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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 March 31, 2020

or
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 No.)
 
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 April 28, 2020 was 222,844,478.


TABLE OF CONTENTS


 
 
 
 
Page 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 4.
 
 
Item 5.
 
 
Item 6.
 
 
 
 
 
 
 
 
 
 



PART I — FINANCIAL INFORMATION
Item1.    Financial Statements
FIREEYE, INC.
Condensed Consolidated Balance Sheets
(In thousands, except per share data)
(Unaudited)
 
March 31, 2020
 
December 31, 2019
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
283,866

 
$
334,603

Short-term investments
696,104

 
704,955

Accounts receivable, net of allowance for doubtful accounts of $2,791 and $2,263 at March 31, 2020 and December 31, 2019, respectively
140,191

 
171,459

Inventories
7,158

 
5,892

Prepaid expenses and other current assets
98,324

 
96,827

Total current assets
1,225,643

 
1,313,736

Property and equipment, net
90,613

 
93,812

Operating lease right-of-use assets, net
58,045

 
58,758

Goodwill
1,213,454

 
1,205,292

Intangible assets, net
128,110

 
134,420

Deposits and other long-term assets
80,521

 
84,468

TOTAL ASSETS
$
2,796,386

 
$
2,890,486

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY

 
 
CURRENT LIABILITIES:
 
 
 
Accounts payable
$
26,288

 
$
26,271

Operating lease liabilities, current
19,017

 
18,437

Accrued and other current liabilities
23,794

 
24,496

Accrued compensation
57,941

 
59,513

Convertible senior notes, current, net
118,805

 
117,288

Deferred revenue, current
572,533

 
603,944

Total current liabilities
818,378


849,949

Convertible senior notes, non-current, net
904,120

 
893,273

Deferred revenue, non-current
347,323

 
370,623

Operating lease liabilities, non-current
68,277

 
70,481

Other long-term liabilities
4,680

 
4,494

Total liabilities
2,142,778


2,188,820

Commitments and contingencies (NOTE 10)

 

Stockholders' equity:
 
 
 
Common stock, par value of $0.0001 per share; 1,000,000 shares authorized, 222,766 shares and 219,422 shares issued and outstanding as of March 31, 2020 and December 31, 2019, respectively
22

 
22

Additional paid-in capital
3,488,456

 
3,457,359

Treasury stock, at cost; 3,333 shares as of March 31, 2020 and December 31, 2019
(150,000
)
 
(150,000
)
Accumulated other comprehensive income (loss)
(1,669
)
 
1,180

Accumulated deficit
(2,683,201
)
 
(2,606,895
)
Total stockholders’ equity
653,608


701,666

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
2,796,386


$
2,890,486


See accompanying notes to condensed consolidated financial statements.

1

FIREEYE, INC.
Condensed Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited)

 
Three Months Ended March 31,
 
2020
 
2019
Revenue:
 
 
 
Product, subscription and support
$
174,083

 
$
169,903

Professional services
50,639

 
40,641

Total revenue
224,722


210,544

Cost of revenue:
 
 
 
Product, subscription and support
53,136

 
48,468

Professional services
28,450

 
23,100

Total cost of revenue
81,586


71,568

Total gross profit
143,136


138,976

Operating expenses:
 
 
 
Research and development
67,503

 
67,395

Sales and marketing
100,200

 
103,896

General and administrative
27,429

 
27,376

Restructuring charges
10,974

 
3,799

Total operating expenses
206,106


202,466

Operating loss
(62,970
)

(63,490
)
Interest income
4,424

 
5,848

Interest expense
(15,846
)
 
(15,263
)
Other expense, net
(989
)
 
(288
)
Loss before income taxes
(75,381
)

(73,193
)
Provision for income taxes
925

 
2,182

Net loss
$
(76,306
)
 
$
(75,375
)
Net loss per share, basic and diluted
$
(0.35
)
 
$
(0.38
)
Weighted average shares used in computing net loss per share, basic and diluted
217,789

 
197,819


See accompanying notes to condensed consolidated financial statements.

