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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, 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
(Address of principal executive offices) (Zip Code)

(408) 321-6300
(Registrant's telephone number, including area code)
 

 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 28, 2020 was 225,521,258.


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)
 
June 30, 2020
 
December 31, 2019
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
404,346

 
$
334,603

Short-term investments
509,858

 
704,955

Accounts receivable, net of allowance for doubtful accounts of $2,885 and $2,263 at June 30, 2020 and December 31, 2019, respectively
119,842

 
171,459

Inventories
5,440

 
5,892

Prepaid expenses and other current assets
94,654

 
96,827

Total current assets
1,134,140

 
1,313,736

Property and equipment, net
87,405

 
93,812

Operating lease right-of-use assets, net
54,572

 
58,758

Goodwill
1,213,454

 
1,205,292

Intangible assets, net
116,864

 
134,420

Deposits and other long-term assets
74,998

 
84,468

TOTAL ASSETS
$
2,681,433

 
$
2,890,486

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY

 
 
CURRENT LIABILITIES:
 
 
 
Accounts payable
$
10,733

 
$
26,271

Operating lease liabilities, current
18,545

 
18,437

Accrued and other current liabilities
19,726

 
24,496

Accrued compensation
71,423

 
59,513

Convertible senior notes, current, net

 
117,288

Deferred revenue, current
563,190

 
603,944

Total current liabilities
683,617


849,949

Convertible senior notes, non-current, net
938,536

 
893,273

Deferred revenue, non-current
329,656

 
370,623

Operating lease liabilities, non-current
64,611

 
70,481

Other long-term liabilities
4,654

 
4,494

Total liabilities
2,021,074


2,188,820

Commitments and contingencies (NOTE 10)

 

Stockholders' equity:
 
 
 
Common stock, par value of $0.0001 per share; 1,000,000 shares authorized, 225,375 shares and 219,422 shares issued and outstanding as of June 30, 2020 and December 31, 2019, respectively
22

 
22

Additional paid-in capital
3,470,503

 
3,457,359

Treasury stock, at cost; 1,778 shares and 3,333 shares as of June 30, 2020 and December 31, 2019, respectively
(80,000
)
 
(150,000
)
Accumulated other comprehensive income
6,311

 
1,180

Accumulated deficit
(2,736,477
)
 
(2,606,895
)
Total stockholders’ equity
660,359


701,666

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
2,681,433


$
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 June 30,
 
Six Months Ended June 30,
 
2020
 
2019
 
2020
 
2019
Revenue:
 
 
 
 
 
 
 
Product, subscription and support
$
177,305

 
$
174,102

 
$
351,388

 
$
344,005

Professional services
52,595

 
43,506

 
103,234

 
84,147

Total revenue
229,900


217,608


454,622


428,152

Cost of revenue:
 
 
 
 
 
 
 
Product, subscription and support
54,026

 
53,198

 
107,162

 
101,666

Professional services
26,967

 
24,195

 
55,417

 
47,295

Total cost of revenue
80,993


77,393


162,579


148,961

Total gross profit
148,907


140,215


292,043


279,191

Operating expenses:
 
 
 
 
 
 
 
Research and development
60,596

 
67,538

 
128,099

 
134,933

Sales and marketing
90,042

 
101,494

 
190,242

 
205,390

General and administrative
25,281

 
27,926

 
52,710

 
55,302

Restructuring charges
12,558

 

 
23,532

 
3,799

Total operating expenses
188,477


196,958


394,583


399,424

Operating loss
(39,570
)

(56,743
)

(102,540
)

(120,233
)
Interest income
2,863

 
6,137

 
7,287

 
11,985

Interest expense
(15,356
)
 
(15,407
)
 
(31,202
)
 
(30,670
)
Other expense, net
(119
)
 
(770
)
 
(1,108
)
 
(1,058
)
Loss before income taxes
(52,182
)

(66,783
)

(127,563
)

(139,976
)
Provision for income taxes
1,094

 
540

 
2,019

 
2,722

Net loss
$
(53,276
)
 
$
(67,323
)
 
$
(129,582
)
 
$
(142,698
)
Net loss per share, basic and diluted
$
(0.24
)
 
$
(0.33
)
 
$
(0.59
)
 
$
(0.71
)
Weighted average shares used in computing net loss per share, basic and diluted
221,352

 
204,109

 
219,570

 
201,001


See accompanying notes to condensed consolidated financial statements.

