SEC Filing | FireEye

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



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

For the quarterly period ended June 30, 2019



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

For the transition period from to

Commission File Number 001-36067

FireEye, Inc.

(Exact name of registrant as specified in its charter)



Delaware		20-1548921
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

601 McCarthy Blvd.

Milpitas, CA 95035

(408) 321-6300

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol	Name of each exchange on which registered
Common Stock, $0.0001 par value per share	FEYE	The NASDAQ Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 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, 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 ☒

The number of shares of the registrant's common stock outstanding as of July 30, 2019 was 214,753,300.

Table of Contents

TABLE OF CONTENTS



		Page
	PART I — FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited)	1
	Condensed Consolidated Balance Sheets as of June 30, 2019 and December 31, 2018	1
	Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2019 and 2018	2
	Condensed Consolidated Statements of Comprehensive Loss for the Three and Six Months Ended June 30, 2019 and 2018	3
	Condensed Consolidated Statements of Stockholders' Equity for the Three and Six Months Ended June 30, 2019 and 2018	4
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2019 and 2018	4
	Notes to Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	45
Item 4.	Controls and Procedures	46

	PART II — OTHER INFORMATION

Item 1.	Legal Proceedings	47
Item 1A.	Risk Factors	47
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	74
Item 3.	Defaults Upon Senior Securities	74
Item 4.	Mine Safety Disclosures	74
Item 5.	Other Information	74
Item 6.	Exhibits	74

	Signature	75

PART I — FINANCIAL INFORMATION

Item1. Financial Statements

FIREEYE, INC.

Condensed Consolidated Balance Sheets

(In thousands, except per share data)

(Unaudited)



	June 30, 2019			December 31, 2018
ASSETS
Current assets:
Cash and cash equivalents	$	331,901		$	409,829
Short-term investments	655,841			706,691
Accounts receivable, net of allowance for doubtful accounts of $1,956 and $2,525 at June 30, 2019 and December 31, 2018, respectively	127,450			157,817
Inventories	6,100			6,548
Prepaid expenses and other current assets	98,708			100,295
Total current assets	1,220,000			1,381,180
Property and equipment, net	95,876			89,163
Operating lease right-of-use assets, net	62,870			—
Goodwill	1,204,674			999,804
Intangible assets, net	163,250			143,162
Deposits and other long-term assets	84,492			82,769
TOTAL ASSETS	$	2,831,162		$	2,696,078

LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	27,246		$	26,944
Operating lease liabilities, current	17,434			—
Accrued and other current liabilities	24,004			29,797
Accrued compensation	55,104			63,808
Convertible senior notes, current, net	114,310			—
Deferred revenue, current	545,876			556,815
Total current liabilities	783,974			677,364
Convertible senior notes, non-current, net	871,967			962,577
Deferred revenue, non-current	366,873			378,013
Operating lease liabilities, non-current	75,920			—
Other long-term liabilities	3,658			27,730
Total liabilities	2,102,392			2,045,684
Commitments and contingencies (NOTE 10)
Stockholders' equity:
Common stock, par value of $0.0001 per share; 1,000,000 shares authorized, 214,606 shares and 199,612 shares issued and outstanding as of June 30, 2019 and December 31, 2018, respectively	21			20
Additional paid-in capital	3,369,963			3,152,159
Treasury stock, at cost; 3,333 shares as of June 30, 2019 and December 31, 2018	(150,000		)	(150,000		)
Accumulated other comprehensive income (loss)	970			(2,299		)
Accumulated deficit	(2,492,184		)	(2,349,486		)
Total stockholders’ equity	728,770			650,394
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	2,831,162		$	2,696,078

See accompanying notes to condensed consolidated financial statements.

Table of Contents

FIREEYE, INC.

Condensed Consolidated Statements of Operations

(In thousands, except per share data)

(Unaudited)