2

FIREEYE, INC.
Condensed Consolidated Statements of Comprehensive Loss
(In thousands)
(Unaudited)

 
Three Months Ended March 31,
 
2020
 
2019
Net loss
$
(76,306
)
 
$
(75,375
)
Change in net unrealized gain (loss) on available-for-sale investments, net of tax
(2,849
)
 
2,097

Comprehensive loss
$
(79,155
)

$
(73,278
)

See accompanying notes to condensed consolidated financial statements.

3

FIREEYE, INC.
Condensed Consolidated Statements of Stockholders' Equity
(Unaudited, in thousands)

 
Three Months Ended March 31,
 
2020
 
2019
Total stockholders' equity, beginning balances
$
701,666

 
$
650,394

 
 
 
 
Common stock and additional paid-in-capital:

 
 
Balance, beginning of period
3,457,381

 
3,152,179

Issuance of common stock for equity awards, net of tax withholdings
1,348

 
843

Shares withheld for taxes
(7,399
)
 

Stock-based compensation
37,148

 
41,482

Balance, end of period
3,488,478

 
3,194,504

 
 
 
 
Treasury Stock:
 
 
 
Balance, beginning of period
(150,000
)
 
(150,000
)
Balance, end of period
(150,000
)
 
(150,000
)
 
 
 
 
Accumulated Other Comprehensive Income (Loss):
 
 
 
Balance, beginning of period
1,180

 
(2,299
)
Unrealized gain (loss) investments, net of tax
(2,849
)
 
2,097

Balance, end of period
(1,669
)
 
(202
)
 
 
 
 
Accumulated Deficit:
 
 
 
Balance, beginning of period
(2,606,895
)
 
(2,349,486
)
Net loss
(76,306
)
 
(75,375
)
Balance, end of period
(2,683,201
)
 
(2,424,861
)
 
 
 
 
Total stockholders' equity, ending balances
$
653,608

 
$
619,441


See accompanying notes to condensed consolidated financial statements

4

FIREEYE, INC.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)

 
Three Months Ended March 31,
 
2020
 
2019
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net loss
$
(76,306
)
 
$
(75,375
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 
 
 
Depreciation and amortization
24,241

 
23,833

Stock-based compensation
36,178

 
40,323

Non-cash interest expense related to convertible senior notes
12,365

 
11,778

Deferred income taxes
143

 
475

Other
6,267

 
1,101

Changes in operating assets and liabilities, net of business acquisitions:
 
 
 
Accounts receivable
30,256

 
46,479

Inventories
(935
)
 
(395
)
Prepaid expenses and other assets
2,827

 
6,975

Accounts payable
1,717

 
6,802

Accrued liabilities
(1,319
)
 
758

Accrued compensation
(1,572
)
 
(7,611
)
Deferred revenue
(54,711
)
 
(28,639
)
Other long-term liabilities
(3,607
)
 
(2,051
)
Net cash provided by (used in) operating activities
(24,456
)

24,453

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Purchases of property and equipment and demonstration units
(11,680
)
 
(13,503
)
Purchases of short-term investments
(103,131
)
 
(156,533
)
Proceeds from maturities of short-term investments
108,462

 
141,004

Purchase of investment in privately held company
(1,000
)
 

Business acquisitions, net of cash acquired
(12,948
)
 

Lease deposits
67

 
(36
)
Net cash used in investing activities
(20,230
)

(29,068
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Payment related to shares withheld for taxes
(7,399
)
 

Proceeds from exercise of equity awards
1,348

 
843

Net cash provided by (used in) financing activities
(6,051
)

843

Net change in cash and cash equivalents
(50,737
)
 
(3,772
)
Cash and cash equivalents, beginning of period
334,603

 
409,829

Cash and cash equivalents, end of period
$
283,866


$
406,057

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 
 
 
Cash paid for income taxes
$
727

 
$
1,399

SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
 
 
 
Purchases of property and equipment and demonstration units in accounts payable and accrued liabilities
$
3,215

 
$
9,161


See accompanying notes to condensed consolidated financial statements.