2

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

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2020
 
2019
 
2020
 
2019
Net loss
$
(53,276
)
 
$
(67,323
)
 
$
(129,582
)
 
$
(142,698
)
Change in net unrealized gain on available-for-sale investments, net of tax
7,980

 
1,172

 
5,131

 
3,269

Comprehensive loss
$
(45,296
)

$
(66,151
)

$
(124,451
)

$
(139,429
)

See accompanying notes to condensed consolidated financial statements.

3

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

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2020
 
2019
 
2020
 
2019
Total stockholders' equity, beginning balances
$
653,608

 
$
619,441

 
$
701,666

 
$
650,394

 
 
 
 
 
 
 
 
Common stock and additional paid-in-capital:

 
 
 
 
 
 
Balance, beginning of period
3,488,478

 
3,194,504

 
3,457,381

 
3,152,179

Issuance of common stock for equity awards, net of tax withholdings
2,383

 
651

 
3,731

 
1,494

Shares withheld for taxes
(640
)
 

 
(8,039
)
 

Issuance of common stock related to employee stock purchase plan
12,300

 
12,315

 
12,300

 
12,315

Shares retired
(70,000
)
 

 
(70,000
)
 

Issuance of common stock and assumption of options related to Verodin, Inc. acquisition

 
121,158

 

 
121,158

Stock-based compensation
38,004

 
41,356

 
75,152

 
82,838

Balance, end of period
3,470,525

 
3,369,984

 
3,470,525

 
3,369,984

 
 
 
 
 
 
 
 
Treasury stock:
 
 
 
 
 
 
 
Balance, beginning of period
(150,000
)
 
(150,000
)
 
(150,000
)
 
(150,000
)
Shares retired
70,000

 

 
70,000

 

Balance, end of period
(80,000
)
 
(150,000
)
 
(80,000
)
 
(150,000
)
 
 
 
 
 
 
 
 
Accumulated other comprehensive income (loss):
 
 
 
 
 
 
 
Balance, beginning of period
(1,669
)
 
(202
)
 
1,180

 
(2,299
)
Unrealized gain investments, net of tax
7,980

 
1,172

 
5,131

 
3,269

Balance, end of period
6,311

 
970

 
6,311

 
970

 
 
 
 
 
 
 
 
Accumulated deficit:
 
 
 
 
 
 
 
Balance, beginning of period
(2,683,201
)
 
(2,424,861
)
 
(2,606,895
)
 
(2,349,486
)
Net loss
(53,276
)
 
(67,323
)
 
(129,582
)
 
(142,698
)
Balance, end of period
(2,736,477
)
 
(2,492,184
)
 
(2,736,477
)
 
(2,492,184
)
 
 
 
 
 
 
 
 
Total stockholders' equity, ending balances
$
660,359

 
$
728,770

 
$
660,359

 
$
728,770


See accompanying notes to condensed consolidated financial statements

4

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

 
Six Months Ended June 30,
 
2020
 
2019
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net loss
$
(129,582
)
 
$
(142,698
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 
 
 
Depreciation and amortization
47,738

 
48,102

Stock-based compensation
73,224

 
80,474

Non-cash interest expense related to convertible senior notes
24,367

 
23,700

Deferred income taxes
154

 
(18
)
Other
6,608

 
637

Changes in operating assets and liabilities, net of business acquisitions:
 
 
 
Accounts receivable
50,320

 
32,860

Inventories
(15
)
 
(243
)
Prepaid expenses and other assets
13,137

 
3,959

Accounts payable
(12,971
)
 
4,415

Accrued liabilities
(6,073
)
 
(3,566
)
Accrued compensation
11,910

 
(8,704
)
Deferred revenue
(81,721
)
 
(24,830
)
Other long-term liabilities
(6,862
)
 
(4,564
)
Net cash provided by provided by (used in) operating activities
(9,766
)

9,524

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Purchases of property and equipment and demonstration units
(17,556
)
 
(28,240
)
Purchases of short-term investments
(106,631
)
 
(258,104
)
Proceeds from maturities of short-term investments
277,749

 
311,905

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

Proceeds from sales of short-term investments
28,208

 

Business acquisitions, net of cash acquired
(12,948
)
 
(127,249
)
Lease deposits
87

 
426

Net cash provided by (used in) investing activities
167,909


(101,262
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Repurchase of convertible senior notes
(96,392
)
 

Payment related to shares withheld for taxes
(8,039
)
 

Proceeds from employee stock purchase plan
12,300

 
12,315

Proceeds from exercise of equity awards
3,731

 
1,495

Net cash provided by provided by (used in) financing activities
(88,400
)

13,810

Net change in cash and cash equivalents
69,743

 
(77,928
)
Cash and cash equivalents, beginning of period
334,603

 
409,829

Cash and cash equivalents, end of period
$
404,346


$
331,901



5

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

 
Six Months Ended June 30,
 
2020
 
2019
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 
 
 
Cash paid for income taxes
$
1,449

 
$
2,682

Cash paid for interest
$
6,962

 
$
6,962

SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
 
 
 
Common stock issued in connection with acquisitions
$

 
$
119,682

Purchases of property and equipment and demonstration units in accounts payable and accrued liabilities
$
2,348

 
$
6,531


See accompanying notes to condensed consolidated financial statements.

