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EX-32.2 - EX-32.2 - GrubHub Inc.grub-ex322_8.htm
EX-32.1 - EX-32.1 - GrubHub Inc.grub-ex321_9.htm
EX-31.2 - EX-31.2 - GrubHub Inc.grub-ex312_7.htm
EX-31.1 - EX-31.1 - GrubHub Inc.grub-ex311_6.htm
EX-10.1 - EX-10.1 - GrubHub Inc.grub-ex101_19.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2018

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 1-36389

 

GRUBHUB INC.

(Exact name of registrant as specified in its charter)

 

 

 Delaware

   

46-2908664

(State or other jurisdiction of

incorporation or organization)

   

(I.R.S. Employer

Identification No.)

   

   

   

111 W. Washington Street, Suite 2100

Chicago, Illinois

   

60602

(Address of principal executive offices)

   

(Zip code)

(877) 585-7878

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes        No    

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).     Yes        No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated filer

 

 

Accelerated filer

 

 

 

 

 

 

 

 

Non-Accelerated filer

 

 

Smaller reporting company

 

 

 

 

 

 

 

 

 

 

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes      No  

As of November 2, 2018, 90,701,489 shares of common stock were outstanding.

 

 

 


GRUBHUB INC.

TABLE OF CONTENTS

 

PART I

 

Page

FINANCIAL INFORMATION

 

 

 

 

Item 1:

Condensed Consolidated Financial Statements (unaudited)

3

 

Condensed Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017

3

 

Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2018 and 2017

4

 

Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2018 and 2017

4

 

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2018 and 2017

5

 

Notes to Condensed Consolidated Financial Statements

6

 

 

 

Item 2:

Management’s Discussion and Analysis of Financial Condition and Results of Operations

23

Item 3:

Quantitative and Qualitative Disclosures About Market Risk

34

Item 4:

Controls and Procedures

34

PART II

 

OTHER INFORMATION

 

Item 1:

Legal Proceedings

35

Item 1A:

Risk Factors

35

Item 2:

Unregistered Sales of Equity Securities and Use of Proceeds

35

Item 3:

Defaults Upon Senior Securities

35

Item 4:

Mine Safety Disclosures

35

Item 5:

Other Information

35

Item 6:

Exhibits

36

Signatures

37

 

 

 

2


Part I. FINANCIAL INFORMATION

 

Item 1. Condensed Consolidated Financial Statements

GRUBHUB INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

(UNAUDITED)

 

 

 

September 30, 2018

 

 

December 31, 2017

 

ASSETS

 

 

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

294,550

 

 

$

234,090

 

Short-term investments

 

 

16,687

 

 

 

23,605

 

Accounts receivable, less allowances for doubtful accounts

 

 

120,306

 

 

 

87,377

 

Income tax receivable

 

 

14,125

 

 

 

8,593

 

Prepaid expenses and other current assets

 

 

17,024

 

 

 

6,818

 

Total current assets

 

 

462,692

 

 

 

360,483

 

PROPERTY AND EQUIPMENT:

 

 

 

 

 

 

 

 

Property and equipment, net of depreciation and amortization

 

 

105,434

 

 

 

71,384

 

OTHER ASSETS:

 

 

 

 

 

 

 

 

Other assets

 

 

11,666

 

 

 

6,487

 

Goodwill

 

 

885,350

 

 

 

589,862

 

Acquired intangible assets, net of amortization

 

 

520,867

 

 

 

515,553

 

Total other assets

 

 

1,417,883

 

 

 

1,111,902

 

TOTAL ASSETS

 

$

1,986,009

 

 

$

1,543,769

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

 

 

Restaurant food liability

 

$

122,900

 

 

$

119,922

 

Accounts payable

 

 

17,184

 

 

 

7,607

 

Accrued payroll

 

 

19,036

 

 

 

13,186

 

Taxes payable

 

 

1,566

 

 

 

3,109

 

Short-term debt

 

 

6,250

 

 

 

3,906

 

Other accruals

 

 

33,186

 

 

 

26,818

 

Total current liabilities

 

 

200,122

 

 

 

174,548

 

LONG-TERM LIABILITIES:

 

 

 

 

 

 

 

 

Deferred taxes, non-current

 

 

44,073

 

 

 

74,292

 

Other accruals

 

 

19,683

 

 

 

7,468

 

Long-term debt

 

 

290,073

 

 

 

169,645

 

Total long-term liabilities

 

 

353,829

 

 

 

251,405

 

Commitments and contingencies

 

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY:

 

 

 

 

 

 

 

 

Preferred Stock, $0.0001 par value. Authorized: 25,000,000 shares as of September 30, 2018 and December 31, 2017; issued and outstanding: no shares as of September 30, 2018 and December 31, 2017.

