Business Combinations

3 Months Ended

Mar. 31, 2020

In January 2020, the Company acquired all of the outstanding shares of S2, a company based in Kirkland, Washington that has developed browser isolation technology, for total purchase consideration of $16.9 million. The Company expects to incorporate S2's technology into Cloudflare Gateway. The total purchase consideration included (i) acquisition-date cash payments of $13.6 million, net of $0.1 million of cash acquired, (ii) $1.1 million in shares of the Company’s Class A common stock, and (iii) a cash holdback of $2.2 million, which the Company is retaining for up to 18 months and will be payable to the previous owners of S2, subject to offset by the Company for any of the previous owners’ indemnification obligations in connection with the acquisition. Concurrent with the closing of the acquisition, the Company made a cash payment of $6.9 million to repay S2’s debt, which was part of the acquisition-date cash payments included in the purchase consideration.

In connection with the acquisition, the Company entered into compensation arrangements for stock-based and cash awards with a value totaling $21.1 million, of which $6.5 million was recognized as compensation expense on the acquisition date and $1.4 million was recorded as additional compensation expense during the three months ended March 31, 2020. The remaining compensation amount of $13.2 million is being recognized over a future weighted-average period of 3.0 years subject to the recipients’ continued service with the Company.

The transaction-related costs for the acquisition were not material and are included in general and administrative expenses in the condensed consolidated statements of operations for the three months ended March 31, 2020.

The fair values of assets acquired and liabilities assumed on the acquisition date are summarized as follows (in thousands):


Prepaid expenses and other current assets	$	6
Developed technology	5,600
Goodwill	12,316
Total assets acquired	17,922
Accrued expenses and other current liabilities	(208)
Other noncurrent liabilities	(782)
Total purchase price	$	16,932

A note payable of $0.2 million, included in accrued expenses and other current liabilities in the table above, assumed on the acquisition date, was paid off during the three months ended March 31, 2020.

The acquired assets and assumed liabilities were recorded at their estimated fair values. The estimated useful life for the acquired developed technology is two years. The excess of the purchase price over the fair value of the net assets acquired was allocated to goodwill, none of which is expected to be deductible for tax purposes. Goodwill is primarily attributable to the assembled workforce as well as the anticipated synergies from the integration of S2's technology with the Company's technology. No adjustments were made during the three months ended March 31, 2020.

This acquisition did not have a material impact on the Company’s condensed consolidated financial statements; therefore, historical and pro forma disclosures have not been presented.