Business Combinations

9 Months Ended

Sep. 30, 2021

Business Combination and Asset Acquisition [Abstract]

Signal Sciences

On October 1, 2020, we completed the acquisition of Signal Sciences. We acquired 100% of the voting rights of Signal Sciences and it is now our wholly-owned subsidiary. The acquisition is expected to expand our security portfolio and bolster our existing security offerings with our web application and API protection solutions.

Under the terms of the Merger Agreement, we acquired Signal Sciences for an aggregate purchase price of $759.4 million, consisting of approximately $223.0 million in cash and the balance in Class A Common Stock and equity consideration of $536.4 million. A total of 6,367,709 shares were issued, of which the fair value of 5,471,210 shares were attributed to purchase price and 896,499 shares, which are restricted as they are subject to revesting conditions, will be recognized as stock-based compensation expense as the required employee services are provided. These restricted shares, which belong to the three co-founders of Signal Sciences, will revest on a quarterly basis over a 2-year period. All of these shares have a par value of $0.00002 per share.

As part of the acquisition, we assumed the Signal Sciences Corp. 2014 Stock Option and Grant Plan, as amended (the “Signal Plan”) and registered 251,754 shares under the Signal Plan, which were the outstanding unvested options to purchase shares of common stock of Signal Sciences. Such options became exercisable to purchase shares of Fastly’s Class A common stock, subject to appropriate adjustments to the number of shares and the exercise price of each such option.

We assumed the aforementioned unvested options at the completion of the acquisition with an estimated fair value of $21.8 million. Of the total consideration, $1.1 million was allocated to the purchase price and $20.7 million was allocated to future services, which will be expensed over the employees' remaining requisite service periods of approximately 2.5 years on a straight-line basis. The estimated fair value of the stock options assumed was determined using the Black-Scholes option pricing model. The share conversion ratio of 0.1 was applied to convert Signal Sciences’ outstanding stock awards into shares of Fastly's Class A common stock.

We accounted for the transaction as a business combination using the acquisition method of accounting. We allocated the purchase price to the tangible and identifiable intangible assets acquired and liabilities assumed based on their respective estimated fair values on the acquisition date. The acquired tangible assets acquired and liabilities assumed were recorded at their estimated fair values. The determination of the fair value of the intangible assets acquired required management to make significant estimates and assumptions related to forecasted future revenues and selection of the royalty rate and discount rate.

The purchase consideration was allocated to the tangible and intangible assets and liabilities acquired as of the acquisition date, with the excess recorded to goodwill, which includes the value attributable to the assembled workforce, as shown below (in thousands):


	Amount
Assets acquired
Cash and cash equivalents	$	21,501
Other current assets	6,419
Intangible assets, net	124,100
Other non-current assets	8,094
Total assets acquired	$	160,114
Liabilities assumed
Current liabilities	(14,755)
Non-current liabilities	(21,170)
Total liabilities assumed	$	(35,925)
Net assets acquired	124,189
Total acquisition consideration	759,393
Goodwill recorded	$	635,204

Identifiable finite-lived intangible assets were comprised of the following:


	Total (in thousands)		Estimated useful life (in years)
Customer relationships	$	69,100	8.0
Developed technology	49,500		5.0
Trade name	3,300		3.0
Backlog	2,200		2.0
Total intangible assets acquired	$	124,100

The fair values of the acquired developed technology and trade name intangible assets were determined using the relief from royalty method. The fair values of the acquired customer relationships and backlog intangible assets were determined using the multi-period excess earnings method. The acquired intangible assets have a total weighted average amortization period of 6.6 years.

As part of the stock acquisition of Signal Sciences, we allocated a significant value of the acquisition to intangible assets. The deferred tax liability provided an additional source of taxable income to support the realization of the pre-existing deferred tax assets. As a result a portion of our valuation allowance was released and we recorded a $13.0 million tax benefit in the year ended December 31, 2020.

During the year ended December 31, 2020, acquisition-related expenses of $20.8 million were expensed within general and administrative expenses as incurred. The amounts of revenue and net loss of Signal Sciences included in our consolidated statement of operations from the acquisition date of October 1, 2020 to December 31, 2020 are $6.7 million and $23.0 million, respectively.

The unaudited pro forma results do not reflect any cost saving synergies from operating efficiencies, or the effect of the incremental costs incurred from integrating these companies. For pro forma purposes, 2020 earnings were adjusted to exclude acquisition-related costs. Accordingly, these unaudited pro forma results are presented for informational purposes only and are not necessarily indicative of what the actual results of operations of the combined company would have been if the acquisition had occurred at the beginning of the period presented, nor are they indicative of future results of operations.

The unaudited pro forma financial information was as follows (in thousands):


	(Unaudited)
	For the year ended December 31, 2020
	(in thousands)
Revenue	$	313,665
Net loss	$	(159,248)