 

 

 

 

 

 

Common stock, $0.0001 par value. Authorized: 500,000,000 shares at September 30, 2018 and December 31, 2017; issued and outstanding: 90,598,259 and 86,790,624 shares as of September 30, 2018 and December 31, 2017, respectively

 

 

9

 

 

 

9

 

Accumulated other comprehensive loss

 

 

(1,620

)

 

 

(1,228

)

Additional paid-in capital

 

 

1,079,165

 

 

 

849,043

 

Retained earnings

 

 

354,504

 

 

 

269,992

 

Total Stockholders’ Equity

 

$

1,432,058

 

 

$

1,117,816

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

 

$

1,986,009

 

 

$

1,543,769

 

 

 

 

 

 

 

 

(See Notes to Condensed Consolidated Financial Statements (unaudited))

3


 

 

GRUBHUB INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(UNAUDITED)

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Revenues

$

247,225

 

 

$

163,059

 

 

$

719,536

 

 

$

477,987

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operations and support

 

111,511

 

 

 

65,352

 

 

 

310,239

 

 

 

187,795

 

Sales and marketing

 

49,426

 

 

 

35,138

 

 

 

144,413

 

 

 

105,346

 

Technology (exclusive of amortization)

 

21,258

 

 

 

14,292

 

 

 

57,306

 

 

 

41,560

 

General and administrative

 

22,195

 

 

 

18,617

 

 

 

58,072

 

 

 

46,627

 

Depreciation and amortization

 

20,987

 

 

 

12,613

 

 

 

61,787

 

 

 

33,067

 

Total costs and expenses

 

225,377

 

 

 

146,012

 

 

 

631,817

 

 

 

414,395

 

Income from operations

 

21,848

 

 

 

17,047

 

 

 

87,719

 

 

 

63,592

 

Interest (income) expense - net

 

337

 

 

 

(373

)

 

 

1,367

 

 

 

(908

)

Income before provision for income taxes

 

21,511

 

 

 

17,420

 

 

 

86,352

 

 

 

64,500

 

Income tax (benefit) expense

 

(1,234

)

 

 

4,432

 

 

 

2,721

 

 

 

19,043

 

Net income attributable to common stockholders

$

22,745

 

 

$

12,988

 

 

$

83,631

 

 

$

45,457

 

Net income per share attributable to common stockholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

0.25

 

 

$

0.15

 

 

$

0.94

 

 

$

0.53

 

Diluted

$

0.24

 

 

$

0.15

 

 

$

0.91

 

 

$

0.52

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

90,494

 

 

 

86,449

 

 

 

89,027

 

 

 

86,162

 

Diluted

 

93,678

 

 

 

88,543

 

 

 

92,091

 

 

 

87,788

 

 

 

 

 

 

 

 

GRUBHUB INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(UNAUDITED)

 

 

Three Months Ended September 30,

 

 

 

Nine Months Ended September 30,

 

 

2018

 

 

2017

 

 

 

2018

 

 

2017

 

Net income

$

22,745

 

 

$

12,988

 

 

 

$

83,631

 

 

$

45,457

 

OTHER COMPREHENSIVE INCOME (LOSS)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

(92

)

 

 

299

 

 

 

 

(392

)

 

 

749

 

COMPREHENSIVE INCOME

$

22,653

 

 

$

13,287

 

 

 

$

83,239

 

 

$

46,206

 

 

 

 

 

 

 

 

 

(See Notes to Condensed Consolidated Financial Statements (unaudited))

 

4


GRUBHUB INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(UNAUDITED)

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

Net income

 

$

83,631

 

 

$

45,457

 

Adjustments to reconcile net income to net cash from operating activities:

 

 

 

 

 

 

 

 

Depreciation

 

 

16,189

 

 

 

7,949

 

Provision for doubtful accounts

 

 

741

 

 

 

338

 

Deferred taxes

 

 

2,048

 

 

 

(2,162

)

Amortization of intangible assets

 

 

45,598

 

 

 

25,118

 

Stock-based compensation

 

 

36,445

 

 

 

23,913

 

Deferred rent

 

 

3,975

 

 

 

130

 

Amortization of deferred loan costs

 

 

588

 

 

 

349

 

Other

 

 

(732

)

 

 

(823

)

Change in assets and liabilities, net of the effects of business acquisitions:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(17,969

)

 

 

(15,903

)

Income taxes receivable

 