5

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, including attacks that target on-premise, cloud and critical infrastructure environments. Our portfolio of cyber security products and services helps customers minimize the risk of costly cyber security breaches by:
validating the effectiveness of existing cybersecurity controls before an attack occurs,
detecting and preventing advanced, targeted and other evasive attacks missed by other security controls,
enabling more efficient management of security operations, including alert management, investigations and response when a breach occurs, and
providing assessment, training and other strategic security consulting services that help organizations improve their resilience to attack.
Our portfolio of cybersecurity solutions includes threat detection and prevention products that include appliance-based, virtual and cloud solutions for web security, email security and endpoint security. These products 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. 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 products 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, automate repetitive security processes, and provide 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.
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.
On January 17, 2020, we acquired Cloudvisory LLC ("Cloudvisory"), a provider of cloud visibility and control solutions. Total consideration for the acquisition was $13.2 million in cash. We also assumed $0.3 million in net tangible liabilities.
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 pre-combination services.
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 months ended March 31, 2020 are not necessarily indicative of the results to be expected for the year ending December 31, 2020 or for any other interim period or for any other future year. The balance sheet as of December 31, 2019 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.

6


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, 2019 included in our Annual Report on Form 10-K for the year ended December 31, 2019.
Use of Estimates
The preparation of 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 of performance obligations, subscriptions and services, 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
There have been no significant changes to our significant accounting policies as of and for the three months ended March 31, 2020, as compared to the significant accounting policies described in our Annual Report on Form 10-K for the year ended December 31, 2019.
Recently Adopted Accounting Pronouncements
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. We adopted the standard effective January 1, 2020. The standard did not have a significant impact on our condensed 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. We adopted the standard effective January 1, 2020. The standard did not have a significant impact on our condensed 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 adopted the standard effective January 1, 2020. The standard did not have a significant impact on our condensed consolidated financial statements.
Simplifying Accounting for Income Taxes
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This standard simplifies the accounting for income taxes by eliminating certain exceptions to the guidance in Topic 740 related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The new guidance also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill and allocating consolidated income taxes to separate financial statements of entities not subject to income tax. ASU 2019-12 is effective for annual and interim periods in fiscal years beginning after December 15, 2020. Early adoption is permitted, and we adopted ASU 2019-12 as of January 1, 2020. The adoption did not have a significant impact on our consolidated financial statements.
Recent Legislation

7


On March 27, 2020, the Coronavirus Aid, Relief and Economic Security (CARES) Act was enacted and signed into U.S. law to provide economic relief to individuals and businesses facing economic hardship as a result of the COVID-19 pandemic. Changes in tax laws or rates are accounted for in the period of enactment. The income tax provisions of the CARES Act do not have a significant impact on our current taxes, deferred taxes, or uncertain tax positions.
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 March 31, 2020
 
As of December 31, 2019
Description
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
$
33,732

 
$

 
$

 
$
33,732

 
$
24,246

 
$

 
$

 
$
24,246

Total cash equivalents
33,732

 

 

 
33,732

 
24,246

 

 

 
24,246

Short-term investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Certificates of deposit

 
5,417

 

 
5,417

 

 
5,145

 

 
5,145

Corporate notes and bonds

 
472,624

 

 
472,624

 

 
472,908

 

 
472,908

U.S. Treasuries

 
41,155

 

 
41,155

 

 
48,069

 

 
48,069

U.S. Government agencies

 
176,908

 

 
176,908

 

 
178,833

 

 
178,833

Total short-term investments

 
696,104

 

 
696,104

 

 
704,955

 

 
704,955

Total assets measured at fair value
$
33,732

 
$
696,104

 
$

 
$
729,836

 
$
24,246

 
$
704,955

 
$

 
$
729,201


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 privately held 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. In light of the COVID-19 pandemic, we performed an analysis of impairment indicators of these assets and noted no adverse impact to their fair values as of March 31, 2020.
The estimated fair value of the Convertible Senior Notes as of March 31, 2020 and December 31, 2019 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.


8


3. Investments
Our investments consisted of the following (in thousands):
 
As of March 31, 2020
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Estimated Fair Value
Certificates of deposit
$
5,368

 
$
49

 
$

 
$
5,417

Corporate notes and bonds
474,461

 
1,299

 
(3,136
)
 
472,624

U.S. Treasuries
41,055

 
106

 
(6
)
 
41,155

U.S. Government agencies
176,380

 
534

 
(6
)
 
176,908

Total
$
697,264


$
1,988


$
(3,148
)

$
696,104


 
As of December 31, 2019
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Estimated Fair Value
Certificates of deposit
$
5,118