	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Revenue:
Product, subscription and support	$	174,102		$	167,429		$	344,005		$	332,902
Professional services	43,506			35,267			84,147			68,864
Total revenue	217,608			202,696			428,152			401,766
Cost of revenue:
Product, subscription and support	53,198			46,136			101,666			93,565
Professional services	24,195			21,146			47,295			41,646
Total cost of revenue	77,393			67,282			148,961			135,211
Total gross profit	140,215			135,414			279,191			266,555
Operating expenses:
Research and development	67,538			63,575			134,933			129,771
Sales and marketing	101,494			94,196			205,390			191,447
General and administrative	27,926			26,179			55,302			54,597
Restructuring charges	—			—			3,799			—
Total operating expenses	196,958			183,950			399,424			375,815
Operating loss	(56,743		)	(48,536		)	(120,233		)	(109,260		)
Interest income	6,137			3,383			11,985			6,323
Interest expense	(15,407		)	(13,605		)	(30,670		)	(26,322		)
Other expense, net	(770		)	(12,690		)	(1,058		)	(12,966		)
Loss before income taxes	(66,783		)	(71,448		)	(139,976		)	(142,225		)
Provision for income taxes	540			1,411			2,722			2,464
Net loss	$	(67,323	)	$	(72,859	)	$	(142,698	)	$	(144,689	)
Net loss per share, basic and diluted	$	(0.33	)	$	(0.38	)	$	(0.71	)	$	(0.77	)
Weighted average shares used in computing net loss per share, basic and diluted	204,109			189,696			201,001			188,085

See accompanying notes to condensed consolidated financial statements.

Table of Contents

FIREEYE, INC.

Condensed Consolidated Statements of Comprehensive Loss

(In thousands)

(Unaudited)



	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Net loss	$	(67,323	)	$	(72,859	)	$	(142,698	)	$	(144,689	)
Change in net unrealized gain (loss) on available-for-sale investments, net of tax	1,172			981			3,269			(614		)
Comprehensive loss	$	(66,151	)	$	(71,878	)	$	(139,429	)	$	(145,303	)

See accompanying notes to condensed consolidated financial statements.

Table of Contents

FIREEYE, INC.

Condensed Consolidated Statements of Stockholders' Equity

(Unaudited, in thousands)



	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Total stockholders' equity, beginning balances	$	619,441		$	619,435		$	650,394		$	632,216

Common stock and additional paid-in-capital:
Balance, beginning of period	3,194,504			2,952,104			3,152,179			2,891,460
Issuance of common stock for equity awards, net of tax withholdings	651			1,469			1,494			4,579
Issuance of common stock related to employee stock purchase plan	12,315			10,993			12,315			10,993
Issuance of common stock related to X15 Software, Inc. acquisition	—			—			—			15,386
Issuance of common stock and assumption of options related to Verodin, Inc. acquisition	121,158			—			121,158			—
Stock-based compensation	41,356			40,577			82,838			82,725
Purchase of capped calls	—			(65,220		)	—			(65,220		)
Equity component of issuance of 2024 Notes, net	—			138,064			—			138,064
Equity component of partial repurchase of Series A Notes, net	—			(13,012		)	—			(13,012		)
Balance, end of period	3,369,984			3,064,975			3,369,984			3,064,975

Treasury Stock:
Balance, beginning of period	(150,000		)	(150,000		)	(150,000		)	(150,000		)
Balance, end of period	(150,000		)	(150,000		)	(150,000		)	(150,000		)

Accumulated Other Comprehensive Income (Loss):
Balance, beginning of period	(202		)	(4,476		)	(2,299		)	(2,881		)
Unrealized gain (loss) on investments, net of tax	1,172			981			3,269			(614		)
Balance, end of period	970			(3,495		)	970			(3,495		)

Accumulated Deficit:
Balance, beginning of period	(2,424,861		)	(2,178,193		)	(2,349,486		)	(2,106,363		)
Net loss	(67,323		)	(72,859		)	(142,698		)	(144,689		)
Balance, end of period	(2,492,184		)	(2,251,052		)	(2,492,184		)	(2,251,052		)

Total stockholders' equity, ending balances	$	728,770		$	660,428		$	728,770		$	660,428

See accompanying notes to condensed consolidated financial statements

Table of Contents

FIREEYE, INC.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)



