectly related to mergers and acquisitions of $12.1 million, $2.7 million, and $6.9 million which were recognized in general and administrative expenses within the consolidated statements of operations for the years ended December 31, 2020, 2019 and 2018, respectively.
53
GRUBHUB INC.
Notes to Consolidated Financial Statements (Continued)
6. 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, 2020 and 2019 were as follows:
|
|
December 31, 2020
|
|
|
|
Amortized Cost
|
|
|
Unrealized Gains
|
|
|
Unrealized Losses
|
|
|
Estimated Fair Value
|
|
|
|
(in thousands)
|
|
Cash and cash equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper
|
|
$
|
15,498
|
|
|
$
|
—
|
|
|
$
|
(3
|
)
|
|
$
|
15,495
|
|
Short-term investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper
|
|
|
46,978
|
|
|
|
—
|
|
|
|
(33
|
)
|
|
|
46,945
|
|
Corporate bonds
|
|
|
6,148
|
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
6,148
|
|
Total
|
|
$
|
68,624
|
|
|
$
|
1
|
|
|
$
|
(37
|
)
|
|
$
|
68,588
|
|
|
|
December 31, 2019
|
|
|
|
Amortized Cost
|
|
|
Unrealized Gains
|
|
|
Unrealized Losses
|
|
|
Estimated Fair Value
|
|
|
|
(in thousands)
|
|
Cash and cash equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper
|
|
$
|
17,548
|
|
|
$
|
—
|
|
|
$
|
(34
|
)
|
|
$
|
17,514
|
|
Corporate bonds
|
|
|
1,300
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,300
|
|
Short-term investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper
|
|
|
46,971
|
|
|
|
—
|
|
|
|
(195
|
)
|
|
|
46,776
|
|
Corporate bonds
|
|
|
2,304
|
|
|
|
2
|
|
|
|
—
|
|
|
|
2,306
|
|
Total
|
|
$
|
68,123
|
|
|
$
|
2
|
|
|
$
|
(229
|
)
|
|
$
|
67,896
|
|
All of the Company’s marketable securities were classified as held-to-maturity investments and have maturities within one year of December 31, 2020. The Company evaluated its marketable securities aggregated by credit rating agency rating, all of which are highly rated, investment grade securities, considering historical investment losses, current market conditions and historical recovery rates of similar securities and determined that no material credit losses were expected as of December 31, 2020.
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, 2020 and 2019 were as follows:
|
|
December 31, 2020
|
|
|
|
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
|
|
$
|
62,440
|
|
|
$
|
(36
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
62,440
|
|
|
$
|
(36
|
)
|
Corporate bonds
|
|
|
4,569
|
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
4,569
|
|
|
|
(1
|
)
|
Total
|
|
$
|
67,009
|
|
|
$
|
(37
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
67,009
|
|
|
$
|
(37
|
)
|
|
|
December 31, 2019
|
|
|
|
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
|
|
$
|
64,290
|
|
|
$
|
(229
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
64,290
|
|
|
$
|
(229
|
)
|
Total
|
|
$
|
64,290
|
|
|
$
|
(229
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
64,290
|
|
|
$
|
(229
|
)
|
54
GRUBHUB INC.
Notes to Consolidated Financial Statements (Continued)
The Company recognized interest income during the years ended December 31, 2020, 2019 and 2018 of $1.7 million, $3.9 million and $4.0 million, respectively, within net interest expense in the consolidated statements of operations. During the years ended December 31, 2020, 2019 and 2018, the Company did not recognize any other-than-temporary impairment losses related to its marketable securities.
The Company’s marketable securities are classified within Level 2 of the fair value hierarchy (see Note 17, Fair Value Measurement, for further details).
7. Goodwill and Acquired Intangible Assets
The components of acquired intangible assets as of December 31, 2020 and 2019 were as follows:
|
|
December 31, 2020
|
|
|
December 31, 2019
|
|
|
|
Gross Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net Carrying
Value
|
|
|
Gross Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net Carrying
Value
|
|
|
|
(in thousands)
|
|
Restaurant relationships
|
|
$
|
492,791
|
|
|
$
|
(158,885
|
)
|
|
$
|
333,906
|
|
|
$
|
497,788
|
|
|
$
|
(135,482
|
)
|
|
$
|
362,306
|
|
Diner acquisition
|
|
|
48,293
|
|
|
|
(29,567
|
)
|
|
|
18,726
|
|
|
|
48,293
|
|
|
|
(19,909
|
)
|
|
|
28,384
|
|
Developed technology
|
|
|
34,095
|
|
|
|
(21,696
|
)
|
|
|
12,399
|
|
|
|
35,826
|
|
|
|
(15,916
|
)
|
|
|
19,910
|
|
Other
|
|
|
2,918
|
|
|
|
(2,787
|
)
|
|
|
131
|
|
|
|
2,918
|
|
|
|
(2,713
|
)
|
|
|
205
|
|
Total amortizable intangible assets
|
|
|
578,097
|
|
|
|
(212,935
|
)
|
|
|
365,162
|
|
|
|
584,825
|
|
|
|
(174,020
|
)
|
|
|
410,805
|
|
Indefinite-lived trademarks
|
|
|
89,676
|
|
|
|
—
|
|
|
|
89,676
|
|
|
|
89,676
|
|
|
|
—
|
|
|
|
89,676
|
|
Total acquired intangible assets
|
|
$
|
667,773
|
|
|
$
|
(212,935
|
)
|
|
$
|
454,838
|
|
|
$
|
674,501
|
|
|
$
|
(174,020
|
)
|
|
$
|
500,481
|
|
The gross carrying amount and accumulated amortization of the Company’s restaurant relationships and developed technology as of December 31, 2020 were each adjusted by $5.0 million and $1.7 million, respectively, for certain fully amortized assets that were no longer in use.
Amortization expense for acquired intangible assets was $45.6 million, $50.7 million and $42.5 million for the years ended December 31, 2020, 2019 and 2018, respectively.