 

(5,533

)

 

 

3,795

 

Prepaid expenses and other assets

 

 

(15,455

)

 

 

4,193

 

Restaurant food liability

 

 

1,608

 

 

 

4,591

 

Accounts payable

 

 

5,265

 

 

 

2,965

 

Accrued payroll

 

 

5,311

 

 

 

1,575

 

Other accruals

 

 

3,752

 

 

 

6,351

 

Net cash provided by operating activities

 

 

165,462

 

 

 

107,836

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

Acquisitions of businesses, net of cash acquired

 

 

(366,856

)

 

 

(51,859

)

Purchases of investments

 

 

(47,642

)

 

 

(145,667

)

Proceeds from maturity of investments

 

 

54,916

 

 

 

164,733

 

Capitalized website and development costs

 

 

(21,471

)

 

 

(15,281

)

Purchases of property and equipment

 

 

(31,984

)

 

 

(12,549

)

Acquisition of other intangible assets

 

 

 

 

 

(25,147

)

Other cash flows from investing activities

 

 

38

 

 

 

589

 

Net cash used in investing activities

 

 

(412,999

)

 

 

(85,181

)

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

Proceeds from the issuance of common stock

 

 

200,000

 

 

 

 

Proceeds from borrowings under the Credit Agreement

 

 

175,000

 

 

 

 

Repayments of borrowings under the Credit Agreement

 

 

(52,344

)

 

 

 

Proceeds from exercise of stock options

 

 

13,010

 

 

 

12,505

 

Taxes paid related to net settlement of stock-based compensation awards

 

 

(28,238

)

 

 

(7,696

)

Payments for debt issuance costs

 

 

 

 

 

(285

)

Net cash provided by financing activities

 

 

307,428

 

 

 

4,524

 

Net change in cash, cash equivalents, and restricted cash

 

 

59,891

 

 

 

27,179

 

Effect of exchange rates on cash, cash equivalents and restricted cash

 

 

(406

)

 

 

709

 

Cash, cash equivalents, and restricted cash at beginning of year

 

 

238,239

 

 

 

242,214

 

Cash, cash equivalents, and restricted cash at end of the period

 

$

297,724

 

 

$

270,102

 

SUPPLEMENTAL DISCLOSURE OF NON-CASH ITEMS

 

 

 

 

 

 

 

 

Cash paid for income taxes

 

$

7,508

 

 

$

16,340

 

Capitalized property, equipment and website and development costs in accounts payable at period end

 

 

4,069

 

 

 

1,048

 

Net working capital adjustment receivable

 

 

530

 

 

 

887

 

Fair value of equity awards assumed on acquisition

 

 

2,594

 

 

 

 

RECONCILIATION OF CASH, CASH EQUIVALENTS, AND RESTRICTED CASH

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

294,550

 

 

$

265,958

 

Restricted cash included in prepaid expenses and other current assets

 

 

 

 

 

1,500

 

Restricted cash included in other assets

 

 

3,174

 

 

 

2,644

 

Total cash, cash equivalents, and restricted cash

 

$

297,724

 

 

$

270,102

 

(See Notes to Condensed Consolidated Financial Statements (unaudited))

 

 

5


GRUBHUB INC.

Notes to Condensed Consolidated Financial Statements (unaudited)

 

1. Organization

Grubhub Inc., a Delaware corporation, and its wholly-owned subsidiaries (collectively referred to as the “Company”) provide an online and mobile platform for restaurant pick-up and delivery orders. Diners enter their delivery address or use geo-location within the mobile applications and the Company displays the menus and other relevant information for restaurants in its network. Orders may be placed directly online, via mobile applications or over the phone at no cost to the diner. The Company charges the restaurant a per order commission that is largely fee based. In certain markets, the Company also provides delivery services to restaurants on its platform that do not have their own delivery operations.

 

2. Significant Accounting Policies

Basis of Presentation and Principles of Consolidation

The accompanying unaudited condensed consolidated interim financial statements include the accounts of Grubhub Inc. and have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and in accordance with the rules and regulations of the United States Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. These unaudited condensed consolidated interim financial statements include all wholly-owned subsidiaries and reflect all normal and recurring adjustments, as well as any other than normal adjustments, that are, in the opinion of management, necessary for a fair presentation of the results for the interim periods and should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017 filed with the SEC on February 28, 2018 (the “2017 Form 10-K”). All significant intercompany transactions have been eliminated in consolidation. Operating results for the three and nine months ended September 30, 2018 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2018.