	Six Months Ended June 30,
	2019			2018
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(142,698	)	$	(144,689	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization	48,102			44,601
Stock-based compensation	80,474			81,040
Non-cash interest expense related to convertible senior notes	23,700			20,144
Loss on repurchase of convertible senior notes	—			10,764
Deemed repayment of convertible senior notes attributable to accreted debt discount	—			(43,575		)
Deferred income taxes	(18		)	(60		)
Other	637			2,372
Changes in operating assets and liabilities, net of business acquisitions:
Accounts receivable	32,860			24,892
Inventories	(243		)	(2,266		)
Prepaid expenses and other assets	3,959			4,892
Accounts payable	4,415			(4,152		)
Accrued liabilities	(3,566		)	949
Accrued compensation	(8,704		)	(1,209		)
Deferred revenue	(24,830		)	(30,545		)
Other long-term liabilities	(4,564		)	1,742
Net cash provided by (used in) operating activities	9,524			(35,100		)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment and demonstration units	(28,240		)	(26,645		)
Purchases of short-term investments	(258,104		)	(218,842		)
Proceeds from maturities of short-term investments	311,905			209,045
Business acquisitions, net of cash acquired	(127,249		)	(5,945		)
Lease deposits	426			26
Net cash used in investing activities	(101,262		)	(42,361		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of convertible senior notes, net of issuance costs	—			584,405
Purchase of capped calls	—			(65,220		)
Repurchase of convertible senior notes	—			(286,817		)
Proceeds from employee stock purchase plan	12,315			10,993
Proceeds from exercise of equity awards	1,495			4,579
Net cash provided by financing activities	13,810			247,940
Net change in cash and cash equivalents	(77,928		)	170,479
Cash and cash equivalents, beginning of period	409,829			180,891
Cash and cash equivalents, end of period	$	331,901		$	351,370

Table of Contents

FIREEYE, INC.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)



	Six Months Ended June 30,
	2019		2018
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for income taxes	$	2,682	$	2,283
Cash paid for interest	$	6,962	$	5,791
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Common stock issued in connection with acquisitions	$	119,682	$	15,387
Convertible senior note issuance costs included in accounts payable and accrued expense	$	—	$	579
Purchases of property and equipment and demonstration units in accounts payable and accrued liabilities	$	6,531	$	14,129

See accompanying notes to condensed consolidated financial statements.

Table of Contents

FIREEYE, INC.

Notes to Condensed Consolidated Financial Statements

1. Description of Business and Summary of Significant Accounting Policies

Description of Business

FireEye, Inc., with principal executive offices located in Milpitas, California, was incorporated as NetForts, Inc. on February 18, 2004, under the laws of the State of Delaware, and changed its name to FireEye, Inc. on September 7, 2005.

FireEye, Inc. and its wholly owned subsidiaries (collectively, the “Company”, “we”, “us” or “our”) provide comprehensive intelligence-based cybersecurity solutions that allow organizations to prepare for, prevent, investigate, respond to and remediate cyber attacks. Our portfolio of cyber security solutions and services is designed to minimize the risk of costly cyber security breaches by detecting and preventing advanced, targeted and other evasive attacks, as well as enabling more efficient management of security operations, including alert management, investigation and response when a breach occurs. We accomplish this through the integration of our core competitive advantages in solutions and services that adapt to changes in the threat environment through a cycle of intelligence-driven innovation. Our core competitive advantages include:


•	Our technologies, including our machine-learning, behavioral-based, and rules-based threat detection, analysis and correlation technologies, combined with our proprietary Multi-vector Virtual Execution ("MVX") engine;


•	Our intelligence on threats and threat actors, based on the continuous flow of machine-, attacker- and victim-based attack data from our global network of threat sensors and virtual machines, as well as intelligence gathered by our security analysts, consultants and incident responders; and


•	Our accumulated security expertise derived from responding to thousands of significant breaches over the past decade.

Our threat detection and prevention solutions encompass appliance-based, virtual and cloud solutions for web security, email security and endpoint security. These solutions are complemented by our cloud-based threat intelligence, security analytics and security automation and orchestration technologies, as well as our managed security services, cybersecurity consulting and incident response offerings including our recently launched Expertise-on-Demand offering. In combination, our solutions and services enable a proactive approach to cybersecurity that extends across the threat management lifecycle to minimize the risk of costly cybersecurity breaches.

We have organized our cybersecurity solutions in a hub and spokes model designed to integrate machine-generated threat data from our detection and prevention solutions with our analytics, response and orchestration technologies delivered through our Helix cybersecurity operations platform. Helix is designed to enable more efficient security operations by correlating security and event data across an organization’s environment to determine which threats present the greatest risk, automating repetitive security processes, and providing tools and workflows to investigate and respond to attacks. The Helix cloud-based interface presents a unified view of an organization’s attack surface, including on-premise and cloud environments, and provides the contextual threat intelligence and threat management tools to enable a rapid response.

In May 2019, we acquired Verodin, Inc. ("Verodin"), a security instrumentation platform company. As consideration for the acquisition, we paid $143.7 million in cash, issued 8,404,609 shares of our common stock with an estimated fair value of $119.7 million and recognized $1.5 million of the fair value of assumed stock options attributable to precombination services.