 
$
27

 
$

 
$
5,145

Corporate notes and bonds
471,172

 
1,950

 
(214
)
 
472,908

U.S. Treasuries
48,086

 
2

 
(19
)
 
48,069

U.S. Government agencies
178,891

 
52

 
(110
)
 
178,833

Total
$
703,267

 
$
2,031

 
$
(343
)

$
704,955


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 March 31, 2020
 
Less Than 12 Months
 
Greater Than 12 Months
 
Total
 
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
Certificates of deposit
$

 
$

 
$

 
$

 
$

 
$

Corporate notes and bonds
258,386

 
(2,936
)
 
23,814

 
(200
)
 
282,200

 
(3,136
)
U.S. Treasuries

 

 
34,000

 
(6
)
 
34,000

 
(6
)
U.S. Government agencies

 

 
35,803

 
(6
)
 
35,803

 
(6
)
Total
$
258,386


$
(2,936
)

$
93,617


$
(212
)

$
352,003


$
(3,148
)

 
As of December 31, 2019
 
Less Than 12 Months
 
Greater Than 12 Months
 
Total
 
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
Certificates of deposit
$
244

 
$

 
$

 
$

 
$
244

 
$

Corporate notes and bonds
$
117,271

 
$
(205
)
 
$
24,514

 
$
(9
)
 
$
141,785

 
$
(214
)
U.S. Treasuries
5,041

 
(2
)
 
33,996

 
(17
)
 
39,037

 
(19
)
U.S. Government agencies
91,221

 
(103
)
 
25,997

 
(7
)
 
117,218

 
(110
)
Total
$
213,777


$
(310
)

$
84,507


$
(33
)

$
298,284


$
(343
)

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.
The following table summarizes the contractual maturities of our investments as of March 31, 2020 (in thousands):
 
Amortized Cost
 
Fair Value
Due within one year
$
262,934

 
$
263,045

Due within one to three years
434,330

 
433,059

Total
$
697,264

 
$
696,104



9


All available-for-sale securities have been classified as current, based on management's ability to use the funds in current operations.
As of March 31, 2020, we held an 11.0% ownership interest in a privately held company, which is accounted for under the equity method based on our ability to exercise significant influence over operating and financial policies of the privately held 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 $0.6 million as of March 31, 2020 and zero as of December 31, 2019.
4. Property and Equipment
Property and equipment, net consisted of the following (in thousands):
 
As of March 31, 2020
 
As of December 31, 2019
Computer equipment and software
$
206,359

 
$
203,242

Leasehold improvements
63,220

 
64,180

Furniture and fixtures
15,498

 
15,496

Machinery and equipment
465

 
465

Total property and equipment
285,542

 
283,383

Less: accumulated depreciation
(194,929
)
 
(189,571
)
Total property and equipment, net
$
90,613

 
$
93,812


Depreciation and amortization expense related to property, equipment and demonstration units during the three months ended March 31, 2020 and 2019 was $9.0 million and $9.2 million, respectively.
During the three months ended March 31, 2020 and 2019, we capitalized $5.8 million and $5.5 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 March 31, 2020 and 2019 were $4.6 million and $3.5 million, respectively. Refer to Note 6 Restructuring Charges regarding fixed assets write-offs.
5. Business Combinations
Acquisition of Cloudvisory
On January 17, 2020, we acquired Cloudvisory, a provider of cloud visibility and control solutions. As consideration for the acquisition, we paid $13.2 million in cash. In addition, we also assumed $0.3 million in net tangible liabilities.
The acquisition of Cloudvisory was accounted for in accordance with the acquisition method of accounting for business combinations with FireEye as the accounting acquirer. 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 $13.2 million was allocated using the information 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. The results of operations of Cloudvisory have been included in our consolidated statements of operations from the acquisition date, though revenue and net income from Cloudvisory were not material for the three months ended March 31, 2020. Transaction costs were immaterial and expensed as incurred. 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 liabilities assumed
$
(288
)
Intangible assets
5,650

Goodwill
$
7,846

Total preliminary purchase price allocation
$
13,208


The preliminary purchase price exceeded the fair value of the net tangible liabilities 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 and trade name. 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. Trade name is attributable to marketing goods and services under the Cloudvisory brand.