6

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 and six months ended June 30, 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.

7


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 and six months ended June 30, 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 was effective for the Company beginning in the first quarter of 2020, and will be applied prospectively. 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 was effective for the Company beginning in the first quarter of 2020. 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

8


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 June 30, 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
$
96,874

 
$

 
$

 
$
96,874

 
$
24,246

 
$

 
$

 
$
24,246

Total cash equivalents
96,874

 

 

 
96,874

 
24,246

 

 

 
24,246

Short-term investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Certificates of deposit

 
3,997

 

 
3,997

 

 
5,145

 

 
5,145

Corporate notes and bonds

 
372,796

 

 
372,796

 

 
472,908

 

 
472,908

U.S. Treasuries

 
21,116

 

 
21,116

 

 
48,069

 

 
48,069

U.S. Government agencies

 
111,949

 

 
111,949

 

 
178,833

 

 
178,833

Total short-term investments

 
509,858

 

 
509,858

 

 
704,955

 

 
704,955

Total assets measured at fair value
$
96,874

 
$
509,858

 
$

 
$
606,732

 
$
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 June 30, 2020.
The estimated fair value of the Convertible Senior Notes was determined to be $1 billion as of June 30, 2020 and $1.1 billion as of December 31, 2019. 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.


9


3. Investments
Our investments consisted of the following (in thousands):
 
As of June 30, 2020
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Estimated Fair Value
Certificates of deposit
$
3,899

 
$
98

 
$

 
$
3,997

Corporate notes and bonds
366,484

 
6,386

 
(74
)
 
372,796

U.S. Treasuries
21,040

 
77

 
(1
)
 
21,116

U.S. Government agencies
111,617

 
337

 
(5
)
 
111,949

Total
$
503,040


$
6,898


$
(80
)

$
509,858


 
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 June 30, 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
6,053

 
(24
)
 
26,907

 
(50
)
 
32,960

 
(74
)
U.S. Treasuries

 

 
14,000

 
(1
)
 
14,000

 
(1
)
U.S. Government agencies
3,498

 
(2
)
 
14,802

 
(3
)
 
18,300

 
(5
)
Total
$
9,551


$
(26
)

$
55,709


$
(54
)

$
65,260


$
(80
)

 
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 June 30, 2020 (in thousands):
 
Amortized Cost
 
Fair Value
Due within one year
$
185,227

 
$
186,748

Due within one to three years
317,813

 
323,110

Total
$
503,040

 
$
509,858



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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, 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 $0.3 million as of June 30, 2020 and zero as of December 31, 2019.
4. Property and Equipment
Property and equipment, net consisted of the following (in thousands):
 
As of June 30, 2020
 
As of December 31, 2019
Computer equipment and software
$
211,516

 
$
203,242

Leasehold improvements
62,797

 
64,180

Furniture and fixtures
15,354

 
15,496

Machinery and equipment
465

 
465

Total property and equipment
290,132

 
283,383

Less: accumulated depreciation
(202,727
)
 
(189,571
)
Total property and equipment, net
$
87,405

 
$
93,812


Depreciation and amortization expense related to property, equipment and demonstration units during the three months ended June 30, 2020 and 2019 was $9.2 million and $9.4 million, respectively. Depreciation and amortization expense related to property, equipment and demonstration units during the six months ended June 30, 2020 and 2019 was $18.2 million and $18.5 million, respectively.
During the three months ended June 30, 2020 and 2019, we capitalized $5.2 million and $6.1 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, 2020 and 2019 were $4.7 million and $4.0 million, respectively.
During the six months ended June 30, 2020 and 2019, we capitalized $11.0 million and $11.6 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, 2020 and 2019 were $9.2 million and $7.5 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 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 and six months ended June 30, 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.

11


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.
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 available to us. 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 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 purchase price allocation
$
264,882


The 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,

12


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):
 
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 flow