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Business Combinations

12 Months Ended

Dec. 31, 2019

SendGrid, Inc.

In February 2019, the Company acquired all outstanding shares of SendGrid, Inc. ("SendGrid"), the leading email API platform, by issuing 23.6 million shares of its Class A common stock with a total value of $2,658.9 million. The Company also assumed all of the outstanding stock options and restricted stock units of SendGrid as converted into stock options and restricted stock units, respectively, of the Company based on the conversion ratio provided in the Agreement and Plan of Merger and Reorganization, as amended (the "Merger Agreement").

The acquisition added additional products and services to the Company's offerings for its customers. With these additional products, the Company now offers an email API and Marketing Campaigns product leveraging the email API. The acquisition has also added new customers, new employees, technology and intellectual property assets.

The acquisition was accounted for as a business combination and the total purchase price was allocated to the net tangible and intangible assets and liabilities based on their fair values on the acquisition date with the excess recorded as goodwill. Subsequent to the acquisition date of February 1, 2019, and during the measurement period that ended on December 31, 2019, the Company recorded $4.4 million of adjustments to goodwill.

The adjusted purchase price of $2,841.5 million reflects the $2,658.9 million fair value of 23.6 million shares of the Company's Class A common stock transferred as consideration for all outstanding shares of SendGrid, and the $182.6 million fair value of the pre-combination services of SendGrid employees reflected in the equity awards assumed by the Company on the acquisition date.

The fair value of the 23.6 million shares transferred as consideration was determined on the basis of the closing market price of the Company's Class A common stock on the acquisition date. The fair value of the equity awards was determined (a) for options, by using a Black-Scholes option pricing model with the applicable assumptions as of the acquisition date, and (b) for restricted stock units, by using the closing market price of the Company's Class A common stock on the acquisition date.

The unvested stock awards assumed on the acquisition date continue to vest as the SendGrid employees continue to provide services in the post-acquisition period. The fair value of these awards is recorded as share-based compensation expense over the respective vesting period of each award.

The purchase price components, as adjusted, are summarized in the following table:



	Total
	(In thousands)
Fair value of Class A common stock transferred	$	2,658,898
Fair value of the pre-combination service through equity awards	182,554
Total purchase price, as adjusted	$	2,841,452

The following table presents the purchase price allocation, as adjusted, recorded in the Company's consolidated balance sheet as of December 31, 2019.



	Total
	(In thousands)
Cash and cash equivalents	$	156,783
Accounts receivable and other current assets	11,635
Property and equipment, net	38,350
Operating right-of-use asset	33,742
Intangible assets ⁽¹⁾	483,000
Other assets	1,664
Goodwill	2,235,193
Accounts payable and other liabilities	(11,114		)
Operating lease liability	(32,568		)
Finance lease liability	(13,616		)
Note payable	(5,387		)
Deferred tax liability	(56,230		)
Total purchase price	$	2,841,452

^{__________________________}

⁽¹⁾ Identifiable intangible assets are comprised of the following:



	Total		Estimated life
	(In thousands)		(In years)
Developed technology	$	294,000	7
Customer relationships	169,000		7
Trade names	20,000		5
Total intangible assets acquired	$	483,000

The Company acquired a net deferred tax liability of $56.2 million in this business combination that is included in long-term liabilities in the accompanying consolidated balance sheet. This amount was offset by a release of a valuation allowance on deferred tax assets of $47.9 million.

Developed technology consists of software products and domain knowledge around email delivery developed by SendGrid, which enables the delivery of email reliably and at scale. Customer relationships consists of contracts with platform users that purchase SendGrid’s products and services that carry distinct value. Trade names represent the Company’s right to the SendGrid trade names and associated design as it existed on the acquisition closing date.

Goodwill generated from this acquisition primarily represents the value that is expected from the increased scale and synergies as a result of the integration of both businesses. Goodwill is not deductible for tax purposes.

The estimated fair value of the intangible assets acquired was determined by the Company and the Company considered or relied in part upon a valuation report of a third‑party expert. The Company used an income approach to estimate the fair values of the developed technology, an incremental income approach to estimate the value of the customer relationships and a relief from royalty method to estimate the fair value of the trade name.

Most of the net tangible assets were valued at their respective carrying amounts as of the acquisition date, as the Company believes that these amounts approximate their current fair values. The leases acquired were recorded at their respective fair values as of the acquisition date.

The acquired entity's results of operations were included in the Company's consolidated financial statements from the date of acquisition, February 1, 2019. For the year ended December 31, 2019, SendGrid contributed net operating revenue of $177.1 million, which is reflected in the accompanying consolidated statement of operations. Due to the integrated nature of the Company's operations, the Company believes that it is not practicable to separately identify earnings of SendGrid on a stand-

alone basis.

During the year ended December 31, 2019, the Company incurred costs related to this acquisition of $13.9 million that were expensed as incurred and recorded in general and administrative expenses in the accompanying consolidated statement of operations.