10


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
3
 
$
5,500

Trade name
1
 
150

Total identifiable intangible assets
 
 
$
5,650


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 35% 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 35% to determine the fair value.
Discount rates for each respective intangible asset were determined by accounting for the risk associated with each asset, including required technology development necessary 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 for circumstances that may be unique to Cloudvisory.
Acquisition of Verodin
On May 28, 2019, we acquired all outstanding shares of privately held Verodin, a security instrumentation platform company. We have incorporated the Verodin technology into our platform and analytics capabilities. 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 pre-combination service prior to acquisition. Based on the above, total purchase consideration for Verodin was $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
(1,158
)
Goodwill
$
205,804

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.

11


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 (dollars 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.
Goodwill and Purchased Intangible Assets
Goodwill increased by $8.2 million for the three months ended March 31, 2020. The increase was comprised of approximately $7.8 million due to the acquisition of Cloudvisory in January 2020 and $0.3 million due to a tax adjustment for the acquisition of Verodin in May 2019.

12


Purchased intangible assets consisted of the following (in thousands):
 
As of March 31, 2020
 
As of December 31, 2019
Developed technology
$
153,803

 
$
148,303

Content
158,700

 
158,700

Customer relationships
115,690

 
115,690

Contract backlog
13,200

 
13,200

Trade names
17,310

 
17,160

Non-competition agreements
1,400

 
1,400

Total intangible assets
460,103

 
454,453

Less: accumulated amortization
(331,993
)
 
(320,033
)
Total net intangible assets
$
128,110

 
$
134,420


Amortization expense of intangible assets during the three months ended March 31, 2020 and 2019 was $12.0 million and $12.1 million, respectively.
The expected future annual amortization expense of intangible assets as of March 31, 2020 is presented below (in thousands):
Years Ending December 31,
Amount
2020 (remaining nine months)
$
33,093

2021
40,220

2022
28,942

2023
22,082

2024
3,692

2025
81

Total
$
128,110


6. Restructuring Charges
In January 2020, we implemented a restructuring plan designed primarily to align our resources with the strategic growth initiatives of the business. This restructuring plan resulted in a reduction of less than 2% of our total workforce as of March 31, 2020 as well as the impairment of certain long lived assets.
The total provision for restructuring charges during the three months ended March 31, 2020 of $11.0 million includes $5.6 million of cash charges which consists of $2.0 million in provision for restructuring charges and $3.6 million in other adjustments, which was offset by a $0.2 million reduction in severance benefits from the third quarter of 2019 that were not utilized. In addition, there are non-cash charges of $5.4 million related to fixed asset and right-of-use asset write-offs.
The following table sets forth the restructuring balance as of March 31, 2020 related to previous restructuring activities and a summary of restructuring activities during the three months ended March 31, 2020 (in thousands):
 
Severance and related costs
 
Facilities costs
 
Total costs
Balance, December 31, 2019
$
164

 
$
470

 
$
634

Provision for restructuring charges
1,997

 

 
1,997

Cash payments
(1,709
)
 
(34
)
 
(1,743
)
Other adjustments
3,498

 
(125
)
 
3,373

Balance, March 31, 2020
$
3,950

 
$
311

 
$
4,261


The remainder of the restructuring balance of $4.3 million at March 31, 2020 is primarily composed of $3.5 million consulting payments, $0.5 million of severance payments which we have paid, or expect to pay during the second quarter of 2020, and $0.3 million of non-cancelable non-lease costs which we expect to pay over the terms of the related obligations through the third quarter of 2021.
7. Leases
We have operating leases primarily for corporate offices. Our leases have remaining lease terms of one to ten years, some of which include options to extend the leases for up to five years, and some of which include options to terminate the leases within one year.