During the year ended December 31, 2020, there were no changes in the carrying amount of goodwill of $1,008.0 million. The change in the carrying amount of goodwill during the year ended December 31, 2019 was as follows.
|
|
Goodwill
|
|
|
Accumulated Impairment Losses
|
|
|
Net Book Value
|
|
|
|
(in thousands)
|
|
Balance as of December 31, 2018
|
|
$
|
1,019,239
|
|
|
$
|
—
|
|
|
$
|
1,019,239
|
|
Acquisitions - measurement period adjustments(a)
|
|
|
(11,271
|
)
|
|
|
—
|
|
|
|
(11,271
|
)
|
Balance as of December 31, 2019
|
|
$
|
1,007,968
|
|
|
$
|
—
|
|
|
$
|
1,007,968
|
|
|
(a)
|
The change in the carrying amount of goodwill during the year ended December 31, 2019 primarily related to changes in the fair value of net deferred tax assets for the purchase price allocations of the Tapingo and LevelUp acquisitions during the measurement period.
|
|
The Company acquired intangible assets of $4.3 million during the year ended December 31, 2019 as a result of the acquisitions of certain restaurant and diner network assets. The components of the acquired intangible assets added during the years ended December 31, 2019 were as follows:
|
|
Year Ended December 31, 2019
|
|
|
|
Amount
|
|
|
Weighted-Average Amortization Period
|
|
|
|
(in thousands)
|
|
|
(years)
|
|
Restaurant relationships
|
|
$
|
3,510
|
|
|
|
19.5
|
|
Diner acquisition
|
|
|
752
|
|
|
|
5.0
|
|
Total
|
|
$
|
4,262
|
|
|
|
|
|
55
GRUBHUB INC.
Notes to Consolidated Financial Statements (Continued)
Estimated future amortization expense of acquired intangible assets as of December 31, 2020 was as follows:
|
|
(in thousands)
|
|
2021
|
|
$
|
38,809
|
|
2022
|
|
|
36,847
|
|
2023
|
|
|
30,348
|
|
2024
|
|
|
28,141
|
|
2025
|
|
|
25,736
|
|
Thereafter
|
|
|
205,281
|
|
Total
|
|
$
|
365,162
|
|
As of December 31, 2020, the estimated remaining weighted-average useful life of the Company’s acquired intangibles was 12.9 years. The Company recognizes amortization expense for acquired intangibles on a straight-line basis.
8. Property and Equipment
The components of the Company’s property and equipment as of December 31, 2020 and 2019 were as follows:
|
|
December 31, 2020
|
|
|
December 31, 2019
|
|
|
|
(in thousands)
|
|
Developed software
|
|
$
|
223,596
|
|
|
$
|
154,656
|
|
Computer equipment
|
|
|
112,564
|
|
|
|
74,052
|
|
Leasehold improvements
|
|
|
74,092
|
|
|
|
52,962
|
|
Furniture and fixtures
|
|
|
13,587
|
|
|
|
14,463
|
|
Purchased software and digital assets
|
|
|
18,432
|
|
|
|
13,395
|
|
Construction in progress
|
|
|
256
|
|
|
|
6,018
|
|
Property and equipment
|
|
|
442,527
|
|
|
|
315,546
|
|
Accumulated depreciation and amortization
|
|
|
(226,381
|
)
|
|
|
(142,802
|
)
|
Property and equipment, net
|
|
$
|
216,146
|
|
|
$
|
172,744
|
|
The gross carrying amount and accumulated amortization of the Company’s developed software, furniture and fixtures, leasehold improvements and computer equipment as of December 31, 2020 were adjusted in aggregate by $13.6 million and $11.9 million, respectively, for certain assets that were no longer in use. The Company recorded depreciation and amortization expense for property and equipment other than developed software for the years ended December 31, 2020, 2019 and 2018 of $42.5 million, $30.2 million and $21.6 million, respectively.
The Company capitalized developed software costs of $76.0 million, $64.5 million and $41.1 million for the years ended December 31, 2020, 2019 and 2018, respectively. Amortization expense for developed software costs, recognized in depreciation and amortization in the consolidated statements of operations, for the years ended December 31, 2020, 2019 and 2018 was $53.7 million, $34.5 million and $21.8 million, respectively.
9. Other Accruals
The Company’s other accruals recorded in current liabilities on the consolidated balance sheets as of December 31, 2020 and 2019 were as follows:
|
|
December 31, 2020
|
|
|
December 31, 2019
|
|
|
|
(in thousands)
|
|
Gift card liability
|
|
$
|
52,290
|
|
|
$
|
12,212
|
|
Other accrued expenses (a)
|
|
|
96,988
|
|
|
|
49,292
|
|
Total Other Accruals
|
|
$
|
149,278
|
|
|
$
|
61,504
|
|
|
(a)
|
Other accrued expenses consist of various accrued expenses with no individual item accounting for more than 5% of the total current liabilities as of December 31, 2020 and 2019.
|
|
56
GRUBHUB INC.
Notes to Consolidated Financial Statements (Continued)
10. Commitments and Contingencies
Leases
As of December 31, 2020, the Company had operating lease agreements for its office facilities in various locations throughout the U.S, as well as in Israel, which expire at various dates through May 2030. The terms of the lease agreements provide for fixed rental payments on a graduated basis. For its primary operating leases, the Company can, after the initial lease term, renew its leases under right of first offer terms at fair value at the time of renewal for a period of five years. The Company's lease terms include options to extend or terminate the lease when it is reasonably certain that it will exercise that option.
As of December 31, 2020, the Company recognized on its consolidated balance sheets operating lease right-of-use assets of $88.2 million that represent the Company's right to use an underlying asset during the lease term and current and noncurrent operating lease liabilities of $17.9 million and $103.4 million, respectively, that represent the Company's obligation to make lease payments.
The components of operating lease costs, which consist of rent expense for leased office space, during the year ended December 31, 2020 were as follows:
|
|
Year Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
(in thousands)
|
|
Fixed operating lease cost
|
|
$
|
19,132
|
|
|
$
|
16,900
|
|
Short-term lease cost
|
|
|
859
|
|
|
|
2,025
|
|
Sublease income
|
|
|
(1,310
|
)
|
|
|
(887
|
)
|
Total lease cost
|
|
$
|
18,681
|
|
|
$
|
18,038
|
|
Supplemental cash flow information related to the Company’s operating leases as well as the weighted-average lease term and discount rate as of December 31, 2020 were as follows:
|
|
Year Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Cash paid for operating lease liabilities (in thousands)
|
|
$
|
17,430
|
|
|
$
|
13,694
|
|
Operating lease assets obtained in exchange for new operating lease obligations (in thousands)
|
|
$
|
5,765
|
|
|
$
|
29,714
|
|
Weighted-average remaining lease term (years)
|
|
|
8.1
|
|
|
|
8.8
|
|
Weighted-average discount rate
|
|
|
5.0
|
%
|
|
|
5.0
|
%
|
Future lease payments under the Company’s operating lease agreements as of December 31, 2020 were as follows:
|
|
(in thousands)
|
|
2021
|
|
$
|
19,841
|
|
2022
|
|
|
18,202
|
|
2023
|
|
|
17,659
|
|
2024
|
|
|
17,269
|
|
2025
|
|
|
16,497
|
|
Thereafter
|
|
|
59,098
|
|
Total future lease payments
|
|
$
|
148,566
|
|
Less interest
|
|
|
(27,253
|
)
|
Present value of lease liabilities
|
|
$
|
121,313
|
|
The table above does not reflect the Company’s option to exercise early termination rights or the payment of related early termination fees. Lease incentives reduce lease payments in the table above in the period in which they are expected to be received.
Rental expense under ASC Topic 840, primarily for leased office space under the operating lease commitments, was $13.1 million for the year ended December 31, 2018.
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, Case No. 3:11-cv-1810. Ameranth subsequently initiated additional actions for infringement of a related patent, including separate actions against Grubhub Holdings
57
GRUBHUB INC.
Notes to Consolidated Financial Statements (Continued)
Inc., Case No. 3:12-cv-739, and Seamless North America, LLC, Case No. 3:12-cv-737, which were consolidated along with approximately 40 other cases Ameranth filed in the same district.
In September 2018, the district court granted summary judgment (on another defendant’s motion) of unpatentability on the sole remaining patent and vacated the December 3, 2018 jury trial date for the claims against Grubhub Holdings Inc. and Seamless North America, LLC. In October 2018, the district court entered final judgment on all claims in the case in which summary judgment was granted, and then stayed the remaining cases (including the cases against Grubhub and Seamless). Ameranth then appealed this decision to the U.S. Court of Appeals for the Federal Circuit. In November 2019, the Federal Circuit affirmed the district court’s findings of unpatentability in all material respects, and remanded certain dependent claims to the district court. In June 2020, Ameranth filed a petition for a Writ of Certiorari with the Supreme Court of the United States, which the Court subsequently denied in October 2020. 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. The Company has not recorded an accrual related to this lawsuit as of December 31, 2020, as it does not believe a material loss is probable.
On November 20, 2019, a purported stockholder of the Company filed a putative class action complaint against the Company, Chief Executive Officer Matthew Maloney, and President and Chief Financial Officer Adam DeWitt in the United States District Court for the Northern District of Illinois, Case No. 19 Civ. 7665. The complaint, which was amended on July 24, 2020, asserts violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, based on its allegation that the defendants made false and misleading statements about the Company’s growth, competitive landscape, and strategy. The complaint seeks unspecified compensatory damages and attorneys’ fees, among other relief. Pursuant to a court scheduling order, the matter is expected to be fully briefed by March 2021. The defendants believe that the complaint is without merit and that a material loss is not probable. However, given the early stage of the proceedings, a reasonable estimate of the amount of any possible loss or range of loss cannot be made at this time.
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, including labor and employment claims, some of which relate to the alleged misclassification of independent contractors. The Company currently has a number of pending putative class actions, Private Attorney General Act lawsuits and arbitrations alleging the misclassification of independent contractors. Legislation in this area continues to evolve, and therefore, the Company expects to continue to receive an increased number of misclassification claims. Nonetheless, the Company believes that its approach to classification is supported by the law and intends to continue to defend itself vigorously in these matters. The Company does not believe any of the foregoing claims will have a material impact on its consolidated financial statements. However, there is no assurance that any claim will not be combined into a collective or class action. During the year ended December 31, 2020, the Company made payments of $12.5 million related to the settlement of certain of these matters.
11. Debt
The following table summarizes the carrying value of the Company’s debt as of December 31, 2020:
|
|
December 31, 2020
|
|
|
December 31, 2019
|
|
|
|
(in thousands)
|
|
Senior Notes
|
|
$
|
500,000
|
|
|
$
|
500,000
|
|
Less unamortized deferred debt issuance costs
|
|
|
(5,897
|
)
|
|
|
(6,991
|
)
|
Long-term debt
|
|
$
|
494,103
|
|
|
$
|
493,009
|
|
Senior Notes
58
GRUBHUB INC.
Notes to Consolidated Financial Statements (Continued)
On June 10, 2019, the Company’s wholly-owned subsidiary, Grubhub Holdings Inc., issued $500.0 million in aggregate principal amount of 5.500% senior notes due July 1, 2027 (“Senior Notes”) in a private placement exempt from the registration requirements of the Securities Act of 1933, as amended. Interest is payable on the Senior Notes semi-annually on January and July of each year, beginning on January 1, 2020. The first interest payment of $15.4 million was made in December 2019. During the year ended December 30, 2020, the Company paid $27.5 million in interest on its Senior Notes.
The Senior Notes were issued pursuant to an indenture, dated June 10, 2019 (the “Indenture”), among Grubhub Holdings Inc., the guarantors party thereto and Wilmington Trust, National Association, as trustee. The Company has the option to redeem all or a portion of the Senior Notes at any time on or after July 1, 2022 by paying 100.0% of the principal amount of the Senior Notes plus a declining premium, plus accrued and unpaid interest to (but excluding) the redemption date. The premium declines from 2.750% during the twelve months on and after July 1, 2022, to 1.833% during the twelve months on and after July 1, 2023, to 0.917% during the twelve months on and after July 1, 2024, to zero on and after July 1, 2025. The Company may also redeem all or any portion of the Senior Notes at any time prior to July 1, 2022, at a price equal to 100.0% of the aggregate principal amount thereof plus a make-whole premium set forth in the Indenture and accrued and unpaid interest, if any. In addition, before July 1, 2022, the Company may redeem up to 40% of the aggregate principal amount of the Senior Notes with the net proceeds of certain equity offerings at a redemption price of 105.5% of the principal amount plus accrued and unpaid interest, if any, provided that certain conditions are met. In the event of a Change of Control Triggering Event (as defined in the Indenture), the Company will be required to make an offer to purchase the Senior Notes at a price equal to 101.0% of their principal amount, plus accrued and unpaid interest.
The Senior Notes are guaranteed on a senior unsecured basis by the Company and each of its existing and future wholly owned domestic restricted subsidiaries that guarantees the credit facility or that guarantees certain of our other indebtedness or indebtedness of a guarantor.
The Indenture contains customary covenants that, among other things, restrict the ability of the Company and the ability of certain of its subsidiaries to incur additional debt or issue preferred shares; create liens on certain assets to secure debt; and consolidate, merge, sell or otherwise dispose of all or substantially all of the Company’s assets. These covenants are subject to a number of important exceptions and qualifications and also include customary events of default.