The following unaudited pro forma condensed combined financial information gives effect to the acquisition of SendGrid as if it was consummated on January 1, 2018 (the beginning of the comparable prior reporting period), and includes pro forma adjustments related to the amortization of acquired intangible assets, share-based compensation expense and direct and incremental transaction costs reflected in the historical financial statements. Specifically, the following adjustments were made:


•	For the year ended December 31, 2019, the Company's and SendGrid's direct and incremental transaction costs of $40.8 million are excluded from pro forma combined net loss.


•	For the year ended December 31, 2018, the Company's direct and incremental transaction costs of $13.9 million are included in the pro forma combined net loss.


•	In the year ended December 31, 2019, the pro forma combined net loss includes a reversal of the valuation allowance release of $48.0 million.


•	In the year ended December 31, 2018, the pro forma condensed combined net loss includes a one-time tax benefit of $53.5 million that would have resulted from the acquisition, and an ongoing tax benefit of $29.4 million.

This unaudited data is presented for informational purposes only and is not intended to represent or be indicative of the results of operations that would have been reported had the acquisition occurred on January 1, 2018. It should not be taken as representative of future results of operations of the combined company.

The following table presents the pro forma condensed combined financial information:



	Year Ended December 31,
	2019			2018
	(Unaudited, in thousands)
Revenue	$	1,148,214		$	796,607
Net loss attributable to common stockholders	$	(322,030	)	$	(211,705	)

Other Fiscal 2019 Acquisitions

In fiscal 2019 the Company acquired several businesses for a total purchase price of $43.2 million paid in cash, of which $9.1 million was withheld for the period of 18 to 36 months, and $12.8 million of deferred equity consideration, which is recorded in the post-acquisition period as the services are provided. The Company does not consider these acquisition to be material, individually or in aggregate. Total purchase price was allocated to the tangible and intangibles assets acquired and liabilities assumed based on preliminary calculations as the Company continues to gather information necessary to finalize the valuations. These preliminary values may change in the future reporting periods until the valuations are finalized, which will occur in the second and fourth quarters of 2020. Goodwill of $23.4 million was recorded to reflect the excess purchase price over the net assets acquired and represents the value that the Company expects to realize from expanding its product offerings and other synergies. Goodwill that is expected to be deductible for tax purposes is $6.8 million.

The following table summarizes the preliminary purchase price allocation in aggregate for the other business acquired in fiscal 2019 recorded in the Company's consolidated balance sheet as of December 31, 2019:



	Total
	(In thousands)
Net liabilities	$	(3,219	)
Intangible assets ⁽¹⁾	22,986
Goodwill	23,425
Total preliminary purchase price	$	43,192

_________________

⁽¹⁾ Identifiable intangible assets were comprised of the following:



	Total		Estimated life
	(In thousands)		(In years)
Developed technology	$	11,771	4 - 6
Customer relationships	5,185		3 - 5
Telecommunication licenses	4,370		Indefinite
Supplier relationships	1,660		2
Total intangible assets acquired	$	22,986

During the year ended December 31, 2019, the Company incurred $1.9 million of costs related to this acquisition that were expensed as incurred and recorded in general and administrative expenses in the accompanying consolidated statement of operation.

Pro forma results of operations for these acquisitions are not presented as the financial impact to the Company's consolidated financial statements is immaterial.

Fiscal 2018 Acquisitions

Ytica.com a.s.

In September 2018, the Company acquired all outstanding shares of Ytica.com a.s. ("Ytica"), a developer and provider of a contact center reporting and analytics based in the Czech Republic, for a total purchase price of $21.8 million, paid in cash, of which $3.2 million was held in escrow with a term of 18 months.

Additionally, the Company granted 47,574 restricted stock units of the Company's Class A common stock to a former shareholder of Ytica that had a value of $3.6 million and is subject to vesting over a period of three years. The Company is recording stock-based compensation expense as the shares are vesting.

The acquisition was accounted for as a business combination and the total purchase price was allocated to the net tangible and intangible assets and liabilities based on their fair values on the acquisition date and the excess was recorded as goodwill. The acquired entity's results of operations have been included in the consolidated financial statements of the Company from the date of acquisition.

The following table presents the purchase price allocation recorded in the Company's consolidated balance sheet as of December 31, 2018:



	Total
	(In thousands)
Net liabilities	$	(1,538	)
Intangible assets⁽¹⁾	9,920
Goodwill⁽²⁾	13,375
Total purchase price	$	21,757

_________________


⁽¹⁾	Identifiable intangible assets were comprised of the following:



	Total		Estimated life
	(In thousands)		(In years)
Developed technology	$	9,090	4
Customer relationships	830		2
Total intangible assets acquired	$	9,920


⁽²⁾	The goodwill is primarily attributable to the future cash flows to be realized from the acquired technology platform as well as operational synergies. The Company has filed for the elections that make the goodwill deductible for U.S. tax purposes.

The Company acquired a net deferred tax liability of $1.7 million in this business combination.

