Business Combinations

9 Months Ended

Sep. 30, 2021

Business Combination and Asset Acquisition [Abstract]

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 a total purchase consideration of $17.7 million. The Company is incorporating S2's technology into the Company's Cloudflare Gateway product. The total purchase consideration included (i) acquisition-date cash payments of $13.7 million, net of $0.1 million of cash acquired, (ii) $1.8 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. Such cash holdback was paid in full during the three months ended September 30, 2021. 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 $20.3 million, of which $1.4 million and $10.0 million were recognized as total compensation expense during the three and nine months ended September 30, 2020, respectively. The Company recorded an additional $1.4 million and $4.2 million of compensation expense during the three and nine months ended September 30, 2021, respectively. The remaining compensation amount of $4.7 million is being recognized over a future weighted-average period of 1.5 years subject to the recipients’ continued service with the Company.

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	13,084
Total assets acquired	18,690
Accrued expenses and other current liabilities	(208)
Other noncurrent liabilities	(782)
Total purchase price	$	17,700

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 fiscal year ended December 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. A purchase accounting adjustment of $0.8 million to revise purchase consideration and goodwill was made during the fiscal year ended December 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.