In the three months ended June 30, 2018, we issued $600 million aggregate principal amount of 0.875% Convertible Senior Notes due 2024 (the "2024 Notes"), in a private placement to qualified institutional purchasers pursuant to an exemption from registration provided by Section 4(a)(2) and Rule 144A under the Securities Act of 1933, as amended (the "Securities Act"). We recognized total net proceeds after the initial purchasers' discount and issuance costs of $584.4 million. In connection with the issuance of the 2024 Notes, we also entered into capped call transactions (the "Capped Calls") with certain parties affiliated with the initial purchasers of the 2024 Notes. We paid approximately $65.2 million for the Capped Calls, which have an initial strike price of $23.17 per share, which corresponds to the initial conversion price of the 2024 Notes. The Capped Calls have an initial cap price of $34.32 per share subject to certain adjustments as set forth in the confirmations for the Capped Calls.

In May 2018, in a separate transaction, we repurchased $340.2 million aggregate principal of existing 1.000% Convertible Senior Notes due 2035 (the "Series A Notes"). We used $330.4 million of the net proceeds from the 2024 Notes offering to repurchase such portion of the Series A Notes.

In January 2018, we completed the acquisition of privately-held X15 Software, Inc. ("X15"), a data management company. As consideration for the acquisition, we paid cash consideration of $5.3 million and issued 1,016,334 shares of our common stock with an estimated fair value of $15.4 million.

The majority of our products, subscriptions and services are sold to end-customers through distributors, resellers, and strategic partners, with a lesser percentage of sales directly to our end-customers.

Basis of Presentation and Consolidation

The accompanying unaudited condensed consolidated financial statements include the accounts of FireEye, Inc. and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”), and following the requirements of the Securities and Exchange Commission (“SEC”), for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by U.S. GAAP can be condensed or omitted. These unaudited condensed consolidated financial statements have been prepared on the same basis as our annual consolidated financial statements and, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments, that are necessary for a fair statement of our financial information. The results of operations for the three and six months ended June 30, 2019 are not necessarily indicative of the results to be expected for the year ending December 31, 2019 or for any other interim period or for any other future year. The balance sheet as of December 31, 2018 has been derived from audited consolidated financial statements at that date but does not include all information required by U.S. GAAP for annual consolidated financial statements.

The accompanying unaudited condensed consolidated financial statements and related financial information should be read in conjunction with the audited consolidated financial statements and the related notes thereto for the year ended December 31, 2018 included in our Annual Report on Form 10-K for the year ended December 31, 2018.

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Such management estimates include, but are not limited to, determining the nature and timing of satisfaction of performance obligations, useful life of our security appliances that are dependent on intelligence and assessing the material rights associated with it, determining the standalone selling price ("SSP") of performance obligations and professional services, determining incremental borrowing rate, commissions expense including the period of benefit of customer acquisition cost, bonus expense, future taxable income, contract manufacturer liabilities, litigation and settlement costs and other loss contingencies, fair value of our equity awards, achievement of targets for performance stock units, fair value of the liability and equity components of the Convertible Senior Notes (as defined in Note 9) and the purchase price allocation of acquired businesses. We base our estimates on historical experience and on assumptions that we believe are reasonable. Changes in facts or circumstances may cause us to change our assumptions and estimates in future periods, and it is possible that actual results could differ from current or revised future estimates.

Summary of Significant Accounting Policies

Except for the accounting policies for leases, updated as a result of adopting Accounting Standard Update ("ASU") No. 2016-02, Leases or Accounting Standard Codification ("ASC") 842, there have been no significant changes to our significant accounting policies as of and for the three and six months ended June 30, 2019, as compared to the significant accounting policies described in our Annual Report on Form 10-K for the year ended December 31, 2018.

Leases

We determine if an arrangement is a lease and classification of that lease, if applicable, at inception based on: (1) whether the contract involves the use of a distinct identified asset, (2) whether we obtain the right to substantially all the economic benefits from the use of the asset throughout the period, and (3) whether we have a right to direct the use of the asset. We currently do not have any finance leases. We have elected to not recognize a lease liability or right-of-use ("ROU") asset for short-term leases (leases with a term of twelve months or less and do not include an option to purchase the underlying asset).

ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make minimum lease payments arising from the lease. ROU assets are initially measured at amounts, which represents the present value of the lease payments over the lease, plus any initial direct costs incurred and less any lease incentives received. Annually, all ROU assets are reviewed for impairment. The lease liability is initially measured at lease commencement date based on the present value of minimum lease payments over the lease term. As the rates implicit in the leases are not readily available, we use our Incremental Borrowing Rate ("IBR") based on the information available at commencement date in determining the present value of lease payments. The determination of our IBR requires judgment. We took into consideration our recent debt offerings as well as external credit rating factors when determining our current IBR. Our lease terms may include options to extend or terminate the lease. We do not include these options in our minimum lease terms unless we believe they are reasonably certain to be exercised. We have lease agreements with lease and non-lease components, which are generally accounted for separately. Non-lease components (i.e. common area maintenance) are separate from the lease components and are paid on actual usage. Therefore, the non-lease components are not included in the determination of the ROU asset or lease liability and are reflected as an expense in the period incurred. Our operating lease costs for operating lease payments are recognized on a straight-line basis over the lease term.

We also sublease certain office space to third-parties. Our subleases consist of office space which was vacated as part of restructuring activities in 2016. We do not recognize ROU assets or lease liabilities associated with subleased office spaces in which we are the sublessor. Sublease income is recognized ratably over the term of the agreement.

Recently Adopted Accounting Pronouncements

Leases

In February 2016, the FASB issued ASU No. 2016-02, Leases (ASC 842). This standard is intended to increase transparency and comparability among organizations by recognizing right-of-use assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. This standard provides for a modified retrospective transition approach to recognize and measure leases at the beginning of the earliest period presented. In July 2018, the FASB issued ASU 2018-11, Leases (ASC 842): Targeted Improvements. The update provides an optional transition method that allows entities to apply the standard prospectively, versus recasting the prior periods presented. We adopted the standard effective January 1, 2019, using a modified retrospective transition method. As a result, the consolidated balance sheet as of December 31, 2018 was not restated, continues to be reported under ASC 840, which did not require recognition of operating lease assets and liabilities on the balance sheet, and is not comparative. We have also elected the practical expedients to not reassess prior conclusions related to contracts containing leases, lease classification and initial direct costs which existed and expired prior to January 1, 2019. The standard had a material impact on our consolidated balance sheets, but did not have an impact on our consolidated income statements. The most significant impact was the recognition of ROU assets and lease liabilities for operating leases. We recognized ROU assets and lease liabilities of $60.7 million and $88.4 million, respectively, on our consolidated balance sheets on January 1, 2019, which included reclassifying lease incentives and deferred rent as a component of the ROU assets. See Summary of Significant Accounting Policies - Leases and Note 7 Leases for further details.

Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income

In February 2018, the FASB issued ASU 2018-02: Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income ("AOCI"). This standard provides companies with an option to reclassify stranded tax effects resulting from the enactment of the Tax Cuts and Jobs Act ("TCJA") from accumulated other comprehensive income to retained earnings. We adopted the standard effective January 1, 2019. The Company has no net stranded tax effect recorded in AOCI due to its full U.S. valuation allowance therefore, the adoption of ASU 2018-02 resulted in no amount reclassified from AOCI to retained earnings on our condensed consolidated statement of stockholders' equity.

Improvements to Non-employee Share-Based Payment Accounting

In June 2018, the FASB issued ASU 2018-07 (Topic 718): Improvements to Non-employee Share-Based Payment Accounting ("Topic 718"). This standard expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from non-employees. FASB clarified that Topic 718 does not apply to share-based payments used to effectively provide financing to the issuer or awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under ASC 606. We adopted the standard effective January 1, 2019. The standard did not have a significant impact on our condensed consolidated financial statements.

Recent Accounting Pronouncements Not Yet Adopted

Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract

In August 2018, the FASB issued ASU 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. This standard requires capitalization of the implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. Further, the standard also requires the Company to expense the capitalized implementation costs of a hosting arrangement over the term of the hosting arrangement. This standard is effective for the Company beginning in the first quarter of 2020. Early adoption is permitted. The adoption of this standard is not expected to have a significant impact on our consolidated financial statements.

Simplifying the Test for Goodwill Impairment

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This standard eliminates the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge (i.e. Step 2 of the current guidance), instead measuring the impairment charge as the excess of the reporting unit's carrying amount over its fair value (i.e. Step 1 of the current guidance). The guidance is effective for the Company beginning in the first quarter of 2020, and should be applied prospectively. Early adoption is permitted for impairment testing dates after January 1, 2017. The adoption of this standard is not expected to have a significant impact on our consolidated financial statements.

Measurement of Credit Losses on Financial Instruments

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This standard changes the impairment model for most financial assets and certain other instruments by introducing

a current expected credit loss ("CECL") model. The CECL model is a more forward-looking approach based on expected losses rather than incurred losses, requiring entities to estimate and record losses expected over the remaining contractual life of an asset. The guidance is effective for the Company beginning in the first quarter of 2020. Early adoption beginning January 1, 2019 is permitted. We are currently evaluating the impact the adoption of this guidance will have on our consolidated financial statements and related disclosures.

2. Fair Value Measurements

The accounting guidance for fair value measurements provides a framework for measuring fair value on either a recurring or nonrecurring basis, whereby the inputs used in our valuation techniques are assigned a hierarchical level. The following are the three levels of inputs to measure fair value:


•	Level 1: Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

•

Level 2: Inputs that reflect quoted prices for identical assets or liabilities in less active markets; quoted prices for similar assets or liabilities in active markets; benchmark yields, reported trades, broker/dealer quotes, inputs other than quoted prices that are observable for the assets or liabilities; or inputs that are derived principally from or corroborated by observable market data by correlation or other means.


•	Level 3: Unobservable inputs that reflect our own assumptions incorporated in valuation techniques used to measure fair value. These assumptions are required to be consistent with market participant assumptions that are reasonably available.

We consider an active market to be one in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis, and consider an inactive market to be one in which there are infrequent or few transactions for the asset or liability, the prices are not current, or price quotations vary substantially either over time or among market makers. Where appropriate, our own or the counterparty’s non-performance risk is considered in measuring the fair values of assets.

The following table presents our assets and liabilities measured at fair value on a recurring basis using the above input categories (in thousands):



	As of June 30, 2019								As of December 31, 2018
Description	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets
Cash equivalents:
Money market funds	$	65,090	$	—	$	—	$	65,090	$	25,748	$	—	$	—	$	25,748
Total cash equivalents	65,090		—		—		65,090		25,748		—		—		25,748
Short-term investments:
Certificates of deposit	—		3,149		—		3,149		—		—		—		—
Corporate notes and bonds	—		407,635		—		407,635		—		448,323		—		448,323
U.S. Treasuries	—		93,172		—		93,172		—		112,700		—		112,700
U.S. Government agencies	—		151,885		—		151,885		—		145,668		—		145,668
Total short-term investments	—		655,841		—		655,841		—		706,691		—		706,691
Total assets measured at fair value	$	65,090	$	655,841	$	—	$	720,931	$	25,748	$	706,691	$	—	$	732,439

Additionally, we have a restructuring liability related to certain real estate facilities that was calculated based on the present value of future non-lease payments, discounted at a rate commensurate with our current cost of financing as well as external ratings. This non-recurring fair value measurement is considered to be a Level 3 measurement due to the use of significant unobservable inputs. See Note 6 Restructuring Charges for a reconciliation of this liability.

We measure certain assets, including goodwill, intangible assets and our equity-method investment in a private company at fair value on a nonrecurring basis when there are identifiable events or changes in circumstances that may have a significant adverse impact on the fair value of these assets. No such events or changes occurred during the six months ended June 30, 2019.

The estimated fair value of the Convertible Senior Notes each as of June 30, 2019 and December 31, 2018 was determined to be $1.1 billion. The fair value was determined based on the closing trading prices per $100 principal amount of the respective Convertible Senior Notes as of the last day of trading for the period. We consider the fair value of the Convertible Senior Notes to be a Level 2 measurement as they are not actively traded.

3. Investments

Our investments consisted of the following (in thousands):



	As of June 30, 2019
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Certificates of deposit	$	3,140	$	9	$	—		$	3,149
Corporate notes and bonds	406,137		1,622		(124		)	407,635
U.S. Treasuries	93,181		49		(58		)	93,172
U.S. Government agencies	151,974		16		(105		)	151,885
Total	$	654,432	$	1,696	$	(287	)	$	655,841



	As of December 31, 2018
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Corporate notes and bonds	$	450,097	$	44	$	(1,818	)	$	448,323
U.S. Treasuries	112,783		2		(85		)	112,700
U.S. Government agencies	146,110		—		(442		)	145,668
Total	$	708,990	$	46	$	(2,345	)	$	706,691

The following tables present the gross unrealized losses and related fair values of our investments that have been in a continuous unrealized loss position (in thousands):



	As of June 30, 2019
	Less Than 12 Months					Greater Than 12 Months					Total
	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
Corporate notes and bonds	$	20,118	$	(14	)	$	139,918	$	(110	)	$	160,036	$	(124	)
U.S. Treasuries	7,066		(4		)	33,973		(54		)	41,039		(58		)
U.S. Government agencies	43,177		(37		)	81,677		(68		)	124,854		(105		)
Total	$	70,361	$	(55	)	$	255,568	$	(232	)	$	325,929	$	(287	)



	As of December 31, 2018
	Less Than 12 Months					Greater Than 12 Months					Total
	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
Corporate notes and bonds	$	420,548	$	(1,817	)	$	1,526	$	(2	)	$	422,074	$	(1,819	)
U.S. Treasuries	105,525		(85		)	—		—			105,525		(85		)
U.S. Government agencies	137,416		(441		)	—		—			137,416		(441		)
Total	$	663,489	$	(2,343	)	$	1,526	$	(2	)	$	665,015	$	(2,345	)

Unrealized losses related to these investments are due to interest rate fluctuations as opposed to credit quality. In addition, we do not intend to sell, and it is not more likely than not that we would be required to sell, these investments before recovery of their cost basis. As a result, there is no other-than-temporary impairment for these investments as of June 30, 2019 and December 31, 2018.

The following table summarizes the contractual maturities of our investments at June 30, 2019 (in thousands):



	Amortized Cost		Fair Value
Due within one year	$	418,165	$	418,263
Due within one to three years	236,267		237,578
Total	$	654,432	$	655,841

All available-for-sale securities have been classified as current, based on management's ability to use the funds in current operations.

As of June 30, 2019, we held a 10.0% ownership interest in a private company, which is accounted for under the equity method based on our ability to exercise significant influence over operating and financial policies of the private company. This investment is classified within deposits and other long-term assets on our condensed consolidated balance sheets. The carrying value of this investment was zero as of June 30, 2019 and $0.5 million as of December 31, 2018.

4. Property and Equipment

Property and equipment, net consisted of the following (in thousands):



	As of June 30, 2019			As of December 31, 2018
Computer equipment and software	$	190,103		$	171,078
Leasehold improvements	66,556			62,832
Furniture and fixtures	14,799			13,835
Machinery and equipment	465			447
Total property and equipment	271,923			248,192
Less: accumulated depreciation	(176,047		)	(159,029		)
Total property and equipment, net	$	95,876		$	89,163

Depreciation and amortization expense related to property, equipment and demonstration units during the three months ended June 30, 2019 and 2018 was $9.4 million and $9.2 million, respectively. Depreciation and amortization expense related to property, equipment and demonstration units during the six months ended June 30, 2019 and 2018 was $18.5 million and $18.6 million, respectively.

During the three months ended June 30, 2019 and 2018, we capitalized $6.1 million and $6.8 million, respectively, of software development costs primarily related to our platform and cloud subscription offerings. Amortization expense related to capitalized software development costs during the three months ended June 30, 2019 and 2018 were $4.0 million and $2.3 million, respectively.

During the six months ended June 30, 2019 and 2018, we capitalized $11.6 million and $11.7 million, respectively, of software development costs primarily related to our platform and cloud subscription offerings. Amortization expense related to capitalized software development costs during the six months ended June 30, 2019 and 2018 were $7.5 million and $4.2 million, respectively.

5. Business Combinations

Acquisition of Verodin

On May 28, 2019, we acquired all outstanding shares of privately held Verodin, a security instrumentation platform company. We expect that the Verodin technology will be incorporated into our platform and analytics capabilities going forward. In connection with this acquisition, we paid cash consideration of $143.7 million and issued 8,404,609 shares of our common stock with an estimated fair value of $119.7 million. We also assumed unvested stock options, which are now exercisable for our common stock, of which $1.5 million of the fair value has been accounted for as consideration for assumed awards pertaining to precombination service prior to acquisition, resulting in total purchase consideration of $264.9 million.

The acquisition of Verodin was accounted for in accordance with the acquisition method of accounting for business combinations with FireEye as the accounting acquirer. We expensed the related acquisition costs of $0.6 million in general and administrative expenses. Under the acquisition method of accounting, the total purchase consideration is allocated to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values. The total purchase price of $264.9 million was allocated using information currently available to us. As a result, we may continue to adjust the preliminary purchase price allocation after obtaining more information regarding asset valuations, liabilities assumed, and revisions of preliminary estimates. Pro forma financial information has not been presented for this acquisition as the impact to our consolidated financial statements was not material. Allocation of the preliminary purchase price is as follows (in thousands):



	Amount
Net tangible assets assumed	$	15,036
Intangible assets	45,200
Deferred tax liability	(224		)
Goodwill	$	204,870
Total preliminary purchase price allocation	$	264,882

The preliminary purchase price exceeded the fair value of the net tangible assets and identifiable intangible assets acquired, resulting in the recognition of goodwill. Goodwill is primarily attributable to expected synergies in our subscription offerings and cross-selling opportunities. None of the goodwill is expected to be deductible for U.S. federal income tax purposes.