On January 1, 2018, the Company adopted Financial Accounting Standards Board (the “FASB”) Accounting Standards Codification Topic 606, Revenue from Contracts with Customers (“ASC Topic 606”) using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. Results for reporting periods beginning on or after January 1, 2018 are presented under ASC Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with historic accounting guidance under ASC Topic 605. See Recently Issued Accounting Pronouncements and Note 3, Revenue, below for additional details.

Use of Estimates

The preparation of condensed consolidated financial statements in accordance with GAAP requires management to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and the related disclosures at the date of the financial statements, as well as the reported amounts of revenue and expenses during the periods presented. Estimates include revenue recognition, the allowance for doubtful accounts, website and internal-use software development costs, goodwill, depreciable lives of property and equipment, recoverability of intangible assets with definite lives and other long-lived assets, stock-based compensation and income taxes. Actual results could differ from these estimates.  

Changes in Accounting Principle

See “Recently Issued Accounting Pronouncements” below for a description of accounting principle changes adopted during the nine months ended September 30, 2018 related to revenue and the statement of cash flows. There have been no other material changes to the Company’s significant accounting policies described in the 2017 Form 10-K.

Recently Issued Accounting Pronouncements

In August 2018, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update No. 2018-15, “Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract” (“ASU 2018-15”). ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in hosting arrangements that are service contracts and that include an internal-use software license with the requirement for capitalizing implementation costs incurred to develop or obtain internal-use software. The capitalized implementation costs are required to be expensed over the term of the hosting arrangement. The guidance also clarifies the presentation requirements for reporting such costs in the entity’s financial statements. The Company has elected to early adopt ASU 2018-15. The amendments will be applied prospectively to all implementation costs incurred after the date of adoption. The adoption of ASU 2018-15 is not expected to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

In May 2017, the FASB issued Accounting Standards Update No. 2017-09, “Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting” (“ASU 2017-09”). ASU 2017-09 provides clarification on when modification accounting should

6


GRUBHUB INC.

Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

 

be used for changes to the terms or conditions of a share-based payment award. This ASU does not change the accounting for modifications but clarifies that modification accounting guidance should only be applied if there is a change to the value, vesting conditions, or award classification and would not be required if the changes are considered non-substantive. ASU 2017-09 is effective for the Company beginning in the first quarter of 2018 on a prospective basis. The adoption of ASU 2017-09 has not had and is not expected to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

In August 2016, the FASB issued Accounting Standards Update No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments” (“ASU 2016-15”). ASU 2016-15 adds or clarifies guidance on the classification of certain cash receipts and payments in the statement of cash flows with the intent of reducing diversity in practice related to eight types of cash flows including, among others, debt prepayment or debt extinguishment costs, contingent consideration payments made after a business combination, and separately identifiable cash flows and application of the predominance principle. In addition, in November 2016, the FASB issued Accounting Standards Update No. 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash” (“ASU 2016-18”). ASU 2016-18 requires companies to include amounts generally described as restricted cash and restricted cash equivalents in cash and cash equivalents when reconciling beginning-of-period and end-of-period total amounts shown on the statement of cash flow. ASU 2016-15 and ASU 2016-18 were effective for and adopted by the Company beginning in the first quarter of 2018. The amendments were applied using a retrospective transition method to each period presented and impacted the Company’s presentation of the consolidated statements of cash flows. The adoption of ASU 2016-15 and ASU 2016-18 had no material impact on the Company’s consolidated financial position, results of operations or cash flows as the Company’s restricted cash balances are immaterial.

In June 2016, the FASB issued Accounting Standards Update No. 2016-13, “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”). ASU 2016-13 introduces a new forward-looking approach, based on expected losses, to estimate credit losses on certain types of financial instruments, including trade receivables and held-to-maturity debt securities, which will require entities to incorporate considerations of historical information, current information and reasonable and supportable forecasts. This ASU also expands disclosure requirements. ASU 2016-13 is effective for the Company beginning in the first quarter of 2020 and early adoption is permitted. The guidance will be applied using the modified-retrospective approach. The adoption of ASU 2016-13 is not expected to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