Credit Agreement
On February 6, 2019, the Company entered into an amended and restated credit agreement (the “Credit Agreement”) which provides, among other things, for aggregate revolving loans up to $225 million and provided for term loans in an aggregate principal amount of $325 million. The $325 million term loan portion of the Credit Agreement was extinguished on June 10, 2019. In addition to the revolving loans available under the Credit Agreement, of which $219.0 million was available as of December 31, 2020, the Company may also incur up to $250 million of incremental revolving or term loans pursuant to the terms and conditions of the Credit Agreement. The credit facility under the Credit Agreement will be available to the Company until February 5, 2024.
Under the Credit Agreement, borrowings bear interest, at the Company’s option, based on LIBOR or an alternate base rate plus a margin. In the case of LIBOR loans the margin ranges between 1.125% and 1.750% and, in the case of alternate base rate loans, between 0.125% and 0.750%, in each case, based upon the Company’s consolidated senior secured net leverage ratio (as defined in the Credit Agreement). The Company is also required to pay a commitment fee on the undrawn portion available under the revolving loan facility of between 0.150% and 0.275% per annum, based upon the Company’s consolidated senior secured net leverage ratio.
On May 8, 2020, the Company entered into Amendment No. 1 to its Credit Agreement (the “Amendment”). The Amendment amends the Credit Agreement by, among other things, (i) permitting the Company to net unrestricted cash and cash equivalents in excess of $175.0 million against the Consolidated Total Net Leverage Ratio (as defined in the Credit Agreement) in any quarter through and including March 31, 2021; (ii) modifying the definition of Consolidated EBITDA to permit the Company to add back cash costs and expenses associated with litigations, claims, proceedings or investigations, up to a maximum of 25% of Consolidated EBITDA (as defined in the Credit Agreement) after giving effect to such addback; and (iii) modifying the definitions of Alternate Base Rate and Adjusted Eurodollar Rate to establish minimum rates of 0.75% and 1.75%, respectively. The foregoing summary does not purport to be complete and is qualified in its entirety by reference to Amendment No. 1, filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2020 and incorporated herein by reference.
The obligations under the Credit Agreement and the guarantees are secured by a lien on substantially all of the tangible and intangible property of the Company and the domestic subsidiaries that are guarantors, and by a pledge of all of the equity interests of the Company’s domestic subsidiaries, subject to certain exceptions set forth in the Credit Agreement.
The Credit Agreement contains customary covenants that, among other things, require the Company to satisfy certain financial covenants and may restrict the Company’s ability to incur additional debt, pay dividends and make distributions, make certain investments and acquisitions, create liens, transfer and sell material assets and merge or consolidate.
Other Information
During the year ended December 31, 2020, the Company borrowed $175.0 million of revolving loans under the Credit Agreement as a precautionary measure in order to increase its cash position and preserve financial flexibility in light of uncertainty in the global markets resulting from the COVID-19 outbreak. The Company repaid the $175.0 million in borrowings under the Credit Agreement on May 5, 2020. As of December 31, 2020, the Company’s outstanding debt consisted of $500.0 million in Senior Notes. See Note 17, Fair Value Measurement, for the fair value of the Company’s Senior Notes as of December 31, 2020.
59
GRUBHUB INC.
Notes to Consolidated Financial Statements (Continued)
The Company was in compliance with the financial covenants of its debt facilities as of December 31, 2020. Additional capacity under the Credit Agreement may be used for general corporate purposes, including funding working capital and future acquisitions.
The Company capitalized $9.1 million of debt issuance costs during the year ended December 31, 2019 in connection with the issuance of the Senior Notes and the amendment of the Credit Agreement. During the year ended December 31, 2020, the Company capitalized an additional $0.1 million of debt issuance costs incurred with the Amendment of the Credit Agreement. As of December 31, 2020, unamortized debt issuance costs of $1.1 million related to the revolving loan facility and $5.9 million related to the Senior Notes were recorded as other assets and as a reduction of long-term debt, respectively, on the consolidated balance sheets. As of December 31, 2019, total unamortized debt issuance costs of $1.1 million related to the revolving loan facility and $7.0 million related to the Senior Notes were recorded as other assets and as a reduction of long-term debt, respectively, on the consolidated balance sheets.
Interest expense includes interest on outstanding borrowings, amortization of debt issuance costs and commitment fees on the undrawn portion available under the credit facility, net of capitalized borrowing costs. During the years ended December 31, 2020, 2019 and 2018, the Company recognized interest expense of $29.7 million, $24.3 million, and $7.5 million, respectively. Interest expense for the year ended December 31, 2019 included $1.9 million for the write-off of unamortized debt issuance costs upon extinguishment of the term loan facility and the amendment of the Credit Agreement. The effective interest rate, including amortization of debt issuance costs and commitment fees, for borrowings under the Company’s senior debt facilities for the years ended December 31, 2020, 2019 and 2018 was 5.59%, 5.18%, and 3.82%, respectively.
Future maturities of principal payments for amounts outstanding under the Company’s debt facilities as of December 31, 2020, excluding potential early payments, were as follows:
|
|
(in thousands)
|
|
2021
|
|
$
|
—
|
|
2022
|
|
|
—
|
|
2023
|
|
|
—
|
|
2024
|
|
|
—
|
|
2025
|
|
|
—
|
|
Thereafter
|
|
|
500,000
|
|
Total
|
|
$
|
500,000
|
|
12. Stock-Based Compensation
In May 2015, the Company’s stockholders approved the Grubhub Inc. 2015 Long-Term Incentive Plan (as amended, 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. Effective upon the adoption of the 2015 Plan, no further grants were or will be made under the Company’s 2013 Omnibus Incentive Plan (the “2013 Plan”). In May 2020 and 2019, the Company’s stockholders approved amendments to the 2015 Plan which increased the aggregate number of shares that may be issued under the 2015 Plan by 3,500,000 and 5,000,000 shares, respectively. As of December 31, 2020, there were 6,345,018 shares of common stock authorized and available for issuance pursuant to awards granted under the 2015 Plan. No further grants will be made under the assumed Tapingo and LevelUp incentive plans. The Board of Directors of the Company and committee or subcommittee of the Board of Directors has discretion to establish the terms and conditions for grants, including, but not limited to, the number of shares and vesting and forfeiture provisions.
The Company has granted non-qualified and incentive 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, 2020, 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, the 2013 Plan and the assumed Tapingo and LevelUp incentive plans 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. The Company does not expect to pay any dividends in the foreseeable future.
60
GRUBHUB INC.
Notes to Consolidated Financial Statements (Continued)
Stock-based Compensation Expense
The total stock-based compensation expense related to all stock-based awards was $84.5 million, $72.9 million and $55.3 million during the years ended December 31, 2020, 2019 and 2018, respectively. As of December 31, 2020, $164.9 million of total unrecognized stock-based compensation expense is expected to be recognized over a weighted-average period of 2.5 years.
Excess tax benefits reflect the total realized value of the Company’s tax deductions from individual stock option exercise transactions and the vesting of restricted stock awards and restricted stock units in excess of the deferred tax assets that were previously recorded. During the years ended December 31, 2020, 2019, and 2018, the Company recognized excess tax benefits from stock-based compensation of $1.0 million, $2.0 million, and $18.0 million, respectively, within income tax (benefit) expense in the consolidated statements of operations and within cash flows from operating activities on the consolidated statements of cash flows.
The Company capitalized stock-based compensation expense as website and software development costs of $19.3 million, $15.9 million and $9.0 million for the years ended December 31, 2020, 2019 and 2018, respectively.
Stock Options
The Company granted 264,245, 333,929 and 347,891 stock options under the 2015 Plan during the years ended December 31, 2020, 2019 and 2018, respectively. In 2018, the Company also assumed 327,752 unvested ISOs with the acquisitions of LevelUp and Tapingo. 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 volatility is based on the historical and implied volatilities of the Company’s own common stock. 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 calculation for option awards considers a combination of the Company’s historical and estimated future exercise behavior. The risk-free rate for the period within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.
The assumptions used to determine the fair value of the stock options granted during the years ended December 31, 2020, 2019 and 2018 were as follows:
|
|
Year Ended December 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
Weighted-average fair value options granted
|
|
$
|
20.46
|
|
|
$
|
30.91
|
|
|
$
|
66.19
|
|
|
Average risk-free interest rate
|
|
|
1.26
|
%
|
|
|
2.42
|
%
|
|
|
2.61
|
%
|
|
Expected stock price volatility
|
|
|
49.6
|
%
|
|
|
48.3
|
%
|
|
|
46.4
|
%
|
|
Dividend yield
|
|
None
|
|
|
None
|
|
|
None
|
|
|
Expected stock option life (years)
|
|
|
4.00
|
|
|
|
4.00
|
|
|
|
3.51
|
(a)
|
|
|
(a)
|
The expected term for Tapingo and LevelUp assumed ISO awards was calculated based on their respective remaining vesting periods as of the acquisition date.
|
|
____________________________________________________________________________________________________________________
Stock option awards as of December 31, 2020 and 2019, and changes during the year ended December 31, 2020, were as follows:
|
|
Options
|
|
|
Weighted-Average
Exercise Price
|
|
|
Aggregate Intrinsic Value (thousands)
|
|
|
Weighted-Average Exercise Term
(years)
|
|
Outstanding at December 31, 2019
|
|
|
2,750,275
|
|
|
$
|
38.74
|
|
|
$
|
50,737
|
|
|
|
6.28
|
|
Granted
|
|
|
264,245
|
|
|
|
51.59
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(85,484
|
)
|
|
|
72.28
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(417,466
|
)
|
|
|
22.93
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2020
|
|
|
2,511,570
|
|
|
|
41.58
|
|
|
|
88,030
|
|
|
|
5.80
|
|
Vested and expected to vest at December 31, 2020
|
|
|
2,467,843
|
|
|
|
41.21
|
|
|
|
87,355
|
|
|
|
5.76
|
|
Exercisable at December 31, 2020
|
|
|
2,017,221
|
|
|
$
|
35.92
|
|
|
$
|
81,218
|
|
|
|
5.22
|
|
61
GRUBHUB INC.
Notes to Consolidated Financial Statements (Continued)
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, 2020, 2019 and 2018 was $18.8 million, $10.4 million and $38.7 million, respectively.
The Company recorded compensation expense for stock options of $11.3 million, $16.1 million and $17.7 million for the years ended December 31, 2020, 2019 and 2018, respectively. As of December 31, 2020, total unrecognized compensation cost, adjusted for estimated forfeitures, related to non-vested stock options was $12.9 million and is expected to be recognized over a weighted-average period of 1.9 years.
Restricted Stock Units
Non-vested restricted stock units as of December 31, 2020 and 2019, and changes during the year ended December 31, 2020 were as follows:
|
|
Restricted Stock Units
|
|
|
|
Shares
|
|
|
Weighted-Average
Grant Date Fair
Value
|
|
Outstanding at December 31, 2019
|
|
|
3,096,025
|
|
|
$
|
70.62
|
|
Granted
|
|
|
2,118,460
|
|
|
|
51.54
|
|
Forfeited
|
|
|
(508,181
|
)
|
|
|
65.66
|
|
Vested
|
|
|
(1,617,568
|
)
|
|
|
64.66
|
|
Outstanding at December 31, 2020
|
|
|
3,088,736
|
|
|
$
|
61.47
|
|
Compensation expense related to restricted stock units was $73.2 million, $56.8 million and $37.6 million during the years ended December 31, 2020, 2019 and 2018, respectively. The aggregate fair value as of the vest date of restricted stock units that vested during years ended December 31, 2020, 2019, and 2018 was $99.4 million, $64.6 million and $96.3 million, respectively. As of December 31, 2020, $152.0 million of total unrecognized compensation cost, adjusted for estimated forfeitures, related to 2,716,395 non-vested restricted stock units expected to vest with weighted-average grant date fair values of $61.80 is expected to be recognized over a weighted-average period of 2.5 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.
13. Income Taxes
The Company files income tax returns in the U.S. federal, the United Kingdom (“U.K.”), Israel and various state jurisdictions.
For the years ended December 31, 2020, 2019 and 2018, the income tax provision was comprised of the following:
|
|
Year Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
|
(in thousands)
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(19,491
|
)
|
|
$
|
328
|
|
|
$
|
(2,934
|
)
|
State
|
|
|
906
|
|
|
|
(1,139
|
)
|
|
|
3,827
|
|
Foreign
|
|
|
7,016
|
|
|
|
327
|
|
|
|
335
|
|
Total current
|
|
|
(11,569
|
)
|
|
|
(484
|
)
|
|
|
1,228
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(25,237
|
)
|
|
|
(5,851
|
)
|
|
|
2,608
|
|
State
|
|
|
647
|
|
|
|
(1,791
|
)
|
|
|
(884
|
)
|
Foreign
|
|
|
15,062
|
|
|
|
(84
|
)
|
|
|
—
|
|
Total deferred
|
|
|
(9,528
|
)
|
|
|
(7,726
|
)
|
|
|
1,724
|
|
Total income tax (benefit) expense
|
|
$
|
(21,097
|
)
|
|
$
|
(8,210
|
)
|
|
$
|
2,952
|
|
62
GRUBHUB INC.
Notes to Consolidated Financial Statements (Continued)
Income (loss) before provision for income taxes for the years ended December 31, 2020, 2019 and 2018, was as follows:
|
|
Year Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
|
(in thousands)
|
|
Domestic source
|
|
$
|
(176,896
|
)
|
|
$
|
(29,227
|
)
|
|
$
|
80,878
|
|
Foreign source
|
|
|
(62
|
)
|
|
|
2,451
|
|
|
|
555
|
|
Income (loss) before provision for income taxes
|
|
$
|
(176,958
|
)
|
|
$
|
(26,776
|
)
|
|
$
|
81,433
|
|
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, 2020, 2019 and 2018:
|
|
Year Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
|
(in thousands)
|
|
Income tax expense (benefit) at statutory rate
|
|
$
|
(37,161
|
)
|
|
$
|
(5,623
|
)
|
|
$
|
17,101
|
|
Excess compensation
|
|
|
2,968
|
|
|
|
1,786
|
|
|
|
1,753
|
|
State income taxes
|
|
|
(13,468
|
)
|
|
|
(1,134
|
)
|
|
|
1,563
|
|
Stock-based compensation
|
|
|
(395
|
)
|
|
|
145
|
|
|
|
(15,924
|
)
|
Research and development tax credit
|
|
|
(2,861
|
)
|
|
|
(2,995
|
)
|
|
|
(1,470
|
)
|
Uncertain tax position
|
|
|
—
|
|
|
|
67
|
|
|
|
(545
|
)
|
Foreign rate differential
|
|
|
45
|
|
|
|
(18
|
)
|
|
|
(57
|
)
|
Meals and entertainment
|
|
|
288
|
|
|
|
659
|
|
|
|
292
|
|
Transaction costs
|
|
|
1,837
|
|
|
|
—
|
|
|
|
897
|
|
CARES Act
|
|
|
(9,740
|
)
|
|
|
—
|
|
|
|
—
|
|
Foreign tax restructuring
|
|
|
(5,551
|
)
|
|
|
—
|
|
|
|
—
|
|
State rate change
|
|
|
(1,805
|
)
|
|
|
(1,055
|
)
|
|
|
(315
|
)
|
Valuation allowance
|
|
|
46,047
|
|
|
|
(262
|
)
|
|
|
262
|
|
All other
|
|
|
(1,301
|
)
|
|
|
220
|
|
|
|
(605
|
)
|
Total income tax (benefit) expense
|
|
$
|
(21,097
|
)
|
|
$
|
(8,210
|
)
|
|
$
|
2,952
|
|
On March 27, 2020, Congress enacted the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which includes provisions, among others, that allow the Company to carryback net operating losses to a year with a higher federal income tax rate and technical corrections to tax depreciation methods for qualified improvement property. The income tax benefit for the year ended December 31, 2020 included a $9.7 million benefit related to net operating losses that can now be carried back as a result of the CARES Act.
On December 27, 2020, the Consolidated Appropriations Act of 2021 (“the Appropriations Act”) was signed into law. The Appropriations Act, among other things includes provisions related to the deductibility of Paycheck Protection Program (“PPP”) expenses paid with PPP loan proceeds, payroll tax credits, modifications to the meals and entertainment deduction, increased limitations on charitable deductions for corporate taxpayers, and enhancements of expiring tax “extender” provisions. The Company has completed its assessment of the impact of the legislation, and there is no significant impact to the consolidated financial statements.
On December 31, 2020, Tapingo Ltd., the Company’s Israeli subsidiary, sold its intellectual property to Grubhub Holdings Inc. (the “Foreign Tax Restructuring”) resulting in a $5.6 million benefit for the year ended December 31, 2020. The sale of the intellectual property intangibles was unilaterally negotiated with the Israeli tax authorities and was undertaken to better reflect the usage of the related intangibles in the U.S. versus in Israel.
63
GRUBHUB INC.
Notes to Consolidated Financial Statements (Continued)
The tax effects of temporary differences giving rise to deferred income tax assets and liabilities as of December 31, 2020 and 2019 were as follows:
|
|
As of December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
(in thousands)
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Loss and credit carryforwards
|
|
$
|
126,199
|
|
|
$
|
84,153
|
|
Accrued expenses
|
|
|
4,641
|
|
|
|
—
|
|
Stock-based compensation
|
|
|
12,425
|
|
|
|
8,302
|
|
Lease accounting
|
|
|
9,246
|
|
|
|
5,817
|
|
Fixed assets - state
|
|
|
6,280
|
|
|
|
2,514
|
|
Total deferred tax assets
|
|
|
158,791
|
|
|
|
100,786
|
|
Valuation allowance
|
|
|
(61,702
|
)
|
|
|
(15,655
|
)
|
Net deferred tax assets
|
|
|
97,089
|
|
|
|
85,131
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Fixed assets
|
|
|
(24,798
|
)
|
|
|
(8,802
|
)
|
Intangible assets
|
|
|
(76,989
|
)
|
|
|
(99,870
|
)
|
Prepaid expenses
|
|
|
(12,937
|
)
|
|
|
(882
|
)
|
Accrued expenses
|
|
|
—
|
|
|
|
(2,740
|
)
|
Total deferred tax liabilities
|
|
|
(114,724
|
)
|
|
|
(112,294
|
)
|
Net deferred tax liability
|
|
$
|
(17,635
|
)
|
|
$
|
(27,163
|
)
|
Classification of net deferred tax assets (liabilities) on the consolidated balance sheets as of December 31, 2020 and 2019 were as follows:
|
|
As of December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
(in thousands)
|
|
Non-current assets
|
|
$
|
142
|
|
|
$
|
—
|
|
Non-current liabilities
|
|
|
(17,777
|
)
|
|
|
(27,163
|
)
|
Total deferred tax liability
|
|
$
|
(17,635
|
)
|
|
$
|
(27,163
|
)
|
The Company generated a significant U.S. deferred tax asset in 2020 as a result of the Foreign Tax Restructuring. The Company records a valuation allowance to reduce deferred tax assets to the amount management believes is more likely than not to be realized. The utilization of deferred tax assets is limited by the amount of taxable income expected to be generated within the allowable carryforward period and other factors. Management also considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. In performing its analysis of whether a valuation allowance to reduce the deferred income tax asset was necessary as of December 31, 2020, the Company evaluated the data and believes that it is more likely than not that the deferred tax assets in the U.S. will be not realized. In the fourth quarter of 2020, the Company entered a three-year cumulative loss position and due to the uncertainty caused in part by COVID-19, the Company is no longer relying on forecasted earnings as a source of positive evidence that the Company will be able to utilize its deferred tax assets. Accordingly, the Company recorded a full valuation allowance against U.S. deferred tax assets as of December 31, 2020. As of December 31, 2020, the Company adjusted its valuation allowance to $61.7 million against its deferred tax assets and liabilities as of December 31, 2020.