Intangible assets consist primarily of developed technology, customer relationships, trade name and contract backlog. Intangible assets attributable to developed technology include a combination of patented and unpatented technology, trade secrets, computer software and research processes that represent the foundation for the existing and planned new products to facilitate the generation of new content. Customer relationship intangibles relate to Verodin's ability to sell current and future content, as well as products built around this content, to its existing customers. Trade name is attributable to marketing goods and services under the Verodin brand. Contract backlog pertains to unbilled and unrecognized contracts yet to be fulfilled.

The estimated useful life and fair values of the identifiable intangible assets are as follows (in thousands):



	Preliminary Estimated Useful Life (in years)	Amount
Developed technology	5	$	38,300
Customer relationships	5	4,600
Trade name	5	1,600
Contract backlog	2	700
Total identifiable intangible assets		$	45,200

The value of developed technology was estimated using the excess earnings method, an income approach (Level 3), which converts projected revenues and costs into cash flows. To reflect the fact that certain other assets contribute to the cash flows generated, the returns for these contributory assets were removed to arrive at estimated cash flows solely attributable to the acquired technology, which were discounted at a rate of 12% to determine the fair value.

The value of customer relationships was estimated using the cost savings method, an income level approach (Level 3), which estimates the value of an asset based upon costs avoided through ownership of the asset. Estimated costs on projected revenues, excluding acquired contract backlog, were made using historical data pertaining to sales to new and existing customers. The cash flow impact of projected cost savings, primarily avoidance of legal costs pertaining to new customers and lower commission rates applicable to existing customers than new customers, were discounted at a rate of 11% to determine the fair value.

The value of the trade name was estimated using the relief-from-royalty method, an income approach (Level 3), which estimates the cost savings that accrue to the owner of the intangibles asset that would otherwise be payable as royalties or license fees on revenues earned through the use of the asset. A royalty rate was applied to the projected revenues associated with the intangible asset to determine the amount of savings, which was at a rate of 12% to determine the fair value.

The value of the contract backlog was estimated by discounting estimated cash flows from existing orders, an income level approach (Level 3). Using expected timing of backlog revenue realization by quarter, the cash flow estimates resulting therefrom were reduced by estimated fulfillment costs associated with completing the backlog obligations, and the net cash flows were then discounted at a rate of 8% to determine fair value.

Discount rates for each respective intangible asset were determined by accounting for the risk associated with each asset, including required technology development and customer acquisition required to support respective projections, the uncertainty of market success and the risk inherent with projected financial results. The estimated useful lives were determined by evaluating the expected economic and useful lives of the assets and of similar intangible assets from previous business combinations and adjusting accordingly after taking into account circumstances that may be unique to Verodin.

Acquisition of X15

On January 11, 2018, we acquired all outstanding shares of privately held X15, a data management company. We expect that the X15 technology will be incorporated into our platform and analytics capabilities going forward. In connection with this acquisition, we paid cash consideration of $5.3 million and issued 1,016,334 shares of our common stock with an estimated fair value of $15.4 million, resulting in total purchase consideration of $20.7 million. The purchase price was allocated to intangible assets of $6.1 million, goodwill of $15.1 million and net tangible liabilities of $0.5 million. The intangible asset relates to developed technology with an estimated weighted average useful life of 3 years. The goodwill is primarily attributable to the know-how of the workforce and is not expected to be deductible for U.S. federal income tax purposes. The results of operations of X15 have been included in our consolidated statements of operations from the acquisition date. Pro forma financial information has not been presented for this acquisition as the impact to our consolidated financial statements was not material.

Goodwill and Purchased Intangible Assets

Goodwill increased by approximately $204.9 million for the six months ended June 30, 2019 due to acquisition of Verodin. There were no other changes in the carrying amount of goodwill.

Purchased intangible assets consisted of the following (in thousands):



	As of June 30, 2019		As of December 31, 2018
Developed technology	$	148,303	$	110,003
Content	158,700		158,700
Customer relationships	115,690		111,090
Contract backlog	13,200		12,500
Trade names	17,160		15,560
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