In February 2016, the FASB issued Accounting Standards Update No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”). Under ASU 2016-02, a lessee will recognize in the statement of financial position a liability to make lease payments and a right-of-use asset for all leases (with the exception of short-term leases) at the commencement date. The recognition, measurement, and presentation of expenses and cash flows arising from a lease under ASU 2016-02 will not significantly change from current GAAP. ASU 2016-02 is effective beginning in the first quarter of 2019 with early adoption permitted. In July 2018, the FASB issued Accounting Standards Update No. 2018-11 “Leases (Topic 842): Targeted Improvements” (“ASU 2018-11”), which provides for the election of transition methods between the modified retrospective method and the optional transition relief method. The modified retrospective method is applied to all prior reporting periods presented with a cumulative-effect adjustment recorded in the earliest comparative period while the optional transition relief method is applied beginning in the period of adoption with a cumulative-effect adjustment recorded in the first quarter of 2019. The Company will apply the optional transition relief method and has elected the optional practical expedient package, which includes retaining the current classification of leases. The Company is currently evaluating the impact of adoption of ASU 2016-02 on its consolidated financial statements under ASU 2018-11. Management anticipates that it will result in a significant increase in the Company’s long-term assets and liabilities but will have no material impact to its results of operations or cash flows.     

In May 2014, and in subsequent updates, the FASB issued ASC Topic 606, Revenue from Contracts with Customers, which supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, including most industry-specific requirements. ASC Topic 606 establishes a five-step revenue recognition process in which an entity will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. ASC Topic 606 also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenues and cash flows from contracts with customers. ASC Topic 606 was effective for and adopted by the Company in the first quarter of 2018. The Company applied the modified retrospective approach to contracts which were not completed as of January 1, 2018. The adoption of these ASUs did not have and is not expected to have a material impact on the Company’s consolidated financial position, results of operations or cash flows or its business processes, systems and controls.

The adoption of ASC Topic 606 resulted in an increase in revenues of $0.1 million and $0.9 million for the three and nine months ended September 30, 2018, respectively, and primarily had the following impact on the Company’s financial statements:

 

Beginning in January 1, 2018, the Company defers the incremental costs of obtaining contracts as contract acquisition assets resulting in a net decrease of $2.0 million and $6.6 million in sales and marketing expense in the condensed consolidated statements of operations for the three and nine months ended September 30, 2018, respectively, and corresponding increase in other assets on the condensed consolidated balance sheets. Contract acquisition assets are amortized to sales and marketing

7


GRUBHUB INC.

Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

 

 

expense in the consolidated statements of operations over the period in which services are expected to be provided to the customer, which is estimated to be approximately 4 years. Prior to the adoption of ASC Topic 606, the cost of obtaining a contract was recognized as it was incurred.

 

Beginning in the first quarter of 2018, the Company recognizes revenue from estimated unredeemed gift cards that are not subject to unclaimed property laws over the expected customer redemption period, rather than when the likelihood of redemption became remote. The Company recorded a cumulative-effect adjustment to opening retained earnings as of January 1, 2018 of $0.9 million related to unredeemed gift cards, breakage income of $0.3 million and $0.9 million in revenues in the condensed consolidated statements of operations during the three and nine months ended September 30, 2018, respectively, and a corresponding decrease in other accruals of $2.0 million on the condensed consolidated balance sheets.

 

Changes in the timing of revenue recognition under ASC Topic 606 related to incentives, refunds and adjustments resulted in a $0.1 million decrease and $0.1 million increase in revenues in the condensed consolidated statements of operations during the three and nine months ended September 30, 2018, respectively.

 

The adoption of ASC Topic 606 had no impact to the Company’s total net cash provided by or used in operations, investing or financing activities within the Company’s condensed consolidated statement of cash flows for the nine months ended September 30, 2018.

See Note 3, Revenue, for additional details.

 

3. 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. Restaurants pay a commission, typically a percentage of the transaction, on orders that are processed through the platform. Most of the restaurants on the Company’s platform can choose their level of commission rate, at or above a base rate. A restaurant can choose to pay a higher rate that affects its prominence and exposure to diners on the platform. Additionally, restaurants that use the Company’s delivery services pay an additional commission for the use of those services. The Company may also charge a delivery fee 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 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 to the diner for delivery services provided by the Company. 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. The Company is the principal in the transaction with respect to credit card processing and managed delivery services because it controls the respective services. 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.

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 related to current orders that create an obligation to discount future orders, the Company allocates the incentives that are expected to be redeemed proportionally to current and future orders based on their relative expected transaction prices.  

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. The Company generally accumulates funds and remits the net proceeds to the restaurants on at least a monthly basis, depending on the payment terms with the restaurant. 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.

8


GRUBHUB INC.

Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

 

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.

During the three months ended September 30, 2018, the Company recognized a small amount of revenues from software and professional services, which are generally recognized ratably over the subscription period beginning on the date the software is available. Revenues for certain professional services may be recognized in full once the services are performed if they are distinct and separately identifiable.  

Accounts Receivable

Accounts receivable primarily represent the net cash due from the Company’s payment processor for cleared transactions and amounts owed from corporate customers, 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 based on historical loss experience and any current or forecasted specific risks.

Deferred Revenues

The Company’s deferred revenues consist primarily of gift card liabilities and certain incentive liabilities. These amounts are included within other accruals on the consolidated balance sheets and 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 contracts including certain commissions and bonuses and related payroll taxes as contract acquisition assets within other assets on the consolidated balance sheets. Contract acquisition assets are amortized using the straight-line method 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. During the three and nine months ended September 30, 2018, the Company deferred $2.4 million and $7.3 million, respectively, of contract acquisitions costs. During the three and nine months ended September 30, 2018, the Company amortized $0.4 million and $0.7 million, respectively, of related expense.

 

4. Acquisitions

2018 Acquisitions

On September 13, 2018, the Company acquired SCVNGR, Inc. d/b/a LevelUp (“LevelUp”) for approximately $369.7 million, including $367.6 million of cash paid (net of cash acquired of $6.0 million), $2.6 million of other non-cash consideration and a net working capital adjustment receivable of $0.5 million. LevelUp is a leading provider of mobile diner engagement and payment solutions for national and regional restaurant brands. The acquisition of LevelUp is expected to simplify the Company’s integrations with restaurants’ systems, increase diner engagement and accelerate product development.

The Company assumed LevelUp employees’ unvested incentive stock option (“ISO”) awards as of the closing date. Approximately $2.6 million of the fair value of the assumed ISO awards granted to acquired LevelUp employees was attributable to the pre-combination services of the LevelUp awardees and was included in the $369.7 million purchase price. This amount is reflected within goodwill in the purchase price allocation. As of the acquisition date, post-combination expense of approximately $17.0 million is expected to be recognized related to the assumed ISO awards over the remaining post-combination service period.

The results of operations of LevelUp have been included in the Company’s financial statements since September 13, 2018 but did not have a material impact on the Company’s condensed consolidated results of operations for the three and nine months ended September 30, 2018.

The excess of the consideration transferred in the acquisition over the net amounts assigned to the fair value of the assets was recorded as goodwill, which represents the value of LevelUp’s technology team and the ability to simplify integrations with restaurants on the Company’s platform. The goodwill related to this acquisition of $295.5 million is not deductible for income tax purposes.

The assets acquired and liabilities assumed of LevelUp were recorded at their estimated fair values as of the closing date of September 13, 2018.

The following table summarizes the preliminary purchase price allocation acquisition-date fair values of the asset and liabilities acquired in connection with the LevelUp acquisition:

 

9


GRUBHUB INC.

Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

 

 

 

 

LevelUp

 

 

 

 

(in thousands)

 

Accounts receivable

 

 

$

6,201

 

Prepaid expenses and other current assets

 

 

 

1,396

 

Property and equipment

 

 

 

895

 

Restaurant relationships

 

 

 

10,217

 

Diner acquisition

 

 

 

3,912

 

Below-market lease intangible

 

 

 

2,205

 

Developed technology

 

 

 

20,107

 

Goodwill

 

 

 

295,488

 

Net deferred tax asset

 

 

 

32,267

 

Accounts payable and accrued expenses

 

 

 

(3,031

)

Total purchase price net of cash acquired

 

 

$

369,657

 

Net working capital adjustment receivable

 

 

 

530

 

Fair value of assumed ISOs attributable to pre-combination service

 

 

 

(2,594

)

Net cash paid

 

 

$

367,593

 

2017 Acquisitions

On October 10, 2017, the Company acquired all of the issued and outstanding equity interests of Eat24, LLC (“Eat24”), a wholly owned subsidiary of Yelp Inc., for approximately $281.8 million, including $281.4 million in net cash paid and $0.3 million of other non-cash consideration. Of such amount, $28.8 million will be held in escrow for an 18-month period after closing to secure the Company’s indemnification rights under the purchase agreement. Eat24 provides online and mobile food ordering for restaurants and diners across the United States. The acquisition expanded the breadth and depth of the Company’s national network of restaurant partners and active diners.

The Company granted RSU awards to acquired Eat24 employees in replacement of their unvested equity awards as of the closing date. Approximately $0.3 million of the fair value of the replacement RSU awards granted to acquired Eat24 employees was attributable to the pre-combination services of the Eat24 awardees and was included in the $281.8 million purchase price. This amount is reflected within goodwill in the purchase price allocation. As of the acquisition date, post-combination expense of approximately $4.1 million is expected to be recognized related to the replacement awards over the remaining post-combination service period.