The estimated fair value of the intangible assets acquired was determined by the Company, and the Company considered or relied in part upon a valuation report of a third-party expert. The Company used an income approach to estimate the fair values of the identifiable intangible assets.

The Company incurred costs related to this acquisition of $0.6 million that were expensed as incurred and recorded in general and administrative expenses in the accompanying consolidated statement of operation.

Pro forma results of operations for this acquisition are not presented as the financial impact to the Company's consolidated financial statements is immaterial.

Core Network Dynamics GmbH

In August 2018, the Company acquired all outstanding shares of Core Network Dynamics GmbH ("CND"), a developer and provider of a complete software mobile network infrastructure based in Germany, for a total purchase price of $11.1 million, paid in cash, of which $2.0 million was withheld by the Company for a term of 18 months.

Additionally, the Company granted 35,950 restricted stock units of the Company's Class A common stock to a former shareholder of CND that had a value of $2.2 million and is subject to vesting over a period of three years. The Company is recording a stock-based compensation expense as the shares are vesting.

The acquisition was accounted for as a business combination and the total purchase price was allocated to the net tangible and intangible assets and liabilities based on their fair values on the acquisition date and the excess was recorded as goodwill. The acquired entity's results of operations have been included in the consolidated financial statements of the Company from the date of acquisition.

The following table presents the purchase price allocation recorded in the Company's consolidated balance sheet as of December 31, 2018:



	Total
	(In thousands)
Net liabilities	$	(313	)
Intangible assets ⁽¹⁾	4,500
Goodwill ⁽²⁾	6,869
Total purchase price	$	11,056

_________________


⁽¹⁾	Identifiable intangible assets were comprised of the following:



	Total		Estimated life
	(In thousands)		(In years)
Developed technology	$	3,910	4
Customer relationships	590		0.5
Total intangible assets acquired	$	4,500


⁽²⁾	The goodwill is primarily attributable to the future cash flows to be realized from the operating synergies between the acquired technology platform and the Company's Programmable Wireless products. The Company has filed for the elections that make the goodwill deductible for U.S. tax purposes.

The Company acquired a net deferred tax liability of $1.2 million in this business combination.

The estimated fair value of the intangible assets acquired was determined by the Company, and the Company considered or relied in part upon a valuation report of a third-party expert. The Company used a replacement cost approach to estimate the fair values of the identifiable intangible assets.

The Company incurred costs related to this acquisition of $0.8 million that were expensed as incurred and have been recorded in general and administrative expenses in the accompanying consolidated statement of operation.

Pro forma results of operations for this acquisition are not presented as the financial impact to the Company's consolidated financial statements is immaterial.

Fiscal 2017 Acquisitions

Beepsend, AB

In February 2017, the Company completed its acquisition of Beepsend AB, a messaging provider based in Sweden, specializing in messaging and SMS solutions, for a total purchase price of $23.0 million, paid in cash, of which $5.0 million was held in escrow with a term of 18 months and was fully released at the escrow expiration date.

The acquisition was accounted for as a business combination and the total purchase price was allocated to the net tangible and intangible assets and liabilities based on their fair values on the acquisition date. The acquired entity's results of operations were included in the consolidated financial statements of the Company from the date of acquisition.

The following table presents the purchase price allocation recorded in the Company's consolidated balance sheet:



	Total
	(In thousands)
Net liabilities	$	(3,575	)
Intangible assets ⁽¹⁾	13,700
Goodwill ⁽²⁾	12,837
Total purchase price	$	22,962

_________________


⁽¹⁾	Identifiable intangible assets were comprised of the following:



	Total		Estimated life
	(In thousands)		(In years)
Developed technology	$	5,000	4
Customer relationships	6,100		7 - 8
Supplier relationships	2,600		5
Total intangible assets acquired	$	13,700

⁽²⁾

Goodwill represents the excess of purchase price over the fair value of identifiable tangible and intangible assets acquired and liabilities assumed. The goodwill in this transaction was primarily attributable to the future cash flows to be realized from the acquired technology platform, existing customer and supplier relationships as well as operational synergies. Goodwill is deductible for tax purposes.

The Company acquired a net deferred tax liability of $2.6 million in this business combination.

The estimated fair value of the intangible assets acquired was determined by the Company, and the Company considered or relied in part upon a valuation report of a third-party expert. The Company used income approaches to estimate the fair values of the identifiable intangible assets. Specifically, the developed technology asset class was valued using the-relief-from

royalty method, while the customer relationships asset class was valued using a multi-period excess earnings method and the supplier relationships asset class was valued using an incremental cash flow method.

The Company incurred costs related to this acquisition of $0.7 million, of which $0.3 million was incurred during the year ended December 31, 2017. All acquisition related costs were expensed as incurred and have been recorded in general and administrative expenses in the accompanying consolidated statements of operations.

Pro forma results of operations for this acquisition are not presented as the financial impact to the Company's consolidated financial statements is immaterial.