As of December 31, 2019, the Company had recorded a partial valuation allowance of $13.2 million against certain state only credits that have a short carryover period for which the Company believed that a portion of the credit carryovers would more likely than not expire before they could be utilized and a $2.5 million partial valuation allowance on Federal and state net operating losses (“NOLs”) that more likely than not will not be utilized.
64
GRUBHUB INC.
Notes to Consolidated Financial Statements (Continued)
The Tax Act enacted by the U.S. legislature on December 22, 2017 generally allows companies to repatriate future foreign source earnings without incurring additional U.S. taxes by providing a 100% exemption for the foreign source portion of dividends from certain foreign subsidiaries. As a result, the Company plans to repatriate cash from its foreign subsidiaries to the U.S. in the future. The Company estimated no additional tax liability as there are no applicable withholding taxes for the repatriation of unremitted earnings of its foreign subsidiaries.
The Company had the following tax loss and credit carryforwards as of December 31, 2020 and 2019:
|
|
2020
|
|
|
2019
|
|
|
Beginning Year of Expiration
|
|
|
(in thousands)
|
U.S. federal loss carryforwards
|
|
$
|
71,115
|
|
|
$
|
34,268
|
|
|
2027
|
U.S. state and local loss carryforwards
|
|
|
34,171
|
|
|
|
21,258
|
|
|
2027
|
Israeli loss carryforward
|
|
|
—
|
|
|
|
15,204
|
|
|
Indefinite
|
Illinois Edge Credits(a)
|
|
|
19,616
|
|
|
|
15,523
|
|
|
2018
|
Federal research and development credit
|
|
|
12,856
|
|
|
|
5,359
|
|
|
2028
|
State research and development credit
|
|
|
2,026
|
|
|
|
1,401
|
|
|
2018
|
|
(a)
|
Amounts are before the federal benefit of state tax.
|
__________________________________________________________________________________________________
The Company’s tax returns are subject to the normal statute of limitations, three years from the filing date for federal income tax purposes. The federal and state statute of limitations generally remain open for years in which tax losses are generated until three years from the year those losses are utilized. Under these rules, the 2006 and later year NOLs of Slick City Media, Inc. are still subject to audit by the IRS and state and local jurisdictions. Also, the 2007 and later year NOLs of Grubhub Holdings Inc. and its acquired businesses are still subject to audit by the IRS and state and local jurisdictions. The December 31, 2017 and later period U.K. returns of Seamless Europe Ltd. are subject to examination by the U.K. tax authorities. The December 31, 2019 and later period Israeli returns of Tapingo Ltd. are subject to exam by the Israeli tax authorities. The Company is currently under examination by the Internal Revenue Service for its federal income tax return for the tax year ended December 31, 2017. The Company does not believe, but cannot predict with certainty, that there will not be any additional tax liabilities, penalties and/or interest as a result of the audit.
The Company is subject to taxation in the U.S. federal and various state jurisdictions. Significant judgment is required in determining the provision for income taxes and recording the related income tax assets and liabilities. The Company’s practice for accounting for uncertainty in income taxes is to recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not criteria, the amount recognized in the financial statements is the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority.
The following table summarizes the Company’s unrecognized tax benefit activity during the years ended December 31, 2020 and 2019, excluding the related accrual for interest:
|
|
As of December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
(in thousands)
|
|
Balance at beginning of period
|
|
$
|
818
|
|
|
$
|
751
|
|
Reductions for tax positions taken in prior years
|
|
|
(818
|
)
|
|
|
—
|
|
Additions for tax positions taken in the current year
|
|
|
—
|
|
|
|
67
|
|
Balance at end of period
|
|
$
|
—
|
|
|
$
|
818
|
|
Deferred tax assets that related to the potential settlement of these unrecognized tax benefits were included in the net deferred tax liabilities on the consolidated balance sheets as of December 31, 2019. The reserve related to research and development credits.
The Company records interest and penalties, if any, as a component of its income tax (benefit) expense in the consolidated statements of operations. No interest expense or penalties were recognized during the years ended December 31, 2020, 2019 and 2018.
65
GRUBHUB INC.
Notes to Consolidated Financial Statements (Continued)
14. Stockholders’ Equity
As of December 31, 2020 and 2019, the Company was authorized to issue two classes of stock: common stock and preferred stock.
Common Stock
Each holder of common stock has one vote per share of common stock held on all matters that are submitted for stockholder vote. At December 31, 2020 and 2019, there were 500,000,000 shares of common stock authorized. At December 31, 2020 and 2019, there were 93,046,676 and 91,576,060 shares of common stock issued and outstanding, respectively. The Company did not hold any shares as treasury shares as of December 31, 2020 and 2019.
On April 25, 2018, the Company issued and sold 2,820,464 shares of the Company’s common stock to Yum Restaurant Services Group, LLC (the “Investor”), a wholly owned subsidiary of Yum! Brands, Inc., for an aggregate purchase price of $200 million pursuant to an investment agreement dated February 7, 2018, by and between the Company and the Investor. The Company has used and expects to use the proceeds for general corporate purposes.
On January 22, 2016, the Company’s Board of Directors approved a program (the “Repurchase Program”) that authorizes the repurchase of up to $100 million of the Company’s common stock exclusive of any fees, commissions or other expenses relating to such repurchases through open market purchases or privately negotiated transactions at the prevailing market price at the time of purchase. The Repurchase Program was announced on January 25, 2016 (the “Repurchase Program”). Repurchased stock may be retired or held as treasury shares. The repurchase authorizations do not obligate the Company to acquire any particular amount of common stock or adopt any particular method of repurchase and may be modified, suspended or terminated at any time at management’s discretion, however, pursuant to the terms of the Merger Agreement, and subject to certain limited exceptions, the Company may not repurchase its common stock. During the years ended December 31, 2020, 2019 and 2018, the Company did not repurchase any shares of its common stock pursuant to the Repurchase Program and does not expect to repurchase any shares of its common stock in connection with the Repurchase Program prior to the consummation of the Transaction or earlier termination of the Merger Agreement.
Since inception of the program, the Company has repurchased and retired 724,473 shares of its common stock at a weighted-average share price of $20.37, or an aggregate of $14.8 million.
Preferred Stock
The Company was authorized to issue 25,000,000 shares of preferred stock as of December 31, 2020 and 2019. There were no issued or outstanding shares of preferred stock as of December 31, 2020 and 2019.
15. Retirement Plan
Since February 1, 2012, the Company has maintained a defined contribution plan for employees. The plan is qualified under section 401(k) of the Internal Revenue Code. The Company may also make discretionary profit-sharing contributions as determined by the Company’s Board of Directors. The Company matched 100% of the first 3% of employees’ contributions of eligible compensation and 50% of the next 2% of employees’ contributions of eligible compensation during the years ended December 31, 2020, 2019 and 2018 and recognized matching contributions expense of $7.4 million, $5.1 million and $3.5 million, respectively.
16. Earnings Per Share Attributable to Common Stockholders
Basic earnings per share is computed by dividing net income (loss) attributable to common stockholders by the weighted-average number of common shares outstanding during the period without consideration for common stock equivalents. Diluted net income per share attributable to common stockholders is computed by dividing net income (loss) by the weighted-average number of common shares outstanding during the period and potentially dilutive common stock equivalents, including stock options and restricted stock units, except in cases where the effect of the common stock equivalent would be antidilutive. Potential common stock equivalents consist of common stock issuable upon exercise of stock options and vesting of restricted stock units using the treasury stock method. For periods of net loss, basic and diluted earnings per share are the same as the effect of the assumed exercise of stock options and vesting of restricted stock units is anti-dilutive.
66
GRUBHUB INC.
Notes to Consolidated Financial Statements (Continued)
The following table presents the calculation of basic and diluted net income (loss) per share attributable to common stockholders for the years ended December 31, 2020, 2019 and 2018:
|
|
Year Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
(in thousands, except per share data)
|
|
Basic earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common stockholders (numerator)
|
|
$
|
(155,861
|
)
|
|
$
|
(18,566
|
)
|
|
$
|
78,481
|
|
Shares used in computation (denominator)
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding
|
|
|
92,328
|
|
|
|
91,247
|
|
|
|
89,447
|
|
Basic earnings (loss) per share
|
|
$
|
(1.69
|
)
|
|
$
|
(0.20
|
)
|
|
$
|
0.88
|
|
Diluted earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common stockholders (numerator)
|
|
$
|
(155,861
|
)
|
|
$
|
(18,566
|
)
|
|
$
|
78,481
|
|
Shares used in computation (denominator)
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding
|
|
|
92,328
|
|
|
|
91,247
|
|
|
|
89,447
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
—
|
|
|
|
—
|
|
|
|
1,601
|
|
Restricted stock units
|
|
|
—
|
|
|
|
—
|
|
|
|
1,306
|
|
Weighted-average diluted shares
|
|
|
92,328
|
|
|
|
91,247
|
|
|
|
92,354
|
|
Diluted earnings (loss) per share
|
|
$
|
(1.69
|
)
|
|
$
|
(0.20
|
)
|
|
$
|
0.85
|
|
The number of shares of common stock underlying stock-based awards excluded from the calculation of diluted net income (loss) per share attributable to common stockholders because their effect would have been antidilutive for the years ended December 31, 2020, 2019 and 2018 were as follows:
|
|
Year Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
(in thousands)
|
|
Anti-dilutive shares underlying stock-based awards:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
2,512
|
|
|
|
2,750
|
|
|
|
216
|
|
Restricted stock units
|
|
|
3,089
|
|
|
|
3,096
|
|
|
|
223
|
|
17. Fair Value Measurement
Certain assets and liabilities are required to be recorded at fair value on a recurring basis. Accounting standards define fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market in an orderly transaction between market participants on the measurement date. The standards also establish a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
The accounting guidance for fair value measurements prioritizes valuation methodologies based on the reliability of the inputs in the following three-tier value hierarchy:
|
Level 1
|
Quoted prices in active markets for identical assets or liabilities.
|
|
Level 2
|
Assets and liabilities valued based on observable market data for similar instruments, such as quoted prices for similar assets or liabilities.
|
|
Level 3
|
Unobservable inputs that are supported by little or no market activity; instruments valued based on the best available data, some of which is internally developed, and considers risk premiums that a market participant would require.
|
The Company applied the following methods and assumptions in estimating its fair value measurements. The Company’s commercial paper, investments in corporate bonds, certain money market funds and Senior Notes are classified as Level 2 within the fair value hierarchy because they are valued using inputs other than quoted prices in active markets that are observable directly or indirectly. Accounts receivable, restaurant food liability and accounts payable approximate fair value due to their generally short-term maturities.
67
GRUBHUB INC.
Notes to Consolidated Financial Statements (Continued)
The following table presents the fair value, for disclosure purposes only, and carrying value of the Company’s assets and liabilities that are recorded at other than fair value as of December 31, 2020 and 2019:
|
|
December 31, 2020
|
|
|
December 31, 2019
|
|
|
|
Level 2
|
|
Carrying Value
|
|
|
Level 2
|
|
Carrying Value
|
|
|
|
(in thousands)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
41
|
|
$
|
41
|
|
|
$
|
28
|
|
$
|
28
|
|
Commercial paper
|
|
|
62,440
|
|
|
62,476
|
|
|
|
64,290
|
|
|
64,519
|
|
Corporate bonds
|
|
|
6,148
|
|
|
6,148
|
|
|
|
3,606
|
|
|
3,604
|
|
Total assets
|
|
$
|
68,629
|
|
$
|
68,665
|
|
|
$
|
67,924
|
|
$
|
68,151
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, including current maturities
|
|
$
|
524,350
|
|
$
|
500,000
|
|
|
$
|
467,500
|
|
$
|
500,000
|
|
Total liabilities
|
|
$
|
524,350
|
|
$
|
500,000
|
|
|
$
|
467,500
|
|
$
|
500,000
|
|
The Company is required to record certain assets and liabilities at fair value on a nonrecurring basis, generally as a result of acquisitions. See Note 5, Acquisitions, for further discussion of the fair value of assets and liabilities associated with acquisitions.
68