On August 23, 2017, the Company acquired substantially all of the assets and certain expressly specified liabilities of A&D Network Solutions, Inc. and Dashed, Inc. (collectively, “Foodler”). The purchase price for Foodler was $51.2 million in cash, net of cash acquired of $0.1 million. Foodler is an independent online food-ordering company with an established diner base in the Northeast United States. The acquisition expanded the breadth and depth of the Company’s restaurant network, active diners and delivery network.

The results of operations of Eat24 and Foodler have been included in the Company’s financial statements since October 10, 2017 and August 23, 2017, respectively.

The excess of the consideration transferred in the acquisitions over the net amounts assigned to the fair value of the assets were recorded as goodwill, which represents the value of increasing the breadth and depth of the Company’s network of restaurants and diners. The total goodwill related to the acquisitions of Eat24 and Foodler of $153.4 million is expected to be deductible for income tax purposes.

10


GRUBHUB INC.

Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

 

The assets acquired and liabilities assumed of Eat24 and Foodler were recorded at their estimated fair values as of the respective closing dates of October 10, 2017 and August 23, 2017. The following table summarizes the final purchase price allocation acquisition-date fair values of the assets and liabilities acquired in connection with the Eat24 and Foodler acquisitions:

 

Eat24

 

 

Foodler

 

 

Total

 

 

(in thousands)

 

Cash

$

40

 

 

$

86

 

 

$

126

 

Accounts receivable

 

8,267

 

 

 

307

 

 

 

8,574

 

Prepaid expenses and other current assets

 

221

 

 

 

 

 

 

221

 

Property and equipment

 

1,113

 

 

 

 

 

 

1,113

 

Restaurant relationships

 

126,232

 

 

 

35,217

 

 

 

161,449

 

Diner acquisition

 

35,226

 

 

 

1,354

 

 

 

36,580

 

Trademarks

 

2,225

 

 

 

74

 

 

 

2,299

 

Developed technology

 

2,559

 

 

 

1,955

 

 

 

4,514

 

Goodwill

 

135,955

 

 

 

17,452

 

 

 

153,407

 

Accounts payable and accrued expenses

 

(30,082

)

 

 

(5,237

)

 

 

(35,319

)

Total purchase price plus cash acquired

 

281,756

 

 

 

51,208

 

 

 

332,964

 

Fair value of replacement RSUs attributable to pre-combination service

 

(274

)

 

 

 

 

 

(274

)

Cash acquired

 

(40

)

 

 

(86

)

 

 

(126

)

Net cash paid

$

281,442

 

 

$

51,122

 

 

$

332,564

 

 

Additional Information

The estimated fair values of the intangible assets acquired were determined based on a combination of the income, cost, and market approaches to measure the fair value of the restaurant relationships, diner acquisition, developed technology and trademarks as follows:

 

 

 

Valuation Method

 

 

 

LevelUp

 

Foodler

 

Eat24

Restaurant relationships

 

 

With or without comparative business valuation

 

Multi-period excess earnings

 

Multi-period excess earnings

Diner acquisition

 

 

Cost to recreate

 

Cost to recreate

 

Cost to recreate

Developed technology

 

 

Multi-period excess earnings

 

Cost to recreate

 

Cost to recreate

Trademark

 

 

n/a

 

Relief  from royalty

 

Relief  from royalty

The fair value of the 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.

The Company incurred certain expenses directly and indirectly related to acquisitions which were recognized in general and administrative expenses within the condensed consolidated statements of operations for the three months ended September 30, 2018 and 2017 of $2.6 million and $1.7 million, respectively, and for the nine months ended September 30, 2018 and 2017 of $5.1 million and $3.6 million, respectively.

Pro Forma

The following unaudited pro forma information presents a summary of the operating results of the Company for the three and nine months ended September 30, 2018 and 2017 as if the acquisitions of LevelUp, Eat24 and Foodler had occurred as of January 1 of the year prior to acquisition:

 

11


GRUBHUB INC.

Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

(in thousands, except per share data)

 

Revenues

$

255,777

 

 

$

190,833

 

 

$

746,545

 

 

$

562,364

 

Net income

 

22,352

 

 

 

5,084

 

 

 

75,348

 

 

 

15,869

 

Net income per share attributable to common shareholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

0.25

 

 

$

0.06

 

 

$

0.85

 

 

$

0.18

 

Diluted

$

0.24

 

 

$

0.06

 

 

$

0.82

 

 

$

0.18

 

 

The pro forma adjustments that reflect the amortization that would have been recognized for intangible assets, elimination of transaction costs incurred, stock-based compensation expense for replacement awards, interest expense for transaction financings and other adjustments, as well as the pro forma tax impact of such adjustments for the three and nine months ended September 30, 2018 and 2017 were as follows:

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

(in thousands)

 

Depreciation and amortization

$

(186

)

 

$

2,085

 

 

$

(248

)

 

$

9,488

 

Transaction costs

 

(2,646

)

 

 

(1,799

)

 

 

(5,010

)

 

 

846

 

Stock-based compensation

 

(458

)

 

 

728

 

 

 

2,325

 

 

 

3,748

 

Interest expense

 

33

 

 

 

1,128

 

 

 

244

 

 

 

3,547

 

Other

 

 

 

 

1,571

 

 

 

 

 

 

4,401

 

Income tax (benefit) expense

 

964

 

 

 

(1,546

)

 

 

796

 

 

 

(9,367

)

 

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

 

 

5. Marketable Securities

The amortized cost, unrealized gains and losses and estimated fair value of the Company’s held-to-maturity marketable securities as of September 30, 2018 and December 31, 2017 were as follows:

 

 

 

September 30, 2018

 

 

 

Amortized Cost

 

 

Unrealized Gains

 

 

Unrealized Losses

 

 

Estimated

Fair Value

 

 

 

(in thousands)

 

Cash and cash equivalents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

$

10,231

 

 

$

 

 

$

(12

)

 

$

10,219

 

Short-term investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

 

14,938

 

 

 

 

 

 

(112

)

 

 

14,826

 

Corporate bonds

 

 

1,749

 

 

 

 

 

 

 

 

 

1,749

 

Total

 

$

26,918

 

 

$

 

 

$

(124

)

 

$

26,794

 

12


GRUBHUB INC.

Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

 

 

 

 

December 31, 2017

 

 

 

Amortized Cost

 

 

Unrealized Gains

 

 

Unrealized Losses

 

 

Estimated

Fair Value

 

 

 

(in thousands)

 

Cash and cash equivalents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

$

39,979

 

 

$

 

 

$

(43

)

 

$

39,936

 

Corporate bonds

 

 

1,250

 

 

 

 

 

 

 

 

 

1,250

 

Short-term investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

 

21,480

 

 

 

 

 

 

(99

)

 

 

21,381

 

Corporate bonds

 

 

2,125

 

 

 

 

 

 

(1

)

 

 

2,124

 

Total

 

$

64,834

 

 

$

 

 

$

(143

)

 

$

64,691

 

 

All of the Company’s marketable securities were classified as held-to-maturity investments and have maturities within one year of September 30, 2018. Approximately $40 million of the Company’s marketable securities matured during the nine months ended September 30, 2018, which was invested in other interest-bearing accounts upon maturity.

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 September 30, 2018 and December 31, 2017 were as follows:

 

 

 

September 30, 2018

 

 

 

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

 

$

25,045

 

 

$

(124

)

 

$

 

 

$

 

 

$

25,045

 

 

$

(124

)

Total

 

$

25,045

 

 

$

(124

)

 

$

 

 

$

 

 

$

25,045

 

 

$

(124

)

 

 

 

December 31, 2017

 

 

 

Less Than 12 Months

 

 

12 Months or Greater

 

 

Total

 

 

 

Estimated

Fair Value

 

 

Unrealized Loss

 

 

Estimated

Fair Value

 

 

Unrealized

 Loss

 

 

Estimated

Fair Value

 

 

Unrealized Loss

 

 

 

(in thousands)

 

Commercial paper

 

$

61,317

 

 

$

(142

)

 

$

 

 

$

 

 

$

61,317

 

 

$

(142

)

Corporate bonds

 

 

3,374

 

 

 

(1

)

 

 

 

 

 

 

 

 

3,374

 

 

 

(1

)

Total

 

$

64,691

 

 

$

(143

)

 

$

 

 

$

 

 

$

64,691

 

 

$

(143

)

 

The Company recognized interest income during the three months ended September 30, 2018 and 2017 of $1.3 million and $0.5 million, respectively, and for the nine months ended September 30, 2018 and 2017 of $3.2 million and $1.5 million, respectively, within net interest (income) expense on the condensed consolidated statements of operations. During the three and nine months ended September 30, 2018 and 2017, the Company did not recognize any other-than-temporary impairment losses related to its marketable securities.

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

 

 

13


GRUBHUB INC.

Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

 

6. Goodwill and Acquired Intangible Assets

The components of acquired intangible assets as of September 30, 2018 and December 31, 2017 were as follows:

 

 

 

September 30, 2018

 

 

December 31, 2017

 

 

 

Gross Carrying