13


The components of lease expenses were as follows (in thousands):
 
Three Months Ended March 31, 2020
 
Three Months Ended March 31, 2019
Operating lease costs
$
4,418

 
$
4,762

Short-term lease costs
527

 
937

Sublease income
(274
)
 
(272
)
Total net lease costs
$
4,671

 
$
5,427


Supplemental balance sheet information related to leases is as follows (in thousands, except lease term and discount rate):
 
As of March 31, 2020
Operating leases:
 
Operating lease right-of-use assets, net
$
58,045

 
 
Operating lease liabilities, current
$
19,017

Operating lease liabilities, non-current
68,277

Total operating lease liabilities
$
87,294

 
 
Weighted average remaining lease term (in years)
6.8

Weighted average discount rate
6.8
%

Supplemental cash flow and other information related to leases is as follows (in thousands):
 
Three Months Ended March 31, 2020
 
Three Months Ended March 31, 2019
Cash paid for amounts included in the measurement of lease liabilities:
 
 
 
Operating cash flows from operating leases
$
4,730

 
$
2,585

 
 
 
 
Lease liabilities arising from obtaining right-of-use assets:
 
 
 
Operating leases
$
478

 
$
2,575


Undiscounted cash flows of operating lease liabilities are as follows (in thousands):
Years Ending December 31, 
Amount 
2020 (remaining nine months)
$
14,779

2021
18,511

2022
15,381

2023
13,376

2024
11,954

2025
11,346

2026 and thereafter
26,446

Total lease payments
111,793

Less: imputed interest
(24,499
)
Total lease obligations
87,294

Less: current lease obligations
(19,017
)
Long-term lease obligations
$
68,277


As of March 31, 2020, we did not have any additional operating lease commitments for an office lease that has not yet commenced.

14


8. Deferred Revenue
Deferred revenue consisted of the following (in thousands):
 
As of March 31, 2020
 
As of December 31, 2019
Product, subscription and support, current
$
485,268

 
$
508,580

Professional services, current
87,265

 
95,364

Total deferred revenue, current
572,533

 
603,944

Product, subscription and support, non-current
346,505

 
369,589

Professional services, non-current
818

 
1,034

Total deferred revenue, non-current
347,323

 
370,623

Total deferred revenue
$
919,856

 
$
974,567


Changes in the balance of deferred revenue for the periods presented are as follows (in thousands):
 
Three Months Ended March 31,
 
2020
 
2019
Deferred revenue, beginning of period
$
974,567

 
$
934,828

Billings for the period
170,011

 
181,906

Revenue recognized
(224,722
)
 
(210,544
)
Deferred revenue, end of period
$
919,856

 
$
906,190


Remaining Performance Obligations
Transaction price allocated to remaining performance obligations represents contracted revenue that has not yet been recognized, which includes deferred revenue and non-cancelable contracts that will be invoiced and recognized as revenue in future periods ("backlog"). While deferred revenue is recorded on our balance sheet as a liability, backlog is not recorded in revenue, deferred revenue or elsewhere in our consolidated financial statements until we establish a contractual right to invoice, at which point it is recorded as revenue or deferred revenue as appropriate. As of March 31, 2020, the aggregate amount of the transaction price allocated to remaining performance obligations was $919.9 million in deferred revenue and $15.5 million in backlog.
We expect that the amount of backlog relative to the total value of our contracts will change from year to year due to several factors, including the amount invoiced early in the contract term, the timing and duration of customer agreements, varying invoicing cycles of agreements and changes in customer financial circumstances. Accordingly, we believe that fluctuations in backlog are not always a reliable indicator of future revenues and we do not utilize backlog internally as a key management metric.
We expect to recognize these remaining performance obligations as follows (in percentages):
 
Total
 
Less than 1 year
 
1-2 years
 
2-3 years
 
More than 3 years
Deferred revenue
100%
 
62%
 
24%
 
11%
 
3%
Backlog
100%
 
55%
 
34%
 
11%
 
%



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9. Convertible Senior Notes
Convertible Senior Notes due 2024
On May 24, 2018, we issued $525.0 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"). In addition, on June 5, 2018, we issued an additional $75.0 million aggregate principal amount of the 2024 Notes pursuant to the full exercise of the initial purchasers' option to purchase additional 2024 Notes, in a private placement exempt from the registration requirements of the Securities Act. The net proceeds from the offerings, after deducting the initial purchasers' discount of approximately $15.0 million and the issuance costs of approximately $0.6 million, were $584.4 million. We used (i) approximately $330.4 million of the net proceeds to repurchase approximately $340.2 million in aggregate principal amount outstanding of the Series A Notes (as defined below) in negotiated transactions with institutional investors and (ii) approximately $65.2 million of the net proceeds from the offering of the 2024 Notes to enter into capped call transactions (the "Capped Calls").
The 2024 Notes are unsecured obligations and rank senior in right of payment to any of our indebtedness that is expressly subordinated in right of payment to the 2024 Notes. They rank equally in right of payment with all of our existing and future liabilities that are not expressly subordinated to the 2024 Notes including the Series A Notes and the Series B Notes (as defined below); and effectively rank junior in right of payment to any of our secured indebtedness to the extent of the value of the assets securing such indebtedness. The 2024 Notes are structurally junior to all indebtedness and other liabilities (including trade payables) of our subsidiaries.
The 2024 Notes do not contain any financial covenants and do not restrict us from paying dividends or issuing or repurchasing other securities.
The 2024 Notes bear interest at 0.875% per year, payable semiannually in arrears on June 1 and December 1 of each year, beginning December 1, 2018. The 2024 Notes mature on June 1, 2024, unless earlier repurchased, redeemed or converted.
The initial conversion rate of the 2024 Notes is 43.1667 shares of our common stock per $1,000 of principal amount of the 2024 Notes, which is equivalent to an initial conversion price of approximately $23.17 per share of common stock. The conversion rate of the 2024 Notes may be adjusted pursuant to the terms of the indenture governing the 2024 Notes upon the occurrence of certain specified events, but not for accrued and unpaid interest.
Holders may convert the 2024 Notes at their option in multiples of $1,000 principal amount prior to the business day preceding March 1, 2024, only under the following circumstances:
during any calendar quarter commencing after the calendar quarter ended on September 30, 2018 (and only during such calendar quarter), if the last reported sale price of the common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price of the 2024 Notes on each applicable trading day;
during the five business day period after any five consecutive trading day period (the "measurement period") in which the trading price per $1,000 principal amount of the 2024 Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of our common stock and the conversion rate for the notes on each such trading day;
if we call any or all of the 2024 Notes for redemption, at any time prior to the close of business on the scheduled trading day immediately preceding the relevant redemption date; or
upon the occurrence of specified corporate events, as specified in each indenture governing the 2024 Notes.
Regardless of the foregoing conditions, holders may convert their 2024 Notes at their option in multiples of $1,000 principal amount during the period from, and including, March 1, 2024 to the close of business on the second scheduled trading day immediately preceding the maturity date. Upon conversion, the 2024 Notes can be settled in cash, shares of our common stock or any combination of cash and shares of common stock at our option.
Holders may also require us to repurchase the 2024 Notes if we undergo a "fundamental change," as defined in each indenture governing the 2024 Notes, at a repurchase price equal to 100% of the principal amount, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.
Additionally, we may redeem for cash all or any portion of the 2024 Notes on or after June 5, 2021, if the last reported sale price of our common stock has been at least 130% of the conversion price of the 2024 Notes then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) immediately preceding the date on which we provide notice of redemption at a redemption price equal to 100% of the principal amount of the notes to be redeemed, plus any accrued and unpaid interest to, but excluding, the redemption date.
As of March 31, 2020, none of the conditions permitting holders to convert their 2024 Notes had been satisfied and no shares of our common stock had been issued in connection with any conversions of the 2024 Notes. Based on the closing price of our common

16


stock of $10.58 per share on March 31, 2020, the conversion value of the 2024 Notes was less than the principal amount of the 2024 Notes outstanding on a per 2024 Note basis.
In accordance with accounting for debt with conversions and other options, we bifurcated the principal amount of the 2024 Notes into liability and equity components. The initial liability component of the 2024 Notes was valued at $458.3 million based on the contractual cash flows discounted at an appropriate comparable market non-convertible debt borrowing rate at the date of issuance of 5.5% with the equity component representing the residual amount of the proceeds of $141.7 million, which was recorded as a debt discount. Issuance costs were allocated pro rata based on the relative initial carrying amounts of the liability and equity components. As a result, transaction costs of $0.5 million and $0.1 million and initial purchasers' discount of $11.5 million and $3.5 million were attributable to the liability component and equity component of the 2024 Notes, respectively. The debt discount and the issuance costs allocated to the liability component are amortized as additional interest expense over the term of the 2024 Notes using the effective interest method as noted in the table below.
The liability and equity components of the 2024 Notes consisted of the following (in thousands):
 
As of March 31, 2020
 
As of December 31, 2019
 
2024 Notes
 
2024 Notes